REG - S4 Capital PLC - First Quarter Trading Update

S4 CapitalAnnouncement

11/05/2023 07:00

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RNS Number : 0226Z  S4 Capital PLC  11 May 2023

S(4) Capital plc

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

First Quarter Trading Update

 

Solid start; guidance re-iterated

 

Reported revenue and net revenue up 26.5% and 28.1% to £262 million and £219
million

Like-for-like(3) revenue and net revenue(2) growth of 6.1% and 6.8% primarily
driven by Technology services

Continued client conversion at scale through land&expand with leading
clients

 Strong balance sheet with net debt(6) of £136 million (1x Operational
EBITDA(4,5)) at 31 March 2023

Share buyback planned in second half to offset share options issued to our
people in 2023

Full year outlook of 8-12%(9) net revenue growth and target(7) of 15-16%
Operational EBITDA/net revenue margin maintained

 

Key financials

 

 £ millions                Three months ended  Three months ended          Reported change  Like-for-like

                           31 March 2023       31 March 2022                                change
 Billings(1)               455.9               360.3                       26.5%            10.4%

 Revenue
 Content                   173.1               149.9                       15.5%            1.6%
 Data&digital media        53.5                49.4                        8.3%             0.6%
 Technology services       35.1                7.5                         368.0%           51.9%
 Total                     261.7               206.8                       26.5%            6.1%

 Net revenue
 Content                   131.4               115.6                       13.7%            0.8%
 Data&digital media        52.7                48.7                        8.2%             0.6%
 Technology services       35.0                6.8                         414.7%           57.0%
 Total                     219.1               171.1                       28.1%            6.8%
 Net revenue by Geography
 Americas                  173.6               124.5                       39.4%            10.9%
 EMEA                      32.7                33.0                        -0.9%            -4.7%
 Asia-Pacific              12.8                13.6                        -5.9%            -9.9%
 Total                     219.1               171.1                       28.1%            6.8%

 

Sir Martin Sorrell, Executive Chairman of S(4)Capital Plc said:

"We have had a solid start to the year, with net revenue rising 7%, while
maintaining a focus on balancing growth in net revenue with costs, which is
reflected in our people numbers remaining almost constant. Net revenue growth
is pretty much in line with the Q1 constant currency growth of the major tech
platforms, which averaged 6.4%. Two and three year like-for-like net revenue
stacks are 41% and 74%. Technology services has led our growth in the first
quarter, followed by Content and Data&digital media, reflecting the
growing client focus on digital transformation.

 

Geographically, the Americas have led, followed by EMEA and APAC, reflecting
the growing relative importance of the North and South America "pillar"
markets, the last being affected by lack of growth in China, although
prospects are improving significantly in the second quarter post-Covid
lockdown.

 

We remain cautiously optimistic for the rest of the year, despite a slowdown
of forecast growth rates in our two major addressable markets to 7-10% and
expect to make continued progress, broadening and deepening our client
conversion at scale.  Technology clients continue to maintain their marketing
investment, with AI and AGI being new opportunities for exploration and we are
opening up further significant land&expand relationships in packaged
goods, financial services and technology.

 

We maintain our full year target of 8-12%(9) net revenue growth and target
15-16% operational EBITDA to net revenue margin with net debt in the range of
£180 to £220 million.  Any contingent merger payments will be satisfied in
2023 and net debt in 2024 is expected to decrease substantially given our
current capital allocation strategy. There has been considerable speculation
about the potential impact of AI and AGI on our industry with various
commentators making early decisions on potential winners and losers. It is
very early days, and the world is not even in the foothills of exploration and
development, but this new Industrial Revolution is already set to have a major
impact on productivity and the patterns of employment. We believe it will make
our disruptive model even more inevitable for clients and are determined to
establish the leadership position and leverage it. We are immediately seeing
positive impact in four areas - use of AI as a superpower or supertool to
improve our people's effectiveness; speeding up the creation of advertising
content through faster copywriting and visualisation; hyperpersonalisation at
scale providing more empathetic advertising assets; and improved media
planning and buying, particularly in digital improving targeting and
optimisation and catering to client concerns around TV frequency capping and
reach. The net effects of these developments will improve the effectiveness
and efficiency of what we do - faster, better, more efficient, more and NOW!"

 

Q1 Trading Update

 

Billings were £455.9 million up 26.5% reported and 10.4% like-for-like.

 

Revenue was up 26.5% reported to £261.7 million, 6.1% like-for-like and net
revenue was up 28.1% to £219.1 million, or 6.8% like-for-like. The full year
guidance range of 8-12% excluded the impact of one major account reduction
last year and on that basis like-for-like growth was 8% for the quarter. While
net revenue growth was at the lower end of our full year guidance range, it
was in line with our expectations. Our full year net revenue growth guidance
is maintained, given our latest forecasts for Q2 and H2 and easier
comparators.

 

The number of people in the firm was 8,713 at the end of the first quarter,
down 2% compared to 8,891 at the end of 2022, reflecting more active and
measured control of the balance of hiring across the Company.

 

There were no new combinations in the first three months of the year. Progress
continues to be made on integration around Media.Monks, our unitary brand,
which continues to be a high priority, with a focus on the Content and
Data&digital media practices and the Americas and Asia Pacific.

 

Performance by Practice

Content practice revenue was up 15.5% reported in the first quarter to £173.1
million, with like-for-like growth of 1.6%. First quarter net revenue was up
13.7% to £131.4 million reported and 0.8% like-for-like. The slowdown in
growth reflects a strong comparator and a weaker addressable market in the
period. Two year and three year net revenue stacks are 34% and 65%.

 

Data&digital media practice first quarter reported revenue was up 8.3% to
£53.5 million and 0.6% like-for-like. First quarter reported net revenue was
up 8.2% to £52.7 million and up 0.6% like-for-like. Like Content the practice
saw slower growth in the period driven by a strong comparator and weaker
market conditions. Two year and three year net revenue stacks are 35% and 71%.

 

Technology services practice first quarter reported revenue was up 368% to
£35.1 million, 51.9% like-for-like. First quarter net revenue was up 414.7%
to £35.0million, up 57.0% like-for-like. Activity with existing clients
remained strong, with effective integration starting to drive net revenue
growth. Two year and three year stacks, which include pre-merger periods are
difficult to compile, but would compare very favorably with the industry
leaders.

 

Performance by Geography

The Americas showed strong growth in the first quarter with reported net
revenue up 39.4% to £173.6 million and 10.9% like-for-like, reflecting the
continued strength of the North and South American markets, the complementary
time zones and contiguous

supply chains.

 

Europe, the Middle East and Africa had a slower first quarter, with reported
net revenue down 0.9% to £32.7 million and like-for-like down 4.7%,
reflecting very strong comparatives last year, slower addressable markets and
year end budgeting and sales cycles by key clients.

 

Asia Pacific, with reported net revenue down 5.9% to £12.8 million in the
first quarter and down 9.9% like-for-like, with China, in particular, still
emerging from Covid lockdown, but with the second quarter expected to be more
lively. There were also strong comparatives last year and sales cycles were
slower, particularly in Japan and Korea.

 

Balance Sheet

Net debt ended the first quarter at £135.7 million, or 1.0x net
debt/operational EBITDA. The balance sheet remains strong with significant
liquidity and long dated debt maturities. Pro-forma Operational EBITDA for the
latest twelve months to 31 March 2023 was £132.8 million.

 

Share buybacks

In order to reduce the impact of any share issue dilution caused by the issue
of share options to our people, the Company intends to buy back approximately
5 million shares or approximately 1% of the issued share capital over the
course of the second half of the year.

 

Client Development and Momentum

The Company developed a 20(2) client objective in 2020. That is, to develop
twenty clients with more than $20 million revenue per year, termed "whoppers".
The company has made significant progress in deepening existing relationships
and winning new accounts and ended 2022 with 10 whoppers. The Company has
identified a further 14 potential "whoppers", which could mature over the
next few years and expects to continue making progress in 2023.

 

While the Company is generally not seeing significant cuts or reductions in
budgets from its major clients, it is clear that Q1 2023 started cautiously
for many of them with sales cycles lengthening, particularly those in the
Technology sector. With the exception of one "whopper" scaling down last year,
growth at our major clients has been strong as a result of implementation of
our land&expand strategy, although regional and local clients have been
more volatile. Our new business pipeline remains very healthy and in Q1 2023
the Company won assignments from new clients such as Suntory, Marriott, BJ's
Restaurants, CJ Bibigo, Pernod Ricard, H&M and two global FMCG companies,
who will likely join the potential "whoppers" list in time.

 

Current Trading

The Company has traded solidly in the first quarter, in line with our
expectations. Based on a stronger forecast net revenue growth rate in Q2 and
into the second half, we re-iterate our full year guidance of 8-12%(9)
like-for-like net revenue growth. We continue to manage costs tightly and with
the target of delivering Operational EBITDA margins of between 15-16%. As in
previous years, given our seasonality, 2023 will again be significantly second
half weighted. Longer term, we expect to continue to be able to deliver strong
like-for-like net revenue growth, ahead of our markets, with Operational
EBITDA margins returning to historic levels.

 

Strategy

The strategy of S(4)Capital remains the same. The Company's purely digital
transformation model, based on first-party data fueling the creation,
production and distribution of digital advertising content, distributed by
digital media and built on technology platforms to ensure success and
efficiency, resonates with clients. Our tagline 'faster, better, cheaper,
more' or 'speed, quality, value, more' (to which with the arrival of AI and
AGI we have added 'more') and a unitary structure both appeal strongly, even
more so in challenging and unpredictable economic times. Our new market
positioning around "NOW!" complements and reinforces this positioning,
offering clients immediate change.

 

Notes (in this document):

1.        Billings is unaudited gross billings to client including pass
through costs.

2.        Net revenue is revenue less direct costs.

3.        Like-for-like is a non-GAAP measure and relates to 2022 being
restated to show the unaudited numbers for the previous year of the existing
and acquired businesses consolidated for the same months as in 2023 applying
currency rates as used in 2023.

4.        Pro-forma numbers relate to unaudited full year non-statutory
and non-GAAP consolidated results in constant currency as if 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.

5.        Operational EBITDA is 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.

6.        Net debt excludes lease liabilities.

7.        This is a target and not a profit forecast.

8.        Controlled billings are unaudited billings we influenced in
addition to billings that flowed through our income statement.

9.        For guidance purposes 2022 pro-forma net revenue is £907
million, including the full year impact of 2022 combinations TheoremOne and XX
Artists and an adjustment for reduced activity on Mondelēz.

 

 

Webcast and conference call

In line with previous reporting, a webcast and conference call will be held at
09:00 BST in London, followed by another webcast and call at 08:00 EDT / 13:00
BST.

 

09:00 BST webcast (watch only) and conference call (for Q&A):

Webcast: https://brrmedia.news/SFOR_Q123

Conference call:

UK: +44 (0) 33 0551 0200

US: +1 786 697 3501

Quote S4 Capital - Q1 Results when prompted by the operator

 

08:00 EDT / 13:00 BST webcast (watch only) and conference call (for Q&A):

Webcast: https://brrmedia.news/SFOR_Q123US

Conference call:

UK: +44 (0) 33 0551 0200

US: +1 786 697 3501

Quote S4 Capital - Q1 Results US when prompted by the operator

 

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)
 

Elly Williamson
 
                                +44 (0)7970 246
725

Ollie Simmonds

 

About S(4)Capital

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

 

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

 

Victor Knaap, Wesley ter Haar, Christopher S. Martin, Scott Spirit and Mary
Basterfield 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 Colin Day.

 

The Company now has approximately 8,700 people in 32 countries with
approximately 70% of revenue across the Americas, 20% across Europe, the
Middle East and Africa and 10% across Asia-Pacific. The longer-term objective
is a geographic split of 60%:20%:20%. Content currently accounts for
approximately 60% of revenue, Data&digital media 30% and Technology
Services 10%. The long-term objective for the practices is a split of
50%:25%:25%.

 

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.
Prior to that Sir Martin was Group Financial Director of Saatchi & Saatchi
Company Plc for nine years.

 

Disclaimer

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.

 

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, shares in the Company.

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