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A Leadership Transition

Defense

1Q24 Reported With Pivotal OLC Data Coming In 2Q24

Biotechnology

First Quarter Results
Revenue for the first quarter totaled $1.05 billion compared to $1.27 billion in the first quarter last year. The decrease is from Kelly's sale of the European staffing business. On an organic basis, revenue declined 2.6% in the quarter, as staffing market headwinds continued during the quarter. Ex the sale, revenue from staffing services declined 0.5%, revenue from outcome-based services decreased 5.9%,&nbsp;revenue from talent solutions decreased 5.7%, and revenue from permanent placement decreased 32.2%.
Within Kelly's segments, the Education segment once again is the bright spot, as the segment had growth of 16.2% from $249.4 million in the previous year to $289.9 million. The segment had new customer wins from fill rate and new demand from existing customers. The Professional &amp; Industrial segment declined 11.0% to $358.4 million from $402.6 million the prior year. Within the segment, revenue from Kelly's staffing product declined 14% due to the macroeconomic environment, resulting in lower hours volume, partially offset by higher bill rates. Contact center outcome-based specialty revenue also experienced a decline. Some positives were the segment's outcome-based specialty revenue improved, while revenue in Mexico improved. Recall, an item of note about the segment is that with the sale of the Europe staffing business, Mexico was added to this revenue segment. Permanent placement fees revenue declined 42.4% to $2.7 million. The SET segment decreased to $289.3 million from $306.4 million last year, or a decrease of 5.6%. Continuing market conditions impacted the segment, as staffing specialties and outcome-based business both experienced revenue declines of 4% and 8.8%, respectfully.&nbsp;Permanent placement fees continued to be impacted by lower demand and declined 23% to $4.2 million. Lastly, Kelly's OCG segment had revenue of $108.0 million, a 5.7% decrease from $114.6 million last year, as RPO continued to experience slower hiring in certain market sectors, resulting in a decline year-over-year. MSP revenues continued to have a deceleration, while PPO revenues improved from last year.
Gross profit for the quarter decreased to $205.7 million from $254.1 million, or 19.1%, driven by the sale of the European staffing operations. Excluding the sale, gross profit decreased 8.3%. Gross profit rate was 19.7% compared to 20%, as the staffing business sale provided a 90bp improvement, resulting in an organic basis decline of 120bp year-over-year. The decline was from unfavorable business mix and lower permanent placement fees. For the business mix, specialties with a lower gross profit rate led, including Education, with lower rates in SET and OCG due to customer and product mix.
Regarding the segments, Professional &amp; Industrial had a gross profit of $63.9 million down from $72.2 million a year ago, a 11.7% decline. Segment gross profit rate declined to 17.8% from 18.0% in the year ago quarter. SET gross profit was $64.4 million, a 9.6% decline from $71.3 million last year, with a first quarter gross profit rate of 22.3%, down from 23.3%. Education was again the lone performer, with an increase of 7.1% in gross profit, or $42.1 million versus $39.3 million in the same period last year. Segment gross profit rate, however, declined to 14.5% from 15.8%. Lastly, OCG had gross profit of $35.3 million, a decrease of 15.0% from $41.6 million in the prior year. Segment gross profit rate was 32.7% compared to 36.3% a year ago.
SG&amp;A expenses were down 22% on a reported basis. The Company incurred $2.3 million of restructuring charges during the quarter related to the Company's transformation efforts. Also incurred was $5.6 million in expenses related to the sale of the European staffing operations. Excluding these expenses and the sale impact, SG&amp;A decreased 11.6% due to the Company's transformation initiatives resulting in workforce reductions, as well as lower incentive compensation expenses due to lower revenue. The Company recognized the gain from the sale of $11.6 million. Operating income for the quarter was $26.8 million compared to $10.7 million in the same period last year. On an adjusted basis, operating income was $23.1 million, or a 34% improvement from the prior year.
Earnings per share in the first quarter was $0.70 up from last year's EPS of $0.29. The gain on the staffing business provided EPS of $0.14 towards the just completed quarter's results. Last year, EPS included restructuring charges of $0.13. On an adjusted basis, EPS was $0.56 compared to $0.42 last year, a 33% increase. Adjusted EBITDA totaled $33.3 million for the quarter, or a margin of 3.2%, from $26.8 million or 2.1% in the prior year.
 Acquisitions and Disposals
As previously noted in prior reports, on January 2nd, Kelly&nbsp;completed the sale of its EMEA staffing operations, receiving&nbsp;cash proceeds of $
 110.6&nbsp;million. The Company expects to receive $26.9 million of additional cash proceeds in the third quarter of 2024 to reflect the cash-free, debt-free transaction basis, as well as working capital and other adjustments. The Company does not expect to receive any proceeds from the contingent consideration opportunity associated with the transaction.&nbsp;Kelly recorded a gain on the transaction as of the end of the first quarter of $
 11.6&nbsp;million.
As we noted in our First Look report, management was limited in their discussion of the proposed acquisition of Motion Recruitment Partners. Revenue was noted to be north of $500 million, while management expects MRP to&nbsp;strengthen Kellyâ€™s scale and capabilities and meaningfully increase market share across several key areas, such as technology, telecommunications, and government specialties in North America and RPO solutions globally.&nbsp;MRP should create opportunities for future revenue growth and additional EBITDA margin expansion at Kelly. Post transaction,&nbsp;MRP is expected to deliver services through its existing operating companies and brands. Management believes there is opportunity to Kelly's capabilities while at the same time enhancing MRP's breadth of solutions.
Just to reiterate the terms of the transaction, Kelly will pay cash at close of $
 425&nbsp;million. Additional cash consideration of up to $
 60&nbsp;million may be due under the terms of an earnout provision. The earnout payment would be due in the second quarter of 2025 and is based on a multiple of gross profit in excess of an agreed-upon amount during the earnout period. The transaction is expected to close in the second quarter of 2024,
The Labor Market
According to the Labor Department's most recent JOLT survey, the number of job openings was at 8.5 million on the last business day of March, down from 9 million at the end of December and down from a series high of 12 million in March 2022. Hires, at 5.5 million, were little changed while total separations decreased to 5.2 million from 5.4 million at year-end. Within separations, quits remained stable at 3.3 million. The labor force participation rate was 62.7% in April 2024, according to the St. Louis Fed. Labor Force Participation rate fell within a narrow band of 62.4% to 62.8% throughout 2023 and remains well below the pre-COVID levels above 67%.
<img src="https://www.noblelinx.com/x/research/images/reports/KELYAJF524.png" style="width: 640px;height: 186px" />
 
In addition, the Manpower Second Quarter 2024 Employment Outlook Survey noted global outlooks weakened by 4% since the previous quarter and were down 2% when compared to the same period last year, with a seasonally adjusted Net Employment Outlook of +22%. Employers across 12 countries report a stronger hiring outlook compared to the same period last year, but 27 of the 41 countries surveyed see a weakening hiring outlook. As one would expect, the skills most difficult positions to fill include IT and Data, engineering, and sales and marketing. Jobs are there but finding the talent to fill the positions remains a significant challenge.
 Balance Sheet
As of the first quarter of 2024, cash and equivalents totaled $200.7 million. The Company had $200 million of available capacity on its $200 million revolving credit facility and $103.9 million of available capacity on the $150 million securitization facility. We expect the undrawn debt capacity, as well as a significant portion of the cash to be used towards financing the acquisition of MRP.&nbsp;
 
Updated Projections.
 
Second quarter results should see modest top line improvement on a "like-for-like" basis. The numbers will change once the MRP acquisition is completed. We are projecting 2Q24 revenue of $1.02 billion, adjusted EBITDA of $34 million, or a 3.3% margin, and adjusted net income of $18.2 million, or an adjusted $0.51 per share. Second quarter 2023 results, which include the European staffing operations, had revenue of $1.22 billion, adjusted EBITDA of $24.6 million, and adjusted net income of $13.5 million, or adjusted EPS of $0.36 per share.
For the full year, we are projecting revenue of $4.035 billion, adjusted EBITDA of $128.3 million, and adjusted net income of $81.6 million, or EPS of $1.97.

First Quarter Results
Revenue for the first quarter totaled $1.05 billion compared to $1.27 billion in the first quarter last year. The decrease is from Kelly&#8217;s sale of the European staffing business. On an organic basis, revenue declined 2.6% in the quarter, as staffing market headwinds continued during the quarter. Ex the sale, revenue from staffing services declined 0.5%, revenue from outcome-based services decreased 5.9%,&nbsp;revenue from talent solutions decreased 5.7%, and revenue from permanent placement decreased 32.2%.
Within Kelly&#8217;s segments, the Education segment once again is the bright spot, as the segment had growth of 16.2% from $249.4 million in the previous year to $289.9 million. The segment had new customer wins from fill rate and new demand from existing customers. The Professional &amp; Industrial segment declined 11.0% to $358.4 million from $402.6 million the prior year. Within the segment, revenue from Kelly&#8217;s staffing product declined 14% due to the macroeconomic environment, resulting in lower hours volume, partially offset by higher bill rates. Contact center outcome-based specialty revenue also experienced a decline. Some positives were the segment&#8217;s outcome-based specialty revenue improved, while revenue in Mexico improved. Recall, an item of note about the segment is that with the sale of the Europe staffing business, Mexico was added to this revenue segment. Permanent placement fees revenue declined 42.4% to $2.7 million. The SET segment decreased to $289.3 million from $306.4 million last year, or a decrease of 5.6%. Continuing market conditions impacted the segment, as staffing specialties and outcome-based business both experienced revenue declines of 4% and 8.8%, respectfully.&nbsp;Permanent placement fees continued to be impacted by lower demand and declined 23% to $4.2 million. Lastly, Kelly&#8217;s OCG segment had revenue of $108.0 million, a 5.7% decrease from $114.6 million last year, as RPO continued to experience slower hiring in certain market sectors, resulting in a decline year-over-year. MSP revenues continued to have a deceleration, while PPO revenues improved from last year.
Gross profit for the quarter decreased to $205.7 million from $254.1 million, or 19.1%, driven by the sale of the European staffing operations. Excluding the sale, gross profit decreased 8.3%. Gross profit rate was 19.7% compared to 20%, as the staffing business sale provided a 90bp improvement, resulting in an organic basis decline of 120bp year-over-year. The decline was from unfavorable business mix and lower permanent placement fees. For the business mix, specialties with a lower gross profit rate led, including Education, with lower rates in SET and OCG due to customer and product mix.
Regarding the segments, Professional &amp; Industrial had a gross profit of $63.9 million down from $72.2 million a year ago, a 11.7% decline. Segment gross profit rate declined to 17.8% from 18.0% in the year ago quarter. SET gross profit was $64.4 million, a 9.6% decline from $71.3 million last year, with a first quarter gross profit rate of 22.3%, down from 23.3%. Education was again the lone performer, with an increase of 7.1% in gross profit, or $42.1 million versus $39.3 million in the same period last year. Segment gross profit rate, however, declined to 14.5% from 15.8%. Lastly, OCG had gross profit of $35.3 million, a decrease of 15.0% from $41.6 million in the prior year. Segment gross profit rate was 32.7% compared to 36.3% a year ago.
SG&amp;A expenses were down 22% on a reported basis. The Company incurred $2.3 million of restructuring charges during the quarter related to the Company&#8217;s transformation efforts. Also incurred was $5.6 million in expenses related to the sale of the European staffing operations. Excluding these expenses and the sale impact, SG&amp;A decreased 11.6% due to the Company&#8217;s transformation initiatives resulting in workforce reductions, as well as lower incentive compensation expenses due to lower revenue. The Company recognized the gain from the sale of $11.6 million. Operating income for the quarter was $26.8 million compared to $10.7 million in the same period last year. On an adjusted basis, operating income was $23.1 million, or a 34% improvement from the prior year.
Earnings per share in the first quarter was $0.70 up from last year&#8217;s EPS of $0.29. The gain on the staffing business provided EPS of $0.14 towards the just completed quarter&#8217;s results. Last year, EPS included restructuring charges of $0.13. On an adjusted basis, EPS was $0.56 compared to $0.42 last year, a 33% increase. Adjusted EBITDA totaled $33.3 million for the quarter, or a margin of 3.2%, from $26.8 million or 2.1% in the prior year.
 Acquisitions and Disposals
As previously noted in prior reports, on January 2nd, Kelly&nbsp;completed the sale of its EMEA staffing operations, receiving&nbsp;cash proceeds of $
  110.6&nbsp;million. The Company expects to receive $26.9 million of additional cash proceeds in the third quarter of 2024 to reflect the cash-free, debt-free transaction basis, as well as working capital and other adjustments. The Company does not expect to receive any proceeds from the contingent consideration opportunity associated with the transaction.&nbsp;Kelly recorded a gain on the transaction as of the end of the first quarter of $
  11.6&nbsp;million.
As we noted in our First Look report, management was limited in their discussion of the proposed acquisition of Motion Recruitment Partners. Revenue was noted to be north of $500 million, while management expects MRP to&nbsp;strengthen Kellyâ€™s scale and capabilities and meaningfully increase market share across several key areas, such as technology, telecommunications, and government specialties in North America and RPO solutions globally.&nbsp;MRP should create opportunities for future revenue growth and additional EBITDA margin expansion at Kelly. Post transaction,&nbsp;MRP is expected to deliver services through its existing operating companies and brands. Management believes there is opportunity to Kelly&#8217;s capabilities while at the same time enhancing MRP&#8217;s breadth of solutions.
Just to reiterate the terms of the transaction, Kelly will pay cash at close of $
  425&nbsp;million. Additional cash consideration of up to $
  60&nbsp;million may be due under the terms of an earnout provision. The earnout payment would be due in the second quarter of 2025 and is based on a multiple of gross profit in excess of an agreed-upon amount during the earnout period. The transaction is expected to close in the second quarter of 2024,
The Labor Market
According to the Labor Department&#8217;s most recent JOLT survey, the number of job openings was at 8.5 million on the last business day of March, down from 9 million at the end of December and down from a series high of 12 million in March 2022. Hires, at 5.5 million, were little changed while total separations decreased to 5.2 million from 5.4 million at year-end. Within separations, quits remained stable at 3.3 million. The labor force participation rate was 62.7% in April 2024, according to the St. Louis Fed. Labor Force Participation rate fell within a narrow band of 62.4% to 62.8% throughout 2023 and remains well below the pre-COVID levels above 67%.

   
In addition, the Manpower Second Quarter 2024 Employment Outlook Survey noted global outlooks weakened by 4% since the previous quarter and were down 2% when compared to the same period last year, with a seasonally adjusted Net Employment Outlook of +22%. Employers across 12 countries report a stronger hiring outlook compared to the same period last year, but 27 of the 41 countries surveyed see a weakening hiring outlook. As one would expect, the skills most difficult positions to fill include IT and Data, engineering, and sales and marketing. Jobs are there but finding the talent to fill the positions remains a significant challenge.
 Balance Sheet
As of the first quarter of 2024, cash and equivalents totaled $200.7 million. The Company had $200 million of available capacity on its $200 million revolving credit facility and $103.9 million of available capacity on the $150 million securitization facility. We expect the undrawn debt capacity, as well as a significant portion of the cash to be used towards financing the acquisition of MRP.&nbsp;
   
Updated Projections.
   
Second quarter results should see modest top line improvement on a &#8220;like-for-like&#8221; basis. The numbers will change once the MRP acquisition is completed. We are projecting 2Q24 revenue of $1.02 billion, adjusted EBITDA of $34 million, or a 3.3% margin, and adjusted net income of $18.2 million, or an adjusted $0.51 per share. Second quarter 2023 results, which include the European staffing operations, had revenue of $1.22 billion, adjusted EBITDA of $24.6 million, and adjusted net income of $13.5 million, or adjusted EPS of $0.36 per share.
For the full year, we are projecting revenue of $4.035 billion, adjusted EBITDA of $128.3 million, and adjusted net income of $81.6 million, or EPS of $1.97.

Post Call Commentary and Updated Model

Business Services

1Q24 Reported With Clinical Data Milestones On Schedule

U.S. Attorney's Office, Central District of California
Some highlights from the press release by the U.S. Attorney's Office:
<ul>
 <li> Andrew A. Wiederhorn, the former CEO and current controlling shareholder of the publicly traded Fat Brands Inc. (FAT), has been indicted on federal charges alleging a scheme to conceal $47 million in distributions he received in the form of shareholder loans from the IRS, FATâ€™s minority shareholders, and the broader investing public.</li>
</ul>
 
<ul>
 <li>Wiederhorn â€“ assisted by FATâ€™s chief financial officer and his outside accountant at advisory firm Andersen â€“ concealed millions of dollars in reportable compensation and taxable income and evaded the payment of millions of dollars in taxes. This is while causing FAT itself to violate the Sarbanes-Oxley Actâ€™s prohibition on direct and indirect extensions of credit to public-company CEOs in the form of a personal loan.</li>
</ul>

<ul>
 <li> Beginning no later than 2010 and continuing through early 2021, Wiederhorn allegedly caused employees of FAT and Fog Cutter Capital (FOG) to compensate him by distributing to him approximately $47 million for his personal use and benefit. Wiederhorn, Amon, Hershinger and others misclassified these distributions as â€œshareholder loansâ€ and failed to disclose as reportable compensation to the IRS, SEC and the broader investing public.</li>
</ul>
<ul>
 <li> Wiederhorn, posing as both â€˜lenderâ€™ and â€˜borrower,â€™ caused defendant FAT and FOG to extend to him and then â€˜forgiveâ€™ tens of millions of dollars in distributions made in the fraudulent form of loans â€“ all while paying no income tax on these distributions and, in fact, using them to generate net operating losses to provide defendant FAT with financially beneficial tax treatments.</li>
</ul>
<ul>
 <li> Although FAT publicly claimed that it was â€œcooperating with the governmentâ€ in connection with this investigation, after members of FATâ€™s Board communicated with the government, Wiederhorn removed every director other than himself in March 2023 and reconstituted FATâ€™s Board with a majority of non-independent directors under his control.</li>
</ul>
 
<ul>
 <li>Wiederhorn, Hershinger, and FAT are charged with two counts of extension and maintenance of credit in the form of personal loan from issuer to executive officer.</li>
</ul>
We did have an opportunity to read through the SEC filing. From our layman perspective, it seems FAT is being accused of conduct that was being caused by the people who controlled the Company, its disclosures, and its filings. Some highlights:
<ul>
 <li>Between October 2017 and March 2021, Andrew Wiederhorn, the former chief executive officer and current director and controlling shareholder of FAT Brands Inc. used almost $27 million of FATâ€™s cash on his personal expenses including private jets, first class airfare, luxury vacations, his rent and mortgage payments, shopping, and jewelry. During this time, Wiederhorn falsely told the Companyâ€™s auditors, board of directors, and investors that neither he nor his family members had any direct or indirect material interest in the FAT cash that Wiederhorn used for those personal expenditures.</li>
</ul>
<ul>
 <li>Wiederhorn concealed from FATâ€™s Board that the purpose of the loans&nbsp;from FAT to FCCG were to fund the Wiederhorn Personal Cash Transfers and to benefit himself personally. Due to this concealment, and the control that Wiederhorn had over FAT as its CEO, he was able to carry out his fraudulent scheme for years.
 </li>
</ul>
<ul>
 <li>Wiederhorn, Roe, and Hershinger made numerous false statements to FATâ€™s auditors relating to the Wiederhorn Personal Cash Transfers, the Thayer Transactions, and/or the Wiederhorn Children Salaries.
 </li>
</ul>
<ul>
 <li>FATâ€™s public filings during the Relevant Period contained numerous false and misleading statements regarding (1) the Wiederhorn Personal Cash Transfers, (2) the Thayer Transactions, (3) the Wiederhorn Children Salaries, and (4) the Companyâ€™s use of investment and loan proceeds.
 </li>
</ul>
<ul>
 <li>Wiederhorn reviewed, edited, approved, and signed FATâ€™s Forms 10-Ks and other company filings. He therefore knew, or was reckless in not knowing, that he disseminated the false statements contained in FATâ€™s Forms 10-Ks and other company filings in furtherance of his scheme which misrepresented the Wiederhorn Personal Cash Transfers and the Thayer Transactions.
 </li>
</ul>
<ul>
 <li>As the CEO of FAT, Wiederhorn also knew of the Wiederhorn Children Salaries, and yet did not disclose the Wiederhorn Children Salaries in the FAT Forms 10-K or Schedule 14A Proxy Statements for FY 2018 and 2019.
 </li>
</ul>
<ul>
 <li> FAT failed to make and keep books and records that accurately reflected the reportable related person transactions. Specifically, FAT failed to track and report its own CEOâ€™s direct or indirect material interest in the Company was sending to FCCG, an affiliate company.
 </li>
</ul>
<ul>
 <li> Wiederhornâ€™s, Roeâ€™s, and Hershingerâ€™s scienter is imputed to FAT, of which they were acting as its CEO or CFOs, respectively.</li>
</ul>
<ul>
 <li> Order Defendants FAT and Wiederhorn to disgorge all funds received from their illegal conduct, together with prejudgment interest thereon.
 </li>
</ul>
<ul>
 <li>Order Defendants to pay civil penalties.
 </li>
</ul>
Obviously, this is just some of the information contained in these two documents and we would advise investors to read the documents. We will provide additional commentary once we are able to get legal opinions on the proceedings.

U.S. Attorney&#8217;s Office, Central District of California
Some highlights from the press release by the U.S. Attorney&#8217;s Office:

 Andrew A. Wiederhorn, the former CEO and current controlling shareholder of the publicly traded Fat Brands Inc. (FAT), has been indicted on federal charges alleging a scheme to conceal $47 million in distributions he received in the form of shareholder loans from the IRS, FATâ€™s minority shareholders, and the broader investing public.


Wiederhorn â€“ assisted by FATâ€™s chief financial officer and his outside accountant at advisory firm Andersen â€“ concealed millions of dollars in reportable compensation and taxable income and evaded the payment of millions of dollars in taxes. This is while causing FAT itself to violate the Sarbanes-Oxley Actâ€™s prohibition on direct and indirect extensions of credit to public-company CEOs in the form of a personal loan.


 Beginning no later than 2010 and continuing through early 2021, Wiederhorn allegedly caused employees of FAT and Fog Cutter Capital (FOG) to compensate him by distributing to him approximately $47 million for his personal use and benefit. Wiederhorn, Amon, Hershinger and others misclassified these distributions as â€œshareholder loansâ€ and failed to disclose as reportable compensation to the IRS, SEC and the broader investing public.


 Wiederhorn, posing as both â€˜lenderâ€™ and â€˜borrower,â€™ caused defendant FAT and FOG to extend to him and then â€˜forgiveâ€™ tens of millions of dollars in distributions made in the fraudulent form of loans â€“ all while paying no income tax on these distributions and, in fact, using them to generate net operating losses to provide defendant FAT with financially beneficial tax treatments.


 Although FAT publicly claimed that it was â€œcooperating with the governmentâ€ in connection with this investigation, after members of FATâ€™s Board communicated with the government, Wiederhorn removed every director other than himself in March 2023 and reconstituted FATâ€™s Board with a majority of non-independent directors under his control.


Wiederhorn, Hershinger, and FAT are charged with two counts of extension and maintenance of credit in the form of personal loan from issuer to executive officer.

We did have an opportunity to read through the SEC filing. From our layman perspective, it seems FAT is being accused of conduct that was being caused by the people who controlled the Company, its disclosures, and its filings. Some highlights:

Between October 2017 and March 2021, Andrew Wiederhorn, the former chief executive officer and current director and controlling shareholder of FAT Brands Inc. used almost $27 million of FATâ€™s cash on his personal expenses including private jets, first class airfare, luxury vacations, his rent and mortgage payments, shopping, and jewelry. During this time, Wiederhorn falsely told the Companyâ€™s auditors, board of directors, and investors that neither he nor his family members had any direct or indirect material interest in the FAT cash that Wiederhorn used for those personal expenditures.


Wiederhorn concealed from FATâ€™s Board that the purpose of the loans&nbsp;from FAT to FCCG were to fund the Wiederhorn Personal Cash Transfers and to benefit himself personally. Due to this concealment, and the control that Wiederhorn had over FAT as its CEO, he was able to carry out his fraudulent scheme for years.
     


Wiederhorn, Roe, and Hershinger made numerous false statements to FATâ€™s auditors relating to the Wiederhorn Personal Cash Transfers, the Thayer Transactions, and/or the Wiederhorn Children Salaries.
     


FATâ€™s public filings during the Relevant Period contained numerous false and misleading statements regarding (1) the Wiederhorn Personal Cash Transfers, (2) the Thayer Transactions, (3) the Wiederhorn Children Salaries, and (4) the Companyâ€™s use of investment and loan proceeds.
     


Wiederhorn reviewed, edited, approved, and signed FATâ€™s Forms 10-Ks and other company filings. He therefore knew, or was reckless in not knowing, that he disseminated the false statements contained in FATâ€™s Forms 10-Ks and other company filings in furtherance of his scheme which misrepresented the Wiederhorn Personal Cash Transfers and the Thayer Transactions.
     


As the CEO of FAT, Wiederhorn also knew of the Wiederhorn Children Salaries, and yet did not disclose the Wiederhorn Children Salaries in the FAT Forms 10-K or Schedule 14A Proxy Statements for FY 2018 and 2019.
     


 FAT failed to make and keep books and records that accurately reflected the reportable related person transactions. Specifically, FAT failed to track and report its own CEOâ€™s direct or indirect material interest in the Company was sending to FCCG, an affiliate company.
     


 Wiederhornâ€™s, Roeâ€™s, and Hershingerâ€™s scienter is imputed to FAT, of which they were acting as its CEO or CFOs, respectively.


 Order Defendants FAT and Wiederhorn to disgorge all funds received from their illegal conduct, together with prejudgment interest thereon.
     


Order Defendants to pay civil penalties.
     

Obviously, this is just some of the information contained in these two documents and we would advise investors to read the documents. We will provide additional commentary once we are able to get legal opinions on the proceedings.

Facing Civil and Criminal Charges

Consumer

First Quarter 2024 Operating Results
 In the first quarter, CoreCivic generated its highest level of quarterly revenue and achieved the highest rate of year-over-year revenue growth since the third quarter of 2019, 18 quarters ago. CoreCivic&nbsp;experienced revenue growth from all three of its partner groups, federal, state and local governments.
First quarter revenue was $500.7 million, up 9.3% from the $458.0 million in the first quarter last year. Safety segment revenue rose 9.6% to $457.7 million, Community segment revenue increased 13.2% to $29.9 million, while Property segment revenue was slightly lower at $13 million. Revenue from ICE was $153.8 million compared to $130.7 million during the three months ended March 31, 2023. State revenues from contracts at correctional, detention, and residential reentry facilities increased $9.7 million, or 5.4%, year-over-year. Local revenues from contracts at correctional, detention, and residential reentry facilities increased $3.8 million, or 44.2%, year-over-year with the new contracts with Harris County, Texas and Hinds County, Mississippi, the drivers.
Average daily compensated population increased 2,332, or 4.7%, to 52,176 in the first quarter,&nbsp;primarily a result of an increase in occupancy at ICE facilities. Revenue also was positively impacted by an&nbsp;increase of 4.1% in average revenue per compensated man-day. The increase in average revenue per compensated man-day primarily resulted from the effect of per diem increases at many of the facilities.
Total revenue generated by CoreCivic Safety increased $40.1 million, or 9.6%, from $417.7 million in the first quarter of 2023 to $457.7 million during the first quarter of 2024. CoreCivic Safety's facility net operating income increased $18.4 million, or 20.6%, from $89.3 million during the three months ended March 31, 2023, to $107.6 million during the three months ended March 31, 2024, as seen in the following table.
 
<img src="https://www.noblelinx.com/x/research/images/reports/CXWSafety124.png" style="width: 733px;height: 166px" />
 
Source: Company reports
 
Total revenue generated by CoreCivic Community increased $3.5 million, or 13.2%, to $29.9 million from $26.4 million last year. CoreCivic Community's facility net operating income increased $2.1 million, or 55.6%, from $3.7 million during the three months ended March 31, 2023, to $5.8 million during the three months ended March 31, 2024.
 
<img src="https://www.noblelinx.com/x/research/images/reports/CXWComm124.png" style="width: 734px;height: 166px" />
 
Source: Company reports
 
Total expenses per compensated man-day increased to $76.94 during the three months ended March 31, 2024, from $76.35 during the three months ended March 31, 2023.&nbsp;Variable expenses per compensated man-day decreased to $20.21 year-over-year, a decline of 4.4%. The decrease in variable expenses per compensated man-day during the first quarter of 2024 was primarily a result of a decrease in registry nursing expense of $2.5 million, or $0.59 per compensated man-day, during the&nbsp;first quarter of 2024 as well as decreases in recruiting and travel expenses.
 
CoreCivic's reported net income was $9.5 million, or $0.08 per diluted share, in the first quarter of 2024, compared with net income of $12.4 million, or $0.11 per diluted share, in the year ago period. First quarter 2024 results include a $0.6 million gain on the sale of real estate assets and $27.2 million of expenses associated with debt repayments and refinancing transactions. For the three months ended March 31, 2024, the income tax benefit reflects a net benefit of $8.4 million. For the three months ended March 31, 2023, income tax expense included $2.3 million associated with a change in the corporate tax structure. Excluding special items, adjusted EPS during the first quarter of 2024 was $0.25 compared with $0.13 per share in the prior year quarter.
 Adjusted EBITDA was $89.5 million during the first quarter of 2024 compared with $73.7 million in the prior year quarter, an increase of $15.8 million or 21%. The increase in adjusted EBITDA resulted from higher occupancy from federal, state, and local populations and the continued normalization of the operating expense structure, partially offset by an increase in G&amp;A expenses.
 
 For the first quarter of 2024, Funds From Operations (FFO) was $52.6 million, or $0.46 per share, compared to $38.9 million, or $0.34 per share, in the first quarter of 2023. The increase in FFO was driven by the higher federal state and local populations, combined with expense normalization and lower interest expense, partly offset by higher G&amp;A expenses.
 
Populations
 ICE populations fluctuated in the first quarter, starting the year at over 37,000, rising to over 39,000 by mid-March, before declining to below 37,000 by quarter's end. CoreCivic ICE populations experienced a similar pattern in the first quarter. We would note ICE populations appear to have bottomed in mid-April, which we attribute to the delay in passing a federal budget, before increasing since then. According to management, CoreCivic ICE populations went from 9,772 on April 1st to 9,208 on April 20th. As of last Wednesday, CoreCivic's systemwide ICE population was 10,310.
Increasing ICE populations during the first quarter, combined with some improvement in USMS populations, and the new state and local contracts signed in the second half of last year, resulted in CoreCivic's overall average daily compensated population increasing. The population increased 2,332, or 4.7%, during the first quarter to 52,176, compared to an average daily population of 49,844 during the three months ended March 31, 2023.
We believe there is momentum for additional population increases. The challenges at the southwest border have not been resolved and southwest border encounters continue at an elevated level. We note there was bi-partisan support in the Senate for a 50,000 bed level for ICE earlier this year. It is unclear if such a level will be revisited in the upcoming budget proposals but there remains room for growth at the current 41,500 level.
In addition to ICE, inmate growth at the state and local level continues to increase. Over the past two years, populations just in the states CoreCivic currently works with rose by some 30,000 inmates. States, especially, continue to deal with a number of issues, including aging infrastructure, as well as challenges in staffing and potential sentencing reform.
Occupancy
Occupancy continues to rebound. With significant operating leverage to changes in occupancy, the recent increases have been a driver of the recent operating improvement. Occupancy for the first quarter of 2024 was 75.2%, the highest occupancy rate since the first quarter of 2020, which is the quarter that marked the start of the COVID-19 pandemic response. Occupancy in the Safety segment increased from 70.9% to 76.1%, and occupancy in the Community segment increased from 59.4% to 63.1%.
Growth Capacity
With the recent rise in ICE populations, funding of up to 41,500 beds for ICE, and ongoing challenges being faced by state and local governments, the demand for additional beds could come quickly. As seen in the following table, as of quarter-end, CoreCivic had
 eight idle correctional facilities that are currently available and being actively marketed.
 The following table summarizes each of the idled facilities and their respective design capacities.
 
<img src="https://www.noblelinx.com/x/research/images/reports/CXWIdles24.png" style="width: 645px;height: 173px" />
 
Source: Company reports


Now, there remains some existing capacity in the system so there are alternatives to re-opening an idled facility, but CoreCivic is well positioned, in our view, if demand for additional facilities materializes. 
Capital Structure
 At the end of the first quarter, CoreCivic had $111 million of unrestricted cash and equivalents. Total debt at quarter's end was $110.5 million of current debt and $984.1 million of long-term debt, including $144 million of non-recourse debt related to the Lansing facility. CoreCivic ended the quarter with net leverage of 2.7 times for the trailing 12 months, placing the Company within the target 2.25-2.75 leverage range for the first time. CoreCivic had&nbsp;$257.0 million available under its Revolving Credit Facility at the end of the first quarter.
As we highlighted in a previous report, during the quarter, CoreCivic refinanced its 8.25% senior notes due 2026 with the public offering of $500 million of new 8.25% senior notes due 2029. On April 15th, the Company redeemed the remaining outstanding balance of the old&nbsp;
 8.25% senior notes using&nbsp;$106.9 million of the available liquidity to fund the purchase.
During the three months ended March 31, 2024, the Company repurchased&nbsp;
 2.7&nbsp;million common shares at a total cost of $39.4&nbsp;million, or $14.52&nbsp;per share. CoreCivic had approximately $73 million of&nbsp;repurchase authorization remaining at the end of the first quarter. We do not expect the Company to be as aggressive in repurchasing shares in the second quarter.
Updated Projections
Second quarter and the remainder of 2024 will be negatively impacted by the loss of the CalCity contract. Management estimates the loss of CalCity will impact second quarter EPS by approximately $0.06 per share compared to the first quarter of 2024, and by approximately $0.15-$0.16 per share for the full year. For all of 2024, management is projecting&nbsp;adjusted EPS of $0.66 to $0.76, up from a previous guidance of $0.58 to $0.72, and normalized FFO per share of $1.56 to $1.66, up from a previous guidance of $1.46 to $1.61. AFFO is expected to range from $172.8 million to $185.3 million, or $1.55 to $1.66 per share, up from a previous guidance of $158.3 million to $175.3 million, or $1.42 to $1.57 per share.
We are projecting second quarter 2024 revenue of $482 million, given the lumpiness of ICE pops and the impact of CalCity. We are estimating adjusted EBITDA of $75.8 million, FFO of $0.37 per share, and EPS of $0.16. In the second quarter of 2023, which was still being impacted by Title 42 restrictions for part of the quarter, the Company reported revenue of $463.7 million, adjusted EBITDA of $72.1 million, FFO of $0.34 per share, and EPS of $0.12.
Full year projections are revenue of $1.99 billion, adjusted EBITDA of $319 million, FFO of $1.46 per share, and EPS of $0.74.

First Quarter 2024 Operating Results
 In the first quarter, CoreCivic generated its highest level of quarterly revenue and achieved the highest rate of year-over-year revenue growth since the third quarter of 2019, 18 quarters ago. CoreCivic&nbsp;experienced revenue growth from all three of its partner groups, federal, state and local governments.
First quarter revenue was $500.7 million, up 9.3% from the $458.0 million in the first quarter last year. Safety segment revenue rose 9.6% to $457.7 million, Community segment revenue increased 13.2% to $29.9 million, while Property segment revenue was slightly lower at $13 million. Revenue from ICE was $153.8 million compared to $130.7 million during the three months ended March 31, 2023. State revenues from contracts at correctional, detention, and residential reentry facilities increased $9.7 million, or 5.4%, year-over-year. Local revenues from contracts at correctional, detention, and residential reentry facilities increased $3.8 million, or 44.2%, year-over-year with the new contracts with Harris County, Texas and Hinds County, Mississippi, the drivers.
Average daily compensated population increased 2,332, or 4.7%, to 52,176 in the first quarter,&nbsp;primarily a result of an increase in occupancy at ICE facilities. Revenue also was positively impacted by an&nbsp;increase of 4.1% in average revenue per compensated man-day. The increase in average revenue per compensated man-day primarily resulted from the effect of per diem increases at many of the facilities.
Total revenue generated by CoreCivic Safety increased $40.1 million, or 9.6%, from $417.7 million in the first quarter of 2023 to $457.7 million during the first quarter of 2024. CoreCivic Safety&#8217;s facility net operating income increased $18.4 million, or 20.6%, from $89.3 million during the three months ended March 31, 2023, to $107.6 million during the three months ended March 31, 2024, as seen in the following table.
   

   
Source: Company reports
   
Total revenue generated by CoreCivic Community increased $3.5 million, or 13.2%, to $29.9 million from $26.4 million last year. CoreCivic Community&#8217;s facility net operating income increased $2.1 million, or 55.6%, from $3.7 million during the three months ended March 31, 2023, to $5.8 million during the three months ended March 31, 2024.
   

   
Source: Company reports
   
Total expenses per compensated man-day increased to $76.94 during the three months ended March 31, 2024, from $76.35 during the three months ended March 31, 2023.&nbsp;Variable expenses per compensated man-day decreased to $20.21 year-over-year, a decline of 4.4%. The decrease in variable expenses per compensated man-day during the first quarter of 2024 was primarily a result of a decrease in registry nursing expense of $2.5 million, or $0.59 per compensated man-day, during the&nbsp;first quarter of 2024 as well as decreases in recruiting and travel expenses.
   
CoreCivic&#8217;s reported net income was $9.5 million, or $0.08 per diluted share, in the first quarter of 2024, compared with net income of $12.4 million, or $0.11 per diluted share, in the year ago period. First quarter 2024 results include a $0.6 million gain on the sale of real estate assets and $27.2 million of expenses associated with debt repayments and refinancing transactions. For the three months ended March 31, 2024, the income tax benefit reflects a net benefit of $8.4 million. For the three months ended March 31, 2023, income tax expense included $2.3 million associated with a change in the corporate tax structure. Excluding special items, adjusted EPS during the first quarter of 2024 was $0.25 compared with $0.13 per share in the prior year quarter.
 Adjusted EBITDA was $89.5 million during the first quarter of 2024 compared with $73.7 million in the prior year quarter, an increase of $15.8 million or 21%. The increase in adjusted EBITDA resulted from higher occupancy from federal, state, and local populations and the continued normalization of the operating expense structure, partially offset by an increase in G&amp;A expenses.
   
 For the first quarter of 2024, Funds From Operations (FFO) was $52.6 million, or $0.46 per share, compared to $38.9 million, or $0.34 per share, in the first quarter of 2023. The increase in FFO was driven by the higher federal state and local populations, combined with expense normalization and lower interest expense, partly offset by higher G&amp;A expenses.
   
Populations
 ICE populations fluctuated in the first quarter, starting the year at over 37,000, rising to over 39,000 by mid-March, before declining to below 37,000 by quarter&#8217;s end. CoreCivic ICE populations experienced a similar pattern in the first quarter. We would note ICE populations appear to have bottomed in mid-April, which we attribute to the delay in passing a federal budget, before increasing since then. According to management, CoreCivic ICE populations went from 9,772 on April 1st to 9,208 on April 20th. As of last Wednesday, CoreCivic&#8217;s systemwide ICE population was 10,310.
Increasing ICE populations during the first quarter, combined with some improvement in USMS populations, and the new state and local contracts signed in the second half of last year, resulted in CoreCivic&#8217;s overall average daily compensated population increasing. The population increased 2,332, or 4.7%, during the first quarter to 52,176, compared to an average daily population of 49,844 during the three months ended March 31, 2023.
We believe there is momentum for additional population increases. The challenges at the southwest border have not been resolved and southwest border encounters continue at an elevated level. We note there was bi-partisan support in the Senate for a 50,000 bed level for ICE earlier this year. It is unclear if such a level will be revisited in the upcoming budget proposals but there remains room for growth at the current 41,500 level.
In addition to ICE, inmate growth at the state and local level continues to increase. Over the past two years, populations just in the states CoreCivic currently works with rose by some 30,000 inmates. States, especially, continue to deal with a number of issues, including aging infrastructure, as well as challenges in staffing and potential sentencing reform.
Occupancy
Occupancy continues to rebound. With significant operating leverage to changes in occupancy, the recent increases have been a driver of the recent operating improvement. Occupancy for the first quarter of 2024 was 75.2%, the highest occupancy rate since the first quarter of 2020, which is the quarter that marked the start of the COVID-19 pandemic response. Occupancy in the Safety segment increased from 70.9% to 76.1%, and occupancy in the Community segment increased from 59.4% to 63.1%.
Growth Capacity
With the recent rise in ICE populations, funding of up to 41,500 beds for ICE, and ongoing challenges being faced by state and local governments, the demand for additional beds could come quickly. As seen in the following table, as of quarter-end, CoreCivic had
  eight idle correctional facilities that are currently available and being actively marketed.
  The following table summarizes each of the idled facilities and their respective design capacities.
   

   
Source: Company reports

Now, there remains some existing capacity in the system so there are alternatives to re-opening an idled facility, but CoreCivic is well positioned, in our view, if demand for additional facilities materializes.
Capital Structure
 At the end of the first quarter, CoreCivic had $111 million of unrestricted cash and equivalents. Total debt at quarter&#8217;s end was $110.5 million of current debt and $984.1 million of long-term debt, including $144 million of non-recourse debt related to the Lansing facility. CoreCivic ended the quarter with net leverage of 2.7 times for the trailing 12 months, placing the Company within the target 2.25-2.75 leverage range for the first time. CoreCivic had&nbsp;$257.0 million available under its Revolving Credit Facility at the end of the first quarter.
As we highlighted in a previous report, during the quarter, CoreCivic refinanced its 8.25% senior notes due 2026 with the public offering of $500 million of new 8.25% senior notes due 2029. On April 15th, the Company redeemed the remaining outstanding balance of the old&nbsp;
  8.25% senior notes using&nbsp;$106.9 million of the available liquidity to fund the purchase.
During the three months ended March 31, 2024, the Company repurchased&nbsp;
  2.7&nbsp;million common shares at a total cost of $39.4&nbsp;million, or $14.52&nbsp;per share. CoreCivic had approximately $73 million of&nbsp;repurchase authorization remaining at the end of the first quarter. We do not expect the Company to be as aggressive in repurchasing shares in the second quarter.
Updated Projections
Second quarter and the remainder of 2024 will be negatively impacted by the loss of the CalCity contract. Management estimates the loss of CalCity will impact second quarter EPS by approximately $0.06 per share compared to the first quarter of 2024, and by approximately $0.15-$0.16 per share for the full year. For all of 2024, management is projecting&nbsp;adjusted EPS of $0.66 to $0.76, up from a previous guidance of $0.58 to $0.72, and normalized FFO per share of $1.56 to $1.66, up from a previous guidance of $1.46 to $1.61. AFFO is expected to range from $172.8 million to $185.3 million, or $1.55 to $1.66 per share, up from a previous guidance of $158.3 million to $175.3 million, or $1.42 to $1.57 per share.
We are projecting second quarter 2024 revenue of $482 million, given the lumpiness of ICE pops and the impact of CalCity. We are estimating adjusted EBITDA of $75.8 million, FFO of $0.37 per share, and EPS of $0.16. In the second quarter of 2023, which was still being impacted by Title 42 restrictions for part of the quarter, the Company reported revenue of $463.7 million, adjusted EBITDA of $72.1 million, FFO of $0.34 per share, and EPS of $0.12.
Full year projections are revenue of $1.99 billion, adjusted EBITDA of $319 million, FFO of $1.46 per share, and EPS of $0.74.

Best Revenue in 18 Quarters

Real Estate

First Quarter Results
The uncertain macroeconomic environment once again impacted ISGâ€™s performance. Continued slower client decision making plagued the Company, reducing ISGâ€™s reported revenues to $64.3 million from $78.5 million from the previous year, or down 18%. The revenue was also lower than our estimate of $66 million and the Companyâ€™s guidance of $65 million to $67 million. Revenue was also impacted by two projects that were not recognized in the quarter, as both projects were pushed back to the second quarter.
However, the silver lining to the quarter was the improvement of the Companyâ€™s recurring revenue stream. Recurring revenue consisted of half of the Companyâ€™s revenues and have totaled $126 million over the trailing 12 months, a 10% improvement from the previous 12-month period. Another positive was utilization, as it was up 555bp sequentially to 70% but down 40bp compared to last year. The Company expects the utilization rate to continue to rise throughout the year due to expected improving demand. Higher demand means higher utilizations, potentially giving ISG improved margins over the year, in our view.
For the Companyâ€™s geographies, the Americas decreased to $40.8 million from $48.4 million last year, or 16%. Europe had revenue of $17.8 million, a decrease of 23% from the prior yearâ€™s $23.1 million. Lastly, Asia Pacific revenue decreased 20% to $5.6 million from $7.0 million last year. Decreases in the Companyâ€™s Advisory and Network &amp; Software Advisory Service (NaSa) affected most of the revenue streams, save for Americas and NaSa. Foreign currency translations resulted in a positive impact of $0.3 million from the prior year for Europe and Asia Pacific.
Operating expenses for the quarter totaled $66.6 million, a decrease of 7% from last yearâ€™s $71.4 million. Lower contract labor expense ($5.1 million) and compensation expense ($1.9 million) contributed to the decrease, offset by higher severance and integration and other expense of $2.7 million. We expect lower labor expense and higher severance as the Companyâ€™s continues to optimize the headcount. Although with decreased expenses, the Company had an operating loss of $2.4 million from operating income of $7.1 million last year, due to the lower revenue.
Net loss for the first quarter was $3.4 million, or a loss of $0.07 per share, from net income of $3.5 million or EPS of $0.07. Adjusted net income was $0.07 million, or $0.01 per share, from $6.0 million or $0.12 in the previous year. Adjusted EBITDA was $4.4 million, or a 6.9% margin, down from $11.0 million or a14.0% margin in the prior year.
Seeing Opportunity in the Environment
While the Company is continuing to experience slower decisions from clients, management sees the light at the end of the tunnel. Management notes that in its market analysis, with support from client discussions and pipeline development, the market reached its trough in the first quarter and is now trending upwards in spending. The spending is expected to accelerate over the balance of the year. Two areas the market shows interest in are cost efficiencies and sourcing, two areas ISG is well equipped to handle, in our view.&nbsp;In the wake of a spending environment, the Company's AI advisory services also will provide a growth catalyst, in our view, as clients will make investments in infrastructure to support the technology. 
Although the pipeline did not convert to contracts as the Company had hoped, the pipeline is still strong. With the pipeline, management is taking a measured approach as clients are still weary of spending, requiring longer contract durations. However, with the expected increase in spending over the year, we believe these longer contract durations will start to shrink. The Ventana Research acquisition has opened new consulting relationships for software vendors and research opportunities with service providers for ISG, potentially increasing the backlog for the Company in our view. Ventana Research also will help in the Company's focus on its recurring revenue, as it continues to be a bright spot in the Company's performance. Management's focus on recurring revenue will continue to be present, in our view, over the 2024 fiscal year through its backlog.
Projections
 
With the results of the first quarter, management guided revenue of $65-$67 million and adjusted EBITDA of $7-$8 million. We believe the challenged environment will continue to impact ISG going into the second quarter. We expect to see additional severance in the quarter, but at a decreased rate from the first quarter, as the Company is continuing to optimize its headcount. Recurring revenue is a focal point in management's strategy, and we believe recurring revenue will continue to grow to be a larger portion of the revenue mix over the year.&nbsp;
For the second quarter, we estimate revenue of $65 million, net loss of $0.2 million or flat per share, and adjusted EBITDA of $7.0 million. We estimate adjusted EPS at $0.05. The second quarter last year had revenue of $74.6 million, net income of $2.3 million or EPS of $0.05, adjusted EPS of $0.11, and adjusted EBITDA of $10.1 million. For the year, we estimate revenue of $267.3 million, net loss of $1.7 million or a loss of $0.04 per share, and adjusted EBITDA of $27.4 million.

First Quarter Results
The uncertain macroeconomic environment once again impacted ISGâ€™s performance. Continued slower client decision making plagued the Company, reducing ISGâ€™s reported revenues to $64.3 million from $78.5 million from the previous year, or down 18%. The revenue was also lower than our estimate of $66 million and the Companyâ€™s guidance of $65 million to $67 million. Revenue was also impacted by two projects that were not recognized in the quarter, as both projects were pushed back to the second quarter.
However, the silver lining to the quarter was the improvement of the Companyâ€™s recurring revenue stream. Recurring revenue consisted of half of the Companyâ€™s revenues and have totaled $126 million over the trailing 12 months, a 10% improvement from the previous 12-month period. Another positive was utilization, as it was up 555bp sequentially to 70% but down 40bp compared to last year. The Company expects the utilization rate to continue to rise throughout the year due to expected improving demand. Higher demand means higher utilizations, potentially giving ISG improved margins over the year, in our view.
For the Companyâ€™s geographies, the Americas decreased to $40.8 million from $48.4 million last year, or 16%. Europe had revenue of $17.8 million, a decrease of 23% from the prior yearâ€™s $23.1 million. Lastly, Asia Pacific revenue decreased 20% to $5.6 million from $7.0 million last year. Decreases in the Companyâ€™s Advisory and Network &amp; Software Advisory Service (NaSa) affected most of the revenue streams, save for Americas and NaSa. Foreign currency translations resulted in a positive impact of $0.3 million from the prior year for Europe and Asia Pacific.
Operating expenses for the quarter totaled $66.6 million, a decrease of 7% from last yearâ€™s $71.4 million. Lower contract labor expense ($5.1 million) and compensation expense ($1.9 million) contributed to the decrease, offset by higher severance and integration and other expense of $2.7 million. We expect lower labor expense and higher severance as the Companyâ€™s continues to optimize the headcount. Although with decreased expenses, the Company had an operating loss of $2.4 million from operating income of $7.1 million last year, due to the lower revenue.
Net loss for the first quarter was $3.4 million, or a loss of $0.07 per share, from net income of $3.5 million or EPS of $0.07. Adjusted net income was $0.07 million, or $0.01 per share, from $6.0 million or $0.12 in the previous year. Adjusted EBITDA was $4.4 million, or a 6.9% margin, down from $11.0 million or a14.0% margin in the prior year.
Seeing Opportunity in the Environment
While the Company is continuing to experience slower decisions from clients, management sees the light at the end of the tunnel. Management notes that in its market analysis, with support from client discussions and pipeline development, the market reached its trough in the first quarter and is now trending upwards in spending. The spending is expected to accelerate over the balance of the year. Two areas the market shows interest in are cost efficiencies and sourcing, two areas ISG is well equipped to handle, in our view.&nbsp;In the wake of a spending environment, the Company&#8217;s AI advisory services also will provide a growth catalyst, in our view, as clients will make investments in infrastructure to support the technology. 
Although the pipeline did not convert to contracts as the Company had hoped, the pipeline is still strong. With the pipeline, management is taking a measured approach as clients are still weary of spending, requiring longer contract durations. However, with the expected increase in spending over the year, we believe these longer contract durations will start to shrink. The Ventana Research acquisition has opened new consulting relationships for software vendors and research opportunities with service providers for ISG, potentially increasing the backlog for the Company in our view. Ventana Research also will help in the Company&#8217;s focus on its recurring revenue, as it continues to be a bright spot in the Company&#8217;s performance. Management&#8217;s focus on recurring revenue will continue to be present, in our view, over the 2024 fiscal year through its backlog.
Projections
   
With the results of the first quarter, management guided revenue of $65-$67 million and adjusted EBITDA of $7-$8 million. We believe the challenged environment will continue to impact ISG going into the second quarter. We expect to see additional severance in the quarter, but at a decreased rate from the first quarter, as the Company is continuing to optimize its headcount. Recurring revenue is a focal point in management&#8217;s strategy, and we believe recurring revenue will continue to grow to be a larger portion of the revenue mix over the year.&nbsp;
For the second quarter, we estimate revenue of $65 million, net loss of $0.2 million or flat per share, and adjusted EBITDA of $7.0 million. We estimate adjusted EPS at $0.05. The second quarter last year had revenue of $74.6 million, net income of $2.3 million or EPS of $0.05, adjusted EPS of $0.11, and adjusted EBITDA of $10.1 million. For the year, we estimate revenue of $267.3 million, net loss of $1.7 million or a loss of $0.04 per share, and adjusted EBITDA of $27.4 million.

Slower Decisions Mean Slower Revenue

Production results hurt by extreme cold weather. Temperatures reaching -40C (also -40F) led to wells freezing, a pipeline break, and wells needing servicing. Management estimates a direct reduction of 340 boe/d and indirect reduction of 115 boe/d due to cold weather. This is approximately the level of quarter over quarter decline in production. Issues related to cold weather are largely behind the company.

InPlay was active drilling during the first quarter, spending 40% of its 2024 capital budget to complete eight wells. Several of these wells came on line at the end of the quarter and should boost 2024-2Q production even if they did not help 2024-1Q production. Cold weather meant wells came on line three weeks later than projected, which has fortunately come at a time of higher prices.

The company has been shifting drilling away from gas and towards oil in recent quarters in response to pricing and gas processing limitations. This shift may be coming to an end. The company will resume drilling in its most prolific area of the Pembina this fall for the first time in two years. The land was part of a tuck-in acquisition three years ago that proved very profitable for the company. The wells in the area have strong oil and gas flow rates and lower production declines. Production will come online in the winter at prices that are higher as indicated by the natural gas futures curve.
<table style="border-collapse: collapse; width: 686px; height: 92px;" border="1">
<tbody>
<tr style="height: 18px;">
<td style="width: 188px; height: 18px;"></td>
<td style="width: 67px; height: 18px;">2024-1Q</td>
<td style="width: 66px; height: 18px;">2023-1Q</td>
<td style="width: 69px; height: 18px;">2023-4Q</td>
<td style="width: 81px; height: 18px;">Noble Est.</td>
<td style="width: 215px; height: 18px;">Comments</td>
</tr>
<tr style="height: 18px;">
<td style="width: 188px; height: 18px;">Oil Production (bbl/d)</td>
<td style="width: 67px; height: 18px;">3,452</td>
<td style="width: 66px; height: 18px;">3,788</td>
<td style="width: 69px; height: 18px;">4,142</td>
<td style="width: 81px; height: 18px;">4,000</td>
<td style="width: 215px; height: 18px;">Weather hurt oil production</td>
</tr>
<tr style="height: 20px;">
<td style="width: 188px; height: 20px;">NGL Production (bbl/d)</td>
<td style="width: 67px; height: 20px;">1,487</td>
<td style="width: 66px; height: 20px;">1,458</td>
<td style="width: 69px; height: 20px;">1,520</td>
<td style="width: 81px; height: 20px;">1,520</td>
<td style="width: 215px; height: 20px;"></td>
</tr>
<tr style="height: 18px;">
<td style="width: 188px; height: 18px;">Gas Production (mmcf/d)</td>
<td style="width: 67px; height: 18px;">22,000</td>
<td style="width: 66px; height: 18px;">22,648</td>
<td style="width: 69px; height: 18px;">23,606</td>
<td style="width: 81px; height: 18px;">23,000</td>
<td style="width: 215px; height: 18px;">Shift away from gas slowing</td>
</tr>
<tr style="height: 18px;">
<td style="width: 188px; height: 18px;">Total Production (boe/d)</td>
<td style="width: 67px; height: 18px;">8,605</td>
<td style="width: 66px; height: 18px;">9,021</td>
<td style="width: 69px; height: 18px;">9,596</td>
<td style="width: 81px; height: 18px;">9,353</td>
<td style="width: 215px; height: 18px;"></td>
</tr>
</tbody>
</table>
---------- page break ----------

Production grew rapidly in recent years but has slowed in recent quarters. As the chart below indicates, production is largely a function of energy prices, mainly oil prices. When oil prices rose between 2020 and 2022, the company responded by increasing drilling, which led to higher production. Since the summer of 2022, oil prices have declined and production has been flat. As we have indicated in the past, company profitability is still very high at oil prices near US$80/bbl., just not as profitable as when oil prices are above US$100 bbl. With WTI oil prices now around US$80 and the Edmonton Par price near C$110/bbl., we would not be surprised to see InPlay increase drilling efforts. The management hinted as much saying "the 2024 capital program will remain flexible and InPlay will revisit this program considering market and economic conditions through the remainder of the year."

<img class="alignleft size-full wp-image-85479" src="https://dashboard.channelchek.com/wp-content/uploads/2024/05/IPOOF_20240513_26739-01.jpg" alt="" width="1721" height="993" />

---------- page break ----------


Realized oil prices were below expectations but new infrastructure should help. Realized oil prices were below expectations as the discount between realized prices and WTI prices expressed in Canadian dollars remains wide. A new oil pipeline (the Trans Mountain Pipeline) may help alleviate the discount. The pipeline is expected to come online shortly. Oil futures already indicate a smaller discount. A similar story is happening on the natural gas side with the construction of the Coastal GasLink pipeline. The pipeline will connect western Canadian gas production with a LNG terminal in Kitmat. The pipeline has completed mechanical testing and could begin delivering natural gas in early 2025. We look for natural gas pricing issues, which have hurt recent financial results, to begin improving as we head into the winter season.
<table style="border-collapse: collapse; width: 685px; height: 90px;" border="1">
<tbody>
<tr style="height: 18px;">
<td style="width: 179px; height: 18px;">Realized Prices</td>
<td style="width: 69px; height: 18px;">2024-1Q</td>
<td style="width: 69px; height: 18px;">2023-1Q</td>
<td style="width: 70px; height: 18px;">2023-4Q</td>
<td style="width: 78px; height: 18px;">Noble Est.</td>
<td style="width: 220px; height: 18px;">Comments</td>
</tr>
<tr style="height: 18px;">
<td style="width: 179px; height: 18px;">Oil Prices (C$/bbl)</td>
<td style="width: 69px; height: 18px;">$72.72</td>
<td style="width: 69px; height: 18px;">$81.30</td>
<td style="width: 70px; height: 18px;">$80.83</td>
<td style="width: 78px; height: 18px;">$81.25</td>
<td style="width: 220px; height: 18px;">New pipeline will help pricing</td>
</tr>
<tr style="height: 18px;">
<td style="width: 179px; height: 18px;">Gas Prices (C$mmcf)</td>
<td style="width: 69px; height: 18px;">$2.66</td>
<td style="width: 69px; height: 18px;">$3.39</td>
<td style="width: 70px; height: 18px;">$2.55</td>
<td style="width: 78px; height: 18px;">$2.46</td>
<td style="width: 220px; height: 18px;"></td>
</tr>
<tr style="height: 18px;">
<td style="width: 179px; height: 18px;">Combined (C$/boe)</td>
<td style="width: 69px; height: 18px;">$48.82</td>
<td style="width: 69px; height: 18px;">$55.80</td>
<td style="width: 70px; height: 18px;">$53.95</td>
<td style="width: 78px; height: 18px;">$47.80</td>
<td style="width: 220px; height: 18px;"></td>
</tr>
<tr style="height: 18px;">
<td style="width: 179px; height: 18px;">Netback (C$boe)</td>
<td style="width: 69px; height: 18px;">$26.29</td>
<td style="width: 69px; height: 18px;">$30.75</td>
<td style="width: 70px; height: 18px;">$31.38</td>
<td style="width: 78px; height: 18px;">$26.59</td>
<td style="width: 220px; height: 18px;"></td>
</tr>
</tbody>
</table>
Bottom line results

With production and pricing below expectations, revenues, cash flow and earnings were all slightly below our expectations. Still, the company may be turning a corner with energy prices and basin discounts improving. With a little luck, InPlay could be returning to the years of 2020-2022 when prices were high, production was growing, debt was decreasing, and the management was increasing the dividend.
<table style="border-collapse: collapse; width: 730px; height: 90px;" border="1">
<tbody>
<tr style="height: 18px;">
<td style="width: 172px; height: 18px;">(C$million expect EPS)</td>
<td style="width: 79px; height: 18px;">2024-1Q</td>
<td style="width: 68px; height: 18px;">2023-1Q</td>
<td style="width: 72px; height: 18px;">2023-4Q</td>
<td style="width: 83px; height: 18px;">Noble Est.</td>
<td style="width: 256px; height: 18px;">Comments</td>
</tr>
<tr style="height: 18px;">
<td style="width: 172px; height: 18px;">Revenues</td>
<td style="width: 79px; height: 18px;">$38.0</td>
<td style="width: 68px; height: 18px;">$45.3</td>
<td style="width: 72px; height: 18px;">$47.6</td>
<td style="width: 83px; height: 18px;">$40.7</td>
<td style="width: 256px; height: 18px;">Reflects lower prices and production</td>
</tr>
<tr style="height: 18px;">
<td style="width: 172px; height: 18px;">Adjusted Fund Flow</td>
<td style="width: 79px; height: 18px;">$16.5</td>
<td style="width: 68px; height: 18px;">$21.3</td>
<td style="width: 72px; height: 18px;">$23.5</td>
<td style="width: 83px; height: 18px;">$19.0</td>
<td style="width: 256px; height: 18px;"></td>
</tr>
<tr style="height: 18px;">
<td style="width: 172px; height: 18px;">Net Income</td>
<td style="width: 79px; height: 18px;">$1.7</td>
<td style="width: 68px; height: 18px;">$9.3</td>
<td style="width: 72px; height: 18px;">$11.6</td>
<td style="width: 83px; height: 18px;">$3.7</td>
<td style="width: 256px; height: 18px;"></td>
</tr>
<tr style="height: 18px;">
<td style="width: 172px; height: 18px;">EPS (diluted shares)</td>
<td style="width: 79px; height: 18px;">$0.02</td>
<td style="width: 68px; height: 18px;">$0.10</td>
<td style="width: 72px; height: 18px;">$0.13</td>
<td style="width: 83px; height: 18px;">$0.04</td>
<td style="width: 256px; height: 18px;"></td>
</tr>
</tbody>
</table>

Production results hurt by extreme cold weather. Temperatures reaching -40C (also -40F) led to wells freezing, a pipeline break, and wells needing servicing. Management estimates a direct reduction of 340 boe/d and indirect reduction of 115 boe/d due to cold weather. This is approximately the level of quarter over quarter decline in production. Issues related to cold weather are largely behind the company.
InPlay was active drilling during the first quarter, spending 40% of its 2024 capital budget to complete eight wells. Several of these wells came on line at the end of the quarter and should boost 2024-2Q production even if they did not help 2024-1Q production. Cold weather meant wells came on line three weeks later than projected, which has fortunately come at a time of higher prices.
The company has been shifting drilling away from gas and towards oil in recent quarters in response to pricing and gas processing limitations. This shift may be coming to an end. The company will resume drilling in its most prolific area of the Pembina this fall for the first time in two years. The land was part of a tuck-in acquisition three years ago that proved very profitable for the company. The wells in the area have strong oil and gas flow rates and lower production declines. Production will come online in the winter at prices that are higher as indicated by the natural gas futures curve.




2024-1Q
2023-1Q
2023-4Q
Noble Est.
Comments


Oil Production (bbl/d)
3,452
3,788
4,142
4,000
Weather hurt oil production


NGL Production (bbl/d)
1,487
1,458
1,520
1,520



Gas Production (mmcf/d)
22,000
22,648
23,606
23,000
Shift away from gas slowing


Total Production (boe/d)
8,605
9,021
9,596
9,353




&#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-
Production grew rapidly in recent years but has slowed in recent quarters. As the chart below indicates, production is largely a function of energy prices, mainly oil prices. When oil prices rose between 2020 and 2022, the company responded by increasing drilling, which led to higher production. Since the summer of 2022, oil prices have declined and production has been flat. As we have indicated in the past, company profitability is still very high at oil prices near US$80/bbl., just not as profitable as when oil prices are above US$100 bbl. With WTI oil prices now around US$80 and the Edmonton Par price near C$110/bbl., we would not be surprised to see InPlay increase drilling efforts. The management hinted as much saying &#8220;the 2024 capital program will remain flexible and InPlay will revisit this program considering market and economic conditions through the remainder of the year.&#8221;

&#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-

Realized oil prices were below expectations but new infrastructure should help. Realized oil prices were below expectations as the discount between realized prices and WTI prices expressed in Canadian dollars remains wide. A new oil pipeline (the Trans Mountain Pipeline) may help alleviate the discount. The pipeline is expected to come online shortly. Oil futures already indicate a smaller discount. A similar story is happening on the natural gas side with the construction of the Coastal GasLink pipeline. The pipeline will connect western Canadian gas production with a LNG terminal in Kitmat. The pipeline has completed mechanical testing and could begin delivering natural gas in early 2025. We look for natural gas pricing issues, which have hurt recent financial results, to begin improving as we head into the winter season.



Realized Prices
2024-1Q
2023-1Q
2023-4Q
Noble Est.
Comments


Oil Prices (C$/bbl)
$72.72
$81.30
$80.83
$81.25
New pipeline will help pricing


Gas Prices (C$mmcf)
$2.66
$3.39
$2.55
$2.46



Combined (C$/boe)
$48.82
$55.80
$53.95
$47.80



Netback (C$boe)
$26.29
$30.75
$31.38
$26.59




Bottom line results
With production and pricing below expectations, revenues, cash flow and earnings were all slightly below our expectations. Still, the company may be turning a corner with energy prices and basin discounts improving. With a little luck, InPlay could be returning to the years of 2020-2022 when prices were high, production was growing, debt was decreasing, and the management was increasing the dividend.



(C$million expect EPS)
2024-1Q
2023-1Q
2023-4Q
Noble Est.
Comments


Revenues
$38.0
$45.3
$47.6
$40.7
Reflects lower prices and production


Adjusted Fund Flow
$16.5
$21.3
$23.5
$19.0



Net Income
$1.7
$9.3
$11.6
$3.7



EPS (diluted shares)
$0.02
$0.10
$0.13
$0.04

Result hurt by production declines and low pricing but help may be coming

Energy

Investment Appraisal
While Q1 revenue of $561.5 million was modestly below our estimate of $571.0 million, adj. EBITDA of $91.8 million beat our estimate of $82.9 million, highlighted in Figure #1 Results. Notably, the companyâ€™s local media segment was up 13% in revenues from the prior year period, primarily driven by strong Political and Retransmission revenue. Local distribution revenue increased 21% from the prior year period to $197.0 million and was driven by the renewal of cable and satellite agreements in 2023. Additionally, high margin Political advertising of $15.2 million in the quarter was substantially higher than our estimate of $6.5 million. &nbsp;
The higher Retransmission Pay TV subscribers increased roughly 1% from the prior year period, which may seem insignificant when viewed in isolation. However, we view the increase in Pay TV subscriber count favorably given that industry trends have been down and Scripps' subscriber count has been down in the mid-single digits range on a trailing twelve month basis. While local core advertising was down roughly 3% y-o-y, encouragingly both automotive and home improvement were up 6% and 5%, respectively. There was some improvement in the revenue trends at its Network segment. Network revenue was down roughly 3% in the quarter, and roughly 1% when excluding, low margin, programmatic programming that was discontinued in Q3 of last year. The moderate 3.3% decline represented sequential quarterly improvement from the Network revenue declines of 8.5% in Q3 2023 and 7.1% in Q4 2023.&nbsp;
The companyâ€™s strong political advertising revenue in the quarter was primarily attributed to early spending for Senate races in Montana and Ohio. We view the strong, high margin, Political advertising in the quarter favorably, given the companyâ€™s focus on debt reduction. Furthermore, management raised full year 2024 Political advertising revenue guide from the range of $210 million to $250 million to a range of $240 million to $270 million. We revised upward our political revenue estimate from $225 million to $260 million, which falls towards the high-end company issued guidance. Notably, the high end of the company's guidance range would exceed that of the last presidential election cycle in 2020 at $265 million, which could be conservative and offers potential upside given the competitiveness of the upcoming elections.
Looking forward toward Q2, management indicated that revenues appear to be somewhat softer than our original expectations. We are lowering our Q2 revenue and adj. EBITDA forecast from $633.4 million to $586.7 million and from $128.1 million to $108.8 million, respectively. Our revisions are illustrated in Figure #2 Revisions. For Q2, management guided local core advertising revenue to be down low to mid single digits. Retransmission revenues will cycle the renewals last year, and, as such, Retransmission revenues will moderate from the 21% increase of the first quarter to up single digits in the second. In total Local Media revenue is expected to be up low to mid single digits. While management indicated that there is strong scatter pricing and improving trends in Direct Response advertising in its Network business, it guided revenues to be down mid single digits for this segment. We believe that its Network revenue will swing positive in the second half as it benefits from higher rates in Upfront advertising.&nbsp;
Given the softer start to the year, we are lowering our full year 2024 revenue forecast from $2.6 billion to $2.5 billion. There could be upside to this estimate should Network advertsing rebound and core advertising strengthens. Our forecast anticipates that there will be displacement in core advertising in its Local Media segment, given the anticipated strong Political advertising expected in the second half. Distribution revenue for full year 2024, is guided to be up low single digits, which factors in the likelihood that Pay TV subscriber counts will be down for the remainder of the year. As indicated earlier in this report, we are raising our Political advertising estimate from $225 million to $260 million. The shift towards this higher margin advertising, combined with earlier cost reduction efforts, should allow the company to achieve our previous adj. EBITDA estimate. As such, we are largely maintaining our full year 2024 adj. EBITDA estimate of $555.4 million. At this time, we are maintaining our full year 2025 adj. EBITDA estimate of $363.8 million.&nbsp;
As of March 31, the company had $30.2 million in cash and cash equivalents and $2.9 billion in long term debt. In Q1, the company paid $3.9 million on its term loans and reduced the outstanding balance on its revolving credit facility by $40 million. The company remains focused on debt reduction and has highlighted Bounce as an asset it is currently shopping, we estimate that the network could be worth between $165 million and $225 million. Management indicated the possibility of further asset monetization, including non-strategic real estate holdings, which it did not identify. In addition to asset monetization, the company stands to benefit from an influx of high margin political revenue which should contribute to its debt reduction efforts. We believe that the company may need to sell additional assets to assuage investor concerns over its relatively high debt leverage.&nbsp;
Near current levels, the SSP shares trade at 5.8 times enterprise value to our 2024 cash flow estimate or 7.0 times our blended 2024/2025 adj. EBITDA estimate. We would note that the valuation is well below historic multiples in the range of 8 to 12 times and based on depressed adj. EBITDA estimates. Our price target of $17 reflects a target multiple of 8.4 times EV to our 2024 adj. EBITDA forecast, or 10.1 times our blended 2024/2025 adj. EBITDA estimate, near the mid point of historic ranges. Notably, the 8.4 multiple would be below the average low trading range for the shares for the past 10 years of 9.5 times. We believe further asset monetization and an influx of high margin political revenue could accelerate debt reduction and alleviate concerns over the company's high debt leverage. In addition, we believe that an improved economic outlook, possibly driven by Fed rate reduction, could enhance the company's revenue and adj. EBITDA outlook and assuage investor concerns.&nbsp;

 
Figure #1 Q1 Results
<img src="https://www.noblelinx.com/x/research/images/reports/ssp-5-12-24.png" style="width: 408px;height: 551px" />

 

 
 Figure #2 Revisions
 
<img src="https://www.noblelinx.com/x/research/images/reports/ssp-revisions-5-12-24.png" style="width: 598px;height: 627px" />

Investment Appraisal
While Q1 revenue of $561.5 million was modestly below our estimate of $571.0 million, adj. EBITDA of $91.8 million beat our estimate of $82.9 million, highlighted in Figure #1 Results. Notably, the companyâ€™s local media segment was up 13% in revenues from the prior year period, primarily driven by strong Political and Retransmission revenue. Local distribution revenue increased 21% from the prior year period to $197.0 million and was driven by the renewal of cable and satellite agreements in 2023. Additionally, high margin Political advertising of $15.2 million in the quarter was substantially higher than our estimate of $6.5 million. &nbsp;
The higher Retransmission Pay TV subscribers increased roughly 1% from the prior year period, which may seem insignificant when viewed in isolation. However, we view the increase in Pay TV subscriber count favorably given that industry trends have been down and Scripps&#8217; subscriber count has been down in the mid-single digits range on a trailing twelve month basis. While local core advertising was down roughly 3% y-o-y, encouragingly both automotive and home improvement were up 6% and 5%, respectively. There was some improvement in the revenue trends at its Network segment. Network revenue was down roughly 3% in the quarter, and roughly 1% when excluding, low margin, programmatic programming that was discontinued in Q3 of last year. The moderate 3.3% decline represented sequential quarterly improvement from the Network revenue declines of 8.5% in Q3 2023 and 7.1% in Q4 2023.&nbsp;
The companyâ€™s strong political advertising revenue in the quarter was primarily attributed to early spending for Senate races in Montana and Ohio. We view the strong, high margin, Political advertising in the quarter favorably, given the companyâ€™s focus on debt reduction. Furthermore, management raised full year 2024 Political advertising revenue guide from the range of $210 million to $250 million to a range of $240 million to $270 million. We revised upward our political revenue estimate from $225 million to $260 million, which falls towards the high-end company issued guidance. Notably, the high end of the company&#8217;s guidance range would exceed that of the last presidential election cycle in 2020 at $265 million, which could be conservative and offers potential upside given the competitiveness of the upcoming elections.
Looking forward toward Q2, management indicated that revenues appear to be somewhat softer than our original expectations. We are lowering our Q2 revenue and adj. EBITDA forecast from $633.4 million to $586.7 million and from $128.1 million to $108.8 million, respectively. Our revisions are illustrated in Figure #2 Revisions. For Q2, management guided local core advertising revenue to be down low to mid single digits. Retransmission revenues will cycle the renewals last year, and, as such, Retransmission revenues will moderate from the 21% increase of the first quarter to up single digits in the second. In total Local Media revenue is expected to be up low to mid single digits. While management indicated that there is strong scatter pricing and improving trends in Direct Response advertising in its Network business, it guided revenues to be down mid single digits for this segment. We believe that its Network revenue will swing positive in the second half as it benefits from higher rates in Upfront advertising.&nbsp;
Given the softer start to the year, we are lowering our full year 2024 revenue forecast from $2.6 billion to $2.5 billion. There could be upside to this estimate should Network advertsing rebound and core advertising strengthens. Our forecast anticipates that there will be displacement in core advertising in its Local Media segment, given the anticipated strong Political advertising expected in the second half. Distribution revenue for full year 2024, is guided to be up low single digits, which factors in the likelihood that Pay TV subscriber counts will be down for the remainder of the year. As indicated earlier in this report, we are raising our Political advertising estimate from $225 million to $260 million. The shift towards this higher margin advertising, combined with earlier cost reduction efforts, should allow the company to achieve our previous adj. EBITDA estimate. As such, we are largely maintaining our full year 2024 adj. EBITDA estimate of $555.4 million. At this time, we are maintaining our full year 2025 adj. EBITDA estimate of $363.8 million.&nbsp;
As of March 31, the company had $30.2 million in cash and cash equivalents and $2.9 billion in long term debt. In Q1, the company paid $3.9 million on its term loans and reduced the outstanding balance on its revolving credit facility by $40 million. The company remains focused on debt reduction and has highlighted Bounce as an asset it is currently shopping, we estimate that the network could be worth between $165 million and $225 million. Management indicated the possibility of further asset monetization, including non-strategic real estate holdings, which it did not identify. In addition to asset monetization, the company stands to benefit from an influx of high margin political revenue which should contribute to its debt reduction efforts. We believe that the company may need to sell additional assets to assuage investor concerns over its relatively high debt leverage.&nbsp;
Near current levels, the SSP shares trade at 5.8 times enterprise value to our 2024 cash flow estimate or 7.0 times our blended 2024/2025 adj. EBITDA estimate. We would note that the valuation is well below historic multiples in the range of 8 to 12 times and based on depressed adj. EBITDA estimates. Our price target of $17 reflects a target multiple of 8.4 times EV to our 2024 adj. EBITDA forecast, or 10.1 times our blended 2024/2025 adj. EBITDA estimate, near the mid point of historic ranges. Notably, the 8.4 multiple would be below the average low trading range for the shares for the past 10 years of 9.5 times. We believe further asset monetization and an influx of high margin political revenue could accelerate debt reduction and alleviate concerns over the company&#8217;s high debt leverage. In addition, we believe that an improved economic outlook, possibly driven by Fed rate reduction, could enhance the company&#8217;s revenue and adj. EBITDA outlook and assuage investor concerns.&nbsp;

   
Figure #1 Q1 Results


   

   
 Figure #2 Revisions

Looking For A Strong Finish To The Year

Media

Investment Appraisal
We believe that the company's recently reported first quarter results indicate that it is on a path toward a swing toward revenue growth. Notably, the first quarter revenue reflected a modest revenue decline of 3.5% and follows a string of sequential quarterly moderating revenue trends from down 12.6% in Q3 2023 to down 9.7% in Q4 2023. Our more sanguine view of the revenue outlook is supported by the better than expected first quarter revenues and some recent client "wins."&nbsp;
First, as illustrated in Figure #1 Q1 Results, the company beat our expectations. First quarter revenues of $45.4 million, which were down 3.5% from the year earlier quarter, was better than our $44.8 million estimate (expected to be down 4.5%). The biggest upside variance was in the company's Sales Services segment. This segment represents the company's InsideOut acquisition it purchased in December 2022 for $7.5 million. Originally, InsideOut was reported in its Customer Care segment and is now a separate segment, which highlights the strong revenue growth of this acquisition. Sales Services reported a remarkable 67% increase in revenues in the latest quarter. Favorable cost containment and improved revenues allowed the company to beat our adj. EBITDA estimate, $2.8 million versus our estimate of $2.1 million, a 33% upside variance.
 On the recent investor call, management indicated that it has recently secured new clients in its Fulfillment &amp; Logistics and Customer Care segments. In its Fulfillment &amp; Logistics segment, it secured a new client utilizing its packaging for distribution and a pharmaceutical company to deliver B2B and B2C literature and samples. Both of these new clients are expected to benefit the second half 2024 results. In its Customer Care segment, the company obtained a new client in the technology enabled, vehicle safety devices area. This new client is expected to benefit Q2 results. Finally, management highlighted that it is expanding its relationship with a international travel agency in its Marketing Services segment. This expected to largely impact second half results. In total, we believe that these new client wins support a more sanguine view of the company's revenue prospects in 2024 and beyond.&nbsp;
 Figure #2 Q2 Revisions illustrate our upwardly revised Q2 revenue expectations. We are raising our revenue estimate from $47.0 million to $47.5 million, up 1.1%. Notably, we believe that the quarter will show further revenue moderation, with a modest 0.5% revenue decline from the year earlier quarter, a continued sequential revenue improvement from the 3.5% revenue decline in the first quarter. The impact of the recently acquired new clients are not expected to kick in until the second half of the year. Notably, in the current quarter, the company is expected to have further restructuring expenses of roughly $500,000. This reflects the company reimaging its operations, making them more efficient, which should favorably affect second half 2024 and full year 2025 margins.
Figure #3 Second Half Revisions highlight the impact of recent client wins and the prospect for improved margins. We are raising our third quarter revenue estimate from $47.9 million to $49.3 million, a 2.9% increase. We believe that adj. EBITDA margins will improve from our previous estimate of 9.0% to 11.6%. As such, we are raising our Q3 adj. EBITDA estimate from $4.3 million to $5.7 million. The company is&nbsp; expected to have additional restructuring charges in Q3, which we estimate to be $700,000. In spite of the restructuring charge, we are raising our Earnings Per Share (EPS) estimate from $0.16 to $0.23. We are also raising our Q4 revenue estimate from $51.5 million to $52.2 million, or up 1.4%. Our adj. EBITDA margin is being increased from 10.5% to 13.1%. As a result, we are raising our Q4 adj. EBITDA estimate from $5.4 million to $6.8 million. We expect that there will be yet another restructuring charge in Q4, which will adversely impact earnings. But, flowing through the adj. EBITDA increase to the bottom line, our Q4 EPS estimate is being increased from $0.26 to $0.29.&nbsp;
Figure #4 Full Year 2024 and 2025 Estimates reflect the upward revenue revisions and margins. We are raising our full year 2024 revenue estimate from $191.2 million to $194.4 million. Due to the anticipated higher margins, we are raising our adj. EBITDA estimate by 21% to $18.9 million, up from $15.7 million. We are raising our full year 2025 revenue estimate from $199.7 million to $202.2 million. Due to the expected improved margins, we are raising our full year 2025 adj. EBITDA estimate 27% to $24.7 million, up from $19.5 million. We estimate full year 2025 earnings per share of $1.47, up from $1.01.&nbsp;
 As of March 31, the company had $11.5 million in cash and cash equivalents, no debt and $25.0 million of capacity on its revolver. The revolver has been extended to June 2025. Importantly, the company is executing on its plan to terminate its Qualified Pension Plan 1, which we anticipate to take place in June. Given that the termination contribution of $7.5 million will be made in June, the long-term pension liability is listed as a current liability, totaling $28.6 million. Combined with recent interest rate increases and the termination of the Qualified Pension Plan 1, we believe that the company derisked its pension obligations. We note that the company's long term pension liabilities were over $50 million in Q1 2022.&nbsp;
We believe that investors have been slow to recognize the improving trends at the company. Certainly, management is relatively new and investors are looking for proven results. But, we believe that the progress is notable, the balance sheet is substantially improved with cash and no long term debt, limited pension liability exposure, and the company is now generating free cash flow and positive earnings. In spite of the progress, the shares have essentially traded sideways since November 2023, as Figure #5 Stock Performance illustrates.&nbsp;
Given our upwardly revised 2024 and 2025 expectations, we are raising our price target from $14 to $20. Our upward revision maintains our target multiple of 6.2 times Enterprise Value to our adj. EBITDA expectations, but now uses our 2025 estimate. Our target multiple does not include pension obligations, which have largely been derisked. We believe that the target multiple has significant upside should the company demonstrate its strong double-digit adj. EBITDA growth potential. Execution of its favorable revenue growth and margin expansion will likely be the key catalysts toward higher stock valuations. We note that the company is expected to swing toward positive revenue growth in the third quarter, a near term potential catalyst.&nbsp;Given the favorable risk/reward relationship, we view the HHS shares as among our favorite in the media industry and rate the shares Outperform.&nbsp;&nbsp;
---------- page break ----------
 
Figure #1 Q1 Results
<img src="https://www.noblelinx.com/x/research/images/reports/HHSq12024r.jpg" style="width: 360px;height: 799px" />
---------- page break ----------
 
Figure #2 Q2 Revisions
<img src="https://www.noblelinx.com/x/research/images/reports/hhsq22024r.jpg" style="width: 364px;height: 654px" />
---------- page break ----------
Figure #3 Second Half Revisions
<img src="https://www.noblelinx.com/x/research/images/reports/HHS2H2024.jpg" style="width: 514px;height: 648px" />
---------- page break ----------
 

 
Figure #4&nbsp;Full Year 2024 and 2025 Estimates&nbsp;
 
 
<img src="https://www.noblelinx.com/x/research/images/reports/hhs20242025.jpg" style="width: 520px;height: 700px" />
 
 ---------- page break ----------
 
Figure #5 Stock Performance
<img src="https://www.noblelinx.com/x/research/images/reports/hhsstockchart.JPG" style="width: 603px;height: 202px" />
Source: Channelchek.com

Investment Appraisal
We believe that the company&#8217;s recently reported first quarter results indicate that it is on a path toward a swing toward revenue growth. Notably, the first quarter revenue reflected a modest revenue decline of 3.5% and follows a string of sequential quarterly moderating revenue trends from down 12.6% in Q3 2023 to down 9.7% in Q4 2023. Our more sanguine view of the revenue outlook is supported by the better than expected first quarter revenues and some recent client &#8220;wins.&#8221;&nbsp;
First, as illustrated in Figure #1 Q1 Results, the company beat our expectations. First quarter revenues of $45.4 million, which were down 3.5% from the year earlier quarter, was better than our $44.8 million estimate (expected to be down 4.5%). The biggest upside variance was in the company&#8217;s Sales Services segment. This segment represents the company&#8217;s InsideOut acquisition it purchased in December 2022 for $7.5 million. Originally, InsideOut was reported in its Customer Care segment and is now a separate segment, which highlights the strong revenue growth of this acquisition. Sales Services reported a remarkable 67% increase in revenues in the latest quarter. Favorable cost containment and improved revenues allowed the company to beat our adj. EBITDA estimate, $2.8 million versus our estimate of $2.1 million, a 33% upside variance.
 On the recent investor call, management indicated that it has recently secured new clients in its Fulfillment &amp; Logistics and Customer Care segments. In its Fulfillment &amp; Logistics segment, it secured a new client utilizing its packaging for distribution and a pharmaceutical company to deliver B2B and B2C literature and samples. Both of these new clients are expected to benefit the second half 2024 results. In its Customer Care segment, the company obtained a new client in the technology enabled, vehicle safety devices area. This new client is expected to benefit Q2 results. Finally, management highlighted that it is expanding its relationship with a international travel agency in its Marketing Services segment. This expected to largely impact second half results. In total, we believe that these new client wins support a more sanguine view of the company&#8217;s revenue prospects in 2024 and beyond.&nbsp;
 Figure #2 Q2 Revisions illustrate our upwardly revised Q2 revenue expectations. We are raising our revenue estimate from $47.0 million to $47.5 million, up 1.1%. Notably, we believe that the quarter will show further revenue moderation, with a modest 0.5% revenue decline from the year earlier quarter, a continued sequential revenue improvement from the 3.5% revenue decline in the first quarter. The impact of the recently acquired new clients are not expected to kick in until the second half of the year. Notably, in the current quarter, the company is expected to have further restructuring expenses of roughly $500,000. This reflects the company reimaging its operations, making them more efficient, which should favorably affect second half 2024 and full year 2025 margins.
Figure #3 Second Half Revisions highlight the impact of recent client wins and the prospect for improved margins. We are raising our third quarter revenue estimate from $47.9 million to $49.3 million, a 2.9% increase. We believe that adj. EBITDA margins will improve from our previous estimate of 9.0% to 11.6%. As such, we are raising our Q3 adj. EBITDA estimate from $4.3 million to $5.7 million. The company is&nbsp; expected to have additional restructuring charges in Q3, which we estimate to be $700,000. In spite of the restructuring charge, we are raising our Earnings Per Share (EPS) estimate from $0.16 to $0.23. We are also raising our Q4 revenue estimate from $51.5 million to $52.2 million, or up 1.4%. Our adj. EBITDA margin is being increased from 10.5% to 13.1%. As a result, we are raising our Q4 adj. EBITDA estimate from $5.4 million to $6.8 million. We expect that there will be yet another restructuring charge in Q4, which will adversely impact earnings. But, flowing through the adj. EBITDA increase to the bottom line, our Q4 EPS estimate is being increased from $0.26 to $0.29.&nbsp;
Figure #4 Full Year 2024 and 2025 Estimates reflect the upward revenue revisions and margins. We are raising our full year 2024 revenue estimate from $191.2 million to $194.4 million. Due to the anticipated higher margins, we are raising our adj. EBITDA estimate by 21% to $18.9 million, up from $15.7 million. We are raising our full year 2025 revenue estimate from $199.7 million to $202.2 million. Due to the expected improved margins, we are raising our full year 2025 adj. EBITDA estimate 27% to $24.7 million, up from $19.5 million. We estimate full year 2025 earnings per share of $1.47, up from $1.01.&nbsp;
 As of March 31, the company had $11.5 million in cash and cash equivalents, no debt and $25.0 million of capacity on its revolver. The revolver has been extended to June 2025. Importantly, the company is executing on its plan to terminate its Qualified Pension Plan 1, which we anticipate to take place in June. Given that the termination contribution of $7.5 million will be made in June, the long-term pension liability is listed as a current liability, totaling $28.6 million. Combined with recent interest rate increases and the termination of the Qualified Pension Plan 1, we believe that the company derisked its pension obligations. We note that the company&#8217;s long term pension liabilities were over $50 million in Q1 2022.&nbsp;
We believe that investors have been slow to recognize the improving trends at the company. Certainly, management is relatively new and investors are looking for proven results. But, we believe that the progress is notable, the balance sheet is substantially improved with cash and no long term debt, limited pension liability exposure, and the company is now generating free cash flow and positive earnings. In spite of the progress, the shares have essentially traded sideways since November 2023, as Figure #5 Stock Performance illustrates.&nbsp;
Given our upwardly revised 2024 and 2025 expectations, we are raising our price target from $14 to $20. Our upward revision maintains our target multiple of 6.2 times Enterprise Value to our adj. EBITDA expectations, but now uses our 2025 estimate. Our target multiple does not include pension obligations, which have largely been derisked. We believe that the target multiple has significant upside should the company demonstrate its strong double-digit adj. EBITDA growth potential. Execution of its favorable revenue growth and margin expansion will likely be the key catalysts toward higher stock valuations. We note that the company is expected to swing toward positive revenue growth in the third quarter, a near term potential catalyst.&nbsp;Given the favorable risk/reward relationship, we view the HHS shares as among our favorite in the media industry and rate the shares Outperform.&nbsp;&nbsp;
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Figure #1 Q1 Results

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Figure #2 Q2 Revisions

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Figure #3 Second Half Revisions

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Figure #4&nbsp;Full Year 2024 and 2025 Estimates&nbsp;



   
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Figure #5 Stock Performance

Source: Channelchek.com

Revising Estimates Upward; Price Target Raised

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