Sectors: Creative, Media & Technology

One is in high spirits thanks to accelerating growth. The other has seen its share price tumble to a record low. As Stagwell and S4 post their Q3 results, Green Square’s Barry Dudley examines the reasons behind their starkly different performance in his regular holding co results round-up. Off the back of a 13.5% decline in net revenues in Q2 comes a like-for-like drop of 12.6% in Q3 for S4. No wonder Sir Martin Sorrell, S4’s executive chairman, had a somewhat dour demeanor during his firm’s earnings call. Global macroeconomic factors, including high interest rates, were referenced. But S4’s fundamental challenge continues to be its dependence on technology clients with one client in particular pulling down its results. The outlook has been revised down to a low double-digit reduction in full-year year like-for-like net revenue – so down at least 10% against 2023, when put in plain English. Which is going to lead to a “significant reduction in the number of Monks.” Staff, that is. The Content division, S4’s largest, saw a drop of 9.1% in net revenues for the quarter. Data & Digital Media was flat, but Technology Services was down a thumping 42.1%. And by geography: Americas were down 14.5%, APAC down 21.2%, with EMEA up slightly by 1.3%. Scott Spirit, S4’s chief growth officer, talked through its “addressable market,” which I thought would add further color to why it is finding trading so tough… in 2024 ‘digital media spend’ is forecast to be up 8.7% (7.8% in 2023) and ‘ad revenue growth at the 5 main platforms’ is forecast to be up 15% (10% in 2023). Sounds like a pretty good addressable market to me! However, ‘Digital Transformation Service’ is projected to decline by 0.25% (compared with 5.2% growth in 2023). But the most fascinating numbers were in a table that showed the number of clients S4 had in four different size bandings for the year 2024 and for the same period in 2023. In 2023, there were 12 clients with revenues of more than £10m and 12 clients with revenues of between £5m and £10m – in 2024 the respective number of clients were nine and seven. As I’m pretty sure S4 hasn’t lost (m)any major clients, so that means there has been some sizeable cuts in spending. What is possibly more troubling is the picture at the other end of the scale: clients with revenues of between £0.1m and £1m have increased from 349 in 2023 to 390 in 2024. In tricky times, it is not unusual for businesses to take on smaller clients, or smaller projects than they might normally wish to in order to fill a sales gap. Sometimes this can also be the wrong type of work. There may simply be no choice: bills have to be paid. But this can create a vicious cycle where your resources are used inefficiently across too many things and then you don’t have the capacity or the right mindset to start working on converting the next £10m+ whopper. Spirit went on to say: “On the positive side our progress in new business, particularly driven by interest in our Monks.Flow AI offering has helped drive an increase in clients at the top of the funnel which we hope to develop into larger relationships in 2025”. Fingers crossed. Then there was Stagwell, with its waxed surfboard. If S4 has the challenge of its dependency (44% of revenues) on the Technology sector, Stagwell has the upside of a strong Advocacy practice which benefited from a US election that supposedly saw a combined cost of $3.5bn around the Trump and Harris campaigns. Stagwell’s Q3 organic net revenue growth was 7.6%, or 4.6% if you exclude advocacy work. All of its ‘principal capabilities’ saw organic growth with Stagwell Marketing Cloud Group up 23.3% and Digital Transformation up 14.5% – the latter a particularly stark contrast to S4’s fortunes. If the US, organic net revenue growth of 10.8% was helped by the election. I suspect the UK’s decline of 10.1% was due in part to clients holding back spending whilst they waited to see the outcome of the recent budget. ‘Other’ was down 0.9%. Mark Penn, Stagwell’s chairman and CEO, said: “The third quarter results show us returning to industry-leading growth. We believe we are poised to deliver double-digit growth in the fourth quarter and will be well-positioned for 2025. We are reaffirming our full-year guidance today after a more moderated start to the year. We are accelerating into the back half. Our new business momentum continued as we won our single largest deal to date with a global tech company and have expanded our work with major tech companies this quarter by 30%. Our tech company relationships have come back strongly. We posted a net new business figure of $101m, bringing our LTM new business to $345m, another company record. This was driven by a new business pipeline, and increasingly larger global pitches”. One of the share prices dropped 15.86% during the trading day of the announcement, the other jumped 2.95% – I’ll leave you to guess which was which. But I know which chairman I would rather have had a cup of tea with after these announcements…

The UK has been waiting 14 years for a Labour budget and, as expected, a rise in employers’ national insurance has stolen many of the headlines, but there was much more. Green Square’s Tony Walford asks if agency leaders are in for a bumpy ride in 2025 as a result. This afternoon, a client compared the budget to one of those fairground ghost trains where you’re promised an absolute bedlam of horrors but, once it starts rattling along the track, it’s all a bit lame. I have to say she was bang on the money, but there were still some nasty twists. The first thing that’s quite irritating is that in scaring folks by largely keeping schtum on what would happen regarding capital gains tax (CGT) and inheritance tax (IHT), while promising no rises in income tax, corporation tax and VAT, Rachel Reeves led a lot of business owners and individuals to take major life decisions in the short term based on conjecture. Last month, in a piece in The Drum, I countenanced against agency owners and shareholders taking a discount to close a sale pre-budget in case the hit to CGT wasn’t as bad as expected. It had been mooted that it could be aligned to income tax, so worst case 45%, but today’s hike from 20% to 24% for higher and top-rate taxpayers is right at the bottom end of expectations. Business asset disposal relief (formerly entrepreneurs relief), which gives qualifying business shareholders a reduced tax rate of 10% on the first £1m of gains, is being held until April 5, 2025, when it will rise to 14% and 18% in 2026. Those that sold quickly and at a chunky discount may rue the day, but I don’t write this with a smug ‘I told you so.’ The government fueling expectations of a Halloween horror-show budget with many being plunged into the depths of hellfire, when in reality it’s a few burnt marshmallows around the fan heater, is a very poor show. The lack of transparency was pitiful and the cynic in me would think it was done on purpose to drive the tax grab up between July’s election result and today’s budget through fear, with the huge time period between the two cementing this conspiracy theory further. The good news is we now know what the rates are and, as it’s not that bad, we don’t foresee a big impact on agency M&A or ongoing investment. Indeed, those qualifying shareholders in a sale process will still save £40,000 in CGT if they get it closed by April. Those in private equity firms that invest in the companies they fund personally will see a relatively modest rise of 4% in their CGT rates. – again, not ridiculously penal, and I’d like to think it won’t impact investment. The real kicker for all businesses however, and particularly smaller ones already struggling with staff costs, is the increase in employers’ NI and the reduction in the threshold from next April. Businesses currently pay employers’ national insurance of 13.8% on every employee’s salary once their salary exceeds £9,100. This is a direct cost of employment and the increase in employers’ NI to 15% (and threshold reduction to £5,000) will have a direct impact of at least 1.2% on the total salary bill of virtually all businesses that employ staff. There is some light for businesses that have four or fewer employees on the national minimum wage who will get an additional £5,000 relief, but this is unlikely to be of any comfort to the vast majority reading this piece. Staff costs are an agency’s biggest single expense line, with a key ratio being staff cost to revenue and the golden target being somewhere between 55% and 60%. Many agencies have been struggling to even get down to a ratio of 60% in recent times, particularly as salaries have gone up with the cost of living while clients have pushed back on fee increases. This additional levy is very unwelcome and if firms can’t pass the cost on to their clients, they will need to find savings in the form of reducing discretionary spend. This could include agencies revisiting their own marketing strategy, holding recruitment, cutting various internal budgets and, in the worst case, reducing headcount. On a macro view, clients will also be suffering the NI increases and the broader impact of higher staff costs and resulting lower profitability could lead to reductions in marketing budgets. These are often the first to be cut in tough times and last to be reinstated when things improve and will be a double-edged sword for all of us in the marketing industry. There were other changes, of course, but the employers’ NI twist in the ghost train track is the one with the biggest capability of spilling a lot of folk from the carriages. Let’s see how the upcoming impact pans out as we head towards the next tax year. Read more

With Halloween just around the corner and the IPA’s latest Bellwether talking of ‘stagnating’ marketing budgets in the UK, a fearless Barry Dudley of Green Square looks at Omnicom, Publicis, Havas, IPG and WPP’s Q3 results to see what horrors lie within. Both Omnicom and Publicis released their Q3 results last week and, despite some pretty mad things going on in the world right now, I’d say they are pretty good. Omnicom reported organic growth of 6.5% with revenues of $3.9bn, up from $3.6bn in Q3 of 2023. Key to this were a 9.4% increase for Advertising & Media and a very impressive 35.3% jump in Experiential. The Healthcare and Branding & Retail Commerce disciplines struggled, however, with 1.1% and 5.4% declines respectively. The latter is surprising as retail has been a hot area of late, with agencies such as Next15’s SMG roaring ahead. All geographies saw growth of between 6.5% (US) and 24.8% (Middle East & Africa), except for Other North America at 1.5% and a decline of 0.2% in the UK. This UK performance probably reflects the recent findings by the Institute of Practitioners in Advertising that said that many companies were ‘pressing pause’ on their marketing budgets ahead of the government’s budget next week. Publicis also delivered a strong performance in Q3, with organic growth of 5.8% to €3.4bn, up from €3.2bn in Q3 of 2023. Chairman and CEO Arthur Sadoun said: “Once again, we were able to gain market share by capturing a disproportionate amount of client demand for personalization at scale, with our combined media and Epsilon activities growing at almost 10%. All of our regions delivered strongly, with the US at +4%, Europe at +4.9% and APAC at +6.4%, with China accelerating to +12.4%”. Despite the “increasingly challenging macroeconomic environment,” Sadoun is maintaining his typical bullishness by upgrading the full-year organic growth guidance to at least 5.5%, up from 5%. Publicis was also on the front foot with its M&A activity, spending a tidy $1bn during the quarter on acquiring Influential, an influencer marketing platform, and Mars United Commerce, a commerce marketing company. Interpublic Group (IPG) released its results this week, with organic revenue ‘unchanged’ at $2.63bn from Q3 2023 ($2.68bn) – so quite some way behind Omnicom and Publicis. And the outlook for the full year also remains largely unchanged, with CEO Philippe Krakowsky commenting: “Looking forward, we are seeing a strong new business pipeline, for both Q4 activity and longer-term AOR opportunities, and we remain focused on achieving organic growth of approximately 1% this year.” Although this 1% is at the lower end of the 1% to 2% in previous guidance. In terms of regional performance, IPG’s strongest market was Latin America, with 9.8% organic net revenue growth. But its biggest market, the US, saw no growth, while Continental Europe was up 0.6%, UK down 0.7%, Asia Pacific down a lumpy 7.4% and All Other Markets were up 1.5%. That seems like there are quite a few headwinds in quite a few places – I’d hazard a guess that the upcoming US election is a factor for that geography. In times gone by, it could have been the likes of R/GA and Huge to bring bright news for IPG, but both are now ‘held for sale’ with conversations, according to Krakowsky, “a good way down the track.” Next up was Havas, reported within its parent company Vivendi’s results. Yannick Bolloré, chairman of Vivendi’s supervisory board, and Arnaud de Puyfontaine, CEO of Vivendi, said: “Vivendi has reported strong growth in the first nine months of 2024. The revenues of the Group increased by 4.5% at constant currency and perimeter compared with the same period in 2023. Canal+ experienced revenue growth across all of its activities. The performance delivered by Havas was particularly driven by Havas Media and the Europe and Latin America regions.” They subsequently added: “These performances confirm the strength of our main businesses and their capacity to become independent if the shareholders’ meeting convened on December 9, 2024, approves the group’s proposed split project.” A confident message around Havas and its potential independent stock exchange listing in the future. This seems a little at odds with a 2.3% organic revenue decline in Q2 and a 3.5% decline in Q3 against the corresponding periods in 2023, but a Q3 decline was forecast in Q2 mainly due to a ‘partial loss of a big client in the US.’ The hope in Q2 was for a return to organic growth in Q4 or maybe in 2025. Let’s see! Europe and Latin America had solid organic growth at 2.8% and 12.1%, respectively. Asia-Pacific and Africa declined 0.6% and, much like IPG, North America was a challenge with a 7.5% decline. But there was no slowdown in the Havas M&A team adding Hotglue, an Aussie ‘media agency and creative production company’ and DPMG in the UK, an ‘Adobe top 3 recommended independent agency.’ And then there was WPP. Mark Read, CEO, said: “Our third quarter delivered like-for-like growth in net sales, with a strong performance from GroupM in particular. We saw growth in North America, Western Continental Europe and India, though trading in China remains difficult.” He went on to say: “We are encouraged by progress during the quarter, but with recent new business wins primarily impacting 2025 and continuing macroeconomic pressures, our expectations for the full year remain unchanged.” An interesting point for me was the 7% growth in Q3 for its top 10 clients. Winning new clients is the lifeblood of the agency world, both for the maths as well as the excitement and challenge for the talent, and we regularly tell the businesses we work with that their existing clients should be the number one business development opportunity. More results are still to come and I expect the variety of fortunes to be extended further! Read more

There have been a lot of headlines recently around agency reorganizations – think Omnicom, Monks, Deloitte and IPG. Green Square’s Barry Dudley raises some questions that, as we approach the end of the year, agency owners should consider asking themselves. Earlier this week, I was caught by the headline of an article in another revered media business, the FT. It read, “PwC to embark on ‘unsettling’ overhaul.” Having spent some years in Andersen and then Deloitte through the dotcom boom and bust of the late 1990s and early 2000s, I have a lingering fascination for that world. I was expecting the piece to be about another round of redundancies – all of the Big Four accounting firms have been reorganizing and making cuts in recent times. There are indeed 2,700 staff and partners affected by the reorganization, but that doesn’t necessarily mean they will become redundant. So, what’s going on and what food for thought might there be for us in the creative, media, production and tech worlds? This is a UK-only initiative, led by senior partner Marco Amitrano and managing partner Laura Hinton, that is going to “simplify” the business and “reduce duplication.” As any business evolves, it encounters more and more complexity, which can sometimes add unwanted fat that goes unnoticed. Perhaps as a result of growth and absolute size, perhaps as it extends its offer, right through to handling things such as how WFH is built into operations.  

Food for thought 1

When did you last step back from your business to consider whether a reset or reorganization might be needed to perhaps simplify or rethink layers that may have started to make things harder, not easier? Another of the objectives was to “create scale and increase our market impact.”  

Food for thought 2

If you were to carry out some sort of review, what would the levers for scaling and creating market impact be? It’s relatively easy to look for places to cut costs; what’s not so simple is finding new ways forward that take the business to another level, turning the fat into muscle. Hinton told staff, “I know that, for some, change can feel energizing, while for others, it can be unsettling.” With the creation of six new teams, including a standalone ‘digital delivery unit’ covering tech, innovation, AI engineering, cloud and data, it sounds as if there is going to be quite a bit of nervousness for many people.  

Food for thought 3

What lessons did you learn from how your staff reacted the last time you added a new dimension to your business and changed old ways for new ones? Change is never simple, but when the term AI creeps into the mix, it will almost certainly make some mildly terrified – it needs to be planned and confidently managed.  

Food for thought 4

This is a repetition of a food for thought in a piece I did on Next 15 and S4’s results – Whether you think AI is going to turn things on their heads or it’s going to just be something that makes your existing business a little more efficient, you have to have a view. And you have to demonstrate knowledge and confidence around AI to your clients and prospects, not least because they are likely to know less than you!   PwC is clearly going on the front foot with this! So, AI can’t be ignored, but for me, humans possess magical and unique creative capabilities that will never become automated. Jo Bacon, the new Group CEO of M&C Saatchi UK, summed things up really well when she recently spoke to The Drum: “At the end of the day, I think creativity is human; there is a human element to all creativity. AI is an idea that humans have had to train, so a truly original idea cannot be created by AI. “AI does have an important role in any agency’s future, but I think it will be used as an efficiency tool for production and an effectiveness tool; it’ll never be trained to replace human creativity. It doesn’t have that human edge to have an emotional conversation. Of course we’re investing in AI, but we have a lot of great creatives that are still writing great content and great stories. Excellent storytelling is still very much at the heart of what we do here.” Read more

In less than a month, the UK’s new chancellor, Rachel Reeves, will unveil her first budget and Green Square director Tony Walford says agency owners should brace themselves for tax changes that could hit them where it hurts. It’s hard to overlook that Rachel Reeves, the UK’s new chancellor of the exchequer, is preparing the country for significant tax changes in the upcoming budget on October 30. And while Labour has committed to maintaining income tax, national insurance, VAT and corporation tax at current rates, capital gains tax (CGT) and inheritance tax remain in the spotlight. As M&A advisers, at Green Square we are frequently asked about potential CGT changes and how they might affect business owners. While we can’t predict the future, here’s a simple guide to the current CGT situation and possible change – though remember, this is a general overview and specific tax advice is always recommended.

Historic CGT position

Back in 1997, CGT rates in the UK were based on the individual’s marginal income tax rate, with a top rate of 40% for higher-rate taxpayers. Ironically, it was the Labour government that introduced taper relief in the 1998 budget, which significantly reduced CGT on business assets. Under taper relief, the longer an asset was held, the lower the CGT rate and, after two years, the effective rate could be as low as 10%. In 2008, Labour replaced taper relief with entrepreneurs’ relief (now called business asset disposal relief, or BADR), which further reduced CGT on qualifying business sales to 10%, up to a lifetime limit of £1m (later increased to £10m under the Conservatives, but then reduced to £1m in 2020).

Current CGT position

Under the current rules, shareholders who are employees, including directors and founders holding at least 5% of shares for two years (and EMI option holders for more than two years), qualify for BADR. This allows the first £1m of lifetime capital gains to be taxed at 10%, with the remainder taxed at 20%. As an example, if a business founded by three shareholders is sold for £15m, with each owning a third (and assuming they hadn’t tapped into their lifetime gain limit), their £5m gain per person would incur £100,000 in tax on the first £1m (at 10%) and £800,000 on the remaining £4m (at 20%), leading to a total CGT bill of £900,000 per person.

Potential changes

Rachel Reeves has not provided any details on CGT changes, but there’s speculation it could be aligned with income tax or a flat 30% rate or tapered based on the length of ownership (as it was in the old days). Here are a couple of possibilities: 1. Worst case: removal of BADR and CGT aligned with income tax This would be a case of Labour reversing the business growth incentives it had created from 1997 onwards and the shareholders in the above example would each pay £2m at a 40% rate (or £2.25m at a 45% rate) compared with £900,000 currently. If the first £1m remains under BADR, their CGT bill would be £1.7m at 40% or £1.9m at 45% – still a significant increase from today’s rates. 2. Median case: removal of BADR with a flat 30% CGT rate Our shareholders would each pay £1.5m. If BADR is unaffected, the bill drops to £1.3m, still £400,000 more than the current rate.

What would we like to see?

As M&A advisers, ideally the current CGT regime would stay as it is, rewarding entrepreneurs for taking risks and creating employment. But that’s very unlikely to happen. Given changes are inevitable, we’d suggest increasing the 10% BADR lifetime allowance to £3m, with anything beyond £3m taxed at 30%. In the example above, a gain of £5m would result in the same CGT bill of £900,000, but gains over £5m would see higher taxes. A £10m gain would be taxed at £2.8m instead of the current £1.9m. Painful, but not draconian.

When are changes likely to take effect?

Given the £22bn hole in public finances we keep being reminded of, it’s likely that changes will take effect from budget day, October 30. However, there’s a chance they could be deferred until the next tax year, April 6, 2025, allowing time for preparation. For those close to completing a sale, it’s advisable to aim for closure before October 30. But be cautious of accepting a discounted deal just to expedite the process – it would be quite annoying to find the discount given was more than the ultimate tax increase. Additionally, if completing before October 30, pre-paying CGT on future earnouts to lock in the current rate is worth considering. For those planning to enter the market soon, we suggest waiting for the budget outcome. While if changes are immediate, you may reconsider selling depending on the new rates, if the changes are deferred, there’s a tight window to close a deal, with six to nine months typically required to find the right acquirer and complete the sale, so you’d have to move fast. Read more

As holding companies invest millions in building and acquiring complex AI tools, Publicis’s acquisition of long-established shopper marketing specialist Mars United Commerce makes ‘perfect sense,’ says analyst. Launched in 1973 by shopper marketing pioneer Marilyn Barnett, Mars United Commerce today employs over 1,000 people across 14 global offices and leverages its suite of commerce solutions to drive growth through shoppers for global brands, including Coca-Cola, Unilever, Lego, Molson Coors, Samsung and Johnson & Johnson. The acquisition becomes the latest in a raft of purchases aimed at further building Publicis’s commerce capabilities for its clients. In July, the group acquired Influential, the world’s largest influencer agency, while March saw its Publicis Sapient business takeover supply chain consulting business Spinnaker SCA. In 2023, Publicis also acquired the website personalization engine Yieldify. Analysing the thinking behind the Mars deal, Tony Walford, director at corporate finance and advisory firm Green Square, said: “While there has been tons of talk around AI and how it can bring efficiencies, smarter ways of working and lots of agencies are throwing the kitchen sink at it (S4 and its Monks being a notable example), the fact still remains that buying good agencies that generate measurable client revenue growth, from techniques the client understands, still can’t be beaten. “It was interesting that Shopper Media Group (SMG) was mentioned a lot in the Next 15 results announcement on Tuesday. It clearly sees this as a jewel in its crown and I’m proud to say it was a Green Square transaction. SMG is very high growth, has analytics capability, which Mars also has in its Marilyn platform and Shopper clearly works. It may well be Publicis was eyeing SMG’s success and, given Mars is also very strong in the retail arena, it makes perfect sense.” The group’s continued acquisition strategy is being fuelled as a result of delivering above expected figures in recent months. In the summer, Publicis reported bullish Q2 figures and told investors it was raising its 2024 net revenue organic growth guidance from 4-5% to 5-6% after reporting organic growth of 5.4% for the first half of 2024 and a better-than-expected 5.6% in the second quarter. The US (up 5.3%) and China (up 10.5%) were among its biggest success stories in Q2. Bringing Mars into Publicis means its clients can now create and implement end-to-end commerce solutions that optimize strategy and insights, combining first-person data from its Epsilon arm with that of Mars to give a 360-degree view of purchase journeys; combine the scale Publicis Media with Mars’s deep understanding of retail organizations; and merge insights into e-commerce sales and operations from Publicis’ digital shelf platform Profitero. Publicis Groupe CEO Arthur Sadoun said: “Following the acquisition of Influential, we are now in a unique position, able to help clients understand their existing customers and future prospects, and connect that knowledge on an individual level across the new media channels that work hardest for their business: connected TV, creators and commerce. All of this, in its own ecosystem, giving it control over its customer relationships and transparency in its investments and outcomes.” Rob Rivenburgh, global CEO at Mars United, will continue in his role and Publicis has said there will be no major changes in senior personnel within Mars, which will remain as its own branded entity within Publicis Groupe. “Joining Publicis Groupe will help Mars realize our vision of being the preeminent global commerce company faster and more completely,” said Rivenburgh. “We’re excited to have the support of Publicis to bring new opportunities to our existing clients and also to share our connected commerce solution with new clients around the globe. We look forward to writing the next chapter of commerce together.” Sadoun added: “We are delighted to be welcoming Rob and his incredible teams at Mars to Publicis Groupe. Its innovative spirit and proprietary platforms will further connect and complement our existing capabilities to deliver industry-leading, end-to-end commerce solutions for our clients, both online and offline. “With the acquisition of Influential this summer, and now Mars, Publicis is uniquely positioned to help our clients understand both existing consumers and future prospects and connect that knowledge at an individual level to the new media channels that work hardest for their business: connected TV, commerce and creators. All of this, in clients’ own ecosystems, gives them control over their customer relationships and transparency in their investments and outcomes.” Read more  

Sir Martin Sorrell’s S4 Capital and Tim Dyson’s Next 15 both announced H1 figures this week and neither made particularly palatable reading for shareholders or staff. Green Square’s Barry Dudley offers some analytical morsels around these latest numbers. Two businesses with very different operating models – Next 15 is decentralized, empowering the business units, while S4 operates with one P&L. But they currently have a common challenge in their dependence on tech services clients, with Next 15 having 34% of net revenues in this sector and S4 an even bigger lump at 44%. Declines they have seen in this sector are the primary reason that their results are behind where they would like them to be. With all that said, you probably know what picture their numbers are going to be painting, so as well as touching on the maths I am going to try and extract a few lessons or food for thought that you may find useful. Starting with Next 15, its net revenues were down 2.2% organically in H1. Certainly not great, but just under two weeks ago, it announced that one of its biggest clients had decided that it would not renew its contract after the initial three-year term – there have been estimates suggesting that this could be 10% to 12% of 2026’s revenues (which will be the first full year without that contract), as well as hitting 2025’s revenues. Next 15’s share price halved on the news. As part of its acquisition model, which involves paying a proportion of its consideration in its own listed equity (much like S4), there will be quite a few people feeling a little upset right now. Havas and IPG encountered a similar challenge in their H1 results: IPG was hit by the “loss of a large AOR assignment with a telco client late last year” and Havas had a “partial loss of a big client in the US.”

Food for thought 1

Client overdependence will bite you at some stage. Possibly one of the toughest things to fix in any size of business, but certainly something you should always be looking to address. Tim Dyson, Next 15’s CEO, was typically frank and forthright. His description of some of its companies that aren’t doing well as “being on the naughty step” was kind of refreshing and as you would expect, he countered that by calling out the businesses that have been doing well. He half apologized for mentioning SMG quite a few times, which has seen “80% growth” and that’s before it has cracked the US – Green Square acted for SMG when it went into Next 15, so we are very happy with the mentions… Dyson’s frankness got really interesting when he talked about its ‘next Next 15’ strategy and the work it has been doing with the board.

Food for thought 2

Dyson said that as it has bought more and more businesses, its head office costs have naturally grown, but to a level that no longer works. Any group should regularly be revisiting these costs, how central services are provided, evolving how everything fits together. Even a one-entity business needs to periodically review how senior management costs, finance, IT, HR etc are functioning and whether they are fit for purpose. Which may mean hiring as opposed to cutting.

Food for thought 3

Dyson referenced the need to “prune” the number of operating entities as things were sometimes “inefficient,” which would involve reducing the 21 or 19 significant businesses (depending on how you define significant!) down to 12. Just as head office and back office need regularly reviewing, how all your business units, offers and products fit together needs to be continually revisited and evolved too.

Food for thought 4

Another challenge that Dyson highlighted with the growing number of business units was having clients in “multiple parts of the business” and that they are “not as joined up as they need to be.” Existing clients are likely to be the best and most effective sources of new business. You may not have units that need to talk to each other more, but focusing on what more you could do for your existing clients, perhaps for other brands they have that you currently don’t act for, should be new business agenda item number one.

Food for thought 5

In going from 21 (or 19!) to 12 significant businesses, Dyson referenced “culture” as being fundamental when bringing businesses together. Whether you are looking to restructure or not, maintaining a brilliant culture arguably has to be the biggest priority. It’s easy to get lost in numbers when headwinds blow but never forget the talent.

Food for thought 6

In another article on The Drum, I referenced how New Commercial Art’s clear agency proposition was fundamental to the exciting deal it did with WPP. Dyson said at one point during the earnings call: “You guys just are clueless about what our business does.” He rightly stated, however: “We need to solve that.” Imagine you had one minute in a lift with Tim Dyson to explain what your business does and why it is exceptional…

Food for thought 7

Dyson described an AI capability where something that takes two to three days can now be done in an hour. But what the client receives at the end is the same thing. How do you maintain pricing and revenues with these sorts of dynamics? We’ll come back to this one. Although Next 15 is working through some bumps, I see it as a fundamentally strong business, with net debt below 1x Ebitda, going back to basics. As Dyson concluded: “We remain on the naughty step, but we’re working hard to get off it.”

Turning to S4…

S4’s bumps seem another level bigger. Net revenues were down 13.5% on a like-for-like basis. “Global macroeconomic uncertainty” and “higher interest rates” were cited as factors, but most of the other listed peers have had this too but not been hit this hard. I would argue it’s the “client caution, particularly among, large technology clients” that’s the toughest thing it is grappling with. It reduced the “number of Monks” by just under 1,000 (around 12%) in the last 12 months. While its outlook for the full year talks of revenues being down versus original guidance, it believes operational Ebitda will be maintained. This can only be delivered through more cost savings. And while tech clients in general are a challenge, there was the seemingly inevitable “lower activity from one key client” in that sector that hit hard (see Food for thought 1). Revenues were down in all three existing revenue segments, Content, Data & Digital Media and Technology Services, the latter down 36.6%. The operational Ebitda margins for these segments were 2.6%, 15.3% and 35.7% in H1 2023, respectively. These changed to 6.9%, 18.5% and 12.4% in H1 2024. So maybe not a huge surprise to hear that there will be two segments moving forward – Marketing Services and Tech Services (see Food for thought 3 and 6). But the standout section of the earnings presentation was Section 4: Artificial Intelligence. Scott Spirit, chief growth officer, stepped in for Wes ter Haar, who was in client meetings, to walk through what S4 is doing here. It was impressive, pretty much what I imagine GM was taken through when S4 pitched for (and won) work from that client. This demonstrated front foot, top to bottom embracing of AI and what can be done with it, what’s possible. Next 15 is marching ahead here, too, but Dyson started his talk around AI by saying: “We can’t avoid AI.”

Food for thought 8

Whether you think AI is going to turn things on their heads or is going to just be something that makes your existing business a little more efficient, you have to have a view. And you have to demonstrate knowledge and confidence around AI to your clients and prospects, not least because they are likely to know less than you! This brought things back to Food for Thought 7 – pricing. There was talk of moving away from “time and materials” (but not completely) and to an “output model,” “license fees” and “price per asset.” These are tough things to make happen and getting away from just time and materials has been an objective for decades, but now the opportunities to genuinely have a case and a model to shift the pricing model really exist. S4’s full-blown embracing of AI is typical of Sir Martin – his macro and future view of the industry has always been respected and is more often than not right. His challenge here is the timeline to get the model right to deliver stand-out results in the future as the market heads the way he foresees when he has the financial markets wanting returns and answers right now. Never underestimate Sir Martin. Read more

Green Square’s Barry Dudley analyses how Adam&Eve co-founders James Murphy and David Golding have done it again as they sell NCA to WPP. On February 11, 2020, three people incorporated a company, each holding one of the three shares that made up the whole of the issued share capital. Just one month later, on March 11, the World Health Organisation referred to the spread of Covid-19 as a ‘pandemic.’ They say a time of crisis is a smart time to start a business. Judging by yesterday’s announcement that WPP has acquired New Commercial Arts (NCA), it seems David Golding, Ian Heartfield and James Murphy are very smart. They started with a proposition of “uniting brand and customer creativity to make brands more desirable and easier to buy.” When I headed to the NCA website, it was no surprise to me that they’ve stuck to this – “brand communications” and “customer experience” flash up first, followed by “more desirable” and “easier to buy.” They know what they are good at and they do it very, very well. Having clarity and consistency of offer seems very obvious, but, more often than not, when we at Green Square first spend time with a new client, we find ourselves trying to decipher what they actually do and what sets them apart. There’s no confusion with NCA. So you can be clear, consistent, creative, award-winning, with happy clients – but can you balance all that with making money? Let’s take a look at how NCA has done. The average monthly number of employees in its first 10-and-a-half months trading to December 31, 2020, was an impressive 20. Even more impressively, it had amassed £2.49m of cash and made a profit after tax of over £0.5m. Through 2021, its average number of employees increased to 31, it had turnover of £16.5m, a gross profit of £6.9m and an operating profit of £3.5m (a staggering 51% margin). Cash at the end of that year was a ‘mere’ £5.4m (cash, plus bank term deposits). Another 20 heads were added in 2022, taking the average for that year to 51. Turnover of £34.2m, gross profit of £10.2m (an increase of nearly 50%), but operating profit was down slightly on the prior year at £3.2m as I suspect it played catch up with investment in operations and infrastructure. Yet the year-end cash position stood at £12.5m – that’s some seriously impressive management of working capital, probably helped by clients paying in advance for production costs (and possibly media). The average number of employees for 2023 was up by 12 to 63. Turnover dipped a little, but, most importantly, gross profit was up another 25% to £12.7m. And an operating profit of £3.4m. Those of you who haven’t switched off from all these numbers may be saying that their margin has been declining. You’re right, but arguably it is moving towards a more sustainable place with an operating profit margin of 26.7%. And cash … £12.1m. So, I’d say it has done pretty well. Another thing it has done pretty well at is building a quality management team and aligning that team through equity. The three initial shareholders may have founded NCA, and I’m sure bring their respective forms of magic dust from time to time, but they’ve put equity into the hands of many others – Murphy and Golding equally share the first £1m of any sale proceeds, six other shareholders join them at differing percentages in the next £39m and there are probably at least 10 more that participate in anything above £40m of sale proceeds. Given that they were likely to have had a big lump of surplus cash that will have been paid out as part of the deal, I am sure that the £40m mark will have been surpassed and who would bet against the total deal value at the end of their earn-out being greater than the £100m+ that was reportedly achieved by Adam & Eve when they were acquired by DDB? The parallels with that deal aren’t just financial. When Adam&Eve went to DDB, it was to leverage the energy and entrepreneurialism of Adam&Eve through DDB’s scale – arguably to reinvigorate DDB. Murphy is to become CEO of Ogilvy Group UK… And I wonder what Sir Martin Sorrell may be thinking. Many moons ago, when he was CEO of WPP, it brought a legal action claiming that Murphy, David Golding and Ben Priest, the founding partners of Adam & Eve, were in breach of contract when they set up the agency – it alleged they approached staff and clients of their former agency, RKCR/Y&R (part of WPP), while still bound by the terms of their gardening leave. WPP won, received an apology an out-of-court settlement. I think WPP has won again. Read more