Pure-play digital advertising group S4 Capital is still seeing longer sales cycles for its all important technology services clients.
And the company founded by Martin Sorrell expects revenue this financial year to be down on the last.
Revenue fell 16.2% like-for-like to £422.5 million in the six months to June. Net revenue was down -13.5% to £376.1 million.
Operating expenses have been cut 14.4% to £342.7 million and staff numbers at S4's Monks unit have been reduced 12% to 7,550.
And more cost cutting is on the way.
“We will be taking further action on costs to ensure we can protect profitability for the full year, and therefore we will expect to see the margin expand in the second half,” CFO Mary Basterfield told a briefing of analysts.
“We expect net revenue for the year to be down year-on-year and to a lower extent than our last update in May.”
She said S4 is seeing longer sales cycles, and continuing caution, from technology services clients.
Joe Spooner, an equities research analyst at HSBC, asked for more detail on cost savings and on the use of AI.
“Can you give a sense of what kind of price points that AI work is coming in at relative to traditional work,” he said.
“Are you having to pass along a significant amount of those cost savings on to clients?
“I guess the question is kind of really thinking about, as you start to look to rebuild revenues going forward, do you have to bring in or attract much more work? Because that's going to be more AI focused than in the past.”
Basterfield said headcount was down about 12% at the end of June.
“We have taken further actions since the end of the half year, and we will be continuing to actively manage the cost base,” she said.
“We're not planning to comment specifically in terms of magnitude. However, I think it's fair to say we expect that the personnel costs will be lower in the second half than both the first half and the second half of 2023.”
Executive chair Sir Martin said the key metric is staff costs to net revenue.
“There is an improvement in the second half because there is some seasonality in the revenue.
“The staff costs to net revenue figure will be lower in the second half … improve as we go through the year.
“But there's still work to be done.”
Scott Spirit, S4’s chief revenue officer, said AI wasn’t something the company sold separately.
It’s used to power conversations, both of existing and new clients.
“One of the key attractions of AI is that there are opportunities to get much more effectiveness from their budget,” said Spirit. “Now that could be if they want to do the same amount of work, then they could do that for less.
“What a lot of clients are doing is keeping their budgets at the levels that they're used to, but expecting to get a lot more output, particularly content, for their money.
“From our perspective, from a margin impact perspective, there are actually good opportunities using AI.
“Clients will expect some of those savings, and that's how you prove the effectiveness of the platform. They'll expect some of those savings to flow through to them.”
He also sees opportunities around the commercial model.
“This is a new model,” he said. “It's moving away from the traditional, purely time and materials based model to more of a hybrid model that still has elements of that, and you still have retained core teams. You do still need people.
“But it also moves us to a more output based model. There are opportunities for more SAS style models where there are licence fees applied to some of the technology we're building.”
And that, he said, could be more profitable.
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