S4 Capital (LSE:SFOR) Q3 2026 Earnings Call

0:00 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.

0:21 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 156.3 million down 6.4% reported and 7.3% like for like. Nine month net revenue was 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 high single digits.

1:29 Operational EBITDA remains at the current analyst consensus level of 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 current analytic consensus of 6.1 pence 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 76 million, or 0.7 times pro forma trailing 12-month operational EBITDA, a reduction of 75.1 million compared to 30th of September 2025 or 66 million like for like. Our year-end target net debt range remains at 50 to 80 million and the company expects to be comfortably within this range.

2:34 The company repurchased a further 50.9 million euros of our term loan B Thank you very much. Looking across our two 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 142.7 million, which is down 6.2%.

3:24 and 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 the 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 continuing longer sales cycle.

4:14 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 £1.35 per share announced at the interim results.

5:18 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 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

5:44 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 prioritise 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 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.

6:47 Next slide, you can see on the left here that spends per client have 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.

7:19 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 and 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.

8:06 Full year like-for-like net revenue now will be estimated to be down high single digits. The company repurchased a further 51 million euros of its terminal B after quarter end. Thank you very much. We continue to target a year-end net debt of 50 to 80 million and anticipate we'll be almost debt-free next year. A full-year target for operational EBITDA is expected to remain at current Analysts Consensus of around 85 million.

9:07 I think the consensus EPS estimates are about 6.1p. We think we'll be in excess of that. Full year operational EBITDA margin 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 monks in the company is now at around 6,100, which is down 4% on around 6,350 at December 25.

10:01 and 6% on a like-for-like basis to last year. Finally, we remain confident in our instrument and together with our scaled client relationships that Scott went through and the strong momentum we believe we're well positioned to deliver sustainable long-term growth. So with that brief update, we're now open operator for questions. Thank you. Ladies and gentlemen, if you would like to ask a question via the conference call, please press star 1 on your telephone keypad.

10:42 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 four regions, three regional heads, James Stevens in North America, Sebastian Caramez in Latin America, and Novick in EMEA and APAC. and then we have client leaders like Rick Eisenman 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 Novik 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.

11:38 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 pitches. I would say competition is intense, as you would expect, not just on the media side of the business. Thank you very much. Steve Siddler Steve Siddler

12:51 Thanks for watching!

13:07 and we've not seen a number of the big tech giants but going into q2 the capex forecast was about 630 billion for the biggest hyperscalers coming out of q2 it was up to about 830 840 and the forecasts for next year were 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 that expectation for next year of capex over 1 trillion or 1.1 trillion for those biggest hyperscales will continue, maybe even increase a bit.

13:52 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 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 around the macroeconomic issues around US, China, Russia and Iran. So you put that together, we are seeing significant client adoption in those three verticals. I think beyond that It's much more varied and it tends still to be around tests,

15:22 experiments and pilots. So I think until 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.

15:41 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 technology segment? So if your group, for instance, is minus, let's say minus 5% in nine months, whatever it is, would the tech be greater than minus five you know would it be a continuing drag or would it be less than minus five or would it be in line with that we've done we've done a bit of analysis on it which we've not published but we've done that do you want to comment on that

16:22 I've got some historic numbers so I can give you the 25 numbers I don't have the up-to-date 26 ones 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 at S4 was down 8.3% on the net revenue level so you can see the delta there and I'd expect that Thank you for watching!

17:00 I don't want to dominate, but I just want to follow up on that. I hear what you're saying on tech, hyperscale and stuff like that. I mean, some of your peers have suggested that their tech clients are kind of stabilized a bit, but it is polarized. Are you not seeing any of that at all in your client base?

17:18 When you say polarized, what do you mean?

17:21 Well, some are down still, some are up now.

17:25 I don't really call it polarising, but if you're saying varied, yes, 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 know, you're thinking about our major tech clients. There is a difference between each and every one of them.

18:11 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 account they become more prone to outsourcing so it does vary but I think generally what we're saying is that the tech companies remain it's not hesitant it's their priorities are building out capacity and Thank you.

19:09 We'll now take our next question from Julian Roche of Barclays. The line is open, please go ahead.

19:34 Yes, good morning everybody. The first one is, to be blunt, on one end you said you have great products, strategy and talent, on the other end, organic continue 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, right? 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 products are actually not resonating with clients? What's going to turn this ship around? That's my first question.

20:19 The second one is on net interest. So page 14, you give 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 on 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 from 42 in Q3 last year and in the first half it was 42 and 42 so it looks that actually tech clients are doing better than the group this year so can you confirm that? Thank you.

21:07 Okay Scott do you want to deal with the last one first?

21:12 Yeah, I'll come back to you on that, Julian, and look at the underlying figures, but I think it's us increasing share maybe on some of our clients rather than overall growth, but let me come back to you on that.

21:26 Okay, and then on net interest?

21:28 Yes, I mean, we don't normally give guidance, so it's a bit early for next year, Julian, but just so for this year, we're saying 19 to 21 million, Nick, and we are obviously looking at our refinancing, but next year at this stage, a bit premature, but I would be happy to sort of say 15 to 16 at this point.

21:48 Okay, and coming back to you, we think the go-to markets, particularly on the content side of the business... Ostril on the data analytics and media side also we think the go-to markets have traction but I think the answer to your question Julian is it's highly competitive and pricing and commercial terms are really important and given the environment clients are taking significantly longer periods of time to make decisions and simply put we're just not winning enough in our current configuration so we really have to up the conversion by using all the means that we have that go to markets our focus on AI which I think Thank you very much.

23:09 Thank you very much. and the AI transformation products or services that we have through Monk's Flow. They do get considerable traction in presentation and conversation. It's a question about delivering it at significant scale. So I think we have to keep plugging away.

23:46 Okay. Well, I mean, you kind of relaunched yourself Thank you for joining us.

24:05 I think those that operate in the area are continuously reinventing. You see it in all the LLMs and lab models that are being put out there. There's continuous reinvention. The answer to your question is you're continuously reinventing, reformulating, trying to develop more intelligent models all the time. So it's a moving process. Our biggest client is in the forefront, I would say our top client.

24:50 three or four clients are in the forefront of AI transformation and they are all using their own technologies and new technologies to develop new formulations literally every day, every week, every month so it's continuous. Monk's Flow is continually Thank you. Thank you. Once again, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Thank you.

25:55 We'll now move on to our next question from Richard Dushnell of Private Investor. Your line is open, please go ahead.

26:02 Yes, hi. You say that the net debt is 76 million, the pro forma training 12 months is therefore 0.7 times EBITDA. That suggests over 100 million in trailing pro forma EBITDA. How do you go from that to 85 million forecasts for the end of the year?

26:37 So that reflects the stronger quarter in Q4 of last year, but you're right in your analysis that the trailing EBITDA is 105. What we've said for the year is that we will be in excess of 85.

26:56 Right, so quite a substantial drop in the fourth quarter.

27:03 Well, on a like-for-like basis, on the fourth quarter, the fourth quarter of last year was a heavy fourth quarter. And we've said that the seasonal pattern between Q1 and Q2 and Q3 and Q4, it's a heavier Q3 and Q4 as usual, but not as heavy as usual. So the seasonal profitability has shifted.

27:35 Right. I mean, obviously, everybody's aware of the change in the weighting between the first and second halves. Was there any accounting change? No. Okay. All right. Thank you very much. Thank you. Thank you, and we'll now take our next question from Andy Ranton of Cavendish. The line is open, please go ahead.

28:10 Thank you for the presentation and pretty pleasing to see the progress on the due leveraging side. There's quite a few other players in the market there where that is still a way around their necks, so good to see that coming down. Do you comment a little bit more on where you think margins can go in this environment? You continue seeing that spending higher towards that 20% level. We sort of talked a little bit about war. Are things quite tight already as they are?

28:35 Sorry, what was the last bit?

28:37 Are things quite tight?

28:38 Can we go more on that? Okay. So it's not rocket science, I think. Our stock cost to revenue ratio for the year, and so for the first three quarters, is about 71%. The averages, and when we talk about the averages, we're comparing ourselves with substantially different companies, to be fair. And the listed companies that you can compare with have got substantially different profiles. But if you take their averages fully loaded with incentives, about 65%, and without incentives, about 62%.

29:25 So incentives tend to be about 3% or thereabouts short and long term of net revenue. So if we're at sort of 13 or 14, whatever, and we're at 71, if we could get to the industry average of 65, it's another six points. And that's where it is. We're running at... Property costs, lower property costs to revenue levels than we have been historically. If you went back in time, pre-COVID, property costs as a percentage of revenue was much higher than it is now.

30:13 If we go back, as we're planning to do, to more in-house, more in-office activity, the three or four days a week, Thank you very much. and the use of our resources and the use of our hubs in particular because we have hubs in Latin America in EMEA and in APAC which we use effectively but we probably could use even more effectively offshoring activity at lower cost to clients and lower cost to ourselves so I think there is more to play for and the range is in is in that range it's between the 13 and 14 and 20 indicated by that staff cost of revenue do you wanna no I agree so I think you know we have you've seen we've taken quite a lot of cost out over the last 18 months

31:28 and there is still more to do but it gets you know it gets harder but we will keep looking at it and evolving it as well as what Martin said about the property looking at that so there is definitely room to increase the margin thank you Thank you. With no further questions from the line, I will now hand it back to the management team for closing remarks.

31:58 Thanks, operator. Thank you very much. Thanks for joining us for Q3. We'll be reporting the full year when in February?

32:07 Second of March.

32:08 Second of March next year. So no doubt we'll be in touch before then, but we'll have a formal presentation on the second of March next year. Thank you very much.