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S4 Capital reveals operating losses and job cuts after investments ‘knock margins’


By Sam Bradley | Senior Reporter

September 21, 2022 | 7 min read

Sales at the Media.Monks owner grew strongly to £446m in the first six months of the year, but operating losses spiralled to £75m on the back of acquisitions, infrastructure and hiring costs.

s4 graphic

S4 Capital posted millions in losses in its financial results for the first half of 2022 / The Drum

S4 Capital has revealed its financial results for the second quarter and first half of 2022, following a rocky few months.

In July, the company issued a profit warning that saw its stock price halve after an “embarrassing” auditing saga.

In its first-half results, released today, the company confirmed its investor guidance and revealed it had achieved over 30% like-for-like revenue growth and an increase of over 20% in billings – and a £75.4m loss.

According to chief financial officer Mary Basterfield, stringent cost controls, including putting a brake on hiring and job cuts over recent months, have steadied the firm.

Sir Martin Sorrell, founder and executive chairman of S4, told analysts: “The first six months of the year haven’t been easy to say the least.” But, he stressed, the company had experienced “strong topline growth,” which “indicates strength of model and dissatisfaction with the old model” despite the operating loss.

‘Knock to margins’

Despite sunny news for S4’s growth numbers, Basterfield was frank about the challenges it had come up against earlier, telling analysts: “Obviously we have taken a knock to margins this year.”

S4’s operational EBITDA (earnings before interest, taxes, deprecation and amortization) was “lower than predicted”, primarily due to “investment running ahead” of earnings. EBITDA was £30.1m, down over 41% and £4m on the same period last year. Its operating margin was down from 14.5% last year to 8%. The company had previously declared its full year EBITDA to reach 25%. Costs associated with “hiring against the curve” impacted its profits, while it spent millions on offices in London, Buenos Aires and New Delhi, as well as on updating its IT systems.

As a result, the company made an operating loss of £75.4m, with total losses for the last six months reaching £82.4m.

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Following the auditing delay declared in spring, Basterfield said that S4 had staged a “full debrief” with auditor PwC and put an “action plan” in place, including installing a “much stronger team” for financial governance and cost controls. That included a “revised operation” to better calculate cost of sales, a hiring “brake” across Media.Monks and “discretionary cost controls,” which were already having the “desired effect”. S4 also cut its net debt to £135.5m, below its previous guidance, by improving its “working capital management,” according to Basterfield.

Sorrell said the company had also made some job cuts with the aim of “eliminating some duplication of resources” and what Basterfield called “pockets of inefficiency,” though she said the cuts had been on a “relatively small” scale. The company now employs 9,041 people worldwide.

Which parts of the business grew?

Despite the operating losses on its balance sheet, every part of the business experienced growth. Overall net revenue reached £375.3m, up 27.8% like-for-like and 89% compared with 2019. Billings were up to £765.6m, up 22.2% like-for-like.

Its content practice grew 26%, a figure which Basterfield expects to grow once “tighter headcount controls” show their impact in future results. Its data business, based around agency MightyHive, grew 23%, while its smaller tech services arm saw net revenues increase 89%.

According to Scott Spirit, technology clients were the biggest client sector for S4, accounting for almost half of its business. Financial services and automobile brands were fast-growing categories, he noted.

The company added two more ‘whopper’ accounts, bringing its total to eight; S4 now lists Meta, Mondelez, HP and Google among its clients and hopes to help its smaller existing customers expand to ‘whopper’ status in coming years.

Despite the losses on paper, Sorrrell struck an optimistic note. “Our top line growth continues to outperform the digital advertising and transformation markets,” he said.

“In the first half of 2022, we continued to invest in increased human capital ahead of further top line advances and in management infrastructure, which impacted our operational EBITDA. In the second half, we are focused on a better balance between top and bottom-line growth to ensure we reach our revised targets for the year.”

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