REG - S4 Capital PLC - Third Quarter Trading Update
09/11/2023 07:00
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RNS Number : 8626S S4 Capital PLC 09 November 2023
RNS Number:
S(4) Capital PLC
9 November 2023
S(4)Capital plc
Third Quarter Trading Update
("S(4)Capital", "the Company" or "the Group")
Third quarter reported net revenue(2) down 15.4%, like-for-like(3) down 10.0%
reflecting lower activity in Content and Data&Digital media
Two and three year third quarter like-for-like net revenue stacks 19.3% and
61.6%
Year to date reported net revenue growth of 5.1%, down 0.3% like-for-like
Two and three year nine month like-for-like net revenue stacks 28.1% and 74.7%
Continued client conversion at scale, with year to date like-for-like revenue
growth from top 20 clients of 2.9% and top 50 clients of 4.6%
Full year like-for-like net revenue expected below prior year, with an
operational EBITDA(1) margin now around 10-11%(8)
Free cash flow in 2024 will be available for buybacks and dividends with no
further merger payments scheduled
Key financials
£ millions Three months ended Three months ended change Reported change change
Like-for-like(3) Pro-forma(4)
30 Sep 2023 30 Sep 2022
Billings(5) 450.3 484.2 (7.0%) (1.4%) (1.4%)
Revenue
Content 160.9 208.2 (22.7%) (18.2%) (18.2%)
Data&Digital media 49.6 58.0 (14.5%) (8.7%) (8.7%)
Technology services 35.4 33.9 4.4% 12.4% 12.4%
Total 245.9 300.1 (18.1%) (13.0%) (13.0%)
Net revenue
Content 127.2 159.7 (20.4%) (15.6%) (15.6%)
Data&Digital media 48.9 57.0 (14.2%) (8.4%) (8.4%)
Technology services 35.4 33.2 6.6% 14.9% 14.9%
Total 211.5 249.9 (15.4%) (10.0%) (10.0%)
Net revenue by Geography(7)
Americas 167.6 196.1 (14.5%) (8.3%) (8.3%)
EMEA 30.4 37.5 (18.9%) (18.5%) (18.5%)
Asia-Pacific 13.5 16.3 (17.2%) (9.4%) (9.4%)
Total 211.5 249.9 (15.4%) (10.0%) (10.0%)
£ millions Nine months ended Nine months ended change Reported change change
Like-for-like(3) Pro-forma(4)
30 Sep 2023 30 Sep 2022
Billings(5) 1,375.6 1,264.1 8.8% 6.2% 6.2%
Revenue
Content 495.7 527.2 (6.0%) (9.3%) (9.3%)
Data&Digital media 157.7 160.3 (1.6%) (1.5%) (1.5%)
Technology services 109.6 59.0 85.8% 36.0% 36.0%
Total 763.0 746.5 2.2% (3.1%) (3.1%)
Net revenue
Content 392.0 409.9 (4.4%) (7.2%) (7.2%)
Data&Digital media 155.5 157.7 (1.4%) (1.3%) (1.3%)
Technology services 109.5 57.6 90.1% 38.6% 38.6%
Total 657.0 625.2 5.1% (0.3%) (0.3%)
Net revenue by Geography(7)
Americas 521.3 480.6 8.5% 1.4% 1.4%
EMEA 96.5 100.8 (4.3%) (5.7%) (5.7%)
Asia-Pacific 39.2 43.8 (10.5%) (7.8%) (7.8%)
Total 657.0 625.2 5.1% (0.3%) (0.3%)
Sir Martin Sorrell, Executive Chairman of S(4)Capital Plc said:
"Trading in the third quarter was difficult, reflecting the global
macroeconomic conditions with continued client caution to commit and extended
sales cycles, particularly for larger projects and to some extent clients in
the Technology sector. Despite the slowdown in Q3, we continue to see year to
date growth from our top clients with like-for-like revenue growth at our top
20 clients up 2.9% and at the top 50 up 4.6%. We expect, as usual, Q4
profitability to be the strongest quarter of the year - stimulated by the
usual seasonal levels of client activity and the Artificial Intelligence
initiatives and use cases we are developing with our clients, along with the
actions taken on cost management. We remain confident our strategy, business
model and talent, together with scaled client relationships position us well
for above average growth in the longer term, with an emphasis on deploying
free cash flow to dividends and share buybacks, especially as in 2024 will
have no further merger payments."
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. 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. Billings is gross billings to client including pass through costs.
6. Net debt comprises cash minus gross bank loans (excluding
transaction costs).
7. The prior period geographical split of net revenue has been
re-presented to be consistent with the internal reporting provided to the
Group's Board of Directors in the current period.
8. This is a target and not a profit forecast.
Q3 Trading Update
The challenging trading conditions we saw in the first half have intensified
in Q3. Billings were £450.3 million down 7.0% reported and 1.4%
like-for-like. Revenue was down 18.1% reported to £245.9 million, down 13.0%
like-for-like. Net revenue declined 15.4% on a reported basis, or 10.0%
like-for-like. Reported revenue and net revenue were impacted by FX, in
particular the USD to GBP. Two year and three year third quarter like-for-like
net revenue stacks were 19.3% and 61.6%.
Q3 earnings before interest, tax, depreciation and amortisation (EBITDA), both
on a reported basis and like-for-like principally reflect lower activity
levels in Content and Data&Digital media. We have continued to take
action on the cost base, particularly in Content and have seen a significant
reduction in headcount across the Company.
The number of people in the firm was 8,187 at the end of the third quarter
down 4% compared to 8,551 at the end of the first half, and 9% lower than our
June 2022 figure of 9,041, reflecting the progress that has been made on
aligning our cost base to the demand we are seeing from our clients. Further
actions are being taken in Q4, with significant focus on managing our cost
base and driving efficiency across the Company.
Performance by Practice
Reported Content practice revenue was down 22.7% in the third quarter to
£160.9 million, with like-for-like down 18.2% whilst there was some growth
across the scaled and managed clients overall demand was lower particularly in
the newer regional and local clients and the technology sector. Third quarter
net revenue was down 20.4% to £127.2 million reported and 15.6%
like-for-like. Two year and three year like-for-like net revenue stacks are at
12.5% and 53.7% for the quarter.
Year-to-date the Content practice reported revenue was down 6.0% to £495.7
million and 9.3% like-for-like. Content reported net revenue was down 4.4% to
£392.0 million and 7.2% like-for-like. Year to date like-for-like net revenue
two year and three year stacks are at 19.5% and 66.5%.
We have made changes to the leadership structure of the Content practice,
which includes a new co-CEO Bruno Lambertini, and new leadership in several
key markets including APAC to accelerate growth from local and regional
clients.
Data&Digital media practice third quarter reported revenue was down 14.5%
to £49.6 million and 8.7% like-for-like reflecting lower activity
particularly in the activation and performance business lines. Third quarter
reported net revenue was down 14.2% to £48.9 million and down 8.4%
like-for-like. Two and three year third quarter like-for-like net revenue
stacks are 6.8% and 51.3%.
Year-to-date Data&Digital media practice reported revenue was down 1.6% to
£157.7 million and 1.5% like-for-like. Net revenue was down 1.4% to £155.5
million and 1.3% like-for-like. Year to date two and three year
Data&Digital media like-for-like net revenue stacks are at 18.8% and
64.6%.
Technology services practice third quarter reported revenue was up 4.4% to
£35.4 million with lower growth than the first half reflecting timing on
major client projects weighted to the first six months. Revenue was up 12.4%
like-for-like. Third quarter reported net revenue was up 6.6% to £35.4
million, up 14.9% like-for-like. Two year third quarter like-for-like net
revenue stacks are industry leading at 88.7%.
Year-to-date Technology services reported revenue was up 85.8% to £109.6
million, like-for-like up 36.0%. Reported net revenue was up 90.1% to £109.5
million, with like-for-like up 38.6%. Year to date two year like-for-like net
revenue stacks are industry leading at 118.6%.
On October 31(st) Technology services practice combined with Formula
Consultants, a leading enterprise software supplier. Formula Consultants
provides mission-critical solutions that keep core mainframe infrastructure
running for major enterprises and large public sector clients around the
World, including United Airlines, Arconic, Lloyds, Carnival Cruise Line, the
IRS, and over twenty more. This combination enables the Company to cross-sell
our consulting, digital transformation, and product engineering capabilities
into a portfolio of blue-chip brands. Formula Consultants generated revenues
of around $2.5m in their last financial year, and the combination values the
company at up to $2.5m in an all cash deal based on performance to the end of
2024. Whilst large scale M&A is not in our current plans we will continue
to look for opportunities like Formula Consultants to boost our capability set
and opportunities for growth.
Performance by Geography
The Americas, our largest market is seeing the impact of the slowdown in
activity and the impact of FX with third quarter reported net revenue down
14.5% to £167.6 million and 8.3% like-for-like. Year-to-date, the Americas
reported net revenue was up 8.5% to £521.3 million and 1.4% like-for- like.
Europe, the Middle East and Africa also saw a reduction in demand, with
reported net revenue down 18.9% to £30.4 million and like-for-like 18.5%.
Year-to-date reported net revenue was down 4.3% to £96.5 million and
like-for-like 5.7%.
Asia Pacific, our smallest region also saw lower activity and FX impact, with
reported net revenue down 17.2% to £13.5 million in the third quarter and
9.4% like-for-like. Year-to-date reported net revenue declined 10.5% to £39.2
million and like-for-like was down 7.8%.
Balance Sheet
Net debt ended the third quarter at £185 million, or 1.7x net debt/12 month
proforma operational EBITDA. The trailing 12 months proforma EBITDA was
£107.2 million. The balance sheet has sufficient liquidity and long-dated
debt maturities to facilitate growth and our key covenant, being net debt not
to exceed 4.5x the 12 month proforma EBITDA.
Client Development and Momentum
Our stated 'whopper' or portfolio client strategy of building broad scaled
relationships with leading enterprise clients continues to be the focus. Year
to date revenues from our top 20 clients grew 2.9% on a like-for-like basis
and the average size of our top 20 clients increased approximately 10% from
£20.3 million to £22.9 million. Our top 50 client cohort delivered year to
date revenue growth of 4.6% on a like-for-like basis and their average size
increased also by approximately 10% from £9.8 million to £11.1 million. We
will likely have eight "whoppers" this year, with a further two almost
reaching $20 million of revenue in 2023.
People and ESG
Our talented people have responded positively to the challenging trading
conditions and our drive for efficiency. We have continued to make progress in
the three areas of our ESG strategy: zero impact workspaces, sustainable work,
and diversity, equity and inclusion (DE&I).
Current Trading
Given slower than expected trading in Q3 and current client activity levels,
we expect that like-for-like net revenue for 2023 will be below the prior
year, with an operational EBITDA margin now of around 10-11%(8).
As in recent years, we continue to expect the full year profits to be heavily
Q4 weighted, reflecting our seasonality and anticipated client activity, along
with the impact of cost actions already taken.
Our net debt is expected to rise in Q4 reflecting further payments for prior
year combinations, after which virtually all the existing contingent
consideration due will have been satisfied. We expect to end the year around
the top of our previously guided range of £180-220 million. We aim for
financial leverage of around 1.5 times operational EBITDA over the medium
term. Over the longer term we continue to expect our growth to outperform our
addressable markets and operational EBITDA margins to return to historic
levels of 20%+.
Webcast and conference call
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.
09:00 GMT webcast (watch only):
Webcast: https://brrmedia.news/SFOR_Q323 (https://brrmedia.news/SFOR_Q323)
Conference call:
UK: +44 (0) 33 0551 0200
US: +1 786 697 3501
Confirmation code: Quote 'S(4)Capital Results' when prompted by operator
08:00 EST / 13:00 GMT webcast (watch only):
Webcast: https://brrmedia.news/SFOR_Q323US
(https://brrmedia.news/SFOR_Q323US)
Conference call:
UK: +44 (0) 33 0551 0200
US: +1 786 697 3501
Confirmation code: Quote 'S(4)Capital Results US' when prompted by 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/ Pete Lambie
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 8,200 people in 32 countries with
approximately 80% of net revenue across the Americas, 15% across Europe, the
Middle East and Africa and 5% across Asia-Pacific. The longer-term objective
is a geographic split of 60%:20%:20%. Content currently accounts for
approximately 60% of net revenue, Data&Digital Media 25% and Technology
Services 15%. 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.
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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
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continue to hold, or dispose of, shares in the Company.
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