REG - S4 Capital PLC - Third Quarter Trading Update

S4 CapitalAnnouncement

10/11/2021 07:05

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RNS Number : 8698R  S4 Capital PLC  10 November 2021

10 November 2021

 

S4 Capital plc

 

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

 

Third Quarter Trading Update

 

Like-for-like gross profit/net revenue up over 42% in third quarter and up
almost 47% year-to-date with two year stacks of 65% (Q3) and 63% (YTD) and
continued client conversion at scale

 

·    Third quarter Revenue up over 106% and almost 56% like-for-like

 

·    Third quarter Gross Profit/Net Revenue up almost 92% and over 42%
like-for-like

 

·    Year-to-date Revenue up 101% and 56% like-for-like

 

·    Year-to-date Gross Profit/Net Revenue up over 91% and almost 47%
like-for-like

 

·    Third quarter like-for-like Revenue and Gross Profit/Net Revenue two
year stack up 69% and 65%

 

·    Year to date like-for-like Revenue and Gross/Net Revenue profit two
year stack up 65% and 63%

 

·    As signaled previously, EBITDA and EBITDA margin continue to reflect
increasing investment to prioritise top-line growth given success in building
our "whopper" client base and structures, as well as emerging service areas
and technology platforms to increase efficiency

 

·    Liquidity remained strong in the third quarter with the current
monthly net debt position fluctuating between £20 million and £40 million
after significant merger payments following launch of €375 million senior
secured term loan issue and £100 million revolving credit facility in July

 

·    Client conversion at scale momentum continues with six "whoppers" now
secured and nineteen more potentials identified

 

·    Ten mergers or combinations announced year to date, five in the
Content practice, four in Data&digital media and the first in Technology
services. Six exclusive letters of intent have been executed, three in content
and three in data&digital media covering all three geographic regions.
Integration into the Media.Monks unitary brand of the Content,
Data&digital media practices and the new Technology services practice
proceeding well

 

·    Company trading in line with external top-line expectations,
surpassing the third guidance revision to 40% from 25% at the beginning of
2021

 

·    The Company's latest and fourth three-year plan for 2022-2024 calls
yet again for a doubling of top and bottom line organically implying top line
and bottom line organic growth of 25% per annum with the digital media and
digital transformation industries forecast to grow at 15-20% per annum over
the same period

 

 

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 months and nine months ended 30 September 2021.

 

Sir Martin Sorrell, Executive Chairman, said: "Following an exceptionally
strong second quarter, we saw continued very strong momentum in the third
quarter, which was ahead of the revised 40% top line like-for-like guidance.
We now have secured six "whoppers" and identified nineteen more potentials,
setting up the possibility of exceeding our 20(2) target. The pandemic has
proven to be an accelerator of digital marketing transformation and we are
taking full advantage of this opportunity by choosing to invest a proportion
of our EBITDA margin in growth"

 

The Group continued to progress, registering a very strong third quarter
performance, following an exceptionally strong second quarter, with two year
revenue and gross profit/net revenue stacks ranging between 65% and 69%, in
line with the performances of the technology service companies and platforms.
The company is now well in line with its target of doubling organically (both
top and bottom line) in three years by 2021. Billings were £320.1million up
58%. "Controlled" Billings (the overall Billings the Company directs) were
£0.9 billion. Revenue was up over 106% to £178.4 million and gross
profit/net revenue up almost 92% to £144.4 million. Like-for-like (including
impact of asset purchase and combinations and in constant currency) revenue
and gross profit/net revenue were up almost 56% and over 42% respectively.

 

The number of people in the firm was 6,926 at the end of the third quarter, up
52% like-for-like compared to the same time last year, as we continue to hire
aggressively ahead of strong gross profit/net revenue growth of 47%
year-to-date and significant new business wins. We also continue to expand our
efforts in the areas of diversity, equity and inclusion, particularly in
hiring, education and development programmes, such as the black minority
focused S4Capital Graduate Fellowship Program. A diverse workforce is a
business imperative and we are relatively well positioned, with 40% people of
colour and gender balance already in the United States and the United Kingdom,
to compete for assignments that increasingly demand diverse teams as a
pre-requisite. We still, however, have to raise the proportion of black people
we employ, which is currently 6-7% to the levels that exist in the communities
in which we operate, which is currently 13% for example in the United States
and which we are committed to do. Our climate change commitment is to net zero
by 2024, well ahead of industry pledges, as well as the commitments to the
Amazon and World Economic Forum Climate pledges, which are less demanding and
to achieving B Corp status.

 

Year to date billings were up over 72% to over £865 million. "Controlled"
Billings were £2.6 billion. Year to date, revenue is up 101% to £457.7
million and gross profit/net revenue up over 91% to £381.1 million.
Like-for-like revenue is up 56% and gross profit/net revenue up almost 47%.

 

As in the first six months of 2021, both reported and like-for-like earnings
before interest, depreciation and amortisation (EBITDA) and operating gross
profit margins reflected the increased investment in client "whopper'
management structures, which usually require higher levels of initial expense
before significant revenue is earned, chiefly at the Content practice. The
Data&digital media practice continued to convert strong revenue and gross
profit/net revenue growth to EBITDA, driven by the uncertainty and increase in
the marketing vix index (if there was one) as a result of both Apple's
decision around IDFA and Google's around deprecation of third party cookies
over two years. Technology services has made a very strong start at all
levels, although having been only consolidated from September. The Company
continues to prioritise top-line growth.

 

These figures include the impact of content combinations with Decoded
Advertising, Tomorrow and Staud Studios from January, Jam 3 from April and
Cashmere from September; Data&digital media includes an asset purchase and
combinations with Metric Theory from January, Datalicious Australia from
February, Raccoon Group from June and Destined from August; Technology
services includes Zemoga from September. Integration around Media.Monks, our
unitary brand, launched very successfully recently, in Content and
Data&digital media and, our new third practice, Technology services
continues at significant pace.

 

Performance by Practice

 

Content practice revenue was up almost 87% in the third quarter to £129.5
million, with like-for-like up over 60%. Third quarter gross profit/net
revenue was up almost 64% to £95.7 million and over 41% like-for-like. Third
quarter like-for-like revenue and gross profit/net revenue two year stacks are
industry leading at 75% and 69%.

 

Year-to-date Content practice revenue was up almost 82% to £328.8 million and
almost 61% like-for-like. Content gross profit/net revenue was up over 65% to
£252.7 million and 47% like-for-like. Year to date like-for-like revenue and
gross profit/net revenue two year stacks are industry leading at 71% and 66%.

 

Data&digital media practice third quarter revenue was up over 186% to
£48.9 million and almost 44% like-for-like. Third quarter gross profit/net
revenue was up almost 188% to £48.7 million and up almost 45% like-for-like.
Third quarter like-for-like revenue and gross profit/net revenue two year
stacks are industry leading at 51% and 50%.

 

Year-to-date Data&digital media practice revenue was up almost 176% to
£128.8 million and up almost 46% like-for-like. Gross profit/net revenue was
up 176% to £128.3 million and almost 46% like-for-like. As with Content,
Data&digital media year to date like-for-like revenue and gross profit/net
revenue two year stacks are industry leading at 52% and 53%.

 

Technology services were included for the first time in September and has not
been broken out separately for just one month, despite an excellent start with
like-for-like revenue up 76% and gross profit/net revenue up almost 80%. The
performance of this practice is currently included in the Content practice,
but will be broken out in future reporting as a third, discrete, practice
along with existing Technology services gross profit/net revenue in Content
and Data&digital, which is not insignificant.

 

 

Performance by Geography

 

The Americas showed strong growth in the third quarter with gross profit/net
revenue up almost 86% to £102.2 million and almost 34% like-for-like.
Year-to-date the Americas gross profit/net revenue was up over 88% to £271.0
million and 42% like-for-like.

 

Europe, the Middle East and Africa also grew significantly in the third
quarter, with gross profit/net revenue up 115% to £27.9 million and
like-for-like up over 75%. Year-to-date gross profit/net revenue was up over
106% to £76.2 million and like-for-like up over 65%.

 

Asia Pacific also grew very strongly from a smaller base, with gross
profit/net revenue up almost 98% to £14.3 million in the third quarter and up
over 54% like-for-like. Year-to-date gross profit/net revenue grew over 84% to
£33.9 million and like-for-like was up almost 48%.

 

Balance Sheet

 

Net cash averaged around £1-2 million in the third quarter, reflecting the
€375 million senior secured term loan and £100 million revolving credit
facility successfully negotiated in July and significant merger cash payments
in the third quarter of approximately £56 million. The Company has further
current merger funding capacity of well over £400 million, assuming
consideration of half shares and half cash, before reaching its maximum target
limit of 1.5-2x EBITDA.

 

Client Development and Momentum

 

The Company developed a 20(2) client objective last year. 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. Pride of place went last year to the Content
practice wins of the BMW/MINI European content and production account named
"The Marketing Engine" and Mondēlez global content, tvc and tech
infrastructure account, which joined Google and an NDA tech company as the
third and fourth "whoppers" in 2021. Significant progress has been made this
year in securing two more "whopper" assignments, at Facebook and HP, making a
total of six so far. The Company has now identified a further 19 potential
'whoppers." Q3 was another strong quarter for new business with significant
land & expand assignments from existing clients including Google, Meta,
HP, Amazon, Burberry and Netflix - often in exciting new areas such as The
Metaverse, crypto/NFT and Digital Transformation. The company also won new
business from clients including M1, Kuaishou, Hasbro, Miele, Luminar, Moncler
and Audible (Amazon). Top line momentum continues to build into the fourth
quarter, with no negative impact from supply chain discontinuities or the
Apple IDFA changes.

 

The merger or combination pipeline remains very strong and increasingly active
in the Americas, EMEA and Asia Pacific. Private equity remains the most
significant competitor, although we believe we can significantly differentiate
ourselves in identifying entrepreneurial managers who buy in to our mission to
build the new age/era advertising and marketing services model, at the same
time disrupting the old and, who at the same time, want to leverage our
talent, geographic and capital resources and build deeper client
relationships.

 

Current Trading

 

The Group continues to trade extremely well in line with our top line
objectives for 2021, although incremental investments particularly in building
client "'whopper" management infrastructure, emerging service areas (such as
CTV and the Metaverse) and technology platforms to help automate our workflow
continue to have an impact on EBITDA conversion and EBITDA margins in the
Content practice. We see no negative impact so far in the remainder of 2021 or
beyond from inflation, which we believe is more than transitory, supply chain
discontinuities or Apple's changes to IDFA. Inflation gives our clients more
pricing power "wiggle room", the supply chain discontinuities have resulted in
a decline of discounts and hence increased profitability (eg autos) and the
Apple IDFA and Google third party cookie moves have both increased
uncertainties and client focus on the power of first party data and platform
signals, stimulating interest in data & analytics.

 

The Group is preparing a new three-year plan for the period 2022-24 and
preliminary budgets for 2022, which are consistent with its objectives, which
remain a doubling of top and bottom lines organically within three years, as
in the first three three year plans, 2019-21, 2020-22 and 2021-23. The
advertising and media, marketing services and trade budgets and digital
marketing transformation addressable markets currently total well over $2
trillion and are forecast to grow by 15-20% over the next four or five years,
despite a slowing of global GDP growth rates from 5-6% this year and 4-5% in
2022 to 2-3% in 2023, as the impact of the pandemic-driven fiscal and monetary
stimuli taper and fade. Advertising as a proportion of GDP is forecast to rise
from 1.0% to 1.75%, purely driven by the growth of digital advertising and
transformation. Traditional media are not forecast to grow. There are
effectively two industries, growing digital and no-growth or ex-growth
analogue.

 

Sir Martin Sorrell, Executive Chairman of S(4)Capital plc said: "Most
importantly, the Board wants to thank all our people for their extraordinary
efforts at this particularly difficult time and the efforts of all the front
line workers who have protected us and kept us safe. We have noted the impact
that the pandemic lockdowns have had on the mental health of our people and
their career thinking. We are moving to a hybrid model of at least 60% time in
the office, which we believe will preserve and nurture the culture we have
developed and want to continue to develop, whilst giving our people the
flexibility we believe they now generally desire.

 

We continue to trade in line with ambitious internal and external targets,
which now include doubling both top and bottom lines organically over the
period 2022 to 2024. Our consistent, very strong like-for-like gross
profit/net revenue growth of almost 47% so far this year and two-year stack of
almost 63%, more than five times better than the best of the traditional
models and at least the equal of the technology services companies, indicates
that we are well positioned in the digital sweetspot of an otherwise stagnant
traditional advertising and marketing industry. In addition, clients are
responding very well to our new age/new era, purely digital, "holy trinity"
model of first party data fueling practices built around digital content, data
& digital media and technology services.

 

Covid-19 has acted as an accelerator for search, social and ecommerce. We have
added two more "whoppers" in 2021, Facebook and HP, to our very significant
client wins in 2020, which included BMW/MINI in Europe and Mondēlez globally,
making six in total. We have identified nineteen more with "whopper"
potential. These successes signal that we are achieving client conversion at
scale in 2020 and 2021, after achieving brand awareness in 2018 and brand
trial in 2019. Our mantra of "faster, better, cheaper" or "speed, quality,
value" and our unitary, one P&L structure around Media.Monks, are clearly
resonating with clients and differentiating our offer.

 

We are optimistic about the macro prospects for the remainder of 2021 and
2022, particularly given the continued Global GDP rebound, the vaccine,
therapeutic and testing developments and roll out. Beyond 2022, we believe the
demand for digital marketing transformation, involving the sales, marketing
and information technology functions in client organisations, will accelerate.
We plan further integration and combinations in the remainder of 2021 and into
2022 across all practices and functions, all of which will reinforce our
client appeal.

 

Agility, accentuated by the impact of covid-19, remains the key, requisite
corporate attribute for marketing success, along with "taking back control" of
marketing functions in a 24/7 always on world and integrating and developing
first part data - particularly as the digital marketing industry continues to
expand rapidly."

 

* See market statistics in About S(4)Capital below

 

Key financials

 

 

 £000                       Reported          +/-%  Like-for-like               +/-%  Reported            +/-%  Like-for-like       +/-%
                            Q3 2021  Q3 2020        Q3 2021      Q3 2020              YTD 2021  YTD 2020        YTD 2021  YTD 2020
 Revenue
 Content                    129,504  69,317   87%   129,504      80,695         60%   328,846   181,021   82%   328,846   204,882   61%
 Data & Digital Media       48,877   17,075   186%     48,877        33,975     44%   128,823   46,718    176%  128,823   88,561    45%
 Total                      178,381  86,392   106%  178,381      114,670        56%   457,669   227,739   101%  457,669   293,443   56%

 Gross Profit
 Content practice           95,693   58,370   64%   95,693       67,778         41%   252,740   152,783   65%   252,740   171,918   47%
 Data & Digital Media       48,701   16,929   188%  48,701       33,711         44%   128,316   46,488    176%  128,316   87,991    46%
 Total                      144,394  75,299   92%   144,394      101,489        42%   381,056   199,271   91%   381,056   259,909   47%

 Gross profit by Geography
 Americas                   102,174  55,074   86%   102,174      76,287         34%   270,962   143,895   88%   270,962   190,854   42%
 EMEA                       27,887   12,972   115%  27,887       15,904         75%   76,171    36,963    106%  76,171    46,074    65%
 Asia-Pacific               14,333   7,253    98%   14,333       9,298          54%   33,923    18,413    84%   33,923    22,981    48%
 Total                      144,394  75,299   92%   144,394      101,489        42%   381,056   199,271   91%   381,056   259,909   47%

 

 

 

 

 

 

A video webcast and conference call covering the trading update will be held
today at 09:00 GMT, followed by another webcast and call at 08:00 EST / 13:00
GMT. Both webcasts of the presentation will be available at www.s4capital.com
(http://www.s4capital.com) during the event.

 

09:00 GMT call - For dial in Q&A only

 

UK:                               +44 (0)330 336
9434

 

US:                               +1 646 828
8193

 

Room code:                2039118

 

 

 

08:00 EST/13:00 GMT call - For dial in Q&A only

 

UK:                               +44 (0)330 336
9434

 

US:                               +1 646 828
8193

 

Room code:                   7732175

 

 

Enquiries to:

 

 S(4)Capital plc                          +44 (0)20 3793 0003
 Sir Martin Sorrell (Executive Chairman)
 Powerscourt (PR Advisor)                 +44 (0)7970 246 725
 Elly Williamson/ Jane Glover

 

 

 

 

 

 

 

 

 

 

About S(4)Capital

 

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 initially by
integrating leading businesses in two practice areas: content and
data&digital media, 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 2020 digital accounted for over 50% (for the
first time) or $290 billion of total global advertising spend of $525 billion
(excluding over $500 billion of trade promotion marketing, the primary target
of the Amazon advertising platform) and projects that by 2022 total global
advertising spend will expand to $650 billion and digital's share will grow to
approximately 60% and by 2024 to approximately 70%, accelerated by the impact
of covid-19.

 

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

 

In April 2019, MightyHive combined with ProgMedia to expand operations into
Latin America and MediaMonks acquired film studio Caramel Pictures to expand
content studio capabilities. In June 2019, MediaMonks announced a planned
combination with Australia-based BizTech, a leading marketing transformation
and customer experience company. In August 2019, MediaMonks combined with
Amsterdam-based digital influencer marketing agency IMA. In October 2019,
MediaMonks combined with Firewood Marketing, the largest digital marketing
agency based in Silicon Valley, that was recently ranked, along with
MediaMonks and Circus (see below), as one of the fastest growing agencies by
Adweek, and MightyHive combined with award-winning UK-based digital analytics,
biddable media and data science company ConversionWorks and South Korea-based
data and analytics consultancy MightyHive Korea. In November 2019, MediaMonks
announced its combination with Delhi-based content creation and production
company WhiteBalance (completed in August 2020 - the delay due to necessary
merger clearance procedures) and then with fully integrated digital agency
Circus Marketing in January 2020 (completed in March 2020).

 

In May 2020, MightyHive announced a combination with Digodat, one of the
leading Latin American data and analytics consultancies, and in June 2020,
MightyHive announced its combination with Lens10, a leading Australian digital
strategy and analytics consultancy. In July 2020, MightyHive announced a
combination with Orca Pacific, a market leading full-service Amazon agency and
boutique consultancy firm based in Seattle. In August 2020, MightyHive
announced a combination with London-based Brightblue, an econometric and media
optimisation consultancy. In September 2020, MediaMonks announced its
combination with Dare.Win, expanding its geographical presence to France.

 

In January 2021, MediaMonks announced its combination with integrated
creative, technology and media agency Decoded Advertising, Shanghai based
creative agency TOMORROW and Stuttgart based automotive specialist STAUD
STUDIOS. MightyHive also announced its combination with integrated digital
performance marketing agency Metric Theory. In February 2021, MightyHive
acquired the assets of Datalicious Australia, a leading Google Marketing
Platform, Google Cloud and Google Analytics partner in Asia Pacific. In March
2021, MediaMonks announced it had entered into a conditional agreement in
relation to a combination of MediaMonks with Toronto-based design and
experience agency, Jam3. In May 2021, MightyHive announced it had entered into
a conditional agreement in relation to a combination of MightyHive with the
leading digital performance agency in Brazil, Raccoon Group.

 

On 26 July 2021, MightyHive announced a combination with Salesforce specialist
Destined expanding its data and digital media practice in Asia Pacific. On 8
September 2021, the new unitary brand Media.Monks announced a combination with
the iconic culture and creative marketing agency Cashmere, based in Los
Angeles. Also in September 2021, Media.Monks announced a merger with leading
digital transformation services firm Zemoga, headquartered in Los Angeles,
with further US offices as well as delivery centres in Colombia. The merger
expanded the Media.Monks offering into technology services.

 

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.

 

On 16 July 2020, S(4)Capital announced the successful placing of 36,766,642
new ordinary shares at a price of 315p raising approximately £116 million
gross proceeds which has been used for further expansion and combination
purposes.

 

On 19 July 2021, S(4)Capital announced it had engaged Credit Suisse AG, London
branch, HSBC Bank plc and Barclays Bank plc as lead arrangers for a seven-year
€375 million senior secured term loan. In addition, it negotiated a
five-year £100 million equivalent multicurrency senior secured revolving
credit facility with Credit Suisse, HSBC, Barclays, JP Morgan and BNP Paribas.
Both term loan and revolving facility were successfully completed in early
August 2021. This refinanced its existing €25 million and US$28.9 million
term loans and its €35 million and €43.5 million multicurrency revolving
credit facilities and will provide approximately £200 million for general
corporate purposes, including funding the cash element of future mergers,
which is typically one-half of overall consideration. The Company will
maintain its policy of maximum net leverage not exceeding 1.5-2x Operational
EBITDA.

 

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

 

The Company now has over 6,900 people in 33 countries across the Americas,
Europe, the Middle East and Africa and Asia-Pacific and a current market
capitalisation of approximately £4.0 billion (c.$5.5 billion) and would rank
well inside the FTSE 125. 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 £13 billion, having recently been surpassed by
Publicis for the first time. Prior to that Sir Martin was Group Financial
Director of Saatchi & Saatchi Company Plc for nine years.

 

 

 

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