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Martin Sorrell built his reputation at WPP and now S4 Capital by backing technology-led businesses. Monday’s bleak profit outlook raised questions about his execution of the strategy, including an overreliance on Big Tech clients.

The speed at which advertising companies issue profit warnings has dampened investor confidence. Its shares fell by a quarter on Monday. Low prices mean getting more growth is no longer an option.

S4C’s first-half comparable earnings before interest, taxes, depreciation and amortization (EBITDA) fell 30% from the same period last year. The outlook is dimming. In July, it expected net income to rise 2% to 4% this year. Now the company says July and August were weak. As Sorrell stared at the horizon, revenue growth slipped below zero.

The line chart shows that S4 Capital’s boom period is long over.  Total returns (in US dollars) for WPP, Publicis, Omnicom, S4C and Interpublic.  2018 to 2023.

Cost cutting by big tech companies is partly to blame. Some companies, including Amazon and Meta, have reduced senior staff. Advertising agencies complain that job cuts mean key contacts are disappearing. S4 is particularly vulnerable. Technology companies accounted for 44% of first-half revenue. That compares with 12% at France’s Publicis and 15% at U.S.-based Interpublic, Citi said.

At the same time, S4 can no longer rely on smaller institutional acquisitions for revenue growth as it did a few years ago. As ad spending booms in the tech industry, aggregation models have grown rapidly. But with S4’s share price halving last year, this source of strong expansion has long since dried up. Instead, S4’s newest owner-manager (who holds a 40% stake) must cut costs on the team.

Two charts. First, the pie chart shows S4's customer mix, as a percentage of revenue in pounds. Categories include technology, fast moving consumer goods, and finance. Automotive, Retail, Media & Entertainment, Fashion & Luxury, Agency and more. The second chart, a two-scale chart shows global digital ad spending. The left scale shows the percentage of total ad spend and the percentage change. The scale on the right shows spending in billions of dollars.

Sorrell has no plans to change his strategy. Although dependent on technology clients, he rightly sees digital advertising as the future. According to eMarketer, the sub-sector is expected to grow to $871 billion by 2027, an increase of nearly 60% from last year. But S4 must address growth issues. Perhaps a merger with another mid-sized institution, such as Havas, could offer new possibilities.

A shrinkage growth strategy has its limitations. S4 Capital has been testing these boundaries for too long.

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