S4 Capital reports weaker first quarter, as expected

(Sharecast News) - Digital advertising and marketing services company S4 Capital reported a decline in net revenue in its first quarter on Friday, which it put down to ongoing client caution and a decrease in activity within its technology services segment. The London-listed firm reported a like-for-like net revenue decrease of 11.7% year-on-year, with reported revenue down 14.9%.

It put the decline down to prevailing macroeconomic uncertainty and lower activity levels, particularly among technology clients.

Billings for the quarter totaled £430.1m, down 5.7% on a reported basis and 1.9% on a like-for-like basis, while revenue decreased by a reported 19.7% to £210.2m, or 16.6% like-for-like.

Operational EBITDA for the quarter met expectations, reflecting reduced activity levels and the benefits of cost reduction initiatives implemented in 2023.

The company said it maintained a disciplined approach to managing its cost base, resulting in a 13% decrease in the number of employees, or 'Monks', compared to the first quarter of the prior year.

Performance across the company's practices varied, with the content practice experiencing an 8.5% like-for-like decrease in net revenue, while the 'Data&digital' media practice saw a similar decline of 8.5%.

The technology services practice was notably impacted, with a significant 28.4% like-for-like decline in net revenue compared to the previous year.

Geographically, the Americas - the company's largest market - saw a reported net revenue decrease of 15.5%, while Europe, the Middle East, and Africa recorded a 10.1% decrease.

Asia-Pacific, the smallest region, also experienced lower activity, with a reported net revenue decline of 19.5%.

Despite the challenges, S4 Capital said it was continuing to secure new business, with notable wins including Burger King, Panasonic, and Santander.

Additionally, the company said it was capitalising on its strong artificial intelligence (AI) positioning, winning multiple exploratory assignments focused on personalisation at scale and client and agency efficiency.

The company said its balance sheet remained stable, with net debt ending the quarter at £206.0m, or 2.2x net debt-to-12 month pro-forma operational EBITDA.

S4 maintained its targets for the year, anticipating a continued decline in like-for-like net revenue compared to the prior year, with a similar level of operational EBITDA as 2023.

Looking ahead, S4 Capital said it expected the second half of the year to be heavily weighted, with improving end markets and a return to historic levels of operational EBITDA margins over the medium to longer term.

"As indicated previously, trading in the first quarter reflects the continuing impact of volatile global macroeconomic conditions, general client caution, particularly amongst technology clients and a reduction in activity with some of our larger technology services clients, although there has been some sequential improvement in the content practice during the first quarter," said executive chairman Sir Martin Sorrell.

"We continue to develop our larger, scaled relationships with leading enterprise clients and are increasing our focus on margin improvement through greater efficiency, utilisation, billability and pricing.

"We maintain our targets for the full year and, as in prior years, financial performance will be significantly second half weighted reflecting both our normal seasonality and an expected improvement in market conditions."

Sorrell said the company was confident in its strategy, business model and talent, which together with scaled client relationships, positioned it for growth in the longer term, with an emphasis on deploying free cash flow to improve shareowner returns now that all significant merger payments had been made.

"In addition to significant new business activity, we continue to capitalise on our prominent AI positioning, developing multiple initial assignments as clients start to experiment with and implement applications."

At 0936 BST, shares in S4 Capital were up 14.73% at 53.05p.

Reporting by Josh White for Sharecast.com.