S4 Capital plc (SFOR) Earnings Call Transcript & Summary

[Audio Gap] That's obviously a large chunk of these revenues go to the cloud computing players, so Google Cloud, AWS for Amazon, Azure for Microsoft. But again, there are significant services revenues here for our data practice around data engineering, systems integration, cloud migration, analytics, visualization, et cetera. And this is not an exhaustive analysis of all the components that make up our addressable market. But hopefully, it illustrates that there is a multi-billion dollar opportunity, and all parts of it are in serious growth mode. The final chart on the bottom right there shows the revenues of the top 25 advertising groups according to AdAge. This includes all the holding companies, includes the digital parts of the consulting companies such as Accenture Interactive or Deloitte Digital and many of the large independents. And this all adds up to a $120 billion of revenue, and that's something we're determined to disrupt and win more than our fair share of. If we head down to the next chart, I'm going to cover clients. So go to the next chart. Q3 was a very strong quarter for new business, in particular, 2 wins that I would highlight. You've all probably heard of the BMW win, which is our latest quarter, which Victor and the team at MediaMonks did a fantastic job on, over almost a year of pitching one of the major assignments on digital, creative and production across all the European markets, and we're very much at the center of what they're calling the engine to deliver that. On the digital media side, T-Mobile is a large win for MightyHive. So Pete and the team brought that in, and that's an in-housing opportunity for them. Really an extension of the work that we've done for Sprint, and so that's a great additional win for them. Other clients, as you can see on here, we have St. Jude's Hospital, also some in-housing work; Shopify doing a lot of work for them out of Canada; Klarna, which is a very interesting fintech platform; Mercado Libre and Whirlpool, which are both big wins for us in Latin America across all of our service offerings and across data, creative and digital media; and then Beyond Meat and Sunrun who are disruptors in their respective fields, whether that's FMCG or the energy sector. And then on the expand side of things, we continue to win assignments for our major clients. So you can see many of them down here and continue to expand our remit to all of those clients. If you head to the next slide, you will see our client portfolio. So this is based on 100% of our revenue for the first 3 quarters, and it's very similar actually to what you've seen in the previous 2 quarters. Actually, technology has had a slight uptick, so it's now 55% of our revenue and something we'd certainly like to maintain because those are the companies that have been growing very solidly through COVID and investing heavily in marketing. As you'll see the other sectors, FMCG, another decent sector for us, something that's also done well during COVID. And you will see -- I would imagine in the next quarter or 2 an uptick in auto as the BMW revenue starts to kick in. If we head down to the next slide, I'm going to cover what we've been up to in the merger side. So head on to the next slide. We've done 3 mergers in the third quarter. So in July 2020, we did Orca Pacific, which is the full-service Amazon agency based in Seattle. In early September, we did Brightblue, which is the econometric measurement and modeling company based in London. And then in late September, we announced Dare.Win, which is opening up the French market for us. So [ Walian ] and his colleagues on the creative side of the business. We continue to have a strong pipeline in M&A. We have several similar-sized deals and some small and midsize deals in due diligence right now. And we are seeing significant interest, partly, I think due to concerns around tax laws changing in markets like the U.S. and the U.K. But there is certainly some pretty frenetic activity out there and a few interesting larger target sort of that are on the market right now that we're looking at; particular focus in data and digital media, expanding our capabilities there; couple of geographical opportunities in markets like Germany; and then further expansion into e-commerce and digital transformation. And with that, I will hand you over to Martin for the summary.

Okay. Thanks, Scott. Thanks, Peter. So let me just try and summarize on the last slide before the Q&A slide, where we are. I mean firstly and most importantly, our people and their families are generally safe and mostly still working from home. So look, the picture is a little bit different from where you are talking about. For example, in Asia Pacific, I mean, probably about 25% to 50% of our people are in the office. In Western Europe, it's probably about 10% or 20%. And then in the Americas, both North and South, it's much more limited. Obviously, the news about the vaccine, the Pfizer vaccine, a few minutes ago will have an impact. And that's very much in our planning for next year, which I'll come onto in a second. Broad diversity, equity and inclusion programs have played a big part of our activities in the first 9 months of this year. And we have 40% people of color representation throughout the company and the gender balance. But there is clearly more to do in the Black community. We're about 5% to 6% Black population in the United States in the various parts of the country in which we operate in. There was some lower and some higher in California. The proportion is about 3% or 4%, 5%. Within New York, for example, it's 25%. We've committed to represent the communities in which we operate. And so, obviously, we have to up our game, and we're doing that with our hiring and education programs, and, in particular, the minority programs, the Black minority programs that we already instituted around high schools and Black universities. So a big effort in that area. In terms of Q3, as Peter laid out, very strong performance, both in comparisons to the tech companies, which we are more aligned with, and in the advertising holding companies, a 23% performance against down all the holding -- ad holding companies of around 5% to 10%. And we're now back to our pre-COVID levels of performance in January and February in terms of revenue growth and indeed margins and reaching our targeted performance. We said that we had a fighting chance of reaching our 3 -- our recent -- other 2-, 3-year plans in doubling the size of the company over 3 years, and we now think that we are in a very strong position to do that. And Q4, as Peter also said, is on track to deliver continued strong double-digit top line and bottom line performance and target margins for 2020. We don't share the uncertainty that the ad holding companies exhibited in relation to Q4 and the impact of the increased lockdowns, particularly in Western Europe, might have. We see a continuation of digital activity and digital disruption. And we believe we have an even stronger fighting chance, as I referred to you before, delivering the 2020 3-year plan to double the size of the company organically. Our new plan for '21-3 also embodies exactly the same objective, doubling the top and bottom line over 3 years. That implies about a 24% growth in the top line going into the budgets, for example, for next year, and maintaining the 20% EBITDA margins after central cost. So strong margins still, which, as we indicated, have improved in Q3, and then back to where we want for the full year 2020. The budgets for 2021, as I said, are showing growth -- like-for-like growth of 25% and bottom line growth at similar level and then consistent with all our 3-year plans. We think that 2021 looks like 2020 -- 2010 in terms of performance. So you may recall that the subprime crisis and the great financial crisis of 2008 in September resulted in the TALF program, which took Paulson a fair amount of time to negotiate with Congress. They came in, in March of 2009, and then 2010 surprised on the upside. And we think the same for 2021. I was just looking at the latest forecast for GDP -- global GDP for next year, and they look to be around 5%. I think Goldman is going for 6% next year. And increasingly, for 2022, we're looking at 3% to 4%, which is stronger than I thought where we're going to be. So I certainly think that '21 will have macroeconomic tailwinds. The vaccine developments are obviously crucial. In our planning, we've assumed that a vaccine is approved, available, distributed, and people are being vaccinated with another issue by the second quarter of next year. And that looks now pretty feasible. And there are micro tailwinds helping us. Our whopper, BMW and Mini Europe, which we spent some time this morning with Victor on our European and Asian call, talking about and indeed the win that Scott referred to in digital media around T-Mobile following the Sprint in-housing a year or so ago. So that -- those tailwinds will help our growth next year, and we believe we're in sight of a further whopper, as we call them. That is a client accounting for more than 20% of our revenue. We have 3 major ones at the moment. Google; a second tech client, which we have NDA-ed on that you can imagine who that is; our third being BMW. And we believe we're on the cusp of a fourth and maybe even a fifth as we move into next year in terms of land and expand strategy around another tech client. So we think by the end of this year going into next year, we will have 5 -- close to 5 whoppers. Three of them will be tech clients, 1 in FMCG and 1 in auto. This all represents concrete evidence of client conversion at scale, which is the objective for 2020. 2018, you remember, we were talking about brand awareness; 2019, brand trial; and 2020, the beginning of client conversion at scale and achieving and making more significant progress on our 20-squared client objective. That is to have 20 clients, $20 million revenue or more. As Scott said, the merger pipeline is very strong and active, particularly given the concern around Blue Wave and the potential tax sites. Whether that comes to pass or not, I guess depends on what happens in Georgia on January 5. The historical present seem to indicate that we will probably have a Republican Senate with a Democratic House of Representatives, and of course, with Democratic President. And that may actually introduce some balance into economic policy, not too hot, not too cold, maybe the Goldilocks type of economy that we were used to in the world a few years ago. It will be interesting to see obviously how President-elect Biden and Mitch McConnell work out [indiscernible] and we'll see -- that probably will -- I mean the markets are signaling this will indicate some compromise, not the extremes, but some compromise between the 2. Finally, we have a very strong management team with a unitary P&L approach and a heavy integration focus, and we are having -- we will have a heightened unitary rebranding of the firm as a whole to come in early 2021, which celebrates the 20th anniversary of MediaMonks. So, that's the background. Fraser, I think we can now move to any questions, if there are any.

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

Congratulations on the terrific results, guys. I mean -- so I guess question for all 3 of you. I mean I'm curious, obviously, pretty interesting announcement this morning with regards to vaccine. As you guys were talking to clients about their planning for next year, I know this lines up nicely, Sir Martin, with your view in terms of macro. Like are they doing basically decision tree analysis and saying, if this happens, then marketing goes to x? Like I'm just curious, like what's your view is, like in terms of how fast, assuming we continue to get validation over this. And I guess it's also happening in an interesting time of the year because people are still probably locking down. What they're thinking about for '21?

Yes. I think -- it's very difficult, I think, to generalize, Michael. I think what we're seeing is the more reshaped sectors of what you would anticipate, namely tech and health care, passenger goods and autos tend to be more U-shaped. I think this is -- these developments around the Pfizer vaccine, and of course, there are other vaccines that may play a role too, I think some of the analysts were expecting 1 or 2 right vaccines to be approved by the end of this year. But this does, I think, change the game, and you see that in the market's reaction to planning. Our own planning for what it's worth has been based on the second quarter of next year is being the vaccine introduction quarter. And I think most of the organizations that we talked to have been planning along those lines. The tech companies haven't really opened up their offices or said they wouldn't open up their offices until the end of Q2 of next year, companies like Google and Facebook and indeed Amazon, end of Q1, end of Q2. So I think this is all good news. And it indicates why President Trump was so keen on trying to get news out about the vaccine before the election, and it's interesting that it's gone just 1 week after the election. And I think there is 90% confidence level that dealing with COVID is really interesting. And I think it will be an extremely strong positive for us. And to your point, we will probably encourage clients to be more optimistic. And I think the general feeling I have is that they will want to -- each company will want to move ahead quicker. It's rather like a coiled spring, I think, over the last 6 months. They've been probably damping down and resisting expansion or expansion distorts. I think this will open up those [ figures ] probably faster than we anticipate. Scott, do you want to comment on any client activity that you see out there?

Well, I think I mean that you have to go back to a sort of client exposure chart and understand that, given our exposure to technology clients, that's a sector that's done very well in the past year and I think big plans for next year as well. So I think that puts us in a very good place. Obviously, we then have BMW win, which is a significant one that's going to up our auto category. And we've been winning a lot of business sort of disruptors in the sector, I guess, who tend to invest heavily kind of ahead of revenues to drive that disruption. So I think we're in a very strong place for next year. And I think when it comes to COVID, obviously, there is the dip in March and April. And I think that was -- a lot of that was driven by panic and clients having to adjust to working from home and not really understanding anything about how the virus was going to affect everyone. I mean the reality is -- the irony is the COVID numbers are worse than ever, but I think everyone sort of settled into the new reality. And so with markets going into new lockdowns in Europe, I don't think it's going to have the same drastic effects on advertisers' plans and spend. I think there's a lot more stability in the market now. So I think we feel very comfortable with how things are going to go for the rest of the year for us and pretty comfortable about the planning processes that are in place for next year.

We're responding immediately to this news came out a few -- an hour or so ago. But I mean what's interesting is if you think about the travel and hospitality industries, which are being crippled by COVID, I mean if there is an effective vaccine and if it is going to come in, in fairly short order, let's say, in Q1, Q2 of next year, obviously, this announcement probably drags it further forward from Q2 of next year. That will have an impact on the tech industry, positive impact, because some of the largest advertisers, as you well know, Michael, on the tech platforms and being in the travel and hospitality category. So that will open up. And that's been -- that's not been dormant, and it's not been completely off the radar screen, but it's been pretty low level for the last 3 to 6 months. So I think, actually, this is going to be a quite a significant development psychologically in terms of client thinking. And if they hadn't been doing what you were talking about before, that sort of scenario analysis about what if, and I think many of them have, if they hadn't been doing it before, they certainly will do it now, because I think this will encourage them to take a more expansive position. Peter, anything you want to add from your perspective?

No, I think that's covered. [Technical Difficulty] So yes.

Okay.

Congratulations...