REG - S4 Capital PLC - First Quarter Trading Update

S4 CapitalAnnouncement

30/05/2022 07:15

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RNS Number : 1627N  S4 Capital PLC  30 May 2022

 

S4 Capital plc

("S(4)Capital" or "the Company")

 

 

First Quarter Trading Update

 

 

S(4)Capital gross profit/net revenue growth continues ahead of market guidance

 

 

 

¤       Reported revenue up 70.1% to £206.8 million, up 40.6%
like-for-like(1) and pro-forma(2)

 

¤       Reported gross profit/net revenue up 64.6% to £171.1 million,
up 34.5% like-for-like and pro- forma

 

¤       Balance sheet remains strong with net debt(3) of £48.0 million
at the end of the first quarter, with further merger payments, chiefly
TheoremOne, made after quarter end.

 

¤       Despite the slowdown in forecasts for global GDP growth in 2022
and 2023, demand for digital advertising and marketing transformation is
forecast to expand at 10-15% per annum with digital increasing its share of
total advertising spend from 61% to 68% by 2025 in the United States

 

¤       The Company continues to target sector leading 25%
like-for-like revenue and gross profit growth and steady improvement in
Operational EBITDA(4) margin in 2022. Two further "whoppers" added making a
total of eight against a target of 20.

 

¤       Performance continues in line with Group's three-year plan of
doubling organically 2022-24

 

¤       Strengthening of financial reporting procedures and structures
to try to avoid any further reporting delays

 

¤       Ukrainian Monks and families supported and aided and
discontinuing minor Russian operations

 

¤       Good progress against our ESG commitments towards industry
leading net zero by 2024

 

 

S(4)Capital plc (SFOR.L), the new age/new era digital advertising and
marketing services company, provides the following trading update for the
three-month period ending 31 March 2022.

 

 

Financial performance and outlook

The Company grew strongly in the first quarter ahead of market guidance,
maintaining a like-for-like gross profit/net revenue growth rate of >30%,
faster than last year's first quarter and almost as strong as last year's
fourth quarter. Momentum has been reinforced by two further "whopper"
additions making a total of eight against the target of 20, one through pitch
and one through a combination, both of which will be fully effective in 2023.
This represents an excellent start to achieving the Company's 2022-24
three-year plan of doubling its size on a like-for-like basis and of also
achieving the previous similarly targeted 2020-22 and 2021-23 three-year
plans, which both also called for a doubling. The Company achieved its first
three-year plan for 2019-21.

 

We maintain our like-for-like gross profit/net revenue growth guidance of 25%.
We continue to target steady improvement in Operational EBITDA margin in 2022.
As in previous years, our result for the full year will be weighted to the
second half, but this year even more significantly so, as hiring has already
been made in the first half to accommodate our planned growth rate for the
year, including new whoppers and investments have been implemented in
management infrastructure. In order to try to avoid any possible future delay
in financial reporting, changes have already been implemented and will be
implemented at the Board, Company and Content practice levels in financial
reporting and control, internal audit, governance, risk and compliance.

 

Reported revenue was up 70.1% to £206.8 million and gross profit/net revenue
up 64.6% to £171.1 million. Like-for-like and pro-forma revenues and gross
profit/net revenue were up 40.6% and 34.5% respectively.

 

The Company's Content practice, representing 67.6% of total gross profit/net
revenue, was up 62.6% in reported revenues and 55.0% in reported gross
profit/net revenue. Like-for-like and pro-forma revenues and gross profit/net
revenue were up 41.1% and 33.3% respectively.

 

The Company's Data&digital media practice, representing 28.4% of total
gross profit/net revenue, was up 68.1% in reported revenues and 65.6% in
reported gross profit/net revenue. Like-for-like and pro-forma revenues and
gross profit/net revenue were up 35.8% and 34.7% respectively.

 

The Company's Technology services practice, representing 4.0% of total gross
profit/net revenue, is a new practice for the group with Zemoga joining in
September 2021. Like-for-like and pro-forma revenues and gross profit/net
revenue were up 71.0% and 58.3% respectively.

 

Geographically, all regions showed strong growth. The Americas, representing
71.8% of reported gross profit/net revenue, reported gross profit/net revenue
up 67.3%, EMEA, representing 19.9%, up 57.3% and Asia Pacific, representing
the remaining 8.3% up 60.0% reported. On a like-for-like and pro-forma basis,
the Americas were up 29.2%, EMEA up 54.7% and Asia Pacific up 40.7%.

 

The Balance sheet remains strong, with net debt of £48.0 million at the end
of the first quarter, after business combination cash payments of around
£16.0 million. After further merger payments, namely TheoremOne, and cash
contingent consideration payments of £40 million, current monthly net debt is
expected to fluctuate between £140-£190 million. Pro-forma Operational
Earnings Before Interest, Taxes, Depreciation and Amortisation for the latest
twelve months to 31 March 2022 was £122.5 million, including TheoremOne.

 

Corporate activity

In the first quarter, the Data&digital media practice announced a
combination with 4Mile in the United States and subsequent to the quarter end
the Technology services practice combined with TheoremOne. These combinations
and the previous ones before have continued to strengthen the Company's
organic growth rate as significant revenue synergies have been identified and
generated through development of existing and new client opportunities across
all three practices and geographies.

 

We continue to examine merger opportunities, especially in high growth
functional areas of the three Content, Data&digital media and Technology
services practices, with the objective of reaching a 50:25:25 split versus the
current pro-forma 70:25:5 split. Geographically, we remain at around 70% in
the Americas, 20% in EMEA and 10% in Asia Pacific. Given the impact of the War
in Ukraine on geographic risk profiles, our geographic objective has been
modified to 60:20:20 from 40:20:40, at least for the short to medium term,
reflecting the growing "risk-on" characteristics of the Americas, the Middle
East and parts of Asia Pacific.

 

We continue to be prepared to leverage the Company to around 1.5-2.0 times
Operational EBITDA. We also continue to deploy the 50:50 cash:equity business
combination structure we have used from inception almost four years ago, but
are only prepared to issue our equity at the pre-delayed 2021 results
announcement VWAP level of 425p, as we did with TheoremOne and continue to do
with one other potential merger partner.

 

In the first quarter, we hired our second flight of fellows for the S(4)
Fellowship programme, who are now starting the four-year internship. We
continue to recruit from the historically black universities in the United
States and now from Public High Schools in New York. In addition to our
matching-funding programme last year and changes to our recruitment and
training techniques, the Fellowship will grow our people of colour population
to where it should be, reflecting the communities in which we work. It remains
currently at around 40%, with the black population around 6%, half of what it
should be to meet our objective.

 

While our gender balance is even across the Company as a whole, the proportion
of women leaders drops off significantly at senior levels. In order to address
this issue, we initiated the S(4) Women Leadership Programme at UC Berkeley.
The first flight of approximately 50 women completed their six-month virtual
course last year and the second flight of over 30 senior female leaders is
currently completing a highly energised, in person course at UC Berkeley.
There will be more cohorts in future from across the firm.

 

On our broader ESG goals we have also made what we believe to be
"industry-leading" sustainability commitments (others seem to have a different
view): we commit to being fully carbon neutral by 2024 and have already
started planting our S(4) Forest; and we have made significant progress in our
ambition to become a certified B corporation.

 

S(4)Capital's fourth annual report has been published on 14 May 2022. Both
digital and pdf versions will be accessible on the Company's website at
www.s4capital.com (http://www.s4capital.com) .

 

 

Statement of the Executive Chairman

Generally and most importantly, almost all of our now approximately 9,000
people in 33 countries and their families continue to be well and safe. We
currently have only around 100 reported cases of Covid, mostly in Latam.
Lockdowns remained a significant issue, however, in Shanghai and have had an
impact on activity and morale.

 

Thankfully, we were able to assist our 84 Ukraine.Monks and their families, as
much as possible. About half remained in the Ukraine because they wished to or
had to sign up for military service. We relocated and redeployed those who had
to leave the country, mostly in Eastern Europe. We have wound down our
operations in Russia, where we had 10 Monks. There was little or no revenue
impact of such actions.

 

We seem to have settled into a rhythm of 60% office working, with Monday and
Friday being the most frequent wfh days. Regional patterns vary currently,
with the Americas at 34% office utilisation, EMEA close to 100% and APAC at
75%. Our office footprints have consequently been reduced to about 60% of what
they used to be on a pro-forma basis and we are limiting leases to three year
periods to accommodate rapid growth and take advantage of market frictions. In
a tight labour market employment flexibility and social awareness remain
critical differentiators for talented potential digital recruits. We continue
to make progress in unifying our practices in our office locations in the 57
cities where we are located, 2 cities remain to be unified.

 

While there may be a need to develop and reinforce the culture of the company,
particularly for new recruits (and we have had some 4,000 of them since this
time last year), the pandemic has demonstrated that a more flexible, "hybrid"
approach may be more effective. This is particularly the case as we are
probably at the beginning of further significant technological change, which
will make distance working and living more effective. Office spaces will also
be different. Given the increasing tendency to wfh, the pattern of office
layout may vary between spaces for clients, spaces for our people to work
together and socialise and for our people to have privacy. Staff turnover
remains at the higher end of our usual range, but remains well below what is
reported elsewhere and seems to be lessening in recent weeks as economic
pressures increase.

 

Secondly, as we effectively represent a royalty on the growth of digital
marketing transformation, we have benefited from our clients continuing to
increase their investment in digital Content, Data&digital media and
Technology services.

 

This was accelerated by the impact of the pandemic, which intensified the
shift to online marketing amongst three communities - consumers, the media and
enterprises. In addition, it was heightened by the Covid stimulus driven
snapback in global GDP growth in 2021 to 5-6%. Now a perfect storm of the
withdrawal of the Covid fiscal and monetary stimulus, the consequent rise in
inflation and interest rates, the war in Ukraine and the extended zero-Covid
lockdowns in China have reduced IMF GDP growth forecasts for 2022 to around 3%
from 4-5% and for 2023 to 3% too, (which seems optimistic to me) with some
others forecasting recession or two negative consecutive quarters of GDP
growth in some parts of the world.

 

Whilst GDP growth is a driver of our four addressable markets - global media,
marketing services, trade budgets and digital marketing transformation - the
digital segments of these markets, as opposed to the analogue, are still
forecast to continue to grow significantly. For example, digital advertising
is forecast to grow by 10-15% inside the United States and outside, whilst
analogue growth will be anaemic. Advertising as a proportion of US GDP is
still forecast to rise from under 1% to approximately 1.5%%, more like where
it used to be, purely because of the continued rise of digital advertising at
around 10-15% per annum to a share of 68% in 2025 against 61% this year. Other
addressable markets are projected to grow at significantly higher rates such
as cloud platform growth (34%), Marketing Technology software (32%) and
Digital Transformation spend (20%), all contributing to our confidence around
our gross profit/net revenue guidance and three year plans.

 

In addition, as we saw in 2020 with the pandemic, the client demand for
digital marketing transformation intensifies as GDP growth slows and organic
volume gains lessen and become more difficult. Change agents inside companies,
who were ignored when times were good are given more oxygen, as the need to
increase efficiency becomes critical.

 

Given all this, we remain optimistic about our prospects for this year,
particularly as consumer and corporate balance sheets remain strong, cushioned
by the Covid stimulus. The chickens may well come home to roost in 2023, as
interest rates rise further this year to counter the inflation surge. But,
digital marketing expenditure remains robust, even in a recession, as, for
example, our results in 2020 demonstrated, given its secular growth trend.

 

Finally, our financial position and liquidity remain robust. We maintained net
debt balances of approximately £50 million in the first quarter and have
scope to increase our net debt to Operational EBITDA ratios.

 

Conversion at scale accelerates

 

We have five objectives for 2022.

 

First, to achieve greater client conversion at scale and achieve our 20(2)
objective as rapidly as possible. Already in 2022 we have now secured 2 more
"whoppers" making a total of 8 in place for 2023 and nineteen further remain
identified with revenue levels of $5-15 million.

 

Second, to integrate our three practices even more effectively. The launch of
our unitary brand last year and the unification of our offices city by city
are further strengthening our one p&l model.

 

Third, to strengthen our diversity, equity and inclusion and climate change
achievements. This year's extensions of both our S(4) Fellowship programme and
S(4)Women Leadership programme, along with our progress towards net zero by
2024 are indicators of our progress.

 

Fourth, to continue to broaden and deepen our service capability through
further combinations. Already this year we have added 4Mile to our
Data&digital media practice and TheoremOne to our Technology services
practice.

 

Finally, to try to ensure that we never experience an unacceptable delays in
our results again. We are strengthening our Company financial control,
treasury and legal, risk and governance functions, with internal audit
enhancements to come and at the Content practice level strengthened control,
pricing and IFRS15 functions. We will be adding a new Non-Executive Chairman
to the Audit Committee shortly too.

 

In the first quarter, the Group's 'land and expand' and judicious pitch
strategy resulted in significant new work with many of our larger clients such
as Alphabet, Meta, HP, Netflix, Amazon, PayPal and Netflix. Notable new
business wins in the quarter include assignments from Brewdog, Tiktok, Diageo,
Booking.com, Tim Horton's, Commonwealth Bank Australia, Beam Suntory, Golden
Goose and the US media account of a large FMCG which will become a leading
account in 2023.

 

New business activity remains frenetic and the pipeline is above the level at
this time last year, with considerable current pitch and land and expand
opportunities across the board.

 

We are planning a Capital Markets Day in London in September. Full details
will be sent to analysts and investors as soon as possible.

 

Digital transformation will continue to accelerate over the next two years and
beyond

 

We remain very optimistic about our Company and its prospects. Clients
continue to be focused on taking back control of their marketing functions,
which favours our in-house, embedded or even outsourced capabilities. In
addition, the privacy decisions by both Google and Apple and the resultant
crumbling of third party cookies have all played to the strengths of our
global data and analytics network and stressed the fundamental importance of
first party data and the walled gardens. Our new Technology services practice
caters to the growing and persistent demand for digital marketing
transformation. Agility continues to be the key corporate attribute and our
go-to-market mantra faster, better, cheaper or speed, quality, value is
resonating increasingly with our current clients and potential ones. The
pandemic has accelerated digital transformation. Despite the softening of
global GDP growth because of the withdrawal of the Covid stimulus, significant
inflation, increasing interest rates, the war in Ukraine and China's continued
zero-Covid lockdowns, the secular trend to digital marketing continues to
provide strong tailwinds.

 

Sir Martin Sorrell,

Executive Chairman

 

 

 

Summary of results

 

 £ million                 Q1 2022  Q1 2021  YOY Growth          Like-for-like(1)  YOY Growth  Proforma(2) Q1 2022  Proforma  YOY Growth

                                                                 Q1 2021                                            Q1 2021

 Revenue                   206.8    121.6    70.1%               147.1             40.6%       206.8                147.1     40.6%

 Content                   149.9    92.2     62.6%               106.3             41.1%       149.9                106.3     41.1%
 Data & digital media      49.4     29.4     68.1%               36.4              35.8%       49.4                 36.4      35.8%
 Technology services       7.5      -        -                   4.4               71.0%       7.5                  4.4       71.0%

 

 

 

 

 

 

 

 £ million                   Q1 2022  Q1 2021  YOY Growth          Like-for-like  YOY Growth  Proforma(2) Q1 2022  Proforma  YOY Growth

                                                                   Q1 2021                                         Q1 2021

 Gross profit (net revenue)  171.1    104.0    64.6%               127.2          34.5%       171.1                127.2     34.5%

 Content                     115.6    74.6     55.0%               86.7           33.3%       115.6                86.7      33.3%
 Data & digital media        48.7     29.4     65.6%               36.1           34.7%       48.7                 36.1      34.7%
 Technology services         6.8      -        -                   4.4            58.3%       6.8                  4.4       58.3%

 Americas                    122.8    73.4     67.3%               95.0           29.2%       122.8                95.0      29.2%
 EMEA                        34.0     21.6     57.3%               22.0           54.7%       34.0                 22.0      54.7%
 Asia-Pacific                14.3     9.0      60.0%               10.2           40.7%       14.3                 10.2      40.7%

( )

(1) Like-for-like relates to 2020 being restated to show the unaudited numbers
for the previous year of the existing and acquired businesses consolidated for
the same months as in 2021 applying currency rates as used in 2021

(2) Pro-forma numbers relate to unaudited full year non-statutory and non-GAAP
consolidated results in constant currency as if the S(4)Capital Plc Group (the
Group) had existed in full for the year and have been prepared under
comparable GAAP with no consolidation eliminations in the pre-acquisition
period

(3) Net debt comprises cash minus gross bank loans (excluding transaction
costs)

(4) Operational EBITDA is EBITDA adjusted for acquisition related expenses,
non-recurring items and recurring share-based payments, and includes
Right-of-use assets depreciation. It is a non-GAAP measure management uses to
assess the underlying business performance (also see note 7). Operational
EBITDA margin is Operational EBITDA as a percentage of Gross Profit/net
revenue.

 

 

Notice of AGM

S(4)Capital posted and published its Notice of Annual General Meeting 2022 on
Monday, 14 May from which it was available on the Company's website:
www.s4capital.com. The Annual General Meeting will take place on 16 June. As
last year, it has been decided to hold a hybrid meeting whereby the Chairman
will host and chair the Annual General Meeting at The Hewett Building, 14
Hewett St, London EC2A 3NP and all other attendees will participate in person
or electronically.

 

Webcast and conference call

A presentation will be held at 8.00am BST. A live webcast of the presentation
will be available during the event at: https://brrmedia.news/SFOR_Q121EU

 

Conference call:

UK: +44 (0)330 165 4012

US: +1 646-828-8073

Confirmation code: 8646271

 

A further live webcast to cover the results will be held today at 8.00am EDT /
13.00pm BST and will be available at:

https://brrmedia.news/SFOR_Q122US

 

Conference call:

UK: +44 (0)330 165 4012

US: +1 646-828-8073

Confirmation code: 9396711

 

 

Enquiries to:

 

S(4)Capital
Plc

Sir Martin Sorrell, Executive
Chairman
+44 (0)20 3793 0003/+44 (0)20 3793 0007

Mary Basterfield, Chief Financial Officer

Scott Spirit, Chief Growth Officer

 

Powerscourt (PR Advisor)
 

Robin
O'Kelly
+44 (0)778 670 2526

Jane Glover

 

 

About S4Capital

S(4)Capital plc (SFOR.L) is the tech-led, new age/new era digital advertising
and marketing services company, established by Sir Martin Sorrell in May 2018.

 

Its strategy is to build a purely digital advertising and marketing services
business for global, multinational, regional, local clients and
millennial-driven influencer brands. This will be achieved by integrating
leading businesses in three practice areas: Content, Data&digital media
and Technology services, along with an emphasis on "faster, better, cheaper"
executions in an always-on consumer-led environment, with a unitary structure.

 

Digital is by far the fastest-growing segment of the advertising market.
S(4)Capital estimates that in 2021 digital accounted for over 60% (for the
first time) or $400-450 billion of total global advertising spend of $680-700
billion (excluding over $500 billion of trade promotion marketing, the primary
target of the Amazon advertising platform) and projects that by 2025 total
global advertising spend will expand to $975 billion and digital's share will
grow to approximately 70%, accelerated by the impact of covid-19. In fact 97%
of the projected growth in Advertising spend between 2021 and 2025 will come
from Digital. Global spend on Digital Transformation (the primary addressable
market for Technology Services) is growing at 21% CAGR and projected to be
$879bn by 2025.

 

In 2018, S(4)Capital combined with MediaMonks, the leading AdAge A-listed
creative digital content production company led by Victor Knaap and Wesley ter
Haar, and then with MightyHive, the market-leading digital media solutions
provider for future thinking marketers and agencies, led by Peter Kim and
Christopher S. Martin.

 

Since then, MediaMonks and MightyHive combined with a significant number of
companies across Content, Data&digital media and Technology services. For
a full list, please see the S(4)Capital website.

 

In August 2021, S(4)Capital launched its unitary brand by merging MediaMonks
and MightyHive into Media.Monks, represented by a dynamic logo mark that
features MightyHive's iconic hexagon. As the operational brand, Media.Monks
underpins S(4)Capital's agility, digital knowledge and efficiency and is the
next step in delivering on its foundational promise to unify Content,
Data&digital media and Technology services.

 

Victor Knaap, Wesley ter Haar, Pete Kim, Christopher Martin, Mary Basterfield
and Scott Spirit all joined the S(4)Capital Board as Executive Directors. The
S(4)Capital Board also includes Rupert Faure Walker, Paul Roy, Daniel Pinto,
Sue Prevezer, Elizabeth Buchanan, Naoko Okumoto, Margaret Ma Connolly, Miles
Young and Peter Rademaker.

 

The Company now has over 8,800 people in 33 countries across the Americas,
Europe, the Middle East and Africa and Asia-Pacific and a current market
capitalisation of approximately £1.5 billion (c.$2.0 billion) and would rank
in the FTSE 200. It achieved Unicorn status in a little over one year, unique
in the advertising and marketing services industry. Sir Martin was CEO of WPP
for 33 years, building it from a £1 million "shell" company in 1985 into the
world's largest advertising and marketing services company with a market
capitalisation of over £16 billion on the day he left. Today its market
capitalisation is £10 billion, dropping into third place behind both Omnicom
and Publicis for the first time ever. Prior to that Sir Martin was Group
Financial Director of Saatchi & Saatchi Company Plc for nine years.

 

Neither the content of the Company's website, nor the content on any website
accessible from hyperlinks on its website for any other website, is
incorporated into, or forms part of, this announcement nor, unless previously
published by means of a recognised information service, should any such
content be relied upon in reaching a decision as to whether or not to acquire,
continue to hold, or dispose of, securities in the Company.

 

This announcement includes 'forward-looking statements'. All statements other
than statements of historical facts included in this announcement, including,
without limitation, those regarding the Company's financial position, business
strategy, plans and objectives of management for future operations (including
development plans and objectives relating to the Company's services) are
forward-looking statements.

 

Forward-looking statements are subject to risks and uncertainties and
accordingly the Company's actual future financial results and operational
performance may differ materially from the results and performance expressed
in, or implied by, the statements. These factors include but are not limited
to those described in the Company's prospectus dated 8 October 2019 which is
available on the news section of the Company's website. These forward- looking
statements speak only as at the date of this announcement. S(4)Capital
expressly disclaims any obligation or undertaking to update or revise any
forward-looking statements contained herein to reflect actual results or any
change in the assumptions, conditions or circumstances on which any such
statements are based unless required to do so.

 

No statement in this announcement is intended to be a profit forecast and no
statement in this announcement should be interpreted to mean that earnings per
share of the Company for the current or future years would necessarily match
or exceed the historical published earnings per share of the Company.

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