S4 Capital plc (SFOR) Earnings Call Transcript

Good morning, everybody. Welcome to our Q3 results for 2027. I'm joined here by Radhika, our CFO in London, and Scott, our Growth Officer in Singapore. So we're going to run through a brief presentation on Q3. First section: a trading update from Radhika, then Scott will weigh in with an analysis around our clients, and I'll come back with a brief summary and outlook, and then we'll take Q&A. So over to you, Radhika.

Thank you, Martin. Good morning, everybody. I will start with the financial headlines for the third quarter of 2026. Throughout the third quarter, trading continued to reflect the challenging macroeconomic conditions. Clients remained cautious, with hyperscalers and other technology clients prioritizing capital expenditure on expanding AI capacity over operating expenditure. The benefits of the 2025 second-half cost actions continue to materialize, and we have maintained our strong discipline on cost control. Third quarter net revenue was GBP 156.3 million, down 6.4% reported and 7.3% like-for-like. 9-month net revenue was GBP 464.3 million, down 6.2% reported and 5.6% like-for-like. We now expect 2026 full-year like-for-like net revenue to be marginally below previous guidance, down in the high single digits. Operational EBITDA remains at the current analyst consensus level of GBP 85 million, and operational EBITDA margin is now expected to increase by at least 160 basis points to 13.7%. Adjusted basic earnings per share is expected to be in excess of the current analyst consensus of 6.1p per share. Liquidity improvements have significantly reduced net debt levels year-on-year. Net debt at the 30th of September was significantly better than anticipated at EUR 76 million or 0.7x pro forma trailing 12-month operational EBITDA, a reduction of EUR 75.1 million compared to the 30th of September 2025 or EUR 66 million like-for-like. Our year-end target net debt range remains at EUR 50 million to EUR 80 million, and the company expects to be comfortably within this range. The company repurchased a further EUR 50.9 million of our Term Loan B after 30th of September 2026, of which EUR 10.5 million remains subject to settlement. Together with the EUR 125.3 million previously repurchased, this reduces the Term Loan B outstanding to EUR 198.8 million, down from EUR 375 million. Looking across our 2 practices, Marketing Services and Technology Services, my commentary here is all on a like-for-like basis. Marketing Services delivered third-quarter net revenue of EUR 142.7 million, which is down 6.2% and EUR 424.6 million year-to-date, down 5%, reflecting ongoing caution among technology clients as they continue to prioritize and increase AI infrastructure CapEx over operational marketing budgets. The practice was further impacted by a scope reduction in BMW, primarily in EMEA, and the ongoing conflicts in Ukraine and the Middle East. Technology Services generated third-quarter net revenue of $13.6 million, down 17.6%, and $39.7 million year-to-date, down 11%, similarly impacted by broader macroeconomic headwinds and a continuing longer sales cycle. From a regional standpoint, we saw some encouraging momentum in the third quarter with both EMEA and Asia Pacific up 3.1% and 9.4%, respectively, while the Americas declined 10%. Year-to-date, the Americas declined 4.1%, EMEA 13.3%, and Asia Pacific 5.6%, representing approximately 81%, 14%, and 5% of the net revenue, respectively. Our improving liquidity continues to support our capital allocation priorities, which remain unchanged. We have established clear capital allocation priorities, focusing on delivering shareholder value through first, dividends; second, further debt repurchases; and third, share buybacks as net debt falls further. On the 6th of October, we were pleased to pay our first interim dividend of GBP 1.35p per share announced at the interim results. As previously announced, the Board has implemented a dividend payout ratio of 50% of adjusted basic earnings per share, subject to financial targets being met, and we will recommend a final dividend for 2026 in line with that policy. There will be increased flexibility to consider share buybacks once the company is net debt-free. With that, I will hand over to Scott for the market update.

Thank you very much, Radhika, and good morning, everybody. Thanks for joining us. A couple of slides from me on our clients. So the first one, this slide illustrates where our revenue comes from in terms of industry sector. As you can see, we maintain that exposure to the technology sector with 43% of our revenues from primarily big technology companies. Whilst the sector continues to prioritize CapEx spend on AI capabilities over marketing spend, this remains an important client segment for us. Clients like Google, Amazon, and Meta are also important partners for us, and as this pressure mounts on tech companies to show a return on their AI investments, we are increasingly working with them to illustrate the benefits of AI-driven marketing transformation with both them and our wider client base. We have a really compelling client list with some of the world's leading and most innovative companies, and these are strong relationships that help us attract and retain talent to work on them. Next slide. You can see on the left here that spend per client has begun to stabilize versus the previous year across our top 10, 20, and 50 client cohorts. So they're only slightly down. The main challenge for us has not been on existing clients or larger clients, but on that longer tail, which is primarily project-based work. A lack of new business conversion has impacted us here. The focus now is very much on returning the company to growth. And with that, I'll hand you back to Martin for the summary.

Thanks, Scott. Thanks, Radhika. So just to summarize where we see ourselves at the end of Q3. Firstly, Q3 net revenue was down just over 6% and 7.3% like-for-like, and that reflected the continuing uncertainty that we've seen macroeconomically and clients remaining extremely cautious, with technology clients focusing -- the hyperscalers focusing on AI CapEx. Year-to-date, net revenue is down just over 6% and reported 5.6% on a like-for-like basis. Full-year like-for-like net revenue now will be estimated to be down in the high single digits. The company repurchased a further EUR 51 million of its Term Loan B after quarter end, of which about EUR 11 million is still subject to settlement. And this, together with the EUR 125 million previously repurchased, reduces the Term Loan B outstanding to just under EUR 200 million, down from the EUR 375 million originally. We continue to target a year-end net debt of $50 million to $80 million and anticipate we'll be almost debt-free next year. Full-year target for operational EBITDA is expected to remain at current analyst consensus of around $85 million. I think the consensus EPS estimates are about 6.1p. We think we'll be in excess of that. Full-year operational EBITDA margin is now expected to increase by at least 160 basis points to 13.7%. The Board paid a first-time interim dividend of 1.35p, and we'll recommend a final dividend in line with our previously announced dividend payout ratio of 50% of adjusted basic earnings per share, subject to our financial targets being met. The number of months in the company is now at around 6,100, which is down 4% from around 6,350 at December '25 and 6% on a like-for-like basis to last year. Finally, we remain confident in our strategy, our business model and our talent. And together with our scaled client relationships that Scott went through and the strong momentum behind our new go-to-market propositions, we believe we're well positioned to deliver sustainable long-term growth. So with that brief update, we're now open, operator, for questions.

[Operator Instructions] We will now take our first question from Steve Craig of Deutsche Numis.

Just a few. So are you able to give us, on your technology segment, what the kind of like-for-like decline would be in either the third quarter or the 9 months? I'm just trying to figure out how much of a drag that is relative to your group like-for-like at minus 5% to minus 6%. So that's the first question. Second question, just on new business. You mentioned -- I think, Scott, you mentioned lack of new business. But what's going on in terms of --

Lack of conversion, not a lack of new business.

Conversion -- sorry. Apologies, Martin. But just maybe just flesh that out in terms of what's going on in the general environment on new business overall. And then, apologies, this is probably me being ignorant, but obviously, there's been some executive changes and some shift from non-exec to exec. Just talk me through the operating structure now because that is interesting in terms of managing the business.

Okay. Let's deal with the last one first. Nirvik Singh, who was a Nonexecutive Director, has stepped down from the Board and is now responsible for EMEA and for APAC. Novi's history, you know, I think, back at WPP and Gray internationally. And now he's responsible. I mean, the matrix structure is, I guess, all matrices are suboptimal, but this, in our view, is the least suboptimal. We're regionally driven or country-driven first, client-driven second, and capability third. And we believe that's the best way of running the business. So we have 4 regions, 3 regional heads: James Stevens in North America. Sebastian Carramed in Latin America and Nirvik in EMEA and APAC. And then we have client leaders, Rick Eisman around both Google and General Motors, and other client leaders as well. And then we have capability leaders as well behind that. So that's the basic structure, and that's what Nirvik has moved into doing that. He's based in Dubai and looking after which is a good location for both regions and looking after both regions. On the conversion, Scott can add. But basically, I think we've had a number of significant new business opportunities, but we've not converted not so much of existing clients, as Scott said, but of the new business picture. I would say competition is intense, as you would expect. Not just on the media side of the business, where we tend to deal with not so much with enterprise clients, the small and medium sized, but also on the creative side as well. And I think that the issue for us is how we can improve our new business conversion rate, not, again, just to emphasize, so much from existing clients. You see the progress at Google and Amazon and T-Mobile and others. It's really a question of conversion of new business opportunities. On the Tech Services, do you want to comment a bit on tech services?

I think Steve said how much of a --

Can I just interrupt? I didn't mean tech services per se. I meant the tech segment of your customer base. So, in overall terms, because it's 40% of the business. Do you know what I mean? I'm just trying to get how much of a drag that is.

Well, look, we're into Q3 this week. I mean, the vast majority of the S&P are going to report this week. And we've not seen a number from the big tech giants. But going into Q2, the CapEx forecast is about $630 billion for the biggest hyperscalers. Coming out of Q2, it was up to about $830 billion, $840 billion, and the forecast for next year was $1.1 trillion, of which I think $530 billion was going to be funded by debt. Those were the rough numbers. We'll have to see what Q3 brings, but my expectation would be that the expectation for next year of CapEx of over $1 trillion or $1.1 trillion for those biggest hyperscalers will continue, maybe even increase a bit. So I think the direct answer to your question is it's unlikely that the hyperscalers will switch from CapEx to OpEx at this point in time. We'll see how it shakes out. On a broader point, we're seeing marketing digital transformation, and I emphasize marketing transformation. I'm not talking about physical AI or health care AI or manufacturing or R&D. I'm talking about marketing. We're seeing extensive transformation in the auto category, as we said in the statement, in financial services and, to a lesser extent, but becoming more meaningful, packaged goods. In all cases, it's due to existential threats: Chinese EVs and AVs in the first case, fintech platforms in the second case. And last but not least, global supply chain issues and macroeconomic issues around the U.S., China, Russia, and Iran. So you put that together, we are seeing significant client adoption in those 3 verticals. I think beyond that, it's much more varied. And it still tends to be around tests, experiments, and pilots. So, coming back to your point on the hyperscalers, until we see a significant shift in that, the tech sector is going to continue still on CapEx.

And just if I can just come back on the question. Are you able to give me any kind of vague number in terms of what the like-for-like trend in spend has been in that tech segment? So if your group, for instance, is minus, let's say, minus 5% for the 9 months, whatever it is, would the tech be greater than minus 5%? Would it be a continuing drag? Or would it be less than minus 5%? Or would it be in line with that?

I mean, we've done a bit of analysis on it, which we've not published, but we've done. Scott, do you want to comment on that?

Yes. I mean, I've got some historic numbers, so I can give you the '25 numbers. I don't have the up-to-date '26 numbers, but I think the delta is probably quite similar. So in '25 full year, our technology clients were down just over 13%, and the group S4 was down 8.3% on the net revenue level. So you can see the delta there. And I'd expect that into '26, that delta, obviously, the amount would be less because we're down less, but that delta would be quite similar.

And I don't want to dominate, but I just want to follow up on that. I hear what you're saying on tech at hyperscalers and stuff like that. I mean, some of your peers have suggested that their tech clients have stabilized a bit, but it is polarized. Are you not seeing any of that at all in your client base?

When you say polarized, what do you mean?

Well, some are still down; some are up now.

I don't really call it polarized. If you're saying varied, yes, I mean, there is some variation. Without naming names, I can think of one -- you've got one major hyperscaler who is just in the process of offering redundancy packages to, what was it, 60,000, 70,000 people, 27% of its workforce. So clearly, there may be variations between clients. You're thinking about our major tech clients; there is a difference between each and every one of them. And by the way, it varies over time. If you get what I just referred to, clearly, there's going to be pressure internally. On headcount or reduction in headcount, and probably there will be more outsourcing opportunities or embedded model opportunities as a result. So it is going to vary over time. And I think we have seen our major clients vary over time. Some have been more consumed with in-housing or models like that. And when they reduce their headcount, they become more prone to outsourcing. So it does vary. But I think generally, what we're saying is that the tech companies, they're not hesitant. Their priorities are building out capacity with CapEx and not expanding the marketing budgets and the OpEx budgets.

We'll now take our next question from Julien Roch of Barclays.

The first one is to be blunt. On one hand, you say you have great product strategy and talent. But on the other hand, organic continues to disappoint. You mentioned macro uncertainty and tech clients focusing on CapEx, but that's unlikely to change next year. So what's going to make you go back to positive organic? I mean, you just say we need to increase conversion, which is basically you went to pitches, and you lost against other people. So could it be that your new services and products are actually not resonating with clients? What's going to turn this ship around? That's my first question. The second one is on net interest. So, on page 14, you gave guidance on a lot of numbers, but not net interest. So can we get some indications for '26, but also '27? As you're buying back expensive debt, I would think net interest will go down quite a lot. And then lastly, coming back to Steve's question on tech. Scott, you gave us last year minus 13 tech clients versus minus 8% for the group. But if I look at Page 8, tech clients are 43% in Q3, up from 42% in Q3 last year. And in the first half, it was 42% and 42%. So it looks like tech clients are doing better than the group this year. So can you confirm that?

Okay. Scott, do you want to deal with the last one first?