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S4 Capital, the advertising group founded by Sir Martin Sorrell, lost about a quarter of its value on Monday morning after issuing a series of latest warnings about revenue and profits.
The group said revenue in 2023 would be lower than last year and margins would narrow due to slower-than-expected trading in the summer.
S4 noted that the global macroeconomic situation is more challenging and clients’ caution reflects concerns about an economic recession. This results in clients of big brands and technology groups taking longer to make decisions and profitability falling below budget.
Shares in S4 fell 28% to 68p, a record low and less than a tenth of their 2021 peak of 878p.
Analysts at Jefferies said the second warning on revenue growth in two months would hit “already fragile market confidence” in S4’s long-term profit targets. It lowered its revenue and earnings forecasts.
In an interview with the Financial Times, Sorrell predicted that conditions would continue to be weak next year. “Customers are very cautious,” he said. “The CEOs are very optimistic, but things are different within the company.”
He noted that some clients are concerned about the economic recession, the ongoing impact of the war in Ukraine, and caution about potential political threats such as the dispute between China and Taiwan.
Sorrell founded S4 after being ousted from WPP in 2018 with the goal of creating one of the largest digital advertising companies in the world. He has adopted an aggressive acquisition strategy, acquiring dozens of media conglomerates and expanding his operations around the world.
However, after a string of profit warnings and accounting issues last year, the company has been questioned by costs and its short-term strategy to boost profit margins, and is now trading at a fraction of its level during the pandemic.
S4 has cut nearly 500 jobs, taking its headcount to 8,550, and pledged to “continue to take action” on costs. The group is less able to use its devalued shares to fund further acquisitions.
The company reported a pre-tax loss of 23.2 million pounds in the six months to June 30, narrowing from 85.6 million pounds in the same period last year. Revenue was £517 million, up 15.8% as reported, but only up 2.5% year-on-year. Year-over-year net income is expected to decline in 2022, with operating margins in the range of 12% to 13.5%.
Sorrell said the company’s results in Asia were particularly weak due to a slow recovery from the pandemic, but added that the company was performing better in the United States.
He said the company will continue to focus on efficiency, noting that it will continue to build business with its largest customers.
The company’s creative business, which produces content for clients, was particularly weak, with revenue down 2.5% year-on-year, while its data and digital media and technology services businesses both grew.
S4 said: “The content business was very challenging in the first half, especially in May and June, with only one or two technology customers and regional and local opportunities.”
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