S4 Capital issues consecutive summer profit warning
Shares in S4 Capital dropped by 22% this morning after founder Sir Martin Sorrell issued a profit warning amid weakened demand from tech clients.
The owner of Media.Monks cited the softness to challenging macroeconomic conditions and cautious spending, especially by tech clients who were very focused on the short-term, as reasons for the downturn.
S4, founded by Sorrell in 2018 following his departure from WPP, has revised its full-year like-for-like net revenue expectations. The company is now forecasting growth of 2%-4%, a significant decrease from its previous 6%-10% projection.
Net revenue over the second quarter was below budget, especially in May and June.
“We continue to see longer sales cycles, particularly for larger transformation projects,” a spokesperson for the company said. “Some impact has been seen in each of the Practices, but it is particularly evident in Content.”
For the first six months of 2023, S4 said that like-for-like net revenue growth was likely to rise by 5%.
Net debt at 30 June was put at £115m and seen rising to £180-220m, on the back of expected cash considerations for prior year combinations, before improving significantly in 2024.
“As in prior years, 2023 will again be significantly second half weighted reflecting our seasonality,” the spokesperson added.
Analysis: S4 impacted by a double-whammy of slowdowns
Since Sir Martin Sorrell launched S4 Capital in 2018, it had seemed like you could set your watch by his nascent company’s announcements that it had “merged” with a smaller digital agency (S4 is always careful to say it merges with, as opposed to acquires, businesses).
But then, as the Covid-19 lockdowns lifted and the world’s extraordinary tech transformation began to slow over the last 18 months, M&A opportunities have also dried up as inflation and interest rates have risen. So, Sorrell has been unable to grow as aggressively by acquisition in order to achieve his ideal vision of global scale to deliver on the stated mantra of being “better, faster and cheaper” than incumbent agency groups such as Publicis Groupe, Omnicom, and his former baby, WPP.
Organic growth has proved difficult, too. Where before and during the pandemic, S4 took pride in being heavily towards Big Tech, the digital slowdown caused Google and Meta to begin reporting weaker financial numbers.
Which is why this profit warning comes, in fact, almost exactly one year after the last one. The difference being that 2022 was also marred by a failure to report financial earnings at the advertised time due to accounting difficulties. A Sunday Times investigation last year also alleged that S4’s finance team failed to accurately record sales on its computer system, and accused Media.Monks of regularly failing to pay social media influencers and other creditors on time.
But here’s why 2023 is different: Big Tech is resurgent thanks to artificial intelligence. The sheer weight of interest, not just in media and advertising, of what Microsoft, Google, Meta and others can deliver with AI has led to huge increases in market cap for those behemoths. We expect this will lead to improved earnings for all of them in the coming days.
The strategic question for S4 now is whether to double down on its tech focus and this latest growth wave, or whether it needs to diversify further with more established media and content deals with advertisers who may be less dynamic and more wedded to “legacy” media, but are more reliable to spend money on marketing during downturns.