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Financial Results S4 Capital Media.monks

Why Sir Martin Sorrell has issued another profit warning for S4 Capital

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By Sam Bradley, Journalist

July 24, 2023 | 4 min read

Overexposure to the tech sector is the culprit behind the company’s second warning to investors in a year.

s4 capital graphic asset

S4 Capital, which owns Media.Monks and XX Artists, has said it expects profits to be lower this year / The Drum

The tech winter has continued to bite advertising groups well into the summer. S4 Capital has issued a profit warning to investors, citing “challenging macroeconomic conditions” and technology clients “remaining cautious and very focussed on the short term.”

S4, which is led by former WPP founder Sir Martin Sorrell, revised its prediction for annual organic revenue growth to 2%-4%, down from 6%-10%.

The company’s statement suggested that job cuts could be on the way in the second half of the financial year, referring to “a disciplined approach to cost management, including headcount and discretionary costs.” S4 Capital currently employs 8,600 people worldwide.

This is not the first profit warning Sorrell has been forced to issue. In 2022, despite bullish predictions, he was forced to row back on numbers as operating costs rose faster than revenue. That followed an auditing mix-up that delayed the release of financial results and sent its share price tumbling.

Analyst Tony Walford of consultancy Green Square said of the latest update: “It’s never great when a company issues a profit warning and S4 is likely to get more scrutiny than most given its share price woes over the past 18 months.”

S4’s share price was down by around 20% on the update.

The group is more exposed than other holding companies to the broader tech sector, notes Walford. Its growth strategy has focused on capturing and keeping a small set of very large clients, dubbed ‘whoppers’ by Sorrell. That approach has meant that spending shifts at those companies have disproportionately impacted its revenues.

“Agencies with significant tech clients are likely to see revenue challenges, given the continued layoffs in that sector, and S4, with ‘whoppers’ Adobe, Google, Meta and Amazon, will certainly be feeling the pinch,” continues Walford.

Revenues at S4 came in underweight during May and June, resulting in the company’s operating margins being thinned. In particular, S4’s latest statement highlighted a slowdown in activity within its core advertising and content business and client hesitancy around big-ticket ‘transformation’ projects, which previously propelled the company’s growth.

“We continue to see longer sales cycles, particularly for larger transformation projects. Some impact has been seen in each of the practices, but it is particularly evident in content,” the statement said.

According to Walford: “The longer sales cycles for large transformation projects are not a surprise, as big corporations focus on short-term revenue and shifting products in an economic slowdown, but what did stand out is the reduction in spend on content. I would have expected this to be more resilient as it’s a key component of consumer influence. It will be interesting to see if this is a trend across the agency landscape.”

The profit warning makes S4 the second advertising group to reduce revenue growth expectations this year. Last week Interpublic Group said it expected organic growth of 1-2%, down from 2-4%. IPG, which owns agencies R/GA, Huge and Mediabrands, also credited that reduction to lower spending among tech clients.

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