S4 Capital finally releases financial results following ‘embarrassing’ auditing delay

What do the results show?

In a statement containing its preliminary financial results, net revenue for the year was £560.2m ($687.53m), compared to £295m for the previous 12 months, an increase of 89.8%. Organic revenue growth over the two years as a whole was 63%, and 100% over the three year ‘stack’ (a means of bracketing years of growth for comparison with pre-Covid results). The company’s billings reached £1.3bn ($1.6bn), a 99.4% increase on last year.

S4’s operating EBITDA margin (earnings before interest, taxes, deprecation and amortization) was 18%, falling 3% compared to 2020; the company’s statement suggests this is due to the effect of its many acquisitions in the last two years. According to chief financial officer Mary Basterfield, its operating expenses increased 110%, reflecting the company's expansion through acquisition. January and February of 2022 beat targets of 25% like-for-like organic growth, the results statement said.

The company has doubled its headcount in the last year, and now employs 8,400 staff across 33 countries.

In a statement, Sorrell said: “In our third full financial year we almost doubled in size, approximately half through organic growth and approximately half through combinations and generated over $900m of revenue in 33 countries. We continued to develop conversion at scale with six well established 'whoppers' and a further 19 clients identified as 'whoppertunities' and with approximately half of our revenues from technology clients.”

What was the impact of the auditing delay?

The results were originally slated to be released March 3. But PricewaterhouseCoopers (PwC), S4’s auditors, said it was unable to complete its verification work of the company’s numbers –an admission that led to a precipitous fall in S4’s share price.

According to CFO Basterfield, who joined early this year, the key issues behind the delay were a lack of documentation and a “lack of understanding” within the legacy Media.Monks business around reporting revenues.

The delay has pushed S4 to establish stricter financial controls and new risk and governance procedures under the scope of group CFO Basterfield, who joined earlier this year.

Sorrell said: “The delay in producing our 2021 results is unacceptable and embarrassing and significant changes in our financial control, risk and governance structure and resources are being implemented and planned, including several significant additions to the central and Content practice financial teams and the Audit Committee.”

Which sectors and agencies performed best?

S4 operates under a single P&L across its 8,000 staff, and doesn’t distinguish between its agency brands on the balance sheet. However, content (that is, advertising and digital creative) accounted for the bulk of its business, bringing in 68% of its net revenues; data and digital media accounted for 29%. Despite S4’s ambition to be seen as a tech company, rather than a marketing services provider like the advertising holding companies, technology services only accounted for 1.25% of its revenues last year.

Much of S4’s growth last year came from expanding its commitments with existing partners, which include Google, Meta, Amazon, Paypal, HP, Netflix, Procter & Gamble, Mondelez and BMW, but it also picked up new business in the form of Allianz, Miele and Instacart. Sorrell’s target of 20 ‘whoppers’ – clients which each generate over $20bn of revenue – may be achieved by 2024, the statement predicted.

Most of S4’s income – and its growth – came from the Americas, with 69% of net revenue coming from that region. EMEA accounted for about 20% of its net revenues, though its slice of the pie will likely increase as Media.monks consolidates its foothold in Europe – it only entered into the German market last year.

Sorrell said that he expects S4 to double its net revenue over the next three years and aims to secure five more ‘whopper’ accounts over the course of 2022, though he warned of risks from the invasion of Ukraine, continued Covid restrictions in China and higher inflation.

“Although global GDP forecasts have slipped… we believe 2022 will generally be a good year economically overall, with consumers temporarily insulated from an inflationary squeeze by Covid savings," Sorrell said.

"This, despite the significant inflation, higher interest rates, continued Covid lockdowns in China, and the bitter, vicious war in Ukraine - which will raise risk levels for clients in Central and Eastern Europe and to a lesser extent Asia Pacific, whilst lowering them in North and South America.”