S4 Capital’s top-line momentum ‘more than maintained’ in Q3 earnings

Following a strong first six months, Sir Martin Sorrell’s S4Capital Plc has said it’s more than maintained its top-line momentum in the third quarter, with like-for-like gross profit/net revenue up over 29%, in line or ahead of the performances of the technology companies and platforms.

Billings were £484.2 million (A$850.3 million) up 51% reported and 21% like-for-like. Controlled billings were £1.4 billion (A$2.4 billion). Revenue was up over 68% reported to £300.1 million (A$527 million), 27% like-for-like and gross profit/net revenue up 73% to £249.9 million (A$438.8 million), 29% like-for-like.

Sir Martin Sorrell

Year-to-date billings were up 46% reported to be £1.3 billion (A$2.28 billion), up 23% like-for-like. Controlled billings were £4 billion (A$7 billion). Year to date, revenue is up 63% reported to be £746.5 million (A$1.3 billion), 29% like-for-like and gross profit/net revenue up 64% reported to be £625.2 million (A$1 billion), 28% like-for-like.

Asia Pacific was the slowest growing region, chiefly impacted by China’s zero-covid policy-driven slowdown, with reported gross profit/net revenue up 16% to £16.6 million (A$29 million) in the third quarter and up 3% like-for-like. Year-to-date reported gross profit/net revenue grew 35% to £45.6 million (A$80 million) and like-for-like was up 18%.

Sir Martin Sorrell, executive chairman of S4Capital Plc said: “Despite the current macropolitical and economic gloom and slowing tech growth, our top-line momentum has been more than maintained in the third quarter and remains relatively strong into the fourth quarter. This is an enormous credit to our people and their ability to operationalise our purely digital, data-driven, faster, better, more efficient and unitary model, with all three practices growing their top lines strongly.

“Given the reduction in global GDP growth rate forecasts for 2022 and 2023 and the likelihood of a recession in some parts of the world, clients will be moving ‘down the funnel’, as we say, prioritising performance and activation, measurement of marketing ROI and media mix modelling, which plays to our strengths. We believe this changing market environment will continue to offer significant growth opportunities given our client profile, relative size and disruptive model.”

The Data&Digital media practice was not as strong in gross profit/net revenue growth and in operational EBITDA conversion in the third quarter but continued to benefit from the uncertainty and the increase in the marketing mix index as a result of both Apple’s decision around IDFA and Google’s around the deprecation of third party cookies. Technology services continue to perform very strongly at all levels.

The number of people in the firm was 8,956 at the end of the third quarter (including XX Artists), down 1% compared to 9,041 at the end of the second quarter.

These figures include the impact of a Content combination with XX Artists from 1 July 2022; Data&Digital media includes 4Mile from 11 January 2022; Technology services include TheoremOne from 16 May 2022. Significant progress continues to be made on integration around Media. Monks, its unitary brand.

Year-end 2022 net debt is still expected to be in the range of £130-170 million (A$228-298 million), after the initial combination payment for XX Artists and contingent consideration related to prior combinations. Net debt ended the third quarter at £157.7 million (A$276 million), or 1.2x net debt/operational EBITDA. The balance sheet remains strong with sufficient liquidity and long-dated debt maturities. Pro-forma Operational EBITDA for the latest twelve months to 30 September 2022 was £126.2 million (A$221 million).

The company is preparing a new three-year plan for the period 2023-5 and preliminary budgets for 2023.

S4 Capital has seen “little or no impact” on its top-line progress from the more than transitory inflation, the higher than previous interest rates, the war in Ukraine and the continued friction between the US and China and the long-term ambitions of Russia and Iran, but it says it would be foolhardy to believe that both the industry and its growth may be unaffected.

Following patchy third-quarter reporting by the tech platforms, hardware and software companies, sell-side analyst forecasts for them in 2023 have been pegged back to up to 10%, versus 8-9% this year.

The company believes the forecast growth of the major platforms and like-for-like growth at Alphabet/Google, Meta/Facebook, Amazon, TikTok and the newer advertising platform entrants such as Microsoft, Apple, Netflix and Disney+, in particular, will offer significant opportunities for it in 2023 and beyond.

All this along with continued robust forecast digital transformation spending growth in the range of 20%, will provide disruptive opportunities and increased desire for digital marketing transformation as GDP growth and clients’ top-line growth slow and they focus more on costs – and move “down the funnel”, emphasising activation and performance, ROI on marketing investment and media mix modelling, which plays to S4’s strengths, the company said.

S4 Capital shares closed at £224.2 (A$393.7) overnight and has a market capitalisation of £1.26 billion (A$2.21 billion).


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