THE NOTE BOOK

THEQ2 RESULTS season is in full swing and, so far, it is fair to describe the season as better than expected. The tech companies have beaten expectations, especially Meta. The consumer goods companies such as Unilever and Coca-Cola have pushed through betterthan-expected price increases to customers. Even ITV’s 1H results saw some love from investors.

Yet the agency side has been more mixed, with Publicis outperforming but others pulling back full year estimates. That was no more evident than in the results of S4 Capital, which pulled back its full year guidance after a weak Q2.

The pullback was another blow to S4, which has lost more than 85 per cent of its share value since its peak less than two years ago. Yet, unlike its previous issues where there was an element of ‘too much, too soon’, this one is more just an issue of serious bad luck.

There are three things about S4 that help explain the latest warning. One is its reliance on digital. The second is the lack of a legacy media business to provide at least some protection.

The third is a high concentration of revenues from a small number of clients.

Spending in tech and by tech clients have been impacted as clients absorb previous high levels of spend and tech companies look to hold off on spend (Meta stated Q2 marketing expenses fell 12 per cent year on year). This is not agency specific but a feature across the whole space (Interpublic mentioned it in its profit warning). For S4, this is extremely problematic as in 2022 digital platforms accounted for 90 per cent of its net revenues. Moreover, other agencies have benefitted from strength in their legacy media units, which plan and buy ad slots for clients. The problem for S4 –as a new agency group –is it does not have the media business to help. There is a rationale for S4 not to have a legacy media unit – if only because scale is critical – but it proved a factor in the latest warning.

Thirdly, because of its concentration, if one or two

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clients pull back spending, this has a disproportionate impact compared with other agencies, which are more diversified and have a long tail of clients. The ‘Whopper’ strategy (clients who spend over £20m p/a) has pros and cons, the latter the case if a few clients decide to hold off on spending.

It might be argued S4 should have invested in traditional agency businesses, but that wasn’t the market reaction when S4 launched five years ago and people praised its digital focus. Hindsight is a wonderful thing.

The key question now is whether this will reverse. My own view is yes. You never underestimate Sir Martin Sorrell. However, more to the point, the conditions for a recovery are building –falling inflation should lead to lower interest rates while better results should mean clients are more willing to spend.

Clients are likely to also return to spend more as market sentiment improves. You would imagine S4 should benefit significantly from these trends. As usual, this is not investment advice.