What's behind -- or isn't behind -- MDC's stock tumble

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MDC Partners' stock tumbled 29 percent today after the agency company announced disappointing first-quarter results and lower full-year prospects amid a pull back by marketers. The reaction came a day after MDC disclosed what Chairman-CEO Scott Kauffman said were "unacceptable" financial results.

MDC closed today at $4.85 a share, down $2.00, after dipping as low as $3.80. That was its lowest price since November 2016, when shares plunged after another quarterly earnings disappointment.

MDC, parent of 72andSunny, Anomaly, Assembly and other agencies, in 2017 scored robust worldwide organic revenue growth of 7.0 percent. That was far above the average of 1.1 percent for the world's five biggest agency companies. Ad Age Datacenter ranks MDC as the 15th largest agency company.

Organic growth is a key financial measure for agency companies that strips out acquisitions, divestitures and the effects of exchange rates.

In a February earnings call, MDC offered guidance to investors that 2018 organic revenue would grow "approximately 4" percent. But first-quarter organic growth came in at just 1.0 percent, and the company this week cut its full-year organic growth outlook to the range of 1 percent to 3 percent.

MDC today declined to comment beyond its May 9 disclosures on its earnings. On the earnings call, Kauffman and CFO David Doft said MDC lowered its growth forecast based on recent spending cutbacks for selected clients and a slower rate of conversion of new business prospects.

MDC has seen "a number of client cutbacks and spending delays over the past several weeks," Kauffman said. "In addition, while our new business pipeline continues to build, we've also seen a slower rate of conversion of our new business, and in some instances budgets appear to be smaller than anticipated.

"We weren't anticipating … the slowdown in the pitch process," Kauffman said. He added: "We see lots of pockets of growth, and we're just being prudent about setting expectations about the rest of the year based on what the first quarter has looked like."

Investors also reset expectations, setting the stock tumbling.

On the call, hedge fund manager Lee Cooperman of Omega Advisors asked tough questions about MDC's direction and wondered aloud "whether the franchise is worth less than I would have thought."

On the call and in disclosures, MDC blamed its results in part on an accounting rule, ASC 606, that took effect Jan 1. That refers to the Financial Accounting Standards Board's Accounting Standards Codification Topic 606, which, among other points, changes how companies report retainer fees, pass-through and out-of-pocket costs.

MDC said: "The adoption of ASC 606 resulted in certain client contracts previously being accounted for as principal, now being accounted for as agent. This results in a reduction in full-year [2018] gross revenue of approximately $65 million with a corresponding reduction in direct costs, with no impact on [full-year] profit."

But ASC 606 did hurt the first-quarter top line and bottom line, in part because the new rules change when MDC gets to book some revenue. "For the three months ended March 31, 2018, the adoption of ASC 606 reduced revenue by $21.3 million, increased operating loss by $6.1 million, and increased net loss attributable to MDC Partners common shareholders by $4.4 million, or $0.08 per share," MDC said.

However, MDC said, the new accounting rules don't affect organic revenue growth because MDC excludes the impact of adopting ASC 606 from its calculation of organic growth.

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