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FRUSTRATED ANALYSTS CRITICIZE MDC PARTNERS EARNINGS REPORT

Agency Holding Company Posts 4th-Straight Quarter of Losses

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NEW YORK (AdAge.com) -- Investors and analysts expressed frustration with MDC Partners' management after the Toronto-based advertising company reported second-quarter losses today.
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MDC Partners reported a loss of $964,000 or 4 cents a share, on revenues of $92 million for the second quarter ended June 30, compared with earnings of $932,000 or 4 cents a share, on revenues of $58 million for the year-ago period.

Expectations revised downward
In addition, management revised downward its expectations for the full year, saying that revenue, originally expected to reach $468 million, is now expected to be between $435 million and $450 million.

"I expect they'll lose money for the year," said Jeff Tkachuk, an analyst with BMO Nesbitt Burns, Toronto.

“We do not believe that the second quarter and six-months results are indicative of the potential earning power of our business,” said Miles Nadal, chairman and CEO of MDC Partners, which holds stakes in well-known agencies including Crispin Porter & Bogusky, Miami; Kirshenbaum Bond & Partners, New York; and Zig, Toronto. “The first half was softer than anticipated, but we believe our portfolio is in its best shape ever,” and he expressed confidence in the company’s earning power.

First-half losses
The company lost $4.7 million, or 21 cents a share, on revenues of $167 million for the first half, compared with $9.4 million in earnings, or 42 cents a share, on revenues of $108 million for the comparable period in 2004.

This is the fourth-straight quarter of losses for the company.

Mr. Nadal’s profile has risen in recent years, and he has become a frequent speaker at industry events, such as the recent Association of American Advertising Agency’s annual confab in Bermuda earlier this year. He seeks to differentiate MDC from much larger multinational holding company competitors, such as Omnicom Group and WPP Group, by touting the company’s “perpetual partnership” model, in which MDC buys stakes in various companies, rather than making outright acquisitions, thereby requiring agency management to remain involved.

In the past two years, the company has been on a buying spree, taking stakes in marketing services companies ranging from Zyman Group in Atlanta to Mono Advertising in Minneapolis to Cliff Freeman & Partners in New York.

'Refining our approach'
While the $92 million in second-quarter revenues generated by MDC's advertising unit is an improvement (up 60%) from the year-ago period, management earlier this year estimated 2005 revenue from marketing communications would be $388 million, but today further revised that projection downward to between $360 million and $370 million. Mr. Nadal said, “In the first half of the year we’ve not been as discriminating in the types of new business we’ve gone after. We are refining our approach.”

Operating costs rose 52% to $104,932,000 for the second quarter vs. the year-ago period; in the first half, operating costs increased 40% to $198,665,000 compared with first-half 2004. The rise was partially attributed to an increase in ongoing professional costs necessary to comply with requirements of Sarbannes-Oxley, as well as bringing legal counsel in-house.

MDC also operates a second division -- secured products. That division, which produces stamps, tickets, cards and labels and includes companies such as Metaca Corp., delivered revenue of $16.7 million in the second quarter, a 3.2% decline vs. one year ago, and $34 million for the first six months, 4% less than a year ago.

Irate investor
One investor, Ross Taylor, charged MDC with having “devolved from a company that was a cash-flow generating machine through asset sales into one that appears to be a company seduced by the appeal of buying into hot ad agencies. ... I’m exceptionally frustrated with your inability to give us a strategy and a plan to get your costs down. ... Twenty million on the corporate line to me seems egregious for a company with revenues of this size. Where on the corporate side are you basically wasting money?”

Mr. Nadal said management is “not pleased with the results to date” but argued that MDC’s $15 million of free cash flow is a positive, and that the company has an "exceptionally good balance sheet.” He added that the company is committed to divesting non-core assets. (In April, when MDC announced fourth-quarter and year-end results for 2004, management said it expected to sell its secured products unit by the end of 2005 to focus fully on marketing communications.) He added that the current cost structure is “not indicative of what we think the future will be. There is huge leveragibility in terms of what’s possible and the cost structure doesn’t need to grow.”

Mr. Taylor countered, “You use a lot of nice language but it is important for you guys to lay out specifics. Where will the cost structure be reduced? It is important to show that the model actually works.”

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