S4 Capital plc (OTCPK:SCPPF) Q2 2022 Results Conference Call September 21, 2022 8:00 AM ET
Company Participants
Sir Martin Sorrell – Executive Chairman
Wesley ter Haar – Executive Director
Mary Basterfield – CFO
Scott Spirit – Chief Growth Officer
Christopher Martin – COO, Media.Monks
DJ Edgerton – CEO and Founder, Zemoga
Conference Call Participants
Tom Singlehurst – Citi
Sir Martin Sorrell
Good afternoon, everybody; good morning in New York and in the U.S. So, this is a second of our calls on the first half ‘22 results. I’m joined by Scott. I’m in Cologne. Scott and Mary are in London; Wes is in — — where are you, Wes? You’re in Seattle, aren’t you? Seattle.
Wesley ter Haar
Yes.
Sir Martin Sorrell
Chris is in Boulder, Colorado. Those of you know where Boulder is. And DJ is in Rhode Island. So, thanks guys for getting up in the middle of the night for this call and the previous one.
So, with that, we’ve got a presentation that’s on our website. There are 7 sections plus Q&A. The first [Technical Difficulty] will take you [Technical Difficulty] through the Content practice; Chris through data & digital media; and DJ through tech services; and I’ll just come back briefly for a summary on where we are, in the outlook. So, over to you, Mary.
Mary Basterfield
Thank you, Martin. So, hello. Thank you for joining us today.
I’d like to start with the financial highlights for the first half. Strong top line momentum continued with gross profit/net revenue of £375 million, up 28% on a like-for-like basis. This is ahead of our full year target of 25% set out at the beginning of the year and continues to be well ahead of underlying market growth. Like-for-like gross profit/net revenue growth for each quarter was 35% in Q1 and 23% in Q2, the latter against a very strong prior year comparator, which is reflected in the two-year stacks 67% for Q1 and 88% for Q2.
Operational EBITDA was £30 million, reflecting continued investment in hiring for expansion, which ran ahead of gross profit/net revenue growth. This resulted in a lower operational EBITDA than predicted, which was down 41% on a like-for-like basis. Operational EBITDA margin also reflects this dynamic and was 8% versus 17% like-for-like in the prior half year. We are taking significant actions to manage costs, including a break on hiring as well as discretionary cost controls. These are having the desired effect and will support our profit delivery in the second half.
Adjusted profit before tax was £15 million and adjusted earnings per share were £0.021. We finished the half year with net debt of £136 million, below the guided range due to improving working capital management and leverage was 1.2 times.
Turning to the next slide, I’d like to update you on the work we have been doing on the finance team processes and controls. We held a full debrief with PwC in May. Our action plan, which is well underway, addresses the areas for improvement we discussed at the full year, and the half year review process has been much smoother. The senior hires we made, including the Group Financial Controller, the CFO for the Content practice, the Finance Transformation lead and the Group Treasurer have created a much stronger team, which is working well, and we continue to build out the junior levels.
Investments in financial processes and controls have been protected. We have reviewed and redesigned our processes and controls for revenue and cost of sales recognition, and the revised process was in operation for the half year close. We continued to carry out significant work on improving our financial controls and processes. And whilst we have made good progress, there is still much to do. We’ll give you another update at the full year.
Moving to the income statement. Revenue grew 60% on a reported basis to £446 million, with like-for-like growth at 31%. Reported gross profit/net revenue of £375 million grew 59% or 28% like-for-like. This highlights the continued strong underlying momentum of the business in addition to M&A activity. We have secured two new whopper clients. These are clients which generate over $20 million of revenue per annum, both of which will be fully operational in 2023. This brings the total number of whoppers to 8. Reported operating expenses of £338 million grew 71% or 43% like-for-like. This reflects continued investment for growth, including in whoppers, and in specific business areas such as the Metaverse and the Unreal Engine.
Within Data & Digital Media, we have also invested in media agency of record capabilities, data and CRM. Some of this investment in growth was ahead of revenue growth and greater than expected, which has impacted our operational EBITDA for the half year and our expectations for the full year.
Operational EBITDA for the 6 months to June was £30 million, down 12% on a reported basis and 41% like-for-like. I have given you a breakdown of adjusting items in the table on the left-hand side. You can see that £70 million is investment in M&A and future growth, while a further £24 million relates to amortization of acquired intangibles.
And finally, the increase in net finance expense is driven by the euro term loan, which was put in place in August 2021 to fund the greater scale and ambition of the group. This provides us with long-term secure financing.
Looking next at our three different practice areas: Content, Data & Digital Media, and Technology Services. My comments here are all on a like-for-like basis. Our largest practice, Content, grew strongly, up 26% as we continue to outperform the market. Content’s operational EBITDA margin reflects hiring running ahead of gross profit/net revenue growth. We are addressing this through tighter headcount controls, which will result in an improvement in practice margins in the second half. Data & Digital Media gross profit/net revenue grew 23%, also ahead of the market, with strong growth from the Media Activation and Performance business. DDM’s operational EBITDA margin is down versus an exceptionally high prior half year. It also shows the impact of investment in growth and will benefit to some extent in the second half from the cost management measures we’ve implemented.
Technology Services, which from mid-May includes a significant combination, TheoremOne, delivered very strong growth. Gross profit/net revenue was up 89%, with a healthy operational EBITDA margin of around 36%. TheoremOne has performed well in its first four months with the Company.
Central costs grew as guided, reflecting investment in finance, legal and assurance to support future growth as we mentioned at the full year. And from a regional perspective, we grew strongly across the globe. While the Americas remains our biggest region at 74% of the mix, EMEA was the fastest growing, up 36%, with Americas up 26% and Asia Pacific 28%.
Moving to cash flow on the next slide. CapEx of £10 million includes the fit-out of our new unitary offices in Buenos Aires, New Delhi and London as well as investments in IT infrastructure.
Interest paid includes payments on the term loan, which was not in place in the first half of last year. We have improved our performance in working capital with an outflow of £8 million compared to £19 million on a smaller base in the prior year. Net, this resulted in a cash outflow of £2 million. The cash spend on combinations was £126 million, including 4Mile and TheoremOne as well as payments relating to prior year activity. This takes net debt to £136 million, which is below the expected range, and we continue to focus on cash management.
Before I conclude, I thought it would be helpful to cover our guidance for the full year. We expect continued strong top line momentum across the practices, and a targeting gross profit/net revenue growth of 25% like-for-like, supported by a strong pipeline. We are seeing the benefit of our break on hiring and controls on discretionary costs, and these will improve profit delivery. As previously guided, we expect the year to be weighted to the second half and the fourth quarter, in particular due to natural seasonality and our trajectory this year. We continue to expect a net finance cash charge of about £16 million. Our guidance for cash contingent consideration is £57 million for the full year, with £21 million due in the second half.
In summary, our revised targets issued at the end of July remain unchanged, with expected gross profit/net revenue growth of 25% and expected operational EBITDA of approximately £120 million.
And with that, I will hand to Scott for the market and client update.
Scott Spirit
Great. Thanks, Mary.
So, I’m going to cover an update on our clients, progress that we’re having there. I’m also going to give some insight into how we’re thinking about our top line growth opportunity in 2023, and then, finally, cover off some of our more recent mergers.
So, I think you’re all familiar with our 20 squared client plan, which is our ambition to build large scaled relationships with clients and to have 20 clients of more than $20 million in annual revenue. We launched this back in 2020 when we had Google and one of our NDA to tech clients. In ‘21, we expanded that to 6, adding BMW, Meta, Mondelez and HP. And as we stand in 2022, we know we’ve added an additional financial services whopper, and we have a new fashion and luxury client, which is on the run rate and will be a £20 million-plus for the full year in 2023.
We have 5 additional clients, two in technology, one retail, one media and one telco, who are tracking to potentially become whoppers this year or certainly next year. And then, we’ve identified a further 14 existing clients where we see the potential for them to expand organically to this level in the next few years. It’s really exciting to see these client relationships blossom, particularly as we expand the touch points and services across our practice areas. Eight out of our top 10 clients are now working with us in an integrated fashion across two or more practices versus two at this point in 2020.
When you look at our clients from a portfolio perspective, you’ll see that technology continues to dominate, with over 46% of our H1 revenues coming from this sector. Vast majority of our revenue here is with large profitable tech companies such as Alphabet, Meta, Amazon, HP, Salesforce, Adobe, Microsoft and others, which are under NDA. And these companies themselves continue to grow at significant rates and are, in many cases, both partners and clients for us at S4. We anticipate continuing to be overweight tech going forward. But we have diversified our client base somewhat as a result of new business wins and merger contributions in sectors such as financial services, fashion and luxury, FMCG and auto.
Given our consistent market-leading top line growth, it’s not surprising to see that our large client relationships continue to scale. The average revenue size of our top 10 clients has grown 80% to almost £20 million. For our top 20 and top 50 client segments, the reported revenues have grown 70% year-on-year. Table shows we’ve more than doubled the number of clients with H1 reported revenues of £10 million or more. And we have 57 clients in the £1 million to £10 million bracket versus £35 million this time last year, illustrating the progress, as I mentioned earlier that we’ve been making with our 20 squared client plan.
Moving on from clients, I wanted to give you some insight on how we’re thinking about 2023. We’re just kicking off our budget process now, as are our clients, so we don’t have any concrete projections for guidance as yet. We should be in a position to give more precise clarity in November when we report our Q3 numbers. That said, we are well aware of investor questions around our view of growth in 2023, so we wanted to address why we remain optimistic about our ability to deliver significant market-leading top line growth, despite the macro dark clouds, which we’re all aware of.
We’ve described the various addressable markets we operate in before, and these continue to be very attractive in 2023 according to various projections. Digital media spend is a key market for us. And whilst analog media will be flat next year, global digital spend will continue to grow at almost 10% in 2023. In fact, our own analysis of various analyst estimates for the top 8 platforms advertising revenue growth in ‘23 is 13% growth, which is actually an acceleration on the 10% they’re expected to deliver this year. When you focus in geographically, we see that predictions for U.S. digital media spend are almost 2.5 percentage points higher than the global average. And remember, 74% of S4’s revenues are in the Americas with the U.S., by far our largest market.
Our data practice is perhaps more correlated with the growth of data services associated with cloud platform penetration. The top 3 cloud platforms will grow 30% in 2023. And as you’ll hear from Chris later, our C360.Monks provides services and systems integration around marketing technology platforms. Their revenues will grow almost 20% in ‘23 to $80 billion, with services widely assumed to be a multiple of that. Our tech services revenues are driven by spend on digital transformation and IT services. These enterprise spends are multiyear budgets with less volatility and exposure to economic cycles and digital transformation spends are projected to grow 17% next year.
Finally, when you look at market sizes, AdAge reports the top 10 agency HoldCos reported revenues of $110 billion in 2021, and the top 25 agency networks had revenues of $72 billion. While small global consulting revenues were almost $1 trillion projected in 2022, and IT services revenues are projected at $1.3 trillion this year.
Suffice to say, with our pure-play exposure to these high-growth markets, we believe S4 will continue to deliver strong top line growth.
Finally, returning to our clients, as we’re nothing without them, this is an edited view of our major client relationships given we are increasingly covered by NDAs and can’t talk publicly about many of our relationships. Our client base of high-quality, strong growth companies reinforces our confidence in our ability to grow at market-leading rates above the growth of our addressable markets as we continue to take share and drive our land-and-expand strategy.
Finally, we completed two mergers in H1, one with 4Mile, an analytics company, which joined the Data & Digital Media practice, and the second one, TheoremOne, which you’ll hear a lot more about later from DJ, which joined our tech services practice. After the end of the first half, we also added XX, which is a highly awarded social media and influencer agency, which joins our Content practice. Just a reminder, the stock component of the completion payments for TheoremOne and XX was priced at £4.25, which was the underserved one-month VWAP price pre-audit delay.
As we mentioned in the statement, combinations remain a key part of our growth strategy. However, for the time being, we are focused on organic growth and maximizing value from our existing business, where the organic momentum remains very strong.
And with that, I will pass you over to Wes, who can update us on the Content side of things.
Wesley ter Haar
Thank you, Scott. Hey, everyone. Happy to share some highlights from H1 for Content. Although the very first highlight isn’t just about Content, I think it also speaks to our broader ability to integrate and operationalize our services across teams. For the very first time in our history we hit the Forrester Waves, not one, but two. We are on the Marketing Creative and Content Services wave and the Global Marketing Services wave. I think this is mostly a confirmation of our positioning. It speaks to our strong offering, strong performance in market, strong strategy, if you look at the marketplace and where our big, especially global brands are headed. That translates into growth.
We’re expanding our biggest strategic clients. So, whoppers, in some cases, we’re adding whoppers on top of what is already existing scale. We also [Technical Difficulty] the growth there. I think we have line of sight on about 30 [ph] now. Some of that is because of the collaboration between DDM and Tech Services and Content. Some of that is just because we’re sort of landing and expanding with the existing surface ranges. And our positioning market also means we regularly land new blue chip logos across the globe. All of that is about future growth. It takes a bit of time to go from land to expand, but I really think it bodes well for our 20 squared plan — or our 20-whopper client promise.
It’s not just about growth. We’re all delivering some really great work, very high quality. Another first in our company, we’ve got named a 10 creative company globally by Cannes Lions. What’s interesting here is if you look at the list, we are by far the company with smallest headcount. So, it just speaks to the amount of great work our teams are doing.
We talk about the work. We can go to the next slide. I think our model always is making sure our clients deliver what’s needed today and what’s needed today is quite specific. I think especially our agility and our ability to get our clients to market quickly with what they need has been really important over the last six months. But we’re also working to make sure our clients are leaders in what comes next. And we’ve talked about Web3 and Metaverse before on these calls. I wanted to use this opportunity just to highlight some work to showcase that our teams really are at the very cutting edge of what’s happening out in that landscape. Some quick rollouts. For Logitech, we organized the Song Breaker festival and roblox. At the moment of launching it was the biggest roblox build of all time ended up with more than 6.5 million visitors in a two-week period, very successful. Really interesting platform. We are actually launching some really fun roblox over the next few weeks as well. So keep an eye for that.
Also, I wanted to call out The Vault. The Vault, which is a full-blown NFT primary marketplace. For Gucci, I think if you think about NFTs as a space and then a luxury premium company like Gucci and the combination of those two, I think it really speaks to the quality of our team, especially at the strategic levels. And then, wanted to call out the Post Malone exclusive VR album experience for Horizon Worlds called Twelve Carat Toothache. Really amazing piece of work. If you have an opportunity to check it out, please do. I think it elevates the sort of entertainment VR experience and concert experience quite a bit. Lots of overlapping stuff there, Metaverse, VR, Web3, NFTs. Rest assured, our team is operating at the very highest level at the nexus of all of those things, which is exciting.
And with that, I’m going to hand over to Chris.
Christopher Martin
Thank you, Wes.
Talking a little bit about Data & Digital Media. Off the back of a very strong growth and margin results in 2021, our investments in the first half of ‘22 and expanding our Data & Digital Media practice as well as investments in onboarding significant long-term clients, they are all yielding results towards our goal of creating foundational long-term enterprise clients, where we become an embedded long-term partner. We are working very closely with our content and tech pillars to nurture and expand our collective relationships within whoppers and opportunities, including progress in servicing Dell, Molson Coors, Pernod Ricard, Walmart, Hewlett Packard, Netflix, LinkedIn, Unity Technologies, T-Mobile, Mondelez, Meta and Amazon. And you’ll hear these logos over and over again as joint wins across the company. This is the unitary promise being delivered into our client base.
Our growth in these brands has been a testament to our disruptive integrated model, promising seamless end-to-end capabilities with subject matter expertise and automation beyond just traditional and digital marketing demands. We’ve seen — we have a deep and growing knowledge of new wave virtualization, Web 3.0, Metaverse and VR, which Wes just talked about, and new modes of digital consumer behavior that need to be woven into a consumer journey that our clients have to get a handle on. And a perfect example of this type of disruptive work is our recent onboarding of Unity Technologies, a leading platform in the 2D, 3D, VR, AR gaming space. We are very excited to be their first ever global media AOR, responsible for media strategy, planning, buying and measurement. And this new expansive engagement is built off the back of our strong content relationship with Unity, proving out our land and expand model across our pillars.
More traditional brands are looking to revamp their digital strategies and approach with our new model. We’ve successfully won and onboarded and launched a top global beauty brand, with a successful hiring and onboarding of over 60 FTEs to ramp them up. And we did it in less than 8 weeks, which is no small feat in a very competitive market for talent, to which our investments in recruiting and talent hubs are paying off with the rapid talent scale capacity in order to onboard these major wins in a short cycle. We are off and running with that client, implementing new media strategies with a focus on incrementality for their brand as well as new market and product line growth. And this global media AOR win is not an isolated growth story for us.
We are seeing more and more clients begin to think about their media and consumer data strategy in an increasingly interconnected way and blurring the lines across the consumer journey, wherever that consumer may spend their time. We’ve invested in the first half in building strong relationships with global media pitch consultants to increase the exposure to brands who are looking for a change in the way they think about e-commerce paid, earned and owned media and that is a significant — that is, I think, significant upper funnel activity for our pitch volume. We’re having to select and choose the best fits versus having to go out and look for new opportunities, which is a good position to be in.
On the next slide, we have got data. And in order to be at the forefront of innovation and competition, our clients find themselves reinventing their data strategy from data collection, acquisition, activation and optimization to power everything from marketing and advertising as well as product design and supply chain decisioning.
And for our data pillar, in ‘22, we saw a significant injection of our data AOR services, or agency of record services for data into our major creative and content and relationships. The conversation starts with data subject matter experts, helping to decide and help clients guide through their understanding of new opportunities for data collection and activation, i.e., how do they engage with the consumers and collect that data and activate it for effective marketing purposes. T-Mobile is a great integrated example where our Content and Digital Media practices work together to both, in-house and create a managed opportunity across that client, making them a whopper for S4.
Another great example, Molson Coors. We started working with them in 2021 as they started to take control of their media operations and bring it in-house. And Molson kicked off building a centralized view of their data sources, which, for a CPG or company that is generally data poor doesn’t have direct relationship with consumers, is an important trend that we’re seeing across that entire sector.
And the industry is recognizing our amazing work. So, we were just named as a finalist for Best Commerce Agency Services by AdExchanger. And this year, our transformations consulting group is involved with two awards, best use of programmatic digital by Campaign U.S. and we were nominated as a finalist in the ANA In-House Excellence Awards for Best Media Planning.
Our strategic platform partnership strategy is an important channel for our growth and competitive advantage. This year, with Amazon, we kicked off co-building solutions with them to tie together Amazon Web Services, Amazon Ads, and we are now a go-to-market partner for the Amazon Marketing Cloud. Amazon’s entry into media and marketing technology space makes them a massive technology growth partner for Media.Monks, and we are well situated in place to grow with them. And of course, our current largest partner, Google, we’re making significant progress in helping with their go-to-market with their GCP cloud platform, Google Ads and the Google Marketing platform tech stacks, all being integrated together for their clients, which unlocks a significant amount of value from that platform partnership.
And then finally, a quick couple of beats on our C360.Monks or our CRM practice, which is nascent. It was only launched last year, but they are busy building our brand reputation in market with a significant presence this year at Salesforce World Tour, Salesforce Connections, Cannes Lions and of course, Dreamforce, where our team is, as we speak, drumming up new business and showing off our status as a global Salesforce summit partner, the highest tier of Salesforce partnership.
Our Marketing Cloud footprint has expanded to account for over half of our global pipeline, and our momentum is not slowing as our enterprise clients look to us for more and more embedded services.
One more beat on this. Salesforce has launched their Web3 and NFT cloud offering and Media.Monks is a very unique partner and a leading partner in building their go to market on that NFT cloud. We are right now talking about that at Salesforce and building the customer reservoir. And this team is very proud to have won its largest engagement to date with a $7 million deal, which kicked off in the second half of this year with a global CPG company. So, that is a big win for that team.
That’s it for Data & Digital Media. I’m going to hand it over to DJ to talk a bit about our tech pillar.
DJ Edgerton
Thanks a ton, Chris, and good morning, everyone.
As we all know, this is the first full half year of tech services as being offering within Media.Monks, and we’re very excited about the growth we see not only in the demand for our services, but also how we’re able to expand the services across the board and delivering on this unity messaging that we provide our clients. Apparent example is we’ve been able to double an engagement revenue over our 2021 revenue by doing exactly what the promise is, offering services across all pillars. This is a very large e-commerce client of ours, inches away from whopper status, again, delivering on the promise of what we’re doing here.
We’ve also been able to be engaged for a major brick-and-mortar brand that has us building a large dedicated e-commerce digital transformation team in Colombia. This is similar to what we have done for Morningstar, where we’re executing front-end development centers of excellence. This is now thriving. The first half of this year, we opened up that center of excellence for Morningstar and it’s going gangbusters [Technical Difficulty] about that.
Competitive market, we’re still one of the top places for top performers to work and grow. And we’re very excited about that as we do hire based on the demand — a very, very strong demand we’ve seen in the first half and for the rest of this year. We’re very proud of the fact that we were — we received ISO-27001 certification. This is an important distinction for us and the services that we provide, especially financial services and e-commerce organizations, and it really, really helps us get in front of some of our competition.
We’re very, very excited about, in May, the pairing with TheoremOne. TheoremOne is very, very well respected firm with complementary services in the tech services space for us. We are sharing resources already. Our management is in lockstep and synced with each other, and we’re already co-pitching the new suite of these combined services.
A little bit about TheoremOne, a very, very fast-growing organization recognized by Inc. Magazine, very highly regarded. We have an enormous amount of complementary services. Their team members are the highest caliber along with Zemoga’s, and we’re very excited that this part of this growing business has the best in the industry, we feel. They came to us with a whopper already in hand in First American. So, we know that we’re going to be able to continue to expand that, not only the clients that we already have, but winning the new clients, like Globaledit, Phillips, Dreamview and CrowdStreet. So, we’re all very, very excited of increased demand. The outlook is very healthy for tech services, and we’re very pleased with the traction that we’re getting.
And with that, over to you, Sir Martin.
Sir Martin Sorrell
Yes. Thanks, DJ. And thanks, Mary, Scott, Wes, Chris for getting up in the middle of the night, as always.
So, just to summarize, strong top line growth in the first half of 2022, ahead of full year guidance, and that’s continued into July and August, continued performance at similar better levels. Further client conversion at scale, proof of our model. The model is resonating not just as a new model, but in relation to the existing advertising and marketing services model. And we made significant progress to our 20 squared goal, up to 8, with potential another 5 and another 14 or so that we think have the potential over time to grow significantly. [Technical Difficulty] a major packaged goods company and are in discussions on financial services, increasing the scale there. So, it’s not just in the whopper area that we’re making significant progress.
Good progress as Mary outlined in our post audit finance and process upgrades, but the work has to continue. And I think the — a lot of the heavy lifting has been done, but there’s more to be done. Actions have also been taken to balance and control the cost base in 2022 and beyond. As we start to think about 2023, we want to go in with a strong platform for 2023 from a cost point of view. We’ve improved working capital management. There’s more to go there, too. And we have sufficient liquidity with long-dated debt maturities for the medium to long term.
So, there’s continued momentum in all our addressable markets. We haven’t done our planning or budgeting for ‘23 and — to ‘25 or for ‘23 in terms of a budget. But if one looking at the overall situation, as Scott pointed out, it looks like the prospects for digital expansion and transformation accelerate as we go into a slower GDP growth and clients — clients emphasize activation and performance more, which is very much our strong suit. There’s strong growth in existing clients and a healthy new business pipeline, and in fact the pipeline is at very similar levels, if not a little bit higher than last year.
From an ESG point of view, we’ve achieved carbon-neutral status ahead of schedule. And we’re making headway across all our E and S and G goals. And last but not least, revised guidance of approximately £120 million of EBITDA remains unchanged. So with that, over to you, operator, for any questions, please.
Question-and-Answer Session
Operator
[Operator Instructions] We will now take our first question from Tom Singlehurst from Citi. Please go ahead.
Tom Singlehurst
Yes. Good morning, good afternoon. Thanks for taking the question. And apologies, I didn’t get on to the call earlier today. So, it’s nice to have a second bite of the cherry. The question — or I have two questions. The first one is I just really wanted to pin down the significantly stronger 2H performance comment. I presume you’re talking about absolute weighting of revenue, but — or possibly profitability. But I was just wondering whether we should also anticipate — I think, mechanically, we probably should, a reacceleration in growth across the back half of the year from the level delivered in the second quarter? That was the first question.
And then on cash flow side…
Sir Martin Sorrell
My Wi-Fi went down. Mechanically, you’re saying that for the second half, is it revenue and profitability? Is that what you’re asking, Tom?
Tom Singlehurst
Is it absolute revenue, or is it growth when you talk about the significantly stronger performance. Are you talking about greater absolute weight of revenue, or is it the growth…
Mary Basterfield
To answer your question head-on, it’s weight of revenue. So, we’re skewed to the second half and particularly the fourth quarter or the last third of the year. So, it’s — in terms of rates of growth, as I indicated, July and August continued at similar rates to the first half.
Tom Singlehurst
Perfect. But that would have been — the first half was slightly better than the second quarter. Is that a fair inference?
Sir Martin Sorrell
Well, we’ve given you the like-for-likes 34 and 23 for Q1 and Q2. We’ve given you the two-year stacks and the three-year stacks.
Tom Singlehurst
Perfect. The next question was on…
Sir Martin Sorrell
So, just so you’ve got them, the two-year stacks for the — for Q1 was 67 and for Q2 were 86 and the three-year stacks were 88 and 95, I think it was.
Tom Singlehurst
Perfect, makes sense. The net debt, I think you said at the first half was £135 million. For the full year, £130 million to £170 million, but there’s only £20 million of contingent consideration. And I would have naturally assumed because of the weighting of the business more cash flow in the second half, seasonal working capital inflow, what am I missing in terms of the net debt /cash flow…?
Sir Martin Sorrell
Yes. Mary?
Tom Singlehurst
Get the debt up…
Mary Basterfield
Yes. So, we said we expect to range from £130 million to £170 million for the year-end. And a couple of points to remember. So firstly, our cash tax is weighted to the second half. Secondly, we have £21 million, as you correctly point out, of contingent consideration, but also there’s the first payment on XX, which fell into the second half as we completed very early in July on that deal. And then, finally, we do expect some working capital outflow driven by the growth of the business in the second half, which results in the £130 million to £170 million guidance.
Tom Singlehurst
Got it. Perfect. And then, one final one. It’s more just from my own understanding more than anything else around how the revenue model works in terms of passing on inflation. If you’ve got employees who are allocated to a particular account and their wages are going up, is it mechanically being passed on, i.e., is your revenue really truly sort of time plus materials, or is it sort of loosely benchmarked to time plus materials, therefore, it will take a bit of time for wage inflation to be sort of caught up?
Sir Martin Sorrell
Well, I mean, I think the direct answer is mixed. There are some — we do have some contracts that go for two or three years. But that, I would say, is at the smaller end of the spectrum. And most of our contracts are not long-term contracts. They’re more — I think we’re calling the phrase retainer by design. And when we talk about land and expand, we’ve built relationships on the back of continuous projects. I mean, Wes, do you want to expand a little bit on pricing and wages, et cetera?
Wesley ter Haar
Yes. I think there’s — I guess, there’s three types of work. There is the typical retainer contracts where we have managed to have the conversations about wage going up with pretty much everyone have been able to implement, some are a bit slower. So you have slight delays depending on the speed at which the process runs. Then you have more time and material-based work, tends to be a bit easier because we upped our rates the end of last year — middle to end of last year. So, in our time and material business, that’s already sort of phased in and your [indiscernible], which tends to also be quoted and scoped against those high rates.
So, it’s not perfect across the board, but we’ve made — we’ve managed to hedge against that relatively well.
Sir Martin Sorrell
Chris, DJ, do you want to answer that?
Christopher Martin
Go ahead, DJ.
DJ Edgerton
Well, with regards to managed services and tech services, those are the contracts that tend to be a little bit more longer, Morningstar, for example. We do have a language in those contracts, some of them that allow for an increase to cover inflation. We try to get that in as much as we can when we have contracts that are lasting several years, of which we’re seeing more and more as tech services becomes part of the general offering. So, we do cover that in the longer contracts.
Sir Martin Sorrell
Chris?
Christopher Martin
And I’d echo Wes and DJ’s commentary there on how we’re proactively passing that through. But my only additional note would be on the long-term infrastructure we are implementing and continuing to invest in a — what we call a deal desk, which makes sure that large engagements are commercially sound before they go out and get stamped and approved. And if there’s any exceptions to the standards that we’ve got in place, then that will be escalated and brought to finance, that will be brought to other parts of the business, so we’ll understand how to swallow that engagement appropriately into the financials.
So, I think we’re buttoning that up relatively quickly. And I said we probably started work on that a couple of quarters ago. So, it’s a point forward. I think we’ve got a decent control mechanism in place to be able to handle both transitory and permanent inflation.
Sir Martin Sorrell
Mary, do you want to add anything to that or not?
Mary Basterfield
No, I think the gents have covered it. Thank you.
Sir Martin Sorrell
Okay. Anything else, Tom?
Tom Singlehurst
That’s great. Thank you very much. No, I think that’s it. Yes. Congrats on the results. Nice. There is no big surprise.
Sir Martin Sorrell
Okay. Operator, any further questions?
Operator
Thank you. [Operator Instructions] There are currently no more questions. I will turn the call back to your host for closing remarks.
Sir Martin Sorrell
All right. Well, thanks, everybody, for joining us, and thanks to my colleagues again for disturbing their sleep. Yes. All right. So, thanks very much. See everybody soon for the third quarter. Thank you very much for joining us.
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