S4 Capital plc (SFOR) Earnings Call Transcript & Summary

So good afternoon from London. I'm joined by Peter Rademaker, our CFO, who's in Amsterdam; and Scott Spirit, who's our Chief Growth Officer, and he's in Singapore. And this is the second presentation we're doing today on our half 1 results at S4. We've had to shorten it because our Capital Markets Day starts at 2:00 p.m. London time. So Scott will be leaving us at about 20 to 2 London time to prepare for that. But Peter and I will be here. And we've got an abbreviated presentation. We made a 2-hour or 1.5 hours recorded presentation this morning in London, which is on our website. And we've abbreviated this afternoon's presentation to results, which Peter will cover; clients and mergers, which Scott will cover, and I'll come back with a summary and outlook and Q&A. So over to you, Peter, to take us through the results.

Thank you, Martin. Good morning, good afternoon from Amsterdam indeed, as Martin just indicated. So I flip to the Page 4. It's called financial performance. I'll try to guide you through. But before I start, I would -- we would like to summarize our first half year as industry-leading progress despite of it, and we're well on track to deliver our full year expectation. Having said that, I want to run through the bullets. The billings, which is our revenue, including pass-through, especially media-related GBP 260.4 million on a pro forma basis. It was GBP 264.9 million. Our revenue, GBP 141.3 million, 61%, up from GBP 88 million last year. In a like-for-like basis, revenue up 7% and on a pro forma basis, 8%. Gross profit are our most important measure, GBP 124 million, 77% up from last year's GBP 70 million and a little bit, and a like-for-like of 12% and a pro forma growth of 13%. Immediately, you see here, and not so much should justify that gross profit is a better measure. But you can see that revenue grew but gross profit grew faster, and that's the result, especially in the second quarter, where some projects were delayed or shifted off to digital. And what I mean with these projects also more the event-driven projects, some TV commercials we produce. That basically stopped, and that was moved over into more digital work and as a result of, our gross profit grew faster than our revenue. Our operational EBITDA was GBP 18 million, which is 87% up. Like-for-like, it was down 6%. And on a pro forma basis, it was down 5%. Main reason for that is, as you may have read in the press release, we maintained our fabric. Of course, we were able to, especially non-business-critical cost savings. But from a headcount point of view, we maintained our fabric, as we call it. Our operational EBITDA was 14.5%, 0.8 margin points up on 2019. And on a pro forma basis, it was GBP 14.6 million (sic) [ 14.6% ]. Our operating profit was GBP 2.5 million, which includes adjusting items of GBP 13.8 million, and these adjusted -- adjusting items relate to acquisition expenses, amortization and share-based compensation. And that was versus an operating loss of GBP 6.2 million in last year in 2019 and a pro forma operating profit of GBP 3 million. The results before income tax was GBP 0.1 million again, including the adjusting item versus a loss of last year of GBP 8.5 million in 2019. And the results for the period, which is the net result after tax, that, of course, again, includes the adjusting items after tax was GBP 0.1 million versus a loss of GBP 8.5 million in 2019 and a pro forma result before income tax of GBP 0.7 million. The adjusted basic net result per share was 2.3p. Last year, it was 0.9p, so in other words, 155% up. And our basic net results per share was 0.1p loss versus a 2.5p loss last year. And on a pro forma, net result was rounded 0p. Midyear cash was GBP 7.2 million, including our term loan coming from 2018, when we did the minimum transaction and including our drawdowns that we did early this year at EUR 35 million, approximately GBP 32 million. We had a -- and from a cash point of view, and I'll come back to that later, we have been operating in a net cash position basically since the start of this year, except for a week or 2, 3. But the main period of overall, we have been operating in a net cash position. Finally, a very good start in Q3. In July, our gross profit is up 18%. Come back to that later, which also means that we're going to deliver or we are well on track to deliver our full year expectation in double-digit growth with a strong or reasonable EBITDA margin. If I go to the next slide, you can see our gross profit performance on a like-for-like basis. When we did -- when we do our budgets, which we typically do in November or in October now November, and also in doubling in size organically, that means a compound growth of approximately 26%, and that's the sort of range where we budget and plan against, and that's what we saw in January, where we had a 33% growth. And February, where we were already immediately confronted with COVID impact in Asia Pacific, dropped to 21%. March at 6%; April, which we consider to be the trough at 3%; May, 5%; June, 11%; and then July, as I just mentioned, 18% growth, so in the sort of the range as we were in February. And if you look at it on a quarter-by-quarter basis, 19% up gross profit like-for-like in Q1; 7% in Q2; and over the full half year, a 12% growth. Now moving to the next slide, our unaudited condensed consolidated income statement. A couple of the numbers I already refer to, will pick a few. This is the reported numbers, the first to come from the left-hand side then the like-for-like numbers from last year and the last 2 comps on the right-hand side are the pro forma numbers on a full financial year basis or at least up until including June. And operating profit of GBP 6.2 million to a -- sorry, that's wrong. An adjusted operating result of 86% compared to -- up compared to last year. A positive PBT, as I just mentioned, of GBP 0.1 million. And if you look at our income tax expenses, although in absolute terms limit, but higher in comparison to our PBT because of some of the nondeductible costs in acquisition-related expenses as such. So still a GBP 600,000 income tax charge, which ultimately delivered on a statutory number of GBP 0.5 million after tax. In the next slide, what we always try to do, especially in relation to the adjusting items. So I repeat the share-based compensation, the amortization and the acquisition-related expenses, we sort of normalize that. So our operating profit in the statutory numbers was GBP 2.5 million, then that GBP 13.8 million added to it. And we try to approach an EBITDA, let's say, in the old world of EBITDA or before IFRS 16, the right-of-use assets. So if we take that all out, our EBITDA in the -- again, in the old definition, is GBP 18 million after central costs and our central costs were approximately GBP 2.5 million, so delivering a GBP 20.5 million EBITDA for this year. And the other items are just, for your information purposes, some reconciliation to the operating profit and the PBT. If you look at the next slide, in relation to our earnings per share. So we had a loss of GBP 4.5 million. But again, if you would take out the adjusting items and take out the tax charge on these adjusting items, our net profit was almost GBP 11 million, to be precise, GBP 10.9 million. And with our weighted average outstanding number of shares of 465 million, that means that we were able to deliver a 2.3p per share as an adjusted basic result compared to last year of 0.9p. In other words, like I said, 155% increase compared to last year. Going to the consolidated balance sheet, a couple of highlights in here. As you can see, our total asset value is now GBP 857 million and approximately 70% is in relation to our merger activities are intangibles that we capitalize on our balance sheet, a big part we are amortizing on an annual basis. And for the rest, we have to take our fair value adjustments, if needed, not necessarily. So we keep on amortizing these. And what you also can see, and that has been much focus ever since, it's always much focus, but especially, there was more focus during the COVID period on our receivables. So in -- although we increased significantly, you see our receivable position decline as a lot of -- as a result of much focus on getting receivables in. And basically, in general term speaking, we have had some conversations with our clients on maybe some delays of payments, which were requested. But we were able to decrease our outstanding position of receivable or, in other words, have a good working capital management. Our net cash, what I just said, GBP 7.2 million, including -- included in the term loan and including or after deducting the term loan and the revolving facility. And in the first half, next to the fact that we concluded the transaction with Circus, we have also settled most of our deferred considerations in relation to prior year's merger activity. And if you would look at the next slide, and I already sort of teed it up with the balance sheet, we consider this as a strong cash flow for the first half. Because if you look at our cash flow from operating activities, which were approximately GBP 37.5 million, that's a sort of in relation to the GBP 18 million EBITDA we produced. So in other words, high cash conversion as well as, again, like I mentioned, our working capital management are our big focus on that. That has helped out as well, delivering a GBP 37.5 million cash flow from operations. And like I just mentioned, with the merger activities and finalizing or settling the last bits and pieces in deferred consideration, you will see in our cash flow from investing activities that we had approximately GBP 45 million cash outflow. So we settled deferred considerations on our activities in shares and in cash because we typically do our mergers on 50% cash and a 50% share basis. And this accounts for, of course, in the cash flow statement, only for the cash settlements in total, including, like I said, the Circus acquisition. So we drew down in early March our revolvers. In the meantime, they have been paid back. And of course, this whole cash flow does not include our share placing, which we did in July, which currently brings us even at a stronger cash balance sheet positions. Moving over to the next slide, our pro forma gross profit and operational EBITDA by practice. Our content practice grew with 77% -- I'm sorry, it was 77% of total and again, 75% in 2019. And our data and digital media practice gross profit was 23% of total against 25% in 2019, a bigger increase in content also as a result of merger activities. Content practice operational EBITDA before central costs was GBP 16 million, which is a 16.5% as a percentage of gross profit. And our data and digital media, operational EBITDA was GBP 5 million in the first half, delivering a 16.9% percentage of gross profit. And my final sheet is the gross pro forma -- the pro forma gross profit by geography. Americas, still the biggest part in gross profit delivery and is also revenue, of course, 72% of total, GBP 92 million around it, and that's up 14% compared to last year. And EMEA, 19% of total, GBP 24 million, plus 7% compared to last year. In our Asia Pacific, activities at 9%, an GBP 11 million contribution, which was up 18%. So this summarizes briefly our half year 2020 performance. So over to you, Scott.

Great. Thanks, Peter. So I'll take over on Slide 14 now. So H1 was a strong time for us from a new business perspective. We drove a lot of growth, and that helped us with our figures and our resilience during the first half of the year. Now we've discussed our land and expand strategy in detail before. And H1 saw us land new engagements with new clients such as Twitch, Bumble, PayPal, Shopify, Verizon, Dole, the LA 2028 Olympics, and some clients under NDA, including a global automotive company in Asia, a global FMCG and a global consumer electronics company. At the same time, we saw significant expansion in clients like Google, Facebook, LinkedIn, HP, Amazon, Netflix, Uber, P&G, Mondelez, Sprint and others. I head on to the next slide. So far this year, 54% of our revenues come from the technology sector. And with the deep exposure to that sector and clients like these and obviously, we have a great opportunity to grow with them given their top line growth. And clearly, our ambition is not to stand still, but to grow our share within them, too. And this exposure to tech is something we want to maintain. We're constantly expanding our tech client portfolio. It's a natural fit and a natural understanding because we, like them, are digital natives. But there's significant opportunities for us in other client sectors, who want to tap into our expertise and leverage our skill set for their own transformations. Now we define whoppers as clients delivering over $20 million of net revenue annually. We currently have 2. Our 20-squared target is a plan to have 20 clients at this level in the medium term. Now there are several clients already in our portfolio on the organic track to become whoppers in the next year or 2. Plus, we're involved in several pitch opportunities with major potential offers, too, more of which we hope to hear very soon. The next slide, this is a section on M&A. So we started the year in January with the merger of Circus in Latin America. And then when COVID started to have an effect in Q1, we decided to balance, protecting our balance sheet and liquidity with a desire to continue expanding our capabilities and our geographical coverage. So we did make some transactions during the COVID period. Now our road map is primarily focused on building out our data practice. So we had Digodat in Latin America and Lens10 here in Asia Pacific, which now give us global coverage on Google and Adobe Analytics. And then more recently, after the H1, we've continued on with Orca Pacific, the full-service Amazon agency; and Brightblue, the predictive modeling and measurement specialist. Now obviously, with our July raise of GBP 112 million, we continue to be active and have a strong pipeline, particularly around data and analytics, specific geographies and e-commerce and digital transformation. And with that, I will hand you back to Martin.

You're on mute, Martin.

You're on mute.

Sorry, sorry, sorry. Thanks, Scott. Thanks for doing it speedily, given our Capital Markets Day in a few minutes. But I just want to summarize and give you the outlook. So I'm grateful to say that all our people, or most of our people, have been safe, and most of them are working from home. There's a regional variation, obviously, in Asia Pacific. A number of people in the office is higher than Western Europe, which in turn is higher than the U.S. But the main point is that we really haven't suffered directly. I mean sadly, a number of our people who lost older parents, older relations, and we will all wish them long life. But beyond that, our people have adapted extremely effectively and well to COVID-19. The second thing is we continue to lead the industry in terms of growth, top line growth, both revenue and gross profit, and indeed in margin. We've got a strong balance sheet with significant liquidity. And we stress tested it and good, I'm glad to report that we've hit the -- or outpaced even the most optimistic assumptions that we made or scenarios that we made at the end of March or beginning of April. We took early cost action, as Peter indicated, particularly in the freelance area in travel and nonessential costs, and we retain flexibility in cost, too. We've got a very favorable client portfolio, 54% of technology. If you add in health care and telcos, we're up to almost 60% in those V-shaped verticals. And we have a very healthy new business record and in deep pipeline, as you will see very shortly. The trends certainly have been accelerated by COVID-19 towards digital transformation and disruption. And we're seeing a larger and larger number of change agents, what we call change agents inside companies, who are not booking any resistance under the direction of CEOs and CMOs and CIOs, CTOs, are not booking any institutional resistance to change. And COVID-19 has clearly accelerated the adoption of our Holy Trinity model and indeed, our integration. So we dropped leases, in some cities we're homeless actually. And when things return to the next normal or new normal, whatever you have it, whichever way you have it, we'll be integrating even faster. And we're ready for the recovery, whichever shape, although we do think it's reverse square root shape with some verticals, that's sort of the general economy, with some verticals V-shaped, U-shaped and L-shaped. And conversion at scale is a priority. 2018 was a half year for us that we're celebrating or will celebrate on September 13, our second anniversary on the London Stock Exchange. But really, '18 was about awareness, generating awareness, '19 was about trial and '20 is about conversion at scale, as we said before. And already, the jungle jams are beating about a significant conversion at scale, which will be announced tomorrow. So we've set a priority of 20 squared of clients. I've unashamedly taken that from Globant, a company I respect and admire highly, and the squared objective is we want 20 whoppers, that is companies that generate $20 million of revenue plus for us. That's about 5% of our revenue base. Our objective is to get to 20. We will have -- well, we have 2, Google and 1 other, which is NDA-ed, which is a major tech company. We will have another tomorrow in another category. We believe we'll have another by the end of the year and probably another 1 organically. So we think by the end of the year, we'll be at 5 whoppers. I'd just point out that if we were to secure 20 at 20, that's equivalent to our revenue base currently of GBP 400 million. So that's the presentation. I would have got about 35 minutes before we're due to depart for the -- Scott has to go slightly earlier. He's got 15 minutes before we go for the Capital Markets Day, so your forbearance on that. So over to you, operator, for questions, please.

[Operator Instructions] And the first question comes from the line of Michael Levine from Pivotal Research Group.

Congrats on the results, guys. Terrific results and great color. A minor point, but was curious just about where you've basically seen the recovery. And I think you've done a good job talking about industries that are going to look more V, look more U, look more L. As you're looking in July and you're looking into the back half of the year, are there any that you think are going to end up being surprising or have been surprising thus far that it performs better than your expectations and maybe some that have performed worse than your expectations?