8th November 2024
One is in high spirits thanks to accelerating growth. The other has seen its share price tumble to a record low. As Stagwell and S4 post their Q3 results, Green Square’s Barry Dudley examines the reasons behind their starkly different performance in his regular holding co results round-up.
Off the back of a 13.5% decline in net revenues in Q2 comes a like-for-like drop of 12.6% in Q3 for S4. No wonder Sir Martin Sorrell, S4’s executive chairman, had a somewhat dour demeanor during his firm’s earnings call.
Global macroeconomic factors, including high interest rates, were referenced. But S4’s fundamental challenge continues to be its dependence on technology clients with one client in particular pulling down its results. The outlook has been revised down to a low double-digit reduction in full-year year like-for-like net revenue – so down at least 10% against 2023, when put in plain English. Which is going to lead to a “significant reduction in the number of Monks.” Staff, that is.
The Content division, S4’s largest, saw a drop of 9.1% in net revenues for the quarter. Data & Digital Media was flat, but Technology Services was down a thumping 42.1%. And by geography: Americas were down 14.5%, APAC down 21.2%, with EMEA up slightly by 1.3%.
Scott Spirit, S4’s chief growth officer, talked through its “addressable market,” which I thought would add further color to why it is finding trading so tough… in 2024 ‘digital media spend’ is forecast to be up 8.7% (7.8% in 2023) and ‘ad revenue growth at the 5 main platforms’ is forecast to be up 15% (10% in 2023). Sounds like a pretty good addressable market to me! However, ‘Digital Transformation Service’ is projected to decline by 0.25% (compared with 5.2% growth in 2023).
But the most fascinating numbers were in a table that showed the number of clients S4 had in four different size bandings for the year 2024 and for the same period in 2023.
In 2023, there were 12 clients with revenues of more than £10m and 12 clients with revenues of between £5m and £10m – in 2024 the respective number of clients were nine and seven. As I’m pretty sure S4 hasn’t lost (m)any major clients, so that means there has been some sizeable cuts in spending.
What is possibly more troubling is the picture at the other end of the scale: clients with revenues of between £0.1m and £1m have increased from 349 in 2023 to 390 in 2024. In tricky times, it is not unusual for businesses to take on smaller clients, or smaller projects than they might normally wish to in order to fill a sales gap. Sometimes this can also be the wrong type of work. There may simply be no choice: bills have to be paid. But this can create a vicious cycle where your resources are used inefficiently across too many things and then you don’t have the capacity or the right mindset to start working on converting the next £10m+ whopper.
Spirit went on to say: “On the positive side our progress in new business, particularly driven by interest in our Monks.Flow AI offering has helped drive an increase in clients at the top of the funnel which we hope to develop into larger relationships in 2025”. Fingers crossed.
Then there was Stagwell, with its waxed surfboard. If S4 has the challenge of its dependency (44% of revenues) on the Technology sector, Stagwell has the upside of a strong Advocacy practice which benefited from a US election that supposedly saw a combined cost of $3.5bn around the Trump and Harris campaigns.
Stagwell’s Q3 organic net revenue growth was 7.6%, or 4.6% if you exclude advocacy work. All of its ‘principal capabilities’ saw organic growth with Stagwell Marketing Cloud Group up 23.3% and Digital Transformation up 14.5% – the latter a particularly stark contrast to S4’s fortunes.
If the US, organic net revenue growth of 10.8% was helped by the election. I suspect the UK’s decline of 10.1% was due in part to clients holding back spending whilst they waited to see the outcome of the recent budget. ‘Other’ was down 0.9%.
Mark Penn, Stagwell’s chairman and CEO, said: “The third quarter results show us returning to industry-leading growth. We believe we are poised to deliver double-digit growth in the fourth quarter and will be well-positioned for 2025. We are reaffirming our full-year guidance today after a more moderated start to the year. We are accelerating into the back half. Our new business momentum continued as we won our single largest deal to date with a global tech company and have expanded our work with major tech companies this quarter by 30%. Our tech company relationships have come back strongly. We posted a net new business figure of $101m, bringing our LTM new business to $345m, another company record. This was driven by a new business pipeline, and increasingly larger global pitches”.
One of the share prices dropped 15.86% during the trading day of the announcement, the other jumped 2.95% – I’ll leave you to guess which was which. But I know which chairman I would rather have had a cup of tea with after these announcements…