Don’t expect client spending to come rushing back, suggests S4 Capital trading update. Barry Dudley quoted in The Drum

23rd January 2024

The Sorrell-helmed holding company’s latest trading update contains little cause for optimism. What does it tell us about the health of the sector at large?

Client caution in the face of adverse economic weather will likely persist over the next 12 months, according to Sir Martin Sorrell, executive chairman of Media.Monks parent firm S4 Capital.

The agency boss said “we are not expecting 2024 to show macro-economic improvement” in a trading update concerning the company’s commercial performance in the fourth quarter of 2023.

Though the company said results were in line with expectations, the update counters some of the optimism expressed by UK ad industry figures, including the IPA’s director general, Paul Bainsfair.

“After four years of very strong growth, 2023 was a difficult year impacted by volatile macro conditions and, consequently, cautious spending from clients, particularly those in the technology sector and from smaller project-based assignments,” Sorrell said in a statement.

The company said it expects like-for-like annual net revenue to fall 4% and for its operating profit margin to hover around 10-11%. The margin rose on the back of “significant cost reductions” which included hundreds of layoffs earlier last year.

Whether or not S4’s Q4 performance will be mirrored by its sector peers is an open question. The fourth quarter of the year is typically lucrative for agencies as clients spend the cash left in their budgets. A recent trading update issued by Mission Group, a smaller British agency network listed on the AIM exchange, bore this out – after issuing a profit warning because of “challenging” commercial performance earlier in 2023, its trading “significantly improved” in the final quarter.

The lift available to agencies may only be a small mercy, however. 2023 saw advertisers slash marketing budgets, leaving little scope for commercial growth for agency businesses.

“For a significant majority, Q4 was tough,” says Barry Dudley, a partner at advisory firm Green Square. “Q4 was a combination of the cost of living, interest rates, the works. Clients just sat on their hands. But conversations seem to be opening up.”

Last week’s IPA Bellwether, a quarterly survey of advertiser confidence, suggested that brand advertisers would look to increase spending on marketing activity over the next few weeks.

“This quarter’s upbeat Bellwether findings show that companies are heeding the evidence that continuing to advertise through the tough times can help maintain brand loyalty and protect the long-term health of their brands,” said Bainsfair.

“Optimism for this year is high, but there’s nervousness for elections and wars,” adds Dudley.

But S4’s client profile – the company prefers to work with tech clients and large multinational advertisers it terms “whoppers” – means that increased spending by British household names is unlikely to provide much benefit.

‘A maelstrom of uncertainty’: My CES chat with Sorrell became an agency survival guide

S4’s revenues were hit when technology clients began cutting marketing spend last year. And its ‘tall’ market offering, which eschews additional sectors included in bigger holding company portfolios such as PR or healthcare, means that the company has proven vulnerable to the whims of the US tech industry.

“They don’t have that balance of other services at S4,” says Dudley.

Sorrell suggested 2024 would not bring a radical change in circumstances for the firm. “While it is early in the year, we are not expecting 2024 to show macro-economic improvement, and client caution on marketing spend will likely persist, although not at last year’s level given interest rates are likely to fall over time,” he said.

Given those conditions, Media.Monks’ content pillar, which broadly covers creative and production, had the most scope for growth, he added.

“Initial indications are for an improvement in performance in the Content practice, reflecting cost reductions, broadly similar performance in Data & Digital Media to last year and a more challenging outlook for Technology Services. In these unpredictable times, we are focused on positioning the Company for medium-term growth, improving profitability and returning funds to shareowners.”

The latter point is an important one for S4 Capital. Its growth strategy in previous years centered on a seductive M&A approach that offered cash-and-share deals to founders. The strategy paid off, and it was able to add companies such as MightyHive, XX Artists and TheoremOne.

Now, S4’s share price is considered to be underweight. If it’s to return to its strategic growth plan and fulfil Sorrell’s medium and long-term ambitions it will need to keep shareholders onside and hope its price rises once more.

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