Agencies are seeing fear about the economy by clients, mainly in the technology sector, translate into a material fall in revenue growth.
S4 Capital, Martin Sorrell’s pure play digital advertising group, is the latest to report caution by clients due to macroeconomic uncertainty.
The company is seeing softness in ad spend, leaner staffing at clients and slower decisions stretching the sales cycle.
Overall trading has been tough, says S4. Net revenue growth of 5% like-for-like to £445.5 million for the six months to June was below expectations.
The company now expects full year group revenue to be below last year, down from the previous forecast of 2.5% growth.
And S4 is keeping pressure on costs, with staff numbers down to 8,500 versus 9,000 or so this time last year.
However, after a “after a challenging first half in difficult market conditions, we are expecting an improved performance in the second half”.
The trend cuts across the big global players in advertising.
WPP has also cut its full year revenue guidance, reporting slower than expected spending by its technology clients.
Dentsu reported a 4.7% drop in organic revenue in the June quarter as technology and finance clients turned cautious.
A window into the local market, shows dentsu Australia down by around 5% in the June quarter. This wasn’t as steep as other regions, including the Americas with organic down 7.4%, EMEA dipping 12.7% and APAC (ex Japan) 7% weaker.
And IPG pulled back its outlook for the rest of the year after reporting a 1.7% drop in organic revenue to $US2.33 billion in the June quarter, with an underperforming technology sector at least partly to blame.
S4 Capital, because of its focus on digital, stands out. It lost about a quarter of its value on the London Stock Exchange when it announced June quarter results, and is still well below its peak of 878p in 2021.
“Growth has been much harder to come by this year,” says Scott Spirit, S4’s chief growth officer.
“That said, it's not all doom and gloom in those markets. There's still pockets of excitement and opportunity in our addressable markets.
“The first and obvious one is artificial intelligence. We've been discussing this on our earnings calls all year.
“The early signs are certainly encouraging that this will be an opportunity for us to grow and continue to differentiate ourselves and disrupt the industry.
“Elsewhere in digital media, there are areas such as retail media or influencer which continue to outperform the market, and we've certainly seen influencer in the wider social category as a bright spot in our business.”
S4 has significant exposure to the technology sector at 44% of reported revenue for the six months to June.
“Obviously, there's been some caution about this sector this year, given many large tech companies are going through their years of efficiency, and we have not been immune to these pressures,” Spirit says.
“However, we still have several large tech companies growing their spend with us this year. And longer term, we are confident this is a sector which will continue to provide growth opportunities ahead of the overall market.”
Wesley ter Haar, co-founder of Media.Monks, a creative production company now part of S4, says the sales cycle has been slowing.
“We see quite a bit of budget and conservatism,” he says. “We're seeing delays on Asian planning among some of our clients. And there's also a general I would say, concern about a potential recession.
“And all these things together are slowing down sales cycles.”
Media.Monks is “optimising” teams and structure.
“That's a bit of a balancing act,” he says.
“We've been able to do that without negatively impacting levels of quality levels of service and we're optimistic about the progress being made and especially what that means for our exit rate in both revenue and cost as we enter 2024.
And it's bouncing act that we've also combined with building out an industry-leading AI vision. That vision is being brought to life.”
Christopher Martin, chief operating officer at Media.Monks based in the US, is seeing “cautious sentiment” around media and large-scale marketing investments in the second half of the year.
“This has led to a lower commitment rate, particularly impacting our revenues derived from the percentage of media spend from our clients,” he says. “And this includes our media technology activation performance units.
“Clients are looking to consolidate and find efficiencies and are pushing decisions until 2024. However, our business is somewhat insulated from this trend.
"Our clients are controlling staffing investments, and that's where our transformations and managed services businesses shine, offering staff augmentation for both seasonal support and downsized client teams.
“We're also experiencing slower decision-making cycles, pushing new investments to year-end or even 2024.”
A slide from S4 Capital's presentation to market analysts:
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