S4 Capital (LSE:SFOR) Q2 2026 Earnings Call

0:00 Good morning, everybody. This is the first half of 2026 from S4 Capital. I'm actually in New York. Wes is in Las Vegas at an AI conference. Scott is in London with Radhika, our CFO. Five areas to go through. First are the results themselves, which Radhika will just take you back, take you through. Secondly, market momentum from Scott, where we'll talk a little bit about artificial intelligence with a demonstration of what we've been doing. And then I'll finally give a brief summary and outlook, and we'll go to Q&A. So with that as background, over to you, Radhika.

0:53 Thank you Martin. Good morning everybody. I will start with the financial headlines for the first half of 2026. Despite global macroeconomic pressures, technology clients and hyperscalers continuing to further prioritise AI investment and ongoing client caution, disciplined cost management has delivered a very strong first half operational EBITDA with a significantly improved EBITDA margin. Liquidity focus has also lowered our net debt. Net revenue was 308 million, down 6.2% reported and 4.7% like for like. Operational EBITDA was 38 million compared to 20.8 million in the first half of 2025, with a margin of 12.3%, up 600 basis points reported and 710 basis points like-for-like.

1:47 Adjusted operating profit was 35.2 million and adjusted basic earnings per share was 2.7 pence versus 0.2 pence in the first half of 2025. The board has approved an inaugural interim dividend of 1.35 pence per share, 50% of the adjusted basic earnings per share. The company generated 10.4 million in free cash flow and net debt reduced to 66.3 million which is 0.7 times pro forma 12-month operational EBITDA, significantly below the 145.9 million on the 30th of June 2025. The company has now met the reduction of its term loan B target, repurchasing a further 40.1 million euros subject to settlement.

2:39 This reduces the outstanding term loan B to 249.7 million euros. Moving on to the P&L. Revenue for the period came in at £344 million which is down 4.6% on a reported basis and 3.2% like for like. Net revenue for the period was £308 million down 6.2% reported and 4.7% like for like. This reflects what has been a volatile macroeconomic environment, exacerbated by the Middle East conflict in conjunction with technology clients and hyperscalers further prioritising AI investment. In response to these conditions, we have continued our disciplined approach to cost management and the first half EBITDA performance reflects the annualised impact of the cost actions taken in the second half of 2025, which primarily focused on non-billable roles and back-office efficiencies.

3:35 Personnel and operating expenses were reduced by 12.6% on a reported basis. The company's aim is to align personnel cost to net revenue ratios more closely to industry averages. As at the half year, this was 72.2% compared to 79.2% for the first half of 2025. At the end of the first half, the total number of monks fell to approximately 6,150, which was down 11% compared to this time last year and down 3% compared to December 2025. Looking across our two practices, marketing services and technology services, my commentary now is all on a like-for-like basis.

4:21 Marketing services delivered net revenue of 281.9 million, a 4.4% decline, reflecting ongoing caution among technology clients as they continue to further prioritize and increase AI infrastructure over operational marketing budgets. The practice was further impacted by a scope reduction in BMW, which impacted the EMEA region. Technology services generated 26.1 million in net revenue, down 7.4%, similarly impacted by broader macroeconomic headwinds and extended sales cycles. From a regional standpoint, the Americas, which represent 80% of our total net revenue, declined 0.8%, EMEA declined 20.3% and represented 14%, and Asia Pacific declined 12.5% representing 5% of our mix.

5:19 Turning to operational EBITDA by practice, on a light for light basis, marketing services delivered 44.1 million An increase of 72.3% compared to the first half of 2025. EBITDA margins strengthened to 15.6% up 690 basis points reflecting decisive headcount actions and continued cost discipline. Technology services generated 4.4 million up 214.3% from the first half last year. EBITDA margins strengthened to 16.9% and improved by over 1000 basis points underlying the effectiveness of our cost control measures.

6:08 Moving on to the debt and balance sheet slide. We maintain a strong balance sheet throughout the period with strong liquidity and long dated maturities. Our M&A obligations are now largely complete. Stronger treasury management and a focus on liquidity reduced period and net debt to 66.3 million. Leverage closed at 0.7 times net debt over pro forma 12-month operational EBITDA, below our target of 1 times and below our key covenant of 4.5 times. The company met the targeted reduction of its term loan B, repurchasing a further €40.1 million subject to settlement, reducing the outstanding term loan B to €249.7 million.

7:00 Moving to the cash flow. Free cash flow was 10.4 million in the period compared to 16 million in the first half of 2025. The movement was driven by an expected Q1 2026 working capital outflow. This was primarily due to a combination of stronger year-on-year Q4 2025 collections and lower year-on-year Q4 2025 media billings. As collections normalised and trading strengthened, working capital improved in the second quarter. Capital expenditure in the period was 2.7 million, up just under 30% from the first half of 2025 of 2.1 million due to ongoing investments in AI capabilities. Financing costs reduced meaningfully driven by the reduction in our net debt and the average effective interest rate improving to approximately 5.7% down from 6.1%.

7:56 Improved cash management increased interest income to 1.9 million and tax paid in the period was higher at 3.8 million driven by utilizations of tax losses in 2025. Restructuring and transformation costs in the period were 5.7 million, primarily 3.9 million due to restructuring costs and 1.4 million related to our finance transformation programme. Moving on to the net debt bridge, net debt at 31st December was 86.9 million or 79.6 million at closing June 2026 exchange rates. The company generated 10.4 million of free cash flow during the period The company repurchased 85.2 million euros of its term loan B at a discount of 4.9 million euros.

8:48 These movements resulted in a lower closing net debt position of 66.3 million, again representing 0.7 pro forma 12-month operational EBITDA below the targeted leverage of one times. Our capital allocation priorities are maintained from the year end. We have established a clear capital allocation priorities, focusing on delivering shareholder value through first dividends, second targeted debt repurchases and third share buybacks. The board has implemented a 50% dividend payout policy out of adjusted basic earnings per share over the medium term, subject to financial targets being met. We now move on to guidance.

9:34 2026 full year like for like net revenue is now expected to be down mid single digits. Operationally EBITDA remains at the current analyst consensus level of 85 million with operational EBITDA margin targeted to increase by 140 basis points. Year end net debt range has been lowered to 50 to 80 million. In line with our The company has repurchased a further €40.1 million subject to settlement of the term loan B. This reduces the outstanding term loan B to €249.7 million.

10:20 Our forecast net finance expense has been lowered to €19-21 million. Excluding the one-off gain on the loan repurchase. The effective tax rate is expected to be 28% to 30%. Adjusted basic earnings per share will now be in excess of current analyst consensus. With that, I will hand over to Scott for the market update. Thank you very much Radhika. Good morning and thank you everyone for joining the meeting today. I'm going to cover some of the dynamics we're seeing in our wider market and then share some specifics on our client relationships before handing over to Wes for an update and a demo on our artificial intelligence product. As you can see, digital marketing spend continues to increase at significant rates whilst overall advertising spend is growing at around 5%, meaning analogue spend continues to decline. The revenues at the top platforms continue to grow in the high teens, significantly outpacing the market growth. One thing to bear in mind here is that 80% plus of their revenues come from small and medium-sized businesses and they continue to expand their market share there. So their growth is not necessarily being driven by enterprise client spend. The technology services market continues to have lower growth compared to recent historical double-digit performance.

11:40 2025 had just over 5% growth and whilst enterprises continue to invest in areas such as cloud and AI, the outlook for 26 continues to be subdued. The next slide charts the comparison between agency and revenue growth at the main public holding companies, and advertising spend and GDP growth. Digital spend now represents around 70% of the total, and as I mentioned on the previous slide, it's growing at high single digit rates, meaning analogue is in decline. Agency growth dipped to almost 0% in 2025 and has decoupled from advertising spend and GDP growth. One explanation for this is the continued pressure from clients to maintain their media spend but to put pressure on what they call non-working spend, i.e. agency spend. This is particularly the case with technology clients.

12:33 And the next slide looks at the relationship between capex spend and sales and marketing spend at the major tech companies, Amazon, Meta and Alphabet. As you know, historically, almost half our revenue has come from this sector. Prior to 2022, marketing spend at the top platforms regularly grew at 20% annual rates and has now essentially been flat since then. On the other hand, capex spend, particularly on AI and infrastructure, has ballooned in the same period, growing over 140%. And this trend is expected to continue with the hyperscalers already announcing plans to increase their capex spend almost 90% in 2026, and some of them committing to similar increases in 2027 already.

13:20 The tech companies are unsurprisingly leading the charge on adopting AI in their marketing workflows and leveraging it to achieve more for the same or less. We continue to have a very compelling client list with some of the world's leading and most innovative companies. Eight of them are what we call whoppers, and that's revenues of $20 million plus, which continues to be a differentiator for a company of our scale. As you can see, we continue to be skewed towards the tech industry with around 42% of our revenues coming from technology. These are strong relationships that help us attract and retain talent to work on them. Spends per client are slightly down, but essentially stabilizing versus the previous year across our top 10, 20 and 50 client cohorts.

14:07 And the focus now is very much on returning all of them to growth. And with that, I'll hand you over to Wes for an update on our artificial intelligence approach. Thanks. Thank you, Scott. and hi everyone um ai update the last update we did was very much focused on the work and i'll start with a little bit of work today as well um we had this up and running in can about a month and a half ago for google one of our clients at google beach uh very fun use of their gemini omni video model uh which uh honestly is pretty amazing for this type of personalization This is not my actual outfit in Vegas. This is all AI related.

14:52 What I'm going to do today is talk a little bit about our discussions in Cannes. Cannes is one of the two big moments we have every year to put a little bit of a stake in the ground. The other one being CES. And if we go to the next slide, our focus really was how does the technology help clients win the race to relevance? I think we showed last time when we showed a bunch of work that efficiency is table stakes. Efficiency is mostly down to vision and decision making. I think what is more interesting is how does the technology help clients generate more demand capture that demand grow their business grow their brand and to do that well we have to move away from thinking about an ad and more moving towards what we call system thinking the system thinking part is something that we've been proving out with clients over the last six to nine months And if we go to the next slide, we started building it into our go-to-market earlier in the year.

15:52 I'm not sure if people on the call know Adforums as an organization, global organization that brings pitch consultants together to visit agencies in a specific region. They'll visit 30 to 35 agencies, score those agencies on the relevance, relevance to the market, relevance to their clients. Relevance to the RFPs that they see in their pipeline. We did that in May. Monks ended up being scored the number one most relevant agency. This was, I think, quite an interesting takeaway quote, meaningfully ahead of our competitive set. We're of course seeing that play out in some of our pipeline already. These are very connected folks that have quite a meaningful impact on pipeline in general. It's also sometimes a little uncomfortable to be ahead. We do believe in the current landscape.

16:42 It's important to be close to the edge of what's happening because that edge is moving more and more quickly. And I think our ability to stay close to that edge helps us understand that. How the technology evolves, how it dissipates into marketing and what that means for marketing organizations, which are our clients. So that's a little bit of framing. If we go to the next slide, the way we think about growth is through two lenses. One, we need to do work that is loved by humans. That's traditionally how we've thought about advertising, marketing, creative. I think the way people currently interact and interface with content is very different to five years ago, ten years ago.

17:30 People are spending an inordinate amount of time on their phones. I think it's about 13 hours a day. And a lot of that time is spent scrolling. So more and more to be loved by humans, we have to be part of that constrained environment. We have to be part of these micro cycles of attention. And then we need to do work that is preferred by machines. Some of that is about algorithmic media, where there's a massive preference for volume, variation, Variety, Velocity, all of these and of course more and more how do LLMs and agents sort of surface brands within the sort of agentic ecosystem. So that was our main focus during Cannes. What I'll do now and I'll spend about 10 minutes on that is show the environment that we showed our clients a month and a half ago from Monk's Flow I think we should be switching screens now.

18:26 Let me know when it's up. Are we good to demo? Yep, we're good. Thank you so much. So first, a little bit of positioning. Monkflow started as an internal project two and a half years ago. I think we saw early what most large enterprise organizations are now finding out. But pilots don't necessarily contribute to P&L impact. It's very difficult to capture the productivity gains if everybody's piloting. So we moved to very fixed processes, which allowed us to double down on best practices. That process heavy movement, we were early when it came to jumping on agentic workflows. Last year, CanMonkFlow was the first agentic marketing platform. and the positioning of Monk's Cloud currently I think is really quite unique.

19:24 It's not vibe coded, it's not worn off, it's enterprise grade, safe, secure, scalable, auditable trails when it comes to Everything that happens within the platform and environment across your teams. Lots of high productivity per token, really making sure every token counts. But then we operate at a much higher clip than traditional SaaS products who are stuck in 3, 6, 12 month cycles. We launch updates every two weeks because our team is fully agentic enabled. And that allows us to do more specific solutions client to client, which I think is quite unique. The way we think about infrastructure from Munk's flow is three levels. Intelligence, creation, and orchestration.

20:11 And I'll run through that relatively quickly so you get a sense of what we have. It starts with knowledge bases. This is a very easy environment to set up knowledge bases related to clients. In this case, we've set this up for one of our clients, Mr. Mussel, part of SC Johnson. It has all of the brand information. You can upload anything that you want here, structured, unstructured data. We can connect it to live data feeds. Agents are able to use this context to do really meaningful, relevant work. But we're not just creating that level of context. We're also adding agents that are representation of the audiences. So that means you have a series of audience agents, in this case, the Efficient Mum, This is a representation of third-party data. We bring to the table lots of interesting third-party data, partnerships, first-party data if it's available. It means you have the voice of the customer everywhere in your workflow and I'll show what that looks like in a moment.

21:07 Let's say hi to the efficient mom for a moment.

21:10 I need cleaning products that work fast, feel safe around my kids and make my routine easier. You get the drift. insights on this persona where does this persona consume their media what's the typical brand relationship etc etc etc you can start conversations with these personas which can be really useful they're also part of other tools and this is really where we get to the creation piece we can run focus groups with these personas for instance how do you decide to purchase Oh, let me check. That's a question. And then you can select your personas, run that focus group. And what's great about Monk's Flow, my question wasn't great.

22:00 It wouldn't be good at getting meaningful insights back, but that gets translated to actually meaningful questions that then get run through this agenting process. All of these personas are now being interviewed. I'll show you what that looks like. This was one done with four people. All the interviews are available, but more importantly, it creates additional data sets that we can use in our agentic workflows. I think a huge part of what we're doing here is making sure our agents have lots of context to be high performing. For instance, which is quite interesting, We can look at an example here, which means we can optimize content in a predictive manner that really outperforms some traditional algorithmic methods.

22:52 Just really useful to have these agents available. So that is the intelligence layer starts leaning into some of the tools that we have for creation. The most important one of those tools is what we call opportunities. So if you think about doing work that people love, a lot of that is down to the inside to in-channel. Can we capture an insight that is of value? And how quickly can we translate that insight to an in-channel asset? And because of the speed of social, speed of culture, that time is compressed. And historically, that might have taken weeks, sometimes even months. Doesn't really make sense anymore. So a lot of our focus has been, how can we do that same day? What you're seeing here is opportunities that are being pre-prepped by agents.

23:43 So we're capturing data feeds from Reddit, from X, trending topics, news within your category. All of that data is being reviewed close to real time by agents that do the job of what used to be a social agency, social listening, social strategy. These opportunities are already being vetted by your audiences. So you get a sense of who would be interested in what type of messaging. You can vet all of the sources. You even get an idea of initial suggested channels. And this is ongoing, right? These are continuous. You can turn these into briefs if you want as part of your projects. I'll show how projects work in a moment. really meaningful really useful gives you details on things that need a really fast response seasonal has a bit more time of course and then behavioral is bigger consumer change that also helps potentially drive some product development These are really interesting. If you want, you can start putting additional research against some of these opportunities.

24:50 We'll call that IQ. A great example here, for instance, is more information on what it means to be Mr. Muscle in Brazil. That also adds information about your competitive set. Agents are looking at what your competitors are doing, their media spend, their messaging. Again, lots of really useful information that also starts helping you define business opportunities. And then of course, if we have insights and we want to get the end channel, we need a piece of content. I'll show you how that works as well with the few minutes we have left. So part of Monk's flow is also the intent workflow. Why is that useful? It's useful because it allows teams to work together, client and agency, but also agents to be part of that workflow.

25:39 And what I'll show here, for instance, is a working environment that we had running during Cannes. And of course, we had the World Cup during Cannes as a Dutch person, not the best World Cup ever. But we spotted a really interesting opportunity, or at least the agents spotted a really interesting opportunity. The Japanese fans went viral because they were cleaning up the stadium before leaving. And then it was actually a little bit of a meme because these were mostly men where the meme was, hey, maybe start doing some of that at home as well. So the idea was, can we do a little bit of a World Cup sort of cleaning moment? Oh, sorry. We have some sound coming through. So what we'll show here is how we took these briefs.

26:31 and these briefs are auto-generated, really best in class. You'll get agents to comment on these briefs. Again, this sort of collaboration between people and agents is really quite unique. And then you can make content. I'll show a piece of content here, World Cup drama, a quick explanation of what happens here. So the moment you take one of these, um briefs you can throw it to studio studio looks at the brief pre-defines what a great reel would be reels are really sort of social currency really key Asset at the moment, it auto-generates initial concepts for you.

27:17 You can, of course, collaborate with agents to change these concepts or you can just accept them. If you accept a concept, it then gets translated to best-in-class script for a real IG. TikTok really has the main platforms. and then it generates all of the environments and images but it does it in a way that's very on brand very in context but you can also still edit so it depends a little on power users versus people that are just going through the workflow and then These ads are on brand safe to use and really the whole workflow we just went through from opportunity spotting to working on some of the strategy and creative and then getting to an asset can be done anywhere between 15 minutes and an hour which of course is a massive massive sort of change to how these things historically happened.

28:23 Lots more in here. We were doing these demos in Cannes and it took us close to 45 minutes. So really powerful tool. This sort of systemic way of working also means we have more and more interesting solutions that we're launching to clients. I'm sure we'll talk about some of those solutions in our next earnings call. And with that, I'm going to hand it back to Sir Martin.

28:46 Thanks, Wes. So finally, a summary and outlook.

28:58 First half net revenue was down 6.2%. and 4.7% LifeLight and that reflected the continuing macroeconomic uncertainty heightened by the Middle East conflict and combined with technology clients and the hyperscalers prioritizing AI investment. I think as we say in our release the top four hyperscalers are spending about $5 trillion on capital investment between 2025 and 2030. A reported record operational EBITDA of $38 million, up almost 83% and 128% like reported and 128% like. With a higher proportion of operational EBITDA in the first half, Ebert Armagen in the first half at 12.3% up 600 basis points reported and 710 basis points like for like.

30:17 Number of monks down 3% to around just over 6,000 people compared with 6,350 at December 2005 and 6,900 in June of 25 last year. Half-year net debt at just over 66 million, which represents a leverage of 0.7 times EBITDA, down from 146 million, which was a leverage of two times, which was reported last year, 30th of June. Full year like for like net revenue expected to be down mid single digits and full year EBITDA remains at current analyst consensus level of 85 million with the margin to increase by 140 basis points.

31:09 New business wins from LVMH, from MercadoLibre, Capital One, Revlon, Square, Seek, Watts and Air India. The targeted net debt range for 2026 has been lowered from 50 to 80 million. It's lowered to 50 to 80 million, from 60 to 90 million. And we aim for leverage to be maintained under one times operationally if it does. The board's implemented a 50% dividend payout policy out of adjusted basic earnings per share subject to our financial targets being met and we'll recommend a final dividend for 2026 in line with that policy. The final dividend for 2025 of 1.1p was paid in July, and the Board has approved a first-time inaugural interim dividend for 2026 of 1.35p per share, 50% That represents 50% of the adjusted basics earnings per share of 2.7p.

32:17 The company has met the targeted €125 million reduction of its term loan B and has therefore reduced the outstanding balance of that term loan B to just under €250 million. We continue to see significant opportunities for new business, particularly driven by our IT tools and capability as Wes has just outlined, particularly in relation to the work for SC Johnson. Adopting from existing clients is ramping up as clients driven by existential threats in automotive, in the automotive category and vertical, in financial services. and FMCG, Fast Moving Consumer Goods, moved from pilots to fully scaled adoption and our proprietary AI solutions that are at the heart of all of our new business efforts.

33:13 We remain confident in our talent, in our business model, in our strategy, in our scaled client relationships, which position us to deliver sustainable long-term growth. So with that, Laura, as operator, we can turn to Q&A. Thank you. Ladies and gentlemen, for analysts wishing to ask a question, please press star 1 on your telephone keypad. We'll pause for a brief moment. Thank you. We will now take our first question from Andy Renton of Cavendish. Your line is open. Please go ahead.

34:01 Thanks all for a really good presentation there. Just a couple from me. First, can you just expand a little bit on the predicted higher margins now and where those higher margins are going to come from? And then just on the AI side, be good to understand what you think AI will be able to do in the future that you didn't think it could do six months ago.

34:25 Thanks. Okay. So, Radhika, do you want to do a margin point? Maybe Wes, you can respond on what AI enables us to do that we couldn't do a few months ago. So, Radhika, margins. So our margins, so the first half, as we said, was driven by really the annualised cost impact of what we did at the back end of 2025. So we continue with our cost focus, really looking at our cost base in relation to our net revenue. So for the second half as well, that's where we've got that full year impact. And that's why we've increased it to by 140 basis points. So it's the full year impact of what we did at the back end of last year and our continued impact. Okay.

35:08 Wes, do you want to talk a little bit about where the AI enables us to do it? I mean, we've, I think, always been quite clear about where we were expecting this to head. And I think that that's been relatively consistent from our perspective. I think it's probably still surprising to look at the length that agents can now work without supervision, which allows us to do much more real time work without human supervision, because the The concept of hallucinations has pretty much gone away. And agents are just very good at long-form work and holding context.

35:53 So the length of unsupervised agentic workflows, even though you could sort of predict it based on the line goes up, I think it's still quite surprising to see where that's already at.

36:10 Yeah, I just... Do you want to add anything to that, Reza, or...? So I would just say a couple of things in relation to that. Firstly is the resistance to using synthetic material, AI-driven material. I think both from clients and from consumers I think will decline. The interesting thing to me about what I think to us about AI is The consumer adoption is moving faster than client or enterprise adoption. That's nothing new. I think we saw that with smartphones, mobile phones and smartphones, and with previous technological revolutions. But whilst the industry and our clients indeed agonize over and every pixel. I'm not sure that consumers do and increasingly I think they will become ambivalent or neutral and maybe even positive about content which is synthetic. The other thing I would say is that we're going through I think this is the seventh quarter of double digit EPS growth and finished Q2 for the S&P 500.

37:40 So we're going through, despite all the volatility, from an earnings growth point of view, we're seeing companies perform extremely well, even excluding the hyperscalers and tech giants, EPS growth is very strong. Usually that converts into and many, many more. Thank you very much. FinTech platforms start to shape traditional banking structures and with FMCGs when pricing is more difficult to get having increased prices during COVID or post-COVID can't do it anymore, consumer resistance to do that and geopolitical conflicts in Eastern Europe and in the Middle East in particular and many others, disrupt supply chains. So companies are becoming more focused on efficiency.

39:13 For example, the P&G CEO yesterday on CNBC was talking about the need to move to content at scale. So when you see clients under a little bit of pressure, and we may start to see that perhaps in the second half of the year as growth maybe slows globally, Thank you, really interesting. Thank you. With no further questions from analysts, I would like to hand it back to Sir Martin for closing remarks. Thank you.

40:11 Thanks everybody for joining us. We'll be back to you. When is it Radhika? We're going to be a little bit earlier this year on Q3. When will that be? September. Okay, early September, we'll be back to you with Q3. Sorry, sorry, October. Sorry, October. Sorry, October. I'm getting ahead of myself.

40:30 We will be very, very quick to do it in September. So it'll be earlier, earlier, earlier in October. All right. Thank you very much. Thank you. Thanks for joining us.

40:39 Thank you. Bye-bye. Thanks.