S4 Capital plc (OTCPK:SCPPF) Q3 2022 Earnings Conference Call November 14, 2022 8:00 AM ET
Company Participants
Sir Martin Sorrell – Executive Chairman
Mary Basterfield – Chief Financial Officer
Scott Spirit – Chief Growth Officer
Conference Call Participants
Sir Martin Sorrell
Welcome to our second webcast of the day. We had one this morning at 8 o’clock London Time. Too early, [indiscernible] middle in the night in America. So, here we are again. I’m joining by Scott Spirit, whose flown in from Singapore; and Mary Basterfield, our CFO, and we’re going to talk a little bit about – Mary is going to talking a bit about trading update. Scott’s going to talk about clients and market trends and I’ll come back with a brief summary and then we’ll take any Q&A. So, Mary?
Mary Basterfield
Thank you, Martin. So, hello everyone and thank you for joining us for third quarter trading update. So, we have delivered strong top line growth, continuing the momentum we saw in the first half. Revenue of 300 million was up 68% on a reported basis and 27% like-for-like versus the third quarter of 2021. Like-for-like gross profit net revenue for the quarter was up 29% to 250 million. This takes gross profit net revenue for the first nine months to 625 million.
Our brake on hiring has stabilized headcount and delivered improved profitability, especially in the content practice. Operational EBITDA in the third quarter was greater than the whole of the first half and we exited the quarter at a run rate sufficient to meet our full-year target. We expect continued good top line performance in the fourth quarter and maintain our full-year guidance of 25% like-for-like growth in gross profit net revenue.
Our revised operational EBITDA target issued at the end of July remains unchanged at approximately 120 million. Net debt at the end of September was 158 million, after the initial payment for XX Artists and contingent payments on previous years’ combinations. We continue to maintain significant liquidity and our 2022 net debt guidance remains at 130 million to 170 million.
Moving to the next slide, and my comments here are all on a like-for-like basis. First half momentum continued into the third quarter, and we delivered strong gross profit net revenue growth. led by content and technology services, which were up 28% and 74% respectively. In content, this growth was driven by our whoppers and whoppertunities.
Data and digital media was up 15% as growth in the activation and performance business lines was not as strong. However, it continued to benefit from the market uncertainty. From a regional perspective, EMEA grew fastest with gross profit net revenue up 38% and it accounted for 16% of the mix. The Americas, our largest region, grew 31%. And in APAC, gross profit net revenue was up 3%, against a strong comparable with performance in China impacted by the zero COVID policy slow down.
On the next slide, we show you a breakdown by practice and region for the year to date. And again, my comments are on a like-for-like basis. Our total gross profit net revenue for the nine months to September was 625 million, up 28%. Content increased 27%, boosted by very strong growth of whoppers. Data and digital media grew 20% with technology services up 80%, reflecting a rapid growth trajectory from TheoremOne and Zemoga. This was mainly driven by expanding our partnerships with existing clients and was further aided by new wins.
From a regional perspective, Americas is up 28%, EMEA 37%, and APAC 18%. We have again included information on outstanding contingent consideration and invested capital in the appendix, and we’re happy to take any questions on these at your convenience.
In summary, we are delivering strong top line momentum, improved profitability, and good progress strengthening our financial controls and processes. Our expectations for the full-year remain unchanged and I look forward to updating you further at the annual results.
And with that, I will hand to Scott.
Scott Spirit
Thanks, Mary. Good morning, everyone. So, I have a few slides to run through. Just an update on how things are going with our clients, and also a little bit of information on how the markets are going and what our growth opportunity looks like. 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. And as we expand the number and nature of these relationships, increasingly in-line with other professional services industries, we are being bound more to confidentiality.
As we approach the final stretch of 2022, we further progressed to celebrate with 10 of these scaled client relationships in sight. Nine expected this year and one more recent win in fashion and luxury, which is at the run rate, but only started in July. Our Chief Client Officer, Amy Michaels and her team are building growth plans around these 10 and a further 14 clients across various sectors, but still with a strong bias towards technology. Of those 10 clients, nine of them are engaged with us across two or more of our three practices.
When you look at our clients from a portfolio perspective, you’ll see that technology continues to dominate with over 47% of our nine-month revenues coming from this sector. The vast majority of our revenue here is with large profitable tech companies such as Alphabet, Meta, Amazon, HP, Salesforce, Adobe, Microsoft, and others that are under NDA, which despite their well-publicized slowdowns, we should not forget, do continue to grow at significant rates, and are in many cases both partners and clients for us. 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, FMCG, auto and fashion and luxury.
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 over 85%. For our top 20 and top 50 client cohorts, reported revenues have grown at close to 80% and 75% year-on-year respectively. The table also shows how much we have continued to expand the scale and number of major clients in-line with the progress I discussed earlier in our 20 squared client plan.
As our clients and our partners continue to work on our budgets for 2023, in a time which is obviously of considerable turbulence and uncertainty. The recent challenges of some of the technology platforms have been very well covered, particularly in traditional media, but one should not forget that the sector as a whole is still producing and projected to produce growth. This chart illustrates the actuals and projected growth rates for the leading eight platforms: Alphabet, Metta, Amazon, TikTok, Microsoft, Twitter, Snap, and Apple.
Analyst projections have them doing slightly less than 10% growth this year, following more than 40% growth in 2021. And as the platforms [grapple] [ph] with a lower growth environment, they are still projected to do double-digit growth next year. Although you can see from the dotted lines that analysts have consistently downgraded their forecasts over the course of this year, such that projected ad revenue for these eight platforms in 2023 has declined from 18% to 10%.
As you can see from the bottom line on the chart, growth at the holding companies, which has consistently lagged overall media spend growth, as well as obviously growth in digital spend is forecast to dip below zero in 2023. A few weeks ago, the World Federation of Advertisers published a report based on a survey of their client base around their thoughts on budgets and spend plans for 2023.
The first chart illustrates that around 30% of clients are expecting to cut budgets with 40% keeping them constant and a further 30% projecting mainly slight rises, and then it’s broken out by region. The next chart shows that almost half of clients claim they’ll be reducing their traditional media spend with 42% saying they will be increasing their digital spend, and only 13% suggesting a reduction in digital.
The final slide from this survey goes into significantly more detail on which channels will see declines on the left and that’s the traditional media channels and then ranks the areas of digital, which we’ll see increases. This ties in well with our service offering and the areas that we at S4 have invested in.
The next chart. Next slide has three charts which are from Cowen and they speak to the addressable market for tech services and our data practice. It’s important to remember that we operate in several multibillion dollar addressable markets, all of which are growing. Client spending on technology tends to be less cyclical, alone, certainly not immune, and budgets tend to be committed over longer multi-year timelines and projects.
As these charts illustrate, they expect demand for engineering services to increase steadily at 20% growth and the client universe for digital transformation is expanding dramatically. The final chart to their view of revenues for the Top 5 pure play digital transformation consultancies including Globant, EPAM, and Endava. And whilst FY 2023 shows a decline in growth, it is still healthy, and they expect growth to stabilize in the medium-term to the mid-20% figures versus low-20% pre-COVID.
As we work to finalize our budgets, we believe we’re very well placed to take advantage of the growth that is available to us. Our diverse exposure to multiple scaled addressable markets, our client base with almost half our revenues from the tech sector continues to be a strong positioning. Our geographical emphasis on the Americas and the U.S. in particular, which remains the largest and a faster growing market for all digital services. And finally, our service offering itself is fully focused on areas clients intend to favor versus those which are sure to decline.
And with that, I’ll hand you back to Martin.
Sir Martin Sorrell
Thanks Scott and thanks Mary. So, just a brief summary. Last slide in the presentation before the appendix. So, we’ve seen strong momentum as you can see or continued momentum in Q3, actually a little bit better with gross profit net revenue up by over 29% versus year to date growth at over 28%. The controls on costs that Mary outlined and is supervising are starting to work. I think we’re at the beginning of that. And the number of people in the company is stable at around 9,000 as our net revenue is rising quite strongly.
Quarter three profitability was significantly better than half one, actually greater than half one as a whole. And our Q3 exit run rate is sufficient to meet the revised target of operational EBITDA of 120 million. So, continued – we’re seeing continued client conversion at scale with 10 whoppers now in sight, as Scott outlined. And our Top 50 clients are up by 70% year-on-year in terms of average client size.
Our addressable market, total addressable market, which covers digital media, marketing services, trade budgets, and digital transformation is forecast to grow by up to 10% on the platform side and as much as 20% on the digital transformation side over the next five years. So, it’s a good backdrop to what we’re seeing. And our three-year plan, covering the period [23 to 5] [ph], which I think is our fourth three-year plan that we’ve had, is currently being put together, along with our budgets for 2023 and those processes are well underway. And as you might expect, we can continue to expect that we will perform outside or greater than the markets as a whole.
In terms of guidance, for 2022, we’ve confirmed guidance at 25% for net revenue, gross profit for the year. We’ve confirmed that our operational EBITDA of 120 million remains – approximately 120 million remains in place. And finally, liquidity remains strong. And net debt, despite contingent payments in relation to mergers is expected to be between 130 million and 170 million at the year end with – at the end of Q3, the net debt being 158 million.
So, that’s a quick summary of the trading results, the strategy and where we are. Laura, operator, can you see if there are any questions, please?
Question-and-Answer Session
Operator
[Operator Instructions]
Sir Martin Sorrell
Okay. If there are none, that’s fine, Laura. We had plenty this morning. You got any?
Operator
Sure. There isn’t. I’ll just hand it back over to Sir Martin Sorrell for any additional or closing remarks. Thank you.
Sir Martin Sorrell
Thanks very much, Laura. Thank you everybody for joining us, albeit briefly. Any questions to myself or Scott or Mary. Thank you. Look forward to speaking to you again early in the New Year about our final results for 2022 and the prospects of 2023. Thanks very much indeed.
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