REG - S4 Capital PLC - Third Quarter Trading Update
14/11/2022 07:00
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RNS Number : 2756G S4 Capital PLC 14 November 2022
S(4) Capital PLC
14 November 2022
S(4) Capital plc
("S(4) Capital", "the Company" or "the Group")
Third Quarter Trading Update
Top-line momentum more than maintained in the Third Quarter with like-for-like
Gross Profit/Net Revenue up over 29%
Third quarter Operational EBITDA(1) improves significantly over the first half
Operational EBITDA for 2022 in line with July revised target of approximately
£120 million(2)
Continued client conversion at scale with ten "whoppers" now in sight and top
50 clients' average revenue grows by 70% year on year
Macro political and economic pressures will continue to offer significant
growth opportunities given our digital offering and disruptive model as
clients move "down the funnel" and accelerate digital marketing transformation
Key financials
£ millions Three months ended Three months ended change Reported change change
Like-for-like(4) Pro-forma(5)
30 Sep 2022 30 Sep 2021(3)
Billings(6) 484.2 320.1 51.3% 21.3% 21.3%
Revenue
Content 208.2 128.5 62.0% 24.2% 24.2%
Data&Digital media 58.0 48.9 18.6% 15.5% 15.5%
Technology services 33.9 1.0 3290.0% 75.6% 75.6%
Total 300.1 178.4 68.2% 26.5% 26.5%
Gross profit/net revenue
Content 159.7 94.7 68.6% 28.1% 28.1%
Data&Digital media 57.0 48.7 17.0% 15.2% 15.2%
Technology services 33.2 1.0 3220.0% 73.8% 73.8%
Total 249.9 144.4 73.1% 29.3% 29.3%
Gross profit/net revenue by Geography
Americas 193.5 102.2 89.3% 30.5% 30.5%
EMEA 39.8 27.9 42.7% 37.7% 37.7%
Asia-Pacific 16.6 14.3 16.1% 3.1% 3.1%
Total 249.9 144.4 73.1% 29.3% 29.3%
£ millions Nine months ended Nine months ended change Reported change change
Like-for-like(4) Pro-forma(5)
30 Sep 2022 30 Sep 2021(3)
Billings(6) 1,264.1 865.5 46.1% 23.4% 24.8%
Revenue
Content 527.2 327.9 60.8% 27.6% 30.4%
Data&Digital media 160.3 128.8 24.5% 20.4% 20.7%
Technology services 59.0 1.0 5800.0% 82.7% 65.9%
Total 746.5 457.7 63.1% 29.0% 31.2%
Gross profit/net revenue
Content 409.9 251.8 62.8% 26.7% 28.7%
Data&Digital media 157.7 128.3 22.9% 20.1% 20.3%
Technology services 57.6 1.0 5660.0% 80.0% 64.3%
Total 625.2 381.1 64.1% 28.4% 30.0%
Gross profit/net revenue by Geography
Americas 472.9 271.0 74.5% 27.8% 29.9%
EMEA 106.7 76.2 40.0% 36.6% 36.6%
Asia-Pacific 45.6 33.9 34.5% 17.5% 17.5%
Total 625.2 381.1 64.1% 28.4% 30.0%
Notes (in this document):
1. 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.
2. This is a target and not a profit forecast.
3. For the three and nine months ended 30 September 2021, Technology services
was previously included within the Content practice, which has now been
restated and Technology services is now reported as a separate practice.
4. Like-for-like is a non-GAAP measure and relates to 2021 being restated to
show the unaudited numbers for the previous year of the existing and acquired
businesses consolidated for the same months as in 2022, applying currency
rates as used in 2022.
5. 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.
6. Billings is gross billings to client including pass through costs.
7. Controlled billings is billings we influenced in addition to billings that
flowed through our income statement.
8. Net debt comprises cash minus gross bank loans (excluding transaction
costs).
Sir Martin Sorrell, Executive Chairman of S(4)Capital Plc said:
"Despite the current macro political 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. Two year and three year
like-for-like gross profit/net revenue stacks are 72% and 94% for the third
quarter and 75% and 91% for the year to date. Operational EBITDA continues
to progress in line with the revised target issued in July. Ten "whoppers" are
now in sight, half of our long-term 20(2) objective, also demonstrating the
conversion at scale power of our disruptive model. We are in the midst of
developing our three year plan for 2023-5 and our budgets for 2023. Despite
the current economic uncertainties, the leading technology platforms are still
forecast by the sell side to grow by up to 10% next year and digital
transformation spending is forecast to continue to grow in the range of 20%.
Given the reduction in global GDP growth rate forecasts for 2022 and 2023 and
the likelihood of 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."
Q3 Trading Update
Following a strong first six months, the Company continued to progress,
registering a similarly strong third quarter gross profit/net revenue
performance, with two year and three year gross profit/net revenue stacks of
72% and 94%, in line or ahead of the performances of the technology companies
and platforms. Billings were £484.2 million up 51% reported and 21%
like-for-like. Controlled Billings(7) were £1.4 billion. Revenue was up over
68% reported to £300.1 million, 27% like-for-like and gross profit/net
revenue up 73% to £249.9 million, 29% like-for-like.
Year to date billings were up 46% reported to £1.3 billion, up 23%
like-for-like. Controlled Billings were £4.0 billion. Year to date, revenue
is up 63% reported to £746.5 million, 29% like-for-like and gross profit/net
revenue up 64% reported to £625.2 million, 28% like-for-like.
Unlike the first six months of 2022, both reported and like-for-like earnings
before interest, depreciation and amortisation (EBITDA) reflected the
improved control of hiring across the Company, as the number of people across
the globe remained pretty constant through the third quarter, whilst gross
profit/net revenue accelerated. The impact of this change in emphasis was most
marked in the Content practice, which started to improve operational EBITDA
significantly. 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 vix index as a result of both Apple's decision around IDFA and
Google's around deprecation of third party cookies. Technology services
continues 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, reflecting more active and measured control of hiring across the
Company.
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 includes TheoremOne from 16 May 2022. Significant progress
continues to be made on integration around Media.Monks, our unitary brand,
which continues to be a high priority.
Performance by Practice
Content practice revenue was up 62% reported in the third quarter to £208.2
million, with like-for-like up 24%. Third quarter gross profit/net revenue
was up 69% to £159.7 million reported and 28% like-for-like. Third quarter
like-for-like gross profit/net revenue two year and three year stacks are
industry leading at 69% and 97%.
Year-to-date Content practice reported revenue was up 61% to £527.2 million
and 28% like-for-like. Content reported gross profit/net revenue was up 63%
to £409.9 million and 27% like-for-like. Year to date like-for-like gross
profit/net revenue two year and three year stacks are industry leading at 74%
and 93%.
Data&Digital media practice third quarter reported revenue was up 19% to
£58.0 million and 16% like-for-like. Third quarter reported gross profit/net
revenue was up 17% to £57.0 million and up 15% like-for-like. Third quarter
like-for-like gross profit/net revenue two year and three year stacks are
industry leading at 60% and 66%.
Year-to-date Data&Digital media practice reported revenue was up 25% to
£160.3 million and up 20% like-for-like. Gross profit/net revenue was up 23%
to £157.7 million and 20% like-for-like. As with Content, Data&Digital
media year to date like-for-like gross profit/net revenue two year and three
year stacks are industry leading at 66% and 73%.
Technology services practice third quarter reported revenue was up 3,290% to
£33.9 million, 76% like-for-like. Third quarter reported gross profit/net
revenue was up 3,220% to £33.2 million, up 74% like-for-like. Two year and
three-year stacks are difficult to compile historically, but would rank with
industry leaders such as Accenture Interactive and Globant.
Year-to-date Technology services reported revenue was up 5,800% to £59.0
million, like-for-like up 83%. Reported gross profit/net revenue was up 5,660%
to £57.6 million, with like-for-like up 80% again. Two year and three year
stacks are difficult to compile, but would compare very favourably with the
industry leaders.
Performance by Geography
The Americas showed strong growth in the third quarter with reported gross
profit/net revenue up 89% to £193.5 million and 31% like-for-like.
Year-to-date the Americas reported gross profit/net revenue was up 75% to
£472.9 million and 28% like-for- like.
Europe, the Middle East and Africa also grew significantly in the third
quarter, with reported gross profit/net revenue up 43% to £39.8 million and
like-for-like up 38%. Year-to-date reported gross profit/net revenue was up
40% to £106.7 million and like-for- like up 37%.
Asia Pacific was the slowest growth region, chiefly impacted by China's
zero-covid policy driven slowdown, with reported gross profit/net revenue up
16% to £16.6 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 and
like-for-like was up 18%.
Balance Sheet
Year end 2022 net debt(8) is still expected to be in the range of £130-170
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, 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.
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 now has ten "whoppers" in 2022 or at run rate.
The Company has identified a further 14 potential "whoppers", which could
mature over the next few years.
Q3 was another strong quarter for new business with significant land &
expand assignments from existing major clients, with the average size of our
top 50 clients growing 70% year on year. The Company also won new business
from clients including Commonwealth Bank of Australia, Pernod Ricard, Moncler,
Richemont, NuBank and significant NDA'd assignments at Technology, FMCG,
Finance and Retail clients, who will all be significant clients in 2023. Top
line momentum continues to look relatively strong into the fourth quarter,
with limited negative impact so far from the macro political or economic
pressures.
Given the Company's current market valuation, mergers or combinations are
currently off the table, that is, unless merger or combination partners are
prepared to accept equity values as part of their consideration of around 425p
per share - as TheoremOne and XX Artists did. That was our share value before
our recent challenges and more in line with the general market declines from
our peak market capitalisation.
People and ESG
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 S(4)Women Leadership Program for our senior female leadership and the
black minority focused S(4)Capital Graduate Fellowship Program, now also aimed
at high schools, as well as universities. 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 achieve B Corp status.
Current Trading
The Company continues to trade in line with our top line objective for 2022 of
25% like-for-like gross profit/net revenue growth and profitability objective
of Operational EBITDA of approximately £120 million. We have seen little
negative impact so far in the remainder of 2022 from the current macro
political and economic gloom.
The Company is preparing a new three-year plan for the period 2023-5 and
preliminary budgets for 2023. Whilst we have seen little or no impact on our
top-line progress from the more than transitory inflation, the higher than
previous interest rates, the war in the Ukraine and the continued friction
between the US and China and the long-term ambitions of Russia and Iran, it
would be foolhardy to believe that both our industry and our 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. We believe that 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 us 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 our strengths.
Webcast and conference call
A video webcast and conference call covering the trading update will be held
today at 08.00 GMT, followed by another webcast and call at 08.00 EST / 13.00
GMT.
8:00am GMT webcast (watch only) and conference call (for Q&A):
Webcast: https://brrmedia.news/S4_Q3 (https://brrmedia.news/S4_Q3)
Conference call:
UK: +44 (0) 808 109 0700
US: +1 866 966 5335
Password: Quote S4 when prompted by the operator
8am EST / 1pm GMT webcast (watch only) and conference call (for Q&A):
Webcast: https://brrmedia.news/S4_Q3_US (https://brrmedia.news/S4_Q3_US)
Conference call:
UK: +44 (0) 808 109 0700
US: +1 866 966 5335
Password: Quote S4 when prompted by the operator
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, and 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, more
efficient" 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% or
$420-450 billion of total global advertising spend of $700-750 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 $770-850 billion and digital's share will
grow to approximately 65% and by 2024 to approximately 70%, accelerated by
the impact of covid-19.
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 have combined with more than 25
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, Christopher 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 9,000 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 split of 60%:20%:20%. Content currently accounts for approximately 65% of
revenue, Data&Digital media 35% and Technology services 10%. The long-term
objective 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
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