9th November 2023
The firm recorded negative net revenue growth for the year to date – and signaled more job losses are due in the coming months.
Falling revenues and ongoing staff layoffs at S4 Capital, the company behind challenger agency network Media.Monks, reveal how acutely one of the highest-profile businesses in advertising has been stung by lower technology client spending.
Revenues at the group fell 15.4% in the third quarter of 2023, the firm’s financial results reveal. Like-for-like revenues were down 10% in the same period, while like-for-like year-to-date net revenue growth fell 0.3%.
S4 has already issued two profit warnings earlier this year after initial commercial results suggested it would overcome 2022’s setbacks.
Tech clients currently account for 43% of S4’s revenue, but “continued client caution to commit and extended sales cycles, particularly for larger projects,” according to executive chairman Sir Martin Sorrell, continued to hold down growth at the firm.
In response, the company emphasized a continuing “drive for efficiency,” which has included a “significant reduction in headcount”: its overall workforce fell 4% in the last three months and 9% since June of last year, equivalent to around 850 job losses. The losses “reflect the progress that has been made on aligning our cost base to demand we are seeing from our clients,” a statement to the market read.
According to chief financial officer Mary Basterfield, more job cuts are due in the fourth quarter of the year. “It’s probably not appropriate for me to comment publicly on specifics and exact numbers. But we will expect to see a noticeable benefit on our cost base as we go into 2024,” she said.
The layoffs mean the company must now find future growth with fewer staffers to service its clients. “Losing people and the word ‘progress’ shouldn’t be in the same sentence in this industry. That’s not a business that can say it’s growing,” Barry Dudley, partner at Green Square, tells The Drum.
In the short-term, attention to the company’s margins and cost base is intended to increase shareholder confidence. “It’s what they’ve got to do for the markets, unfortunately – taking action, cutting costs,” explains Dudley.
So, too, are promises of cash earmarked for share buybacks and shareholder dividends next year. S4’s strategy of offering cash-and-share deals to the owner of agencies it acquires (and it was previously highly acquisitive) means that its ability to pursue future deals rests upon the value of its shares. Rival holding companies such as WPP or Omnicom, for example, typically buy new companies with cash.
“They’re saying: we’re looking after the shareholders here and we’re not going to pile into more deals until things have turned around a little bit,” Dudley adds.
The company hopes that the fourth quarter will bring it some relief. Sorrell said: “We expect, as usual, Q4 profitability to be the strongest quarter of the year.
“We remain confident our strategy, business model and talent, together with scaled client relationships, position us well for above-average growth in the longer term.”
Given the current caution among CMOs across the globe, growth may not be forthcoming. Basterfield said that “expectations for Q4 from a revenue perspective are now lower than they were.”
Over a longer span, those efforts may aid its journey back to growth. However, at the time of writing, S4’s share price had fallen 13.85%. It’s down almost 70% compared with its position at the beginning of the year.
The bulk of S4’s revenue – 55% – comes from just 13 clients, according to Sorrell. A more diverse portfolio of clients would insulate it against macroeconomic trends such as the tech sector slowdown, which has affected it and many of its rivals, but demand among its smaller, newer clients has been low.
According to the company statement, “overall demand was lower, particularly in the newer regional and local clients.” Given that layoffs were also targeted at its local and regional businesses, per Basterfield, its ability to turn that situation around may be limited.
AI-related projects may provide some demand going forward. According to Scott Spirit, the company’s chief growth officer and executive director, it’s the number one topic of conversation between the company and clients.
In today’s statement, the only parts of S4’s business that recorded growth in the last quarter were its technology services arm, which accounts for around $110m in net revenue; its data, digital and media and content practices, which both saw third-quarter net revenue slide 1.4% and 4.4% respectively, account for the lion’s share.
“We’re seeing a lot of [AI] conversations, a lot of new business opportunities with clients, and we are starting to see those convert,” he said on a call this morning with investors.
“Initially, a lot of the work is around audits, workshops, examining the opportunities with AI because it is a significant change, not just for us and our people and the technologies that they use, but also for our clients, how they approach their marketing, how they structure it and how they build the relationships and even the remuneration models with their agencies.”
S4 and Media.Monks have been among the most bullish organizations within advertising on generative AI and the economies of scale it can potentially deliver to them. They’ll likely play a big role in the firm’s proposition to the large multinationals it courts in the near future. But it’s not clear when its business will start to see those benefits show up on balance sheets.
“It’s difficult, in all honesty, to say,” Sorrel told investors. The company is experiencing more and more demand among clients for auditing and discovery sessions around AI, but its benefits on S4’s own cost base and how it can improve the company’s margins are so far unclear. “We have to wait and see how that develops,” Sorrell said. “I think it all adds up to being positive for the industry and positive for ourselves.”
Until then, the company is likely to remain a hostage to the fortunes of its largest tech clients. Sorrell concluded: “Our client list is very heavily technology geared… we [will] outperform when the technology clients start to become more confident about advertising and marketing spending.”