REG - S4 Capital PLC - Third Quarter Trading Update

S4 CapitalAnnouncement

07/11/2024 07:00

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RNS Number : 2678L  S4 Capital PLC  07 November 2024

S(4)Capital PLC

7 November 2024

S(4)Capital plc

Third Quarter Trading Update

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

 

Third quarter reported net revenue(2) down 15.2%, like-for-like(3) down 12.6%
primarily reflecting lower activity in both Content and one of the larger
Technology Services clients

Year to date reported net revenue down 15.5%, like-for-like down 13.2%

New business activity continues at significant levels with a particular focus
on AI-driven hyper-personalisation at scale

Full year like-for-like net revenue expected to be down low double digits,
with like-for-like Operational EBITDA(5) slightly below the prior year(8)

Net debt at £180 million, leverage at 2.2x EBITDA (covenant at 4.5x EBITDA)
and year end net debt expected to be in the previously stated range of £150
to £190 million(7)

 

Key financials

 £ millions                Three months ended  Three months ended          change Reported  change             change

                                            Like-for-like(3)   Pro-forma(4)
                           30 Sep 2024         30 Sep 2023
 Billings(1)               481.6               450.3                       7.0%             10.1%              10.1%

 Revenue
 Content                   131.0               160.9                       (18.6%)          (16.4%)            (16.4%)
 Data&Digital Media        47.3                49.6                        (4.6%)           (0.4%)             (0.4%)
 Technology Services       20.1                35.4                        (43.2%)          (42.1%)            (42.1%)
 Total                     198.4               245.9                       (19.3%)          (17.0%)            (17.0%)

 Net revenue
 Content                   112.4               127.2                       (11.6%)          (9.1%)             (9.1%)
 Data&Digital Media        46.8                48.9                        (4.3%)           0.0%               0.0%
 Technology Services       20.1                35.4                        (43.2%)          (42.1%)            (42.1%)
 Total                     179.3               211.5                       (15.2%)          (12.6%)            (12.6%)

 Net revenue by Geography
 Americas                  138.5               167.6                       (17.4%)          (14.5%)            (14.5%)
 EMEA                      30.4                30.4                        0.0%             1.3%               1.3%
 Asia-Pacific              10.4                13.5                        (23.0%)          (21.2%)            (21.2%)
 Total                     179.3               211.5                       (15.2%)          (12.6%)            (12.6%)

 

 £ millions                Nine months ended  Nine months ended          change Reported  change             change

                                           Like-for-like(3)   Pro-forma(4)
                           30 Sep 2024        30 Sep 2023
 Billings(1)               1,390.5            1,375.6                    1.1%             3.8%               3.8%

 Revenue
 Content                   410.4              495.7                      (17.2%)          (15.0%)            (15.0%)
 Data&Digital Media        144.3              157.7                      (8.5%)           (5.4%)             (5.4%)
 Technology Services       66.2               109.6                      (39.6%)          (38.4%)            (38.4%)
 Total                     620.9              763.0                      (18.6%)          (16.4%)            (16.4%)

 Net revenue
 Content                   346.7              392.0                      (11.6%)          (9.2%)             (9.2%)
 Data&Digital Media        142.5              155.5                      (8.4%)           (5.3%)             (5.3%)
 Technology Services       66.2               109.5                      (39.5%)          (38.4%)            (38.4%)
 Total                     555.4              657.0                      (15.5%)          (13.2%)            (13.2%)

 Net revenue by Geography
 Americas                  432.5              521.3                      (17.0%)          (14.7%)            (14.7%)
 EMEA                      90.1               96.5                       (6.6%)           (5.1%)             (5.1%)
 Asia-Pacific              32.8               39.2                       (16.3%)          (12.8%)            (12.8%)
 Total                     555.4              657.0                      (15.5%)          (13.2%)            (13.2%)

 

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

 

"Trading in the third quarter reflected the continued impact of trends we saw
in the first half, namely challenging global macroeconomic conditions and high
interest rates, as well as some underperformance when compared to our
addressable markets. These trends have impacted marketing spend by some
technology clients and our Technology Services practice continued to be
affected by a reduction in one of our larger client relationships, as
previously flagged. Data&Digital Media's like-for-like run rate improved,
while Content saw a slight improvement in the third quarter, but did not
benefit as much as expected from easier prior year comparisons. We continue to
focus on our larger, scaled relationships with leading enterprise clients and
margin improvement through greater efficiency, utilisation, billability and
pricing. In light of the continued net revenue softness, we have maintained
the heightened focus on cost reduction and we now expect like-for-like
operational EBITDA to be slightly below the prior year(8). As in previous
years, financial performance will be weighted to the fourth quarter. We remain
confident in our strategy, business model and talent, which together with
scaled client relationships position us well for growth in the longer term. We
continue to capitalise on our prominent AI positioning and are seeing multiple
initial AI related assignments as clients start to use our MonksFlow tools and
our experience to implement applications. Our three newly introduced
Go-To-Markets - Orchestration Partner, Real Time Brands and Glass Box Media -
are all starting to resonate with clients."

 

Notes:

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 2023 being
restated to show the unaudited numbers for the previous period of the existing
and acquired businesses consolidated for the same months as in 2024 applying
currency rates as used in 2024.

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

5.     Operational EBITDA is operating profit or loss adjusted for
acquisition related expenses, non-recurring items (primarily amortisation of
business combination intangible assets, restructuring and other one-off
expenses and acquisition payments tied to continued employment) and recurring
items (share-based payments) and includes right-of-use assets depreciation. It
is a non-GAAP measure management uses to assess the underlying business
performance. Operational EBITDA margin is operational EBITDA as a percentage
of net revenue. Operational EBITDA for the year ended 31 December 2023 on a
like-for-like basis at current exchange rates is £87m.

6.     Adjusted figures are adjusted for non-recurring and recurring items
as defined above.

7.     Net debt excludes lease liabilities.

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

 

Third Quarter Trading Update

 

The challenging trading conditions we saw in the first half have continued in
the third quarter. Revenue was down 19.3% reported to £198.4 million, down
17.0% like-for-like. Net revenue declined 15.2% on a reported basis, 12.6%
like-for-like. Reported revenue and net revenue were both significantly
impacted by FX, in particular the USD to GBP.

 

Third quarter earnings before interest, tax, depreciation and amortisation
(EBITDA), both on a reported basis and like-for-like principally reflect lower
activity levels in Technology Services, primarily due to both a reduction in
one of our larger relationships, and lower revenues in the Content practice.
We are continuing to take action on the cost base during the second half and
are seeing a significant reduction in the number of Monks across the Company
on a year on year basis, as we bring our capacity more in line with the level
of revenue.

 

Performance by Practice

Reported Content practice revenue was down 18.6% in the third quarter to
£131.0 million, with like-for-like down 16.4%. The quarter's performance was
below our expectations. This reflected ongoing client caution and lower
activity, particularly with some of our larger technology clients. Reported
third quarter net revenue was down 11.6% to £112.4 million and 9.1%
like-for-like. Year-to-date the Content practice reported revenue was down
17.2% to £410.4 million and 15.0% like-for-like. Content reported net revenue
was down 11.6% to £346.7 million and 9.2% like-for-like.

 

Data&Digital Media practice third quarter reported revenue was down 4.6%
to £47.3 million and 0.4% like-for-like with the practice managing its costs
to match its activity levels. Third quarter reported net revenue was down 4.3%
to £46.8 million and was flat year on year on a like-for-like basis.
Year-to-date Data&Digital Media practice reported revenue was down 8.5% to
£144.3 million and 5.4% like-for-like. Net revenue was down 8.4% to £142.5
million and 5.3% like-for-like.

 

Technology Services practice third quarter reported revenue was down 43.2% to
£20.1 million with lower revenue from one key client and longer sales cycles
for new business. Revenue was down 42.1% like-for-like. Third quarter reported
net revenue was down 43.2% to £20.1 million, down 42.1% like-for-like.
Year-to-date Technology Services reported revenue was down 39.6% to £66.2
million, like-for-like down 38.4%. Reported net revenue was down 39.5% to
£66.2 million, with like-for-like down 38.4%.

 

Performance by Geography

The Americas, our largest region is seeing the impact of continued slower
activity and the impact of FX with third quarter reported net revenue down
17.4% to £138.5 million and 14.5% like-for-like. Year-to-date, the Americas
reported net revenue was down 17.0% to £432.5 million and 14.7%
like-for-like. Europe, the Middle East and Africa was flat in the third
quarter, with reported net revenue at £30.4 million and like-for-like up
1.3%. Year-to-date reported net revenue was down 6.6% to £90.1 million and
like-for-like down 5.1%. Asia Pacific, our smallest region also saw lower
activity, with reported net revenue down 23.0% to £10.4 million in the third
quarter and 21.2% like-for-like. Year-to-date reported net revenue declined
16.3% to £32.8 million and like-for-like was down 12.8%.

 

Balance Sheet

Net debt ended the third quarter at £179.6 million, or 2.2x net debt/12 month
proforma operational EBITDA. This compared to net debt at the end of the first
half of £182.9 million. The trailing 12 months proforma EBITDA was £82.5
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. Our Term Loan B matures in August
2028 and our undrawn revolving credit facility in August 2026.

 

New business and AI

We are seeing our AI initiatives improve visualisation and copywriting
productivity, deliver considerably more effective and economic
hyper-personalisation (better targeted content at greater scale), more
automated and integrated media planning and buying, improving general client
and agency efficiency and democratisation of knowledge. MonksFlow is our AI
product solution that automates marketing workflows, and we are continuing to
add applications and expand its capabilities. Our 10+ MonksFlow product suites
enable our clients to more easily implement AI solutions, particularly in
visualisation and copywriting, in hyper-personalisation at scale, in real time
focus groups and linking media planning and buying.

 

Our three new Go-To-Market propositions - Orchestration Partner, Real Time
Brands and Glass Box Media - are all starting to resonate strongly with
clients. These are built around hyper-personalisation at scale, social media
and brand strategy and transparent media planning and buying.

 

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) having secured BCorp status
across the Company.

 

Current Trading and Outlook

Given the level of trading in Q3 and current client activity, we expect that
like-for-like net revenue for 2024 will be down by low double digits, with
like-for-like Operational EBITDA slightly below the prior year(8). We continue
to focus on the cost base to improve operational efficiency. As in recent
years, we expect the full year profits to be Q4 weighted, reflecting
seasonality and anticipated client activity, along with the impact of cost
actions. We also continue to expect net debt to be within our previously
targeted range of £150-190 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%+(8).

 

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) and conference call (for Q&A):

Webcast: https://brrmedia.news/SFOR_Q3UK_24
(https://brrmedia.news/SFOR_Q3UK_24)

Conference call:

UK: +44 (0) 33 0551 0200

US: +1 786 697 3501

 

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

Webcast:  https://brrmedia.news/SFOR_Q3US_24
(https://brrmedia.news/SFOR_Q3US_24)

Conference call:

UK: +44 (0) 33 0551 0200

US: +1 786 697 3501

 

Enquiries to:

 

S(4)Capital
plc
+44 (0)20 3793 0003

Sir Martin Sorrell (Executive Chairman)

 

Sodali (PR
Advisor)
+44 (0)79 3535 1934

Elly Williamson/Pete Lambie

 

About S(4)Capital

 

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 two synchronised practices: Marketing services and
Technology services, along with an emphasis on 'faster, better, cheaper, more'
execution in an always-on consumer-led environment, with a unitary structure.

The Company now has approximately 7,500 people in 33 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%. At the Group's last full year results,
Content accounted 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.

 

 

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