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S4 Capital losses and job cuts deepen: what the analysts say

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By Jennifer Faull | Deputy Editor

September 18, 2023 | 8 min read

Sir Martin Sorrell’s group has been forced to make more job cuts as its revenue forecast was lowered (again).

Sir Martin Sorrell

Sir Martin Sorrell, S4 Capital

S4 Capital has cut a further 500 roles from the group, which includes digital giant Media.Monks, as a fall in spend from tech clients continue to blight the holding company. As of June 2023, it employed 8,550 people worldwide.

Among the hardest hit divisions was Content – which generates about 60% of S4’s net revenue – as it saw like-for-like sales fall by 2.5%. The group’s two other main divisions, Data & Digital Media and Technology Services, were up 2.4% and 54.3%, respectively.

However, the poor performance of its Content practice led S4 to warn that total group revenues for the year were expected to fall by 1%, compared with a previous forecast of 2.5% growth.

In its interim results report, founder and executive chair Sir Martin Sorrell said: “We had a very mixed first half of the year reflecting challenging global macroeconomic conditions and consequent fears of recession, which resulted in client caution to commit and extended sales cycles, particularly for larger projects.”

The problem, Sorrell stressed, is that its roster of clients is overwhelmingly weighted toward those in the technology sector. They accounted for nearly 50% of its total revenues last year, compared with 12% at Publicis or 15% at Interpublic (according to Citi). But those tech clients have significantly cut spending.

The company’s share price fell 25% on the update.

It’s an update that investors will be all too used to hearing. In July, Sorrell issued a profit warning to investors, citing “challenging macroeconomic conditions” and technology clients “remaining cautious and very focussed on the short term.” Then, it revised its annual organic revenue growth prediction to 2%-4%, down from 6%-10%.

Meanwhile, 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. That year, it also made a round of job cuts.

“We expect the year as usual to be weighted to the second half, especially the fourth quarter,” continued Sorrell. “Stimulated, in particular, by increased seasonal levels of clients’ activity and our artificial intelligence initiatives and the use cases we are developing with our clients.”

Higher staff and IT costs mean more cuts could be coming as S4 continues to take action, especially in its Content division.

“We remain confident our talent, business model, strategy and scaled client relationships position us well for above-average growth in the longer term,” Sorrell said, adding that it’s seen like-for-like revenue growth among its top 20 clients increase by 8.9% year-on-year. As such, he said, S4 will outperform rivals and eventually return its profit margins to above 20%.

But what do the analysts think? Here’s what they said on the news

Russ Mould, investment director AJ Bell

Advertising agencies are at the mercy of the economy. In bright times, companies are prepared to spend big to promote their products and services. In harder or uncertain times, those budgets are pared back, which means companies like S4 Capital will find it harder to grow fast.

Martin Sorrell’s digital advertising agency is currently suffering from subdued client activity – its customers are worried about recession, so they are cautious about signing off big advertising campaigns.

This is not a new trend for S4 as it has been moaning about the state of the market for some time. However, the latest downgrade to earnings expectations has caused yet another sell-off in the share price, down a further 20%.

S4’s shares are now down 69% since their year-to-date peak in February, illustrating how its fortunes are going from bad to worse.

Victoria Scholar, head of investment at Interactive Investor

Geographically, Asia Pacific was a particularly weak area this year, due to lower client demand amid China’s bumpier-than-expected post-Covid recovery.

In July, the company already cut its forecasts for annual revenue growth and core profit margins due to a reduction in marketing spending from tech clients.

The sluggish global growth backdrop means there’s a hesitance among businesses to commit to long-term advertising spending, with companies focusing on keeping a lid on costs amid the high inflation, rising interest rate environment.

There’s also a growing concern for the sector that the rise of artificial intelligence in-house may result in less demand for external ad agencies.

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Jay Pattisall, vice-president, principal analyst at Forrester

I would attribute the decline in S4 Capital performance to its exposure to technology sector and the somewhat brittle economy in China at this moment. S4 counts up to 50% of its clients in the technology sector, including Google and Netflix which have cut staff in the last year and likely marketing program budgets. The Chinese economy is soft at the moment. The unemployment rate for 16-24 year olds is at 21% as of August. And many of S4 merges and acquisitions are designed to build its presence in the region.

I don’t view S4’s situation as an indictment of its model or strategy. In fact, S4’s focus on content production, digital creative and data are the right mixture to be a successful marketing services company today. A rebound in tech and increased demand for content (both driven by cloud and generative AI) in 2024 should benefit S4 and Media.Monks in the future.

Greg Paull, cofounder and principal at R3

The group was right to lean into technology companies but it needs to pivot to more recession-proof sectors now in order to drive growth.

A big challenge is migrating from lower-value content creation work to higher-value strategic engagements. They have the right people and tools to do this – time will tell if they can.

Additional reporting by Kendra Clark.

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