S4 Capital plc (OTCPK:SCPPF) Q4 2023 Earnings Conference Call March 27, 2024 5:00 AM ET
Company Participants
Martin Sorrell – Executive Chairman
Mary Basterfield – Chief Financial Officer
Scott Spirit – Chief Growth Officer
Wesley ter Haar – Executive Director, Co-Founder of MediaMonks
Jean-Benoit Bertie – Chief Operating Officer
Brady Brim-DeForest – TheoremOne CEO
Christopher Martin – Chief Operating Officer
Conference Call Participants
Tom Singlehurst – Citi
Joe Spooner – HSBC
Steve Liechti – Numis
Fiona Orford-Williams – Edison Group
Martin Sorrell
So good morning everybody, I’m here in London. I’m joined by on my left Scott Spirit. On my right Mary Basterfield and for the first time on our extreme is right Jean-Benoit Bertie who as you’ve seen from the release has joined us now as Chief Operating Officer of S4.
The Presentation today is got a number of aspects to it. I’ll do a brief introduction, then hand over to Scott to talk a little bit about our strategy. Mary will talk about our results and then Scott will again will talk about market momentum and client analysis and then Wesley ter Haar, who is in Las Vegas? So it’s really early morning for him; will cover artificial intelligence and what we’re seeing there and I’ll do a brief summary and outlook and then for Q&A we have Brady, where are you Brady?
Brady Brim-DeForest
We met early here, too.
Martin Sorrell
Okay. Thank you for any morning and Chris Martin Is in Barcelona. It’s a little bit more civilized. So with that let’s move to the introduction. Just want to make a few comments on the release and what we’re seeing. So after four years of very strong Organic growth to 2023 was a very challenging year. That did reflect global macroeconomic conditions. But it also reflected considerable client caution as interest rates rose and indeed fears of recession.
To deal with that we’ve made several structural changes to improve performance. The first was a reduction in the number of monks, people in the business from about over 9,000 to about 7,700. The second was a reorganization and additional leadership in our content practice, with the appointment of Bruno Lambertini as Co-CEO, with Wes on this call.
Thirdly the appointment of as I mentioned before of Jean-Benoit Bertie as our Chief Operating Officer, with extensive background at EY, Capgemini and CRM agencies before and finally a simplification of our Board structure and Strengthening the executive committee.
Our board structure historically had been both non-executive and executive. We’ve now slimmed it down to mainly non-executive. Involvement free freeing up our executives who focus even more on the business. At the same as time as all this we made further investments in our systems, in our processes in our control and our governance and Mary of course has been heavily involved in that in strengthening the central financial team.
Now given all that given mark — continued market uncertainty, this that, this time this year, we think clients are a little bit more optimistic; at this time last year they were concerned about interest rates rising; now they’re focused on the possibility of interest rates starting to fall in the second half of the year. But given all that uncertainty, we maintain our continued discipline in hiring and indeed in-cost management.
The strategies you’ll hear shortly from Scott, remains exactly the same and we’re confident that our talent, our business model, our strategy and our scaled relationships, which continue to strengthen position as well, well for above average industry growth and in the medium and longer term.
So with that, let me hand over to Scott to talk a little bit about the strategy.
Scott Spirit
Thank You Martin, good morning everybody Thank you for joining as Martin just said our strategy remains consistent and I wanted to cover some of our key differentiators. Firstly, we’re purely digital. We’re focused on the fastest growing segments of the marketing and technology services industries and with a natural understanding of the impacts of technology, which is especially relevant in the age of artificial intelligence.
We are data driven, data informs all of our work and this leads to more effective and reliable results for clients Data is also the key input and the fuel which powers AI. We go to market as faster, better, cheaper and with the advent of AI, more. Our unique combination of marketing and technology capabilities allows us to address budgets across CMO’s, CSO’s, CIO’s and CTO’s.
Given the pace and impact of change we focus on the now, we help clients achieve results and relevance today. We have a single P&L approach and we go to market under a unified media dot monks brand and offering clients a more integrated approach.
We generate value for our stakeholders by having scaled profitable clients. Our addressable markets of digital marketing and technology services are both multi-billion dollar opportunities. We rely on our talented entrepreneurial colleagues and there are 7,700 of them around the world.
We aim to deliver maximum and measurable results for our clients, across our three core practices Content, Data and Digital Media and Technology Services. We have a global network of connected offices; 61 in 32 markets and finally we act as responsible stewards, managing risk and aligning our ESG goals with our business objectives.
And with that I’ll hand over to Mary for our audited financials.
Mary Basterfield
Thank you very much, Scott. Good morning and thank you for joining us today. I look forward to catching up with many of you during the investor road show. I’ll start with the financial highlights. After four years of strong growth, 2023 was a difficult year. Net revenue was £873 million, down 4.5% on a like-for-like basis. We delivered growth in the first half, but the third and fourth quarters were more challenging.
Profitability came under pressure due to lower revenues. However, operational EBITDA was in-line with the revised targets, at £94 million. We made significant cost reductions to deliver an operational EBITDA margin of 10.7%. EBITDA improved as these cost reductions took effect and we delivered £57 million in the second half compared to £37 million in the first.
Adjusted operating profit was £82 million and adjusted earnings per share were 5.7 pence. We finished the year with net debt of £181 million reflecting combination payments made in the year; this was at the bottom of the targeted range due to tight cost control and slightly lower than expected combination payments. Leverage was 1.9 times.
Moving now to the income statement, revenue decreased 5% on a reported basis to £1 billion and like-for-like was down 8% reported net revenue of £873 million was down 2% or 4.5% like-for-like. This reflects global macro economic conditions, client caution, longer sales cycles a difficult year for new business and a lower seasonal uplift than in previous years. Whilst all practices were impacted, this was most evident in content.
We finished the year with 10 whoppers, that is clients delivering over £20 million of revenue. Our strategy of building broad scaled relationships with leading clients continues to drive our revenue and we saw better performance in our top 10, 20, and 50 clients. Operating expenses were broadly flat year-on-year, despite inflation and a full year of combinations made in 2022. This is the result of tight cost management and a reduction in the number of monks to about 7,700 at year end, down 13% on December, 2022.
Operational EBITDA of £94 million was down 25% on a reported basis and 37% like-for-like driven by lower revenues. I’ve given you a breakdown of the adjusting items in the table on the left hand side. You can see that M&A investment was significantly lower due to reduced activity. Acquisition restructuring and other expenses of £12 million includes £13 million of contingent consideration linked to employment and restructuring costs of £18 million, which have driven significant cost reductions.
This was partly offset by revaluation of contingent consideration on prior year combinations resulting in a credit of £25 million. Reported profit includes a credit of £9 million, relating to the significant one-off devaluation of the Argentinian peso, which we have excluded from operational EBITDA. Finally, the increase in net finance expense is driven by higher interest rates on our term loan, which provides us with secure long-term financing.
Looking next at our three different practice areas, content, data and digital media and technology services; my comments here are all on a like-for-like basis, net revenue in our largest practice content was down 10% in a challenging year, especially in the second half when macro-economic conditions made clients cautious, some technology clients spent less and there were fewer regional and local opportunities. It was a difficult year for new business and there was limited seasonal uplift in the fourth quarter.
Data and digital media net revenue was down 3% with modest growth in the first half, but a decline in the second, highlighting tougher end markets. Net revenue in technology services was up 22% with very good growth in the first half. As expected, this slowed significantly in the second half due to longer sales cycles for transformation projects, phasing of work and a reduction in activity from some larger clients. From a regional perspective, the Americas was down 3% and it remains our biggest region boosted by technology services at 79% of the mix. EMEA decreased 11% in challenging macro conditions and Asia Pacific declined 9%.
Moving to EBITDA by practice on the next slide, again, my comments are on a like-for-like basis. In content operational EBITDA margins were significantly impacted by the decrease in net revenue, though this was tempered by strong cost discipline. Operational EBITDA was £39 million, down 56% on the prior year at a margin of 7%. Ongoing hiring controls and reorganization of the practice have reduced headcount and we continue to focus on improving the operating model integration and forecasting.
In data and digital media, a modest decrease in net revenue impacted margins and we took corrective action to reduce cost. Operational EBITDA was £34 million, down 22% at a margin of 16%. Technology services had a strong first half, but delivered lower margins in the second on lower revenues. Operational EBITDA of £43 million was up 1% at a margin of 32%. Central costs were down 15% year-on-year, reflecting tight cost control and efficiencies.
Moving to the next slide, you can see that we continue to maintain a strong balance sheet with sufficient liquidity and long dated maturities to facilitate growth. Our €375 million term loan matures in August, 2028 and our hundred million revolving credit facility, which remains un-drawn matures in August, 2026. We currently have comfortable headroom against the key covenant.
Moving to cash-flow on the next slide, CapEx of £10 million is primarily investment in IT Infrastructure. Interest paid increased as a result of the higher euro ball rates on the term loan while higher tax paid reflects our performance in 2022. Restructuring and other one-off expenses includes the £18 million of restructuring costs mainly related to people and around £3 million of spend on our ERP program. There was a very small working capital outflow due to a reduction in trade payables driven by activity levels and cost control.
Free cash flow was £14 million and we continue to focus on cash management. The cash spend on combinations was £81 million, almost completing the payments related to activity in prior years. This takes net debt to £181 million, which is at the bottom of the targeted range.
Turning to our guidance for 2024, we anticipate significant market uncertainty as clients remain cautious in the near term, despite potential interest rate reductions later in the year. At a practice level, we expect content to deliver an improvement in EBITDA and margin driven by the benefits of cost reductions made in 2023 and data and digital media to perform in-line with 2023 on both the top and bottom-line with some margin improvement.
Technology services has a more challenging outlook and is expected to be lower in both revenue and EBITDA following a reduction in activity with some key clients. Given the outlook for technology services, we are targeting like-for-like net revenue for the group to be down on 2023 with overall a broadly similar level of operational EBITDA.
The comparatives with 2023 will be tougher in the first half and ease in the second, and we expect 2024 to be heavily weighted to the second half given our natural seasonality and an inspected improvement in end markets. As interest rates come down. Given the uncertain market outlook, we continue to maintain a diff disciplined approach to cost management, including headcount and discretionary costs. We anticipate a net finance cash charge of about £30 million and a tax rate of 24% to 26%.
Our guidance for cash contingent consideration is £10 million settled in the first quarter, and our expectations for net debt at year end are in the range of £150 million to £190 million, with capital allocation priorities focused on debt reduction buybacks and dividends. As usual, we have included information on weighted average share count and invested capital in the appendix, and we are happy to take any questions on these at your convenience.
In summary, we expect clients to remain cautious this year. We continue our disciplined approach to cost management and operational efficiency, and we are targeting a broadly similar level of performance as 2023 medium term prospects remain good.
And with that, I will hand over to Scott for the market and client update.
Scott Spirit
Thanks Mary. I’m going to take you through some of the market and client dynamics that we saw in 2023 and the outlook for 2024. Some of the challenges we faced last year and the actions we’ve taken to stabilize the business and build stronger foundations for growth.
As you’re aware, last year was a difficult year from a macro perspective, we entered 2023 with re reduced growth expectations and less than typical visibility as many of our clients delayed their budgeting processes well into Q1. As it turned out, ’23 was most notable for the challenges faced by our primary client segment, the technology sector.
Historically, our growth has been tightly correlated to the growth of digital advertising and the revenue growth of the major tech platforms. As the tech companies engaged in rounds of layoffs rightsizing their businesses after a post covid fueled growth spurt, they also cut their marketing budgets and double down on their year of efficiency.
Actually, digital marketing had a relatively healthy year. The platforms had a tough first half, but delivered strong growth in H2 and overall digital media spend growth was around 8.7%. That was driven by FMCG spend, driven by inflation and other non-tech categories. Our quoted agency peers originally guided to 5% growth and ultimately delivered 0.6%. 2024 looks like it will be a similar year for digital media growth with analysts projecting 7.7% growth, but with the technology category continuing to be muted, our quoted agency peers are currently guiding towards a more modest 3% growth.
Our other addressable market tech services had a turbulent time after many years of 20% plus growth originally guiding to above 12% growth. Our main peers delivered just over 5%, and for 2024 are projecting less than 1% growth with significant margin compression and many of them turning into negative territory. Despite these macro challenges, our stated goal remains to outgrow our markets and we did not achieve that in ’23, and our guidance for ’24 also falls short. So I wanted to dig into our clients and our growth approach some more and look at what changes and actions we’re taking to turn things around.
Our scaled client relationships remained healthy in 2023, the only significant loss we had was the previously flagged Mondelez content business. Although Mondelez does remain an important client, the reduction in work with Mondelez was around £30 million in net revenue and thus represents 3.3% of our total 4.5% decline in net revenue. Our heavy exposure to technology clients was also a challenge in 2023 as they embarked on cost saving programs.
Meta publicly disclosed their sales and marketing spends were down almost 20% in 2023 with others down similar amounts as we understand it. We had six technology clients in our top 10 in 2022, and their net revenues were down just over 8% in 2023, due to spend declines. So this contributed to our overall decline, but in a year where budgets were down as much as 20%, we still gained share.
Our strategy of focusing on large scaled client relationships continued to be successful. We ended 2023 with 10 whoppers clients with revenues above £20 million, the same number as 2022, with two dropping out Mondelez and one tech company with reduced spending and two new ones, one Telco and one FMCG entering the list.
Overall, our like-for-like revenues from our top 20 clients were down 2.6% and our top 50 were down 1.1% versus an overall figure of 5.4% for the whole of S4, illustrating that the key challenge in ’23 was with smaller and local client relationships, project work and winning new business.
Whilst we expect clients to remain cautious with their spending in 2024, we do have a renewed focus on growth. We’ve launched a plus one strategy of expanding existing client relationships by selling in additional services or geographies. We’ve simplified the go to market approach for our eight capabilities, each of which has clear leadership and accountability.
We’re investing in sales and new business capabilities, expanding the teams and using technologies such as Salesforce and Brady can tell us more later about how he’s reshaping the tech services sales approach. We have new leadership in place in several key markets such as the UK, France, Germany, and regions such as Latin America and Asia Pacific, to specifically address the challenges we’ve seen with local and regional clients.
The pipelines are improving and the significant new business activity, including recent wins from the likes of Zillow, Burger King, Liv Golf, Ali Express, FanDuel, and ASML. I also have a couple of slides showing the usual data that we share on our clients. As you can see, our client portfolio did not change significantly in 2023. Technology remains at 43% of our total business, slightly down based on reduced spending from clients. We remain bullish and committed to the technology sector.
We continue to develop our relationships and our partnerships there. That said, we also continue to diversify our client base and are pursuing a pipeline of opportunities in other categories too.
Finally, in terms of scale, our average reported revenue for our larger clients was largely stable in 2023, and this is in comparison to our overall reported revenue decline of 5.4% across FS4. That’s further evidence of the health of our scale client relationships. This momentum with larger clients is also evident in the table on the right with slight increases in the number of clients in the 5 million to 10 million and 10 million plus categories. That said, we had declines in the number of clients in the lower revenue categories, many of which are one-off projects, new business or local client relationships, and we are focused on rebuilding this pipeline in 2024.
With that, I’ll hand over to Wes who’s going to update us on artificial intelligence.
Wesley ter Haar
Thanks Scott. And hey everyone. So if we go to the next slide, let’s look at our year in AI. I know these types of updates have become a bit of the standard, but I do think it’s quite interesting to look back at the start of last year if we go to the next slide, to get a sense of the progress made and especially where we’re headed next.
So in February of last year we committed quite publicly to being fast and first I think saw a very disruptive moment coming for our industry. We followed that up with some really meaningful thought leadership quickly. The future will be generated. It actually echoes quite a lot of what we heard at GTC last week marking, sort of moving from re to evil to generations. And then of course, in this call last year, I think we were the first of our cohort to spend meaningful time on gen AI what it meant, our point of view and our plan.
We got to the next slide. What we’re seeing is that AI is changing the industry in two important ways. The first one really sits at the customer experience level. We were awarded AI at of the year a few months ago by Adweek. And that’s really for work like the show right now. If we go to the next slide, we’ll show a quick video for Burger King. And this is really interesting piece of work, probably in the most significant use of generative AI in a creative campaign so far.
And you can start seeing sort of a great irony when you talk about AI. AI actually allows us to make the consumer experience more human. The ability to understand the consumer’s intent, their interactions, the ability to respond to that in close real time with super high levels of relevance and fidelity. Really great piece of work. People were able to make a completely personalized er of any type and because of that, when a million dollars potentially we just finished the campaign, massively successful, really great example of personalization, but also some of the joy and fun that the technology enables.
It also starts pushing into the scale that these branded models can actually create. There was moments where we were generating, I think about eight burgers a second. So this is also a great example of just AI at scale and the power of a branded model. So that’s one part of the spectrum. If we go to the next slide, the other big impact of AI is on marketing operations.
And again, I think we’re really decently positioned here. We just won a series of AI excellence awards from the Business Intelligence Group, one specifically for the quality of our strategic planning. I think that’s a really good reflection of the growing importance of our consultancy practice. We also got awarded one for product. So if we go to the next slide, we launched Monks cloud CS this year. I think really exciting practical real use cases in market. This is our workflow orchestration solution.
We’re connecting talent and technology across the enterprise stack. We’re doing that in ways that sold high value marketing use cases. And really this initial launch, and I would almost say year one in general, was about helping marketers solve the speed, scale and spend issues that plague pretty much every global marketing organization. Really great response, very much a new pipeline, a new business line for us and lots of traction, which is exciting to see, of course.
If we go to the next slide, I want to be super clear. This isn’t just about content. I think year one was very much focused on that space. Year two, our focus is on intelligence and insights. And this is a good example. We’re targeting better performance, better predictions really bringing and collapsing almost our, our steps and silos together between data, digital media, content, and of course a lot of the actual framework and architecture delivered by our technology teams.
We launched this at Nvidia, GTC, it’s called Persona Flow. It’s part of Monk Flow, actually accelerates the process of generating 3D insights for the marketing org. We now have statistical proof that this sort of profitable proxy of the consumer base can actually replace qualitive and quantitative surveys. And there’s a very telling internal tagline from three months to three prompts, which I think again shows that collapsing function of AI, the ability to speed up quite traditional processes, I think is very exciting and, and sort of define the next few years in our industry.
Go to the next slide. Launch this at GTC. Workflow in general is designed in close collaboration with NVIDIA engineers. Why it’s important that what we do is sympathetic to some of the architecture and roadmap decisions for it to run efficiently at real scale. I think what is probably a little bit underestimated at the moment is there’s all the piloting and in Adobe’s words, a lot of playground work.
If you start doing that at scale, the efficiency of the models is, is actually one of the defining features of this being a, a net positive from a DL perspective, so lots of focus on that. We didn’t just launch persona here. PTC, which was at the beginning of last week was I think really great setting for our team. We were on stage twice. One of those settings was really talk about our avatar solutions connected to, to Nvidia solution Ace, and the other one was more focused on live broadcast solutions.
And our work was also in the Jensen keynote, which of course was really fun for our teams.
If we go to the next slide, pretty much everything we do in our mon low efforts and product roadmap is connected to our technology partnerships. I think it’s worth talking a bit about Adobe, especially because I am at the summit at the moment in Vegas.
There is, I think, something quite interesting to what we saw yesterday at Adobe’s Keynote. So if you look at the Firefly services announcement, you can see how that connects really well with our roadmap for Monk Flow, right? We’re not competing with big technology companies. We’re enabling their models, their APIs, their automation technology to get lifted into workflows to enable the marketing org and Firefly services, I think is, is an amazing reflection of that. We’ll go into this in a lot more detail at can where we’ll have a, a major update to Monk’s flow if we go to the next slide.
A lot of this is driven by our relationship with our big technology partners. We’re also always looking at the next wave of technology companies in the AI space. We all sort of see how quickly that’s moving. We just launched a really exciting and much deeper working relationship with Runway, which has really been one of the, the winners of that next wave of technology.
We’ll actually have some more announcements in this space to come quite soon. But our team, of course is really excited. We sort of, we flex if we go to the next slide that this is exciting for creatives as well. I think there, there is sort of an unease in the industry that this is against good craft or good creatives. We don’t believe that to be the case at all. We launched Artist Monks earlier last year to show our commitment to the space.
This is a mixture of both internal talent and excellent talent and obviously some of the most exciting AI creators globally that we’re bringing into our clients. We’re bringing into our projects. And I think if I would have to end sort of year one on an important note, that’s a reflection of us not treating AI as a separate standalone line of business or effort.
Realistic, this is becoming our business. There are very few current new business pitches or I would say opportunities in the pipeline where AI is not either a meaningful part of our offer or the full effort, which I think is pretty exciting. If we go to the next slide, the question then of course is what happens next? So we said that AI would be disruptive to our space. I think so far the evidence bears that out.
We committed to that early and I think because of that have been able to make a lot of, lot of progress. The sort of commitment to being fast and first I think has put us in a key position with our client base as a subject matter expert and an expert advisor next year. I think if we go to the next slide, it’s really taking that role. And a lot of that role was around learning. It was around pilots and it’s about scaling that. I think that’s the main message that we’re also seeing reflected at GPC that we’re seeing reflected at Adobe Summit. How do we start doing this at real scale? We are seeing that shift in our client base as well.
Moving from pilots to programs. Those are meaningful changes. I think sometimes the complexities around change management might be a little bit underappreciated there. We’re hoping to start communicating some of these later in the year. You can imagine it’s an interesting area and companies are a little, little slow to communicate that out in the open. If we go to next slide, the most important slide, I would say what happens next is commercial model. The reality is our industry at large relies on a time and material commercial model and they explain that in a very simplified manner.
What percentage of my people can I get billable? At what percentage of their time in the age of generative AI? Those concepts, people and time become quite squishy if that is what your commercial, commercial model relies on fully. So we also believe that that traditional time and material model actually incentivizes against this innovation. So for clients who are ready to buy differently, and that is not every client, we’re focusing on a new version of TNM, we call it talent and machine.
And really it’s about what the combination of those two can offer from an output and outcomes perspective. I think exciting new commercial model, we’re seeing this as a very sizable opportunity for us, as long as we keep moving quickly.
I think we’ve done so in year one and looking at the first few months of this year, I’m pretty confident we’ll be able to keep moving both quickly but also with intent towards some really clear goals. If we go to the next slide, just to end it, this really is the next phase of this disruption. If you look at it through the lens of S4 and we heard school talk about this in more detail just now.
I think the initial disruption from S4 perspective was quite tactical. Single P&L different M&A model, faster, better, cheaper and if you look at that through the lens of AI, it also is now more, this next phase of disruption really is a cloud and compute revolution. I would say that is the defining trend of what we’ll see in the next five to 10 years. It’ll be relatively consistent across industries. We’re of course seeing that first and foremost in marketing and advertising ’cause that’s the industry where we have most of our business.
What we’ll do in the next call, we’ll start showcasing some of the work we’re doing in broadcast that’s also related to this cloud and compute disruption. Realistically, that disruption will happen across industries, especially industries that have quite traditional commercial models like timing material. I’m sure we’ll have some Q&A around AI as well. But that’s our quick AI update.
I’m going to hand it back to Sir Martin before we head to Q&A.
Martin Sorrell
Thanks. Thanks, we Thanks Mary. Thanks Scott. So just a summary and some comments on the outlook. Net revenue and operational EBITDA margin, we delivered in-line with the revised expectations and there was improved performance in the second half, primarily due to reductions in cost. Our net revenue at £873 million was down 2.1% on reported and 4.5% like-for-like, and that reflected the challenging macroeconomic conditions and cautious spending from clients, particularly those in the technology sector. It also reflected the smaller client relationships, a reduction in the M&A reduction in regional and local clients along with a difficult new year for new business and lower seasonal uplift.
In the fourth quarter our strategy of building broad scaled relationships continues to drive revenue and we saw better performance with the top 10, with the top 20 and with the top 50 clients than average. We exercised a disciplined approach to cost management and focused on efficiency and integration. And the number of our months was around 7,700, down about 13% when compared to December of 2022.
Net debt at the year-end was £181 million and that was leverage of 1.9 times. That’s the lower end of the guided range reflecting tight cost control and lower combination payments. The initial response from our AI initiatives, as you just heard, is encouraging and we remain very much at the forefront of the industry leading this change.
2024 net revenue is expected to be down on the prior year with overall a broadly similar level of operational EBITDA. And we expect the year to be heavily second half weighted given improving end markets and, and our normal seasonal seasonality. Our, our net debt range for target range for 2024 is £150 million to £190 million. With our capital allocation priorities focused on debt reduction buybacks and dividends we’ve made structural changes to improve performance with a strengthened [ph]Exco.
We’ve simplified the Board and we’ve appointed, as you’ve heard, Jean Benoit as Chief Operating Officer. We remain very confident in our talent business model and strategy and scale client relationships position as very well for above industry average growth in the longer term within emphasis on improving efficiency and indeed margins.
So with that let’s turn to operator, the Q&A.We’ve got Chris and Brady and Wes are on the line to answer questions as well. We, we’ve put into the appendix some commentary on content on data and digital media and tech. So this is to give you a bit more background what was happening last year and what’s going to happen this year.
So, with that, over to you operator?
Question-and-Answer Session
Operator
[Operator Instructions]. And our first question, it comes from the line of [ph]Idina Abu Ramya from Morgan Stanley. Please go ahead.
Unidentified Analyst
Hi, sorry. Maybe just two questions on our end. First one is, could you maybe shed more light on the current market environment and when you see that maybe longer term when that will improve? And then secondly any thoughts on tech companies ad spend and how do you see that evolving? Thank you.
Martin Sorrell
Yeah, Scott, you want to deal with the second one first and I’ll come back to current?
Scott Spirit
Sure. So I think if you look historically at tech advertising or advertising from the large technology companies it’s been very significant and it’s, it’s provided a really significant portion of, of overall media spend growth over the past decade or so. And that’s obvious when you consider the scale of those companies and, and the massive growth that they’ve gone through.
As I said last year, many of them put the brakes on their marketing budgets and had their years of efficiency. Certainly coming into this year, we, we see continued caution, but the reality is, you know, as we’ve said, we do want to continue to have really strong relationships with tech companies. We believe that spend will return. We believe that these are growth focused companies for the long term. Even as you saw in Wes’ presentation, the, the partnerships we have with them are also really important.
Not just the client relationships, but they’re also very innovative companies. They’re constantly launching new pro new products. We see that particularly around AI, whereas is with Adobe today, and they’re launching their new products today at their summit. So we do believe that that, that spend and that growth will return we can’t put a, a date on that. And certainly coming into this year, I think we still see significant caution from technology clients. So we’re not bullish on it in the very, very short term. But we do see that returning.
Martin Sorrell
On the, on the first question on client confidence, I guess is the, is the question at this time. Last year, clients were concerned about interest rates rising. This, this time this year, they’re, they’re looking at client interest rates probably falling, and there’s differences of view as to when that will happen, but it seems to be focused on the second half of the year.
We’ve had one central bank, the Swiss bank cut rates probably a little bit surprisingly but we’ll see what, what happens with the ECB and the Bank of England. It looks like they will go first in comparison with the Fed and this morning, there was some commentary that the Fed will certainly be cutting as we go into the second half of next year. So I expect client confidence to strengthen as we go into the second half of the year.
It obviously had it depends to some extent on what is going to happen in the US presidential election. I, if President Trump is re-elected, which I guess is probably a 50-50 or maybe a higher probability than that given polls that probably will strengthen confidence in North America. It might cause some shutters elsewhere in the world.
But in North America, I think CEOs are worried about regulation. And Trump rep probably Trump’s Trump card is that he’s more low tax, low reg, low regulation, and therefore probably more attractive to the business community in that sense; so I would expect client confidence to improve, but as Scott said, we’ve seen no sign yet of, of that happening on the tech side.
We think the strength that we have in the, the tech sector will continue to be a positive factor for us, and that’s where the future lies, particularly as you heard from Wes, given the developments around AI, AI and not just AI technology, but what we see happening with the metaverse and blockchain and quantum computing in particular.
Next question, operator?
Operator
The next question comes from the line of Tom Tom Singlehurst from Citi. Please go ahead.
Tom Singlehurst
Hmm. Good morning. It’s Tom here from Citi. Thanks for taking the question and thanks for the presentation. A couple of questions, if it’s okay. The first one on margins, maybe whether you could give us a little bit more sort of detail on the sort of divisional moves, because I appreciate you are offering sort of flat-ish EBITDA in the context of falling revenue. So that does imply at a group level, a step up in margin, but I, I’m, I’m presuming the, the anticipated fall off in margin within tech services is expected to be quite significant.
Can you just give us some framework for thinking about how the margins will develop at a divisional level and why it’s not, they’re not rebounding maybe a little bit more at the at the group level? And then secondly M&A in a sort of broader industry context, obviously Wall Street Journal report a couple of a week or so back indicating that you had been approached and have rejected that?
I just wonder whether you could just give us a bit of a sort of rationale for S four being a standalone asset and whether you think, you know, being a smaller player in the context of the industry is or what the advantages are, just a broader views on, on industry consolidation, pros and cons would be very much appreciated.
Martin Sorrell
Okay. Mary, do you want deal with the margins question?
Mary Basterfield
Yeah, sure. Thanks Martin. Hi Tom. So from a margin perspective we’ve given some detail on practice expectations for 2024 in the release and in the presentation. So our expectations are that content will show improvement at an EBITDA and a margin level driven by the cost savings that have been made in 2023. For data and digital media, we are expecting a similar both top and bottom line performance as 2023, but with some margin improvement.
And then tech services as we’ve said, we expect tech services to have a challenging year in 2024. And that will be evident both in the net revenue and the EBITDA and in the EBITDA margin and so when we pull those things together, we arrive at our overall guidance which is down on 2023 for net revenue and broadly similar in line with EBITDA. So we’ve got a number of moving parts at the practice level that contribute to that overall guidance.
Martin Sorrell
I will attend to the second question, Tom, on M&A, we’ve received no credible offer to, to consider for the board to consider. And as you know, our, our structure ensures that our shareholding structure ensures that we control our own destiny. On the broader question that you asked about our offer, and I think we’ve made clear in the presentation, we think our offer is effective and competitive.
And we believe we can compete even with the, the more scaled competitors, whether they be in the consulting business, whether they be parts of the holding companies. Because we don’t go head to head with the holding companies as a whole, given our digital emphasis. It’s really more with their digital components.
And last but not least, with the, with the specialists who are of similar or even smaller scale. So I, I think the scaled offers that we have in the three areas that we operate in, that’s content, data and digital media and tech services integrate effectively in terms of pitches and in presentations and indeed developing relationships.
If you look at our top 10, top 13 relationships, I think our top 13 clients account for about 55% of our revenues. That concentration, I think, indicates to you, and you know, that we have our 20 squared objective, and we’re halfway there. We, we had 10 large scale clients in ’22 and 10 in ’23. So despite the, the downdraft that we saw in the net revenue, we managed at the larger client end of the top 10, the top 20, the top 50, to improve the scale of those relationships. And I think we are at our best in two areas.
One, one is land and expanding and developing the relationships rather than major presentations. That’s one area. And the second as you saw from the, the presentation, and if you look at the material in the appendix, we have deep technological expertise which enables us to compete extremely effectively. You don’t develop integrated integration relationships with companies like Nvidia, AWS and Adobe unless our people have very deep technological capabilities.
So having said all that, I think the, the scale that we have is sufficient. That doesn’t mean that we shouldn’t look at expanding at the right time our scale and our abilities, but now is not the right time. We have to get our house in order from an efficiency point of view, an effectiveness point of view an internal point of view. And that’s one of the reasons why Jean-Benoit has joined us to ensure that we do that certainly as we go through the rest of 2024. Does that, does that answer what you had there, Tom?
Tom Singlehurst
Yeah, that’s, that’s very clear. And, and on the, on the former, on the margin, maybe to go back to that you could, you talk about whether there’s some investment going in, I ideally quantify it, but is there, should we think about that technology margin coming down involving a little bit of sacrifice in order to get the growth coming through? Or is that a permanent sort of step down in, what we should expect margin wise.
Mary Basterfield
So I think, you know, I’ll Pass to Brady in a minute and he can talk a little bit about the work that’s being done in technology services to expand our sales approach. So there is some investment in the numbers, but not as significant amount overall. I think the, the key impact we’re seeing on margin for technology services is due to the, the change in the top line trajectory which we believe will be relatively short-lived as the sales approach takes hold.
Brady, do you want to comment a bit more on the sales approach?
Brady Brim-DeForest
Certainly. Thanks, Mary. And Tom. Nice, nice to, to chat. Fundamentally there is a shift that’s taking place in the market. If you look at, at, in the early post-COVID days, there was significant tailwinds and the transformation efforts inside of the scaled enterprise technology organizations and our client base. Over the last 12 months that has shifted that’s been shifted pretty significantly. And there’s an increased focus on cost management and cost takeout moving efforts towards scaling contingent workforces and near-shoring as and that the investments that we’re making in ’24, as Mary just alluded to we’re changing our go-to-market strategy for technology services emphasizing a new geographic and market-based sales strategy that is focused on moving into that managed capacity ecosystem at a pretty significant pace.
It doesn’t mean that the transformation business is, is less important to us. It’s just a reflection of the reality of where the demand sits in the market. Overall, I think there is significant upside more broadly, I believe ’24, based on what Gartner has shared, that will be the first year in which IT services is the largest segment of the overall it ecosystem. So I think that that is certainly compelling and helpful to our overall long-term growth trajectory. But this is definitely a year of transition for us as we shift emphasis selling into a new area of demand.
Martin Sorrell
Yeah, I think it’s also important to say, Brady, that as you’ve expanded the sales effort, we’ve done it sequentially. So picking up on Tom’s question about investment and impact on margin as each sales outlet is initiated and developed, we look at the return and then we add on the basis, basis or, or contract on the basis of sales and success. So it’s trying to balance the sales growth with, with the investment. Does that fully answer what you, you asked Tom?
Okay, operator, next question?
Operator
The next question, the next question comes from the line of Joe Spooner from HSBC. Please go ahead.
Joe Spooner
Good morning. You, you spoke about the challenge that you have faced in the smaller client area, and the focus on needing to rebuild that, that client pipeline there. Can you just give a sense of, of how you engage that client base I, I imagine they’re a tougher audience to, to engage with. And then secondly you spoke about again when you entered 2023 there was reduced visibility around the budgets that the clients were setting. Is that different as you enter 2024? Thanks.
Martin Sorrell
Yeah, on, the, the second one, I think it is different in ’24. In 2023, we saw significant delay as we went into, and not, not just the marketing budgets, but of operational budgets ought to which the marketing budget came. So I, I think it, it, it is different this year that, that’s why I think the levels of focus are different this year. And the levels of certainty or uncertainty are different this year on, on the smaller clients, to be clear, we, we are not talking about necessarily, and I think your question is around SMEs and mid-size clients.
We’re not actually talking about those exclusively, although that’s a part of it. It’s more it’s more smaller relationships. It could be with smaller relationships with bigger clients.
So Chris, do you want to comment at all from a DDM point of view and maybe an overall point of view, what you see happening with the, the smaller relationships?
Christopher Martin
On the SMB front and our mid-market advertising services? We’re actually seeing a strong recovery from ’23 to ’24 in the overall level of activity. Not just inbound logos, but also our relationship with the big platforms. So when we look at West’s presentation around AI and the changing landscape and marketing services and how the impact is, is felt in the industry, it’s going to impact the mid-market clients and the regional advertisers a lot faster, especially those that are digitally native or derive most of their growth from, from online channels.
So our relationships with Google’s p Max and Gemini, our relationship with Meta and Advantage plus and Amazon ads, all of which have platforms and native connections to their AI efforts, that momentum is beginning to seep into our mid-market business. And we’re actually seeing an expectation of a, a very decent recovery from the 23 slowdown in that market segment for us. So the automation efforts and AI buzz has already got some significant traction in our mid-market exposure in DDM.
Martin Sorrell
Do you want to add a little bit, because it came up a bit in the, in previous question about deprecation of third party cookies and that impact that’s having on, on DDM and Indeed across the, across the company?
Christopher Martin
The deprecation has been a very slow burn over the last few years, and the platforms have been dragging their heels a bit to allow for different types of measurement solutions and targeting solutions. And that shift of the identifier of an individual moving from a third party ecosystem into a first and zero party owned environment has been embraced by the large platforms and now finally Google.
So we’re seeing that shift into multi-touch attribution being powered more and more by alternative methods other than the cookie. And that is filling out in scale in the big walled gardens. So you’ll see more budgets being consolidated around Google, around big private marketplaces, around Amazon, around TikTok, around social platforms, where there’s a direct connection between the consumer and the advertisers.
So we are relatively well insulated as media monks inside of, of that shift in transition, and that pushes a lot more business towards our data services and technology services business that integrates all of those functions on the MarTech stack. So even though we’re seeing fluctuations in our media business, which is a big discussion in 2023 about our backwards top line revenue the consulting business and the work that we’re doing in ai and systems integration in the MarTech world, that is where we’re seeing the significant acceleration inclusive of what others in the industry will feel is a bit of a pinch from cookie deprecation.
Martin Sorrell
Thanks. Thanks, Chris. Does that cover what you wanted, Joe?
Joe Spooner
Yes, thank you. And, and, and if I could just ask one further question. I think you were due to conduct impairment tests on, on the Goodwill at at the full year doesn’t look like you feel, feel like you need to to, to do anything on that front. Can you just give a, a sense of, of what you looked at and why you’ve come to the decisions you’ve come to? Thanks.
Martin Sorrell
Mary. Yeah?
Mary Basterfield
Thank you. Hi Joe. Yeah, so as every year we perform the impairment tests on the CGU, which for us are the practices. We’ve been through that review process based on our budget and three year plans as usual. And obviously we’ve discussed it with PWC and we are comfortable, we have carrying value and headroom, headroom over their carrying value in each of the CGU. And therefore there will be there’s no impairment to disclose.
Martin Sorrell
Next question?
Operator
Next question comes from the line Steve Liechti from Numis, please go ahead.
Steve Liechti
Yeah, morning everybody. Thanks for taking some questions. Question I’ve got three actually. First two are related, one is on new business comments. Scott, you said new business slower. Can you just link back to your kind of land and expand strategy? And I, I know that that’s what you do, but are you being invited to new pitches? And if so, are you not winning them or are we really saying in the land and expand? People are just not expanding right now? So that’s the first question.
Second question, you, you said there is a pipeline of opportunities this year maybe some color on that and whether that’s different to 2023 in terms of where you are in the year. And then the last one is maybe Jean-Benoit. I just wonder if you could maybe speak to us, introduce yourself give us a bit of history and what’s attracted you to the position at S four and what you’re going to be concentrating on. Thanks.
Martin Sorrell
Hey, Jean, let’s start off with you. Very good. You go.
Jean-Benoit Bertie
Hello everyone. Thank you. I’m excited to be part of S four day one. So it’s my first meeting and I still don’t have a laptop, so I’m still very native. But my background is over 30 years in professional services. Started in consulting back in the US with Capgemini, and then run a couple of CIM consultancies. And then went back to Capgemini, where I led the strategy practice. And then I moved to EY back in 2006 to be part of rebuilding Consulting and spent 18 years at EY doing various roles. And part of my roles. I led the t and t sector. And within that role, I also obviously looked after some accounts and spent 12 years advising boards and senior management in the advertising and media sector.
So I not only have experience and expertise in management consulting, but also have experience in operational efficiency and effectiveness and straight growth in the media and advertising sector. And so with that blend of, of skill set I built over the years I wanted to have a new challenge and thought that moving into an operational role within this industry would give me a new opportunity to practice what I’ve learned through those last few decades. And I believe this industry is in the midst of transformation. It will go back to growth and we’d like to be part of that journey.
Martin Sorrell
Thank you, Jean. Scott, do, do you want to, is that sufficient for you, Steve?
Steve Liechti
Yeah, just maybe a bit more color in terms of, of what [indiscernible] is going to focus in on in his role.
Scott Spirit
Yeah, good. So very much on the operational efficiency agenda to start with, and really working with the team across to look at how we can improve margin in areas that we believe can have improvement. So give you an example around how we price, how we resource projects how we deliver on these projects. Those are very similar topics that I’ve experienced elsewhere. And my aim with a, with a team is to see how we can improve margin across the board.
Martin Sorrell
Okay. Scott, do you want to, to talk about New business pitches and business?
Scott Spirit
Sure. So new business was a challenge in ’23, so I think when I was talking about it being particularly challenging, that was more a historical sort of context. As we, as we come into ’24. So you asked about land and expand. I think land and expand continues to be a real focus for us. And as I said, whilst we did see a decline in our larger clients that decline was certainly a lot less than the decline they saw in their marketing spend. So from that I think we feel that even in ’23 we were gaining share with our major clients, and a lot of that comes from constantly pitching and, and gaining new opportunities with them. So it was really more about reduced spend than any losses or lack of ability to develop new opportunities with our existing clients.
As for new, new business I think we do have actually a, a pretty strong pipeline for ’24. There’s quite a lot of activity much of it driven, as we said, around curiosity around AI,. So almost every pitch or presentation we’re making right now does include something around AI. And as Brady already outlined, he’s got a, a sort of new approach to driving new business in the top of that pipeline in tech services, which is in its early days really started in, in Q4 last year, but is and they have longer sales cycles, but it is proving to be successful in terms of building the pipeline.
Martin Sorrell
So, I don’t know, Wes, if you’ve got anything specific to ask. I know you’re spending your life to add, sorry, I know you spent your life pitching and there, there is quite a lot of activity at the moment.
Wesley ter Haar
Yes. pipeline is better. Both that at what I would call the, the scaled ER level, we’re seeing more of those in the pipeline now than we probably saw in the last year, year and a half or so. And more activity on the ground. I think maybe it’s less meaningful difference in pipeline, but the speed of closing it gets a lot higher. So we, we heard some of the new logos that’s called message, that’s a, a selection, but there are some really good wins in Q1 that we didn’t manage to get last year in Q1. Sizable clients with real land and expand opportunity. So in general, it feels more positive.
Martin Sorrell
Okay. Brady, do you want to add ’cause we’ve touched on tech services and the, the more challenging times. You want to talk a little bit about pipeline?
Brady Brim-DeForest
Certainly. So the bets that we’re placing in our growth strategy are, are driving really significant outcomes at the top of the funnel. Our geographic strategy is focused on initially three core markets where we have the highest density of prospective buyers. As Scott said, our sales cycles are traditionally quite long from first contact to close. What we’re seeing is higher velocity of opportunities of prospective leads moving through the funnel with this strategy, because we’re putting our sales force in direct proximity to our target buyers, quite literally within, within, you know, the same block or the same or a three block radius of the headquarters of our most important buying community.
The upside that, that we’re seeing from the organic collisions that are taking place is really driving a lot of, of well qualified opportunities and the kinds of opportunities that, that we have traditionally seen take a very long time to move through the funnel now moving at, at higher velocity, so still early days but in my opinion, really solid indicators that we’re headed in the right direction. And if you look at the scale of our efforts relative to the competition there’s really only upside to be captured here. And I’m personally really excited for the trajectory that we’re on.
Martin Sorrell
And, and Chris, do you want to add any more from DDM point of view? You’ve covered it a a lot of it in the answer to a previous question, but do you want to add anything?
Christopher Martin
I did, I, mentioned our mid-market push. I think the we’re, we’re going to see a lot of our business development efforts pay off in 2024 with the big platforms. They are very cost conscious. On the OpEx side, there’s going to be less services and a lot more integration needs, and there’s going to be a dearth of expertise sitting on top of AI and automation in the marketing services space. And we are well poised to be able to take advantage of that, that, and we’re already seeing those, those channels light up a bit. So from a, from a sales and marketing perspective, I think we’ve, we’ve placed our bets well inside of the AI space and with our strategic partnerships with the big platforms and tech providers and monks flow being the connector of all of those endpoints inside of the new marketing services landscape that is our channel for for increased revenue and navigating all of this.
Martin Sorrell
Okay. Thanks. Steve. Does that cover what you wanted? Okay. Operator, more questions
Operator
[Operator Instructions]. And our next question, it comes from the line of Fiona Orford-Williams from Edison Group. Please go ahead.
Fiona Orford-William
Good morning. Most of what I had was, has been covered elsewhere, but perhaps we could have some more information. You made a comment about in, in terms of the content practice improvements being made to the operating model and, and forecasting and new leadership in key markets. Does that extend beyond what you were talking about in terms of the, the change in the pricing structure and the AI? Just, just maybe some more background on that? Be helpful. Thank you.
Martin Sorrell
I, I don’t think, I think we’ve sort of covered it. I think the, the changes that were made to the management structure that I think Scott referred to in APAC and, and elsewhere, and what in the, the content practice were, were really not just, actually the APAC is covers the other parts of our business too. Not just content, but data and digital media and tech services. So it covers across, across the board and the same would apply to what we’ve, what we’ve done in Europe. You know, in the, in the case of the content practice Bruno Lamber who joined, we as co CEOs is really focusing on the, the internal stuff that we’ve really men mentioned before. And whereas as you’ve seen from the presentation is really 100% focused on, on AI and its impact, which is just not an impact on the content practice.
But on DDM and tech services too, it permeates everything that we do. If you look at the, the slides in the appendix, you’ll see that it impacts, it affects all the three practices almost uniformly. So I would say we’ve sort of covered it pretty much in, in our comments and Jean Benoit is to add added, added emphasis. Chris is now focusing 100% on DDM instead of having both, both roles. So I think it enables him to focus even more on it, and John BeMore can bring a, a different outside focus to what we are doing in pricing and billability and duplication and integration. So I, I think that covers it, unless there’s any specifics that you, that you, you want to answer?
Fiona Orford-William
Well, it, it was more about how the, the talent and machine structure works?
Martin Sorrell
Mean. Meaning what? When you say what?
Fiona Orford-William
Well, you said you’re mo moving in terms of pricing. Moving from a time and material basis to…
Martin Sorrell
Okay. Yeah, I, Wes, do you want to comment a little bit more on that? Fill out your comments on, on outputs as opposed to time?
Wesley ter Haar
Yes. So, historically, the bulk of our industry sort of sells hours at a rate. The reality is that the time spent on something isn’t necessarily going to be the best proxy for value anymore. If you look for instance, at the Burger King work models being able to generate eight burgers a second means you can do thousands or 10, some thousands of, of images for output in a matter of minutes.
By connected to what we saw at Adobe Summit as well time spent is not longer the best reflection of value created. So what we’ve done amongst flow is a huge part of that. What we’ve done is packaged talent with our productized workflows to give clients an output and outcomes based commercial goal, which is they’re buying a certain level of output, a certain amount of scale that’s part of our sows, but then the output also is going to connect to certain business impacts.
And sometimes those are a little more around internalized KPIs speed of turnaround quality of deliverable, et cetera, et cetera. Ideally it’s connected to actual business impact and performance and conversion, and that allows us to change a business model from quite a traditional space where you can only pay us for the hours that we have, that the impact that we can have on a business. The complexity there is at scale. A lot of traditional enterprise organizations really are only to buy red, are only able to buy red cards.
So we’re doing this with clients that are ready to buy through that lens. What we’re seeing is that it’s very compelling. I think the clients that understand what’s happening and are ready to, to move into that space prefer an outcome and output based commercial model of our time and material model. So it’s, it’s a different way to think about value creation and getting getting paid for that value creation.
Martin Sorrell
Yeah, I think this is a, a fundamental point in relation to our, there’s a question raised by Tom before about competitiveness. AI is changing the way, and that’s why I think the incumbents are very defensive in relation to it. You know, we go to market as faster, better, cheaper, and more. We’ve added more because of AI and our ability to do more, for example, hyper personalization at a scale we haven’t seen before. In that case, it’ll be, it’ll mean more assets at a lower average price per asset, but more of them.
So revenue generated will probably increase quite substantially. And this is a fundamental difference between our approach and others’ approach. We are, we are taking it head on and facing what we believe to be the reality, which is the, each of those areas that we mentioned, AI is impacting our industry. There may be, there may be increased employment, there may be decreased employment, there may be increased revenues, there may be decreased revenues, and it’s far better for us to deliver as Wes just out just outlined out output an output model than a time-based model visualization and copywriting and we said before What took us three weeks is taking us a matter of hours and clients are indicating they want to share in those in those benefits and the problem with the industry is it focuses on selling time Not selling outputs. Does that does that get to the heart of what you were asking. Thank you.
Any other questions over it?
Operator
We have no further questions. So I will now hand back to you. So, Martin some closing remarks? Thanks very much.
Martin Sorrell
Thank you everybody for joining us Thanks ways for getting up early in the morning another one coming shortly and Brady, Chris, was saved this time and Thanks everybody here in London and thanks the team for the broadcast any further questions Scott, Mary, myself all available today. Thank you very much. Thank you.