The Notebook: Ian Whittaker on S4’s bad luck, a surprising election forecast and the unbeatable pull of strong brands
Where the City’s movers and shakers get some things off their chest. Today it’s Ian Whittaker, founder of Liberty Sky Advisors
S4’s latest woes are down to bad luck, not bad judgement
The Q2 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 better-than-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 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.
The benefits of advertising
Speaking of results, mass market consumer goods companies have surprised the markets with much higher-than-expected price increases without the expected impact on volumes. Coca-Cola, Nestle, Pepsi-Co, Unilever and others have all pointed to this, leading several to upgrade full year guidance.
On many of the calls, the strength of their brands has been highlighted as the key driver of this. Maybe it is time to recognise advertising adds real shareholder value.
The election ain’t called yet…
A few columns back, I mentioned that the next general election was not in fact a foregone conclusion (one of my side-hobbies is political betting). The Uxbridge by-election, where the Conservatives held the seat despite expectations, suggest this may be the case.
Unlike all the other recent by-elections which have been free hits with little consequence, this one was fought on a real-life issue – and the Tories won. As we get closer to the election, and Labour’s policies come under more scrutiny, the polls will narrow sharply.
Bairns’ tech
There are many excellent podcasts and newsletters out there on the media and tech sector but if you want to know more about what is happening in the kids’ arena – which is a very valuable area – then I would recommend two people: Jo Redfern and Emily Horgan, both of whom give incredibly valuable insight into the space on both their newsletters and their Kids Media Club podcast. And check out Joel Silverman, who went from being a Mayfair stylist to the CEO of the excellent Kidsknowbest company.