Martin Sorrell’s S4 Capital shares drop 16% as earning forecast cut

Sir Martin Sorrell’s advertising company was weighed down by a sustained reduction in spending from clients in the technology sector as it faced “challenging” economic conditions in the third quarter.
S4 Capital has lowered its earning forecasts because of a slowdown in demand, pushing its shares down by 6¼p, or 15.9 per cent, to close at 33¼p. The marketing group had previously guided it would achieve the same level of earnings as last year, but has now told investors it expects a drop in earnings.
The marketing company said revenue declined by 19.3 per cent from £245.9 million to £198.4 million in the three months to September 30. Content revenues were down by 18.6 per cent from 160.9 million to £131 million, and technology services revenue declined from £35.4 million to £20.1 million. Billings to clients were up 7 per cent to £481.6 million, with net debt down from £182.9 million to £179.6 million.
The update came after net revenue fell by more than 15 per cent to £376 million in the six months to June 30, alongside a statutory pre-tax loss of £17.2 million.
Sorrell founded S4 Capital six years ago following his acrimonious departure from WPP after a 33-year career with the FTSE 100 advertising group. It focuses on the digital advertising market and has grown through the acquisition of the agencies Media.Monks and MightyHive. The company now operates in 33 countries and employs around 7,500 people.
Sorrell said: “Trading in the third quarter reflected the continued impact of trends we saw in the first half, namely challenging global macroeconomic conditions and high interest rates, as well as some underperformance when compared to our addressable markets.
“These trends have impacted marketing spend by some technology clients and our technology services practice continued to be affected by a reduction in one of our larger client relationships.”
He said the “softness” in revenues would force the company to maintain a “heightened focus” on reducing costs, and that operational earnings would be “slightly below” last year.
S4 Capital has been expanding its client book this year by signing up companies such as Marriott, Burger King, Panasonic, FanDuel, AliExpress, Decathlon, Santander, SC Johnson and PepsiCo. It most recently secured new business from General Motors.
The group has also built an artificial intelligence product known as MonksFlow to automate workflows in marketing and has been building out the platform’s capabilities. The product helps clients automate copywriting and visualisation, and helps improve media planning and media buying processes.
S4 Capital said cost cutting and an expected uplift in client spending in the final quarter of the year would help improve profitability. In the first half of the year, S4 Capital reduced the average number of employees by 12 per cent from 8,500 to 7,553.
Analysts at Peel Hunt have given S4 Capital’s stock a target price of 45p. They said: “Market conditions remain challenging for S4 Capital, with technology client spending yet to recover and a continued tough backdrop for digital transformation. Despite continuing top-line headwinds, the company is taking measures to cut costs and protect profitability, including further headcount reductions in the fourth quarter.
“On a positive note, its AI initiatives are gaining traction, with more assignments from clients and the General Motors win expected to contribute more meaningfully next year.”