Shares in Martin Sorrell’s S4 Capital tumble after profit warning

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Shares in Sir Martin Sorrell’s marketing group S4 Capital dropped by a fifth after it warned that profits would be lower than expected this year as clients continued to tighten marketing budgets.

The company said on Monday that clients were “very focused on the short term”, blaming challenging economic conditions for their increased cautiousness.

S4 Capital’s warning follows disappointing results from US-based advertising agency Interpublic on Friday. Interpublic’s shares fell 11 per cent after it cut its outlook for the year, dragging shares in other marketing groups with them.

Rival Omnicom also reported weak earnings for the quarter last week, blaming the impact of economic uncertainty on its clients and sending its shares tumbling.

Advertising groups have been hit particularly hard by big-spending technology groups cutting back marketing budgets, with many executives warning that the rest of the year looked equally tough due to fewer big product launches in the sector.

S4 Capital said net revenue in the second quarter was below expectations, particularly in May and June, reflecting challenging conditions for clients, “especially those in the technology sector”, which make up about half of its revenues.

The company is now targeting like-for-like revenue growth this year of 2-4 per cent, rather than the previous 6-10 per cent range. Profit margins will also be slightly lower than expected.

The results will be a fresh blow for investors in S4 Capital, who backed Sorrell’s vision of a digital advertising model that involves using data to create, produce and distribute online and social media content.

The company was forced into a similar profit warning this time last year after an embarrassing delay to its annual results that was blamed on financial control weaknesses, staff turnover and a lack of documentation.

Shares in S4 were down about 20 per cent in Monday morning trading, leaving it with a market capitalisation of £653mn.

Sorrell on Monday said he was “not pleased” with the trading update. “Its lower growth than before. The tech sector has found growth a little bit harder to come by; [executives] more hesitant to commit.”

The former WPP boss has bought up dozens of smaller digital media groups in the past five years as part of an aggressive acquisition strategy.

Sorrell added that the group had now paused acquisitions while it integrated the various companies acquired over the past few years, with its low share price now making it difficult to do deals using its stock.

The company’s core “content” business — the more traditional creative advertising and marketing operations that make up about 60 per cent of revenue — had been particularly hit this quarter, it said.

S4’s net debt is expected to rise this year — albeit in line with a targeted range of £180-220mn — owing to cash payments related to these acquisitions. But it said the balance sheet remained strong with sufficient liquidity and long-dated debt maturities and there would be no further merger payments next year.

Rival British advertising group M&C Saatchi on Monday announced that chief executive Moray MacLennan would retire, with former Future boss Zillah Byng-Thorne acting as executive chair from September. Byng-Thorne became non-executive chair earlier this year.

M&C Saatchi this month also blamed a challenging trading environment for a small decline in like-for-like net revenue for the full year.