Sorrell ‘cautiously optimistic’ as S4 recovers from last year’s auditing misstep

Preliminary unaudited results published by S4 today show it increased net revenue by 26% compared with the previous financial year, and net billings by 24% over the same period. S4 employs around 9,000 people worldwide.

Executive chairman Sir Martin Sorrell said that the results put the group on a strong footing amid a weak global economy. “This reflects what the company is capable of achieving.”

• Media.Monks readies launch of generative AI service for clients

“We have momentum going into 2023 and are cautiously optimistic, despite the slowdown of growth in our major addressable markets. We expect to make continued progress, stimulated, in particular, by the early and rapid implementation of revolutionary new technologies such as AI.”

Revenue at the challenger group exceeded £1bn for the first time since its foundation in 2018, with the group posting a total revenue of £1,069bn, and £891.7m in net revenue. Net debt was also lower than expected, at £110m.

Is recovery in sight?

Last spring, the firm had to postpone its full-year results twice, later revealing that issues in its financial governance had led it to an “unacceptable and embarrassing” delay.

Over $1.2bn was knocked off its share price, and in July, the company issued a profit warning to investors and froze hiring. In its first half results – published in September – with the company feeling the weight of its five-year acquisition and hiring spree, it posted a £75m operating loss.

Today’s results, published nearly a year after the company’s initial decision to delay, suggest the company is back on the right track.

“The actions taken by our management and the positive response by our people to the first half challenge of balancing growth in net revenue with growth in costs, have delivered a much improved second half performance,” said Sorrell.

S4’s statement to the press and investors credited that improvement to “significant cost management measures implemented, including a brake on hiring and discretionary cost controls” and added that a “more balanced” approach to staffing would be the rule in the future.

‘Content’ – S4’s catchall term for creative and ad services, and the group’s largest revenue generator – showed the most significant improvement, with 24% growth after stricter financial discipline brought its costs down.

Chief financial officer Mary Basterfield said that the firm has also established a finance team “appropriate for the size and ambition” of S4 to keep a lid on costs going forward.

The company’s operating margins, however, are still lower than its long-term goals. Its operational Ebitda margin – a measure of revenue with the costs such as acquisitions, taxes and interest payments removed – increased 24%, but was down 16% compared with the previous financial year. The earnings statement suggested it expects that figure to rise to over 20% in “the longer term.”

Meanwhile, cost controls are expected to continue at the company’s digital media arm, which has “a more challenging second half,” owing to slowing client activity.

The results also showed that the group’s reliance on the US market remains unchanged; 75.6% of its revenues are from the Americas, with 17.5% coming from Europe, Africa and the Middle East. Growth in Asia Pacific remained slow at just 6.9%, owing to the impact of Covid in China.

Its goal of establishing a base of 20 ‘whopper’ clients remains a central aim (it has 10 on the books), though one of those big customers, consumer goods and confectionary advertiser Mondelez, wrapped up its contract earlier this year.

Economic headwinds

Speaking to investors this evening, chief growth officer Scott Spirit said that “there’s no denying our addressable markets face a tougher macro environment in 2023” and that digital advertising was “not immune to macro trends.”

Chief growth officer Scott Spirit said that he’d faced several questions from industry peers about the company’s exposure to the struggling tech sector, an industry that has been central to Media.Monks’ growth so far, with major clients including Netflix, Google and Meta.

However, he was at pains to state the opposite. “We remain bullish on technology,” he declared, adding that “we believe it to be a long-term winner and driver of economic growth.”

Spirit added that the firm was “not exposed to any of the banking issues we’ve seen,” referring to the collapse of Silicon Valley Bank and that most of its dealings with the sector were with large, established businesses. “Just 2% of our revenue comes from what you might call startups,” he said.

Addressing those “macro” clouds on the horizon, Sorrell said the direct impact of a slowdown wasn’t yet clear.

“It is concerning. We’ve put certain hedges and reserves into our figures and our guidance. We have looked at our budgets carefully. Clients took a fair amount of time to close off their budgets for 2023 at the end of 2022; clients are skittish and sales cycles are longer. We’ve not seen significant cuts but we’ve seen people delaying decisions because of uncertainty.”

Looking further ahead, the company took time to highlight its emerging AI capabilities. Wesley ter Haar, executive director at S4 and co-founder of Media.Monks, devoted a 10-minute segment during its presentation for investors to the subject.

He said he expects it to herald “industrial revolution-type disruption.” Asked whether S4 might be vulnerable to smaller agency groups using AI to fuel business growth, he said he is “bullish” that S4 can move faster than any rivals, and disrupt its internal workings to remain competitive.

Executive chairman Sorrell used the segment to add a jab at the holding company he helped build: “What this does do is make it much easier for a 9,000-person organization to compete against a 100,000 one.”