S4 Capital H1 2025 Earnings Call Transcript

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Provided by Quartr
September 15, 2025

Key Takeaways

  • Negative Sentiment: Net revenue for H1 2025 was £328.2 million, down 10% like-for-like, with operational EBITDA margin sliding 190 bps to 6.3% and adjusted EPS falling to £0.002 from £0.012 a year earlier.
  • Positive Sentiment: Net debt improved to £145.9 million (from £182.9 million), free cash flow rose to £16 million, and leverage fell to 2.0× pro-forma EBITDA, enhancing the balance sheet.
  • Negative Sentiment: Technology Services revenue plunged 35% and EBITDA by 57% due to longer sales cycles and a major client ramp-down, though this is expected to cycle out in H2.
  • Positive Sentiment: The MonksFlow AI platform has won industry awards, forged partnerships with NVIDIA, Adobe and others, and is driving a growing pipeline of AI-enabled engagements.
  • Neutral Sentiment: Full-year 2025 guidance calls for mid-single digit like-for-like net revenue decline with operational EBITDA broadly flat versus 2024 and stronger H2 weighting, plus capital returns once net debt dips below £100 million.
AI Generated. May Contain Errors.
Earnings Conference Call
S4 Capital H1 2025
00:00 / 00:00

Transcript Sections

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Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Good morning, everybody. Welcome to S4 Capital's first half results for 2025. I'm joined in London by Radhika, our Chief Financial Officer, by Scott, our Chief Growth Officer, and by Jean-Benoit Berty, our Chief Operating Officer. We have Bruno Lambertini, who runs our Marketing Services business, who's up early in Miami, and Wesley ter Haar, who is in Amsterdam. With that, we'll get into the presentation. Radhika will talk a little bit about the results, Scott on our market momentum and client analysis, and Wes will do a brief session on AI and its impact on our business and the prospects. I'll come back with a summary and outlook, and then we'll take Q&A. Over to Radhika for the results, please.

Radhika Radhakrishnan
Radhika Radhakrishnan
Group CFO & Executive Director at S4 Capital

Thank you, Martin. Good morning, and thank you for joining us today. I will start with the financial headlines for the first half of 2025. Performance in the first half was impacted by volatile global macroeconomic conditions, tariff uncertainties, and larger technology clients, which represent almost half our revenue, continuing to prioritize capital expenditure on expanding AI capacity. Net revenue was £328.2 million, down 10% on a like-for-like basis and 12.7% on a reported basis. Operational EBITDA was £20.8 million, delivering a 6.3% margin for the period. Adjusted operating profit was £16.4 million, and adjusted earnings per share was £0.002 compared to £0.012 in the prior period. We closed the period with a net debt of £145.9 million, compared to £182.9 million at 30th of June 2024, an improvement of £37 million.

Radhika Radhakrishnan
Radhika Radhakrishnan
Group CFO & Executive Director at S4 Capital

The month-end average net debt for the period improved by £52 million, almost 27% from £196 million to £144 million. The company generated £16 million of free cash flow in the first half of 2025, reflecting strong focus on working capital management. The leverage was 2 times pro forma 12-month operational EBITDA versus 2.2 times as at 30th of June 2024. Moving to the income statement, revenue of £360.4 million, down 11.9% like-for-like and 14.7% reported. Net revenue decline reflects the general client cautiousness given the wider challenging global macroeconomic conditions. We continue to have a disciplined approach to cost management. Personnel and operating expenses were reduced by 11.2%, and the number of Monks at the end of the period was around 6,900, 4% lower than December 2024.

Radhika Radhakrishnan
Radhika Radhakrishnan
Group CFO & Executive Director at S4 Capital

A cost reduction plan is being actioned in the second half of 2025 to align our personnel cost to revenue ratio, down from 76% towards the industry averages of 65%. Operational EBITDA was £20.8 million with a 6.3% margin, down 190 basis points like-for-like and 170 basis points on a reported basis. Finally, net finance expenses, which mainly relate to the term loan, increased primarily due to adverse foreign exchange movements, partially offset by a reduction in the interest rate. Looking at our two practices, Marketing Services and Technology Services, we reorganized into two practices as of 1st of January 2025, with Marketing Services reflecting the legacy Content and Data & Digital Media practices. My comments here are all on a like-for-like basis. Net revenue in our largest practice, Marketing Services, was $299 million, down 6.4%, reflecting the timing of new business wins and ongoing client cautiousness.

Radhika Radhakrishnan
Radhika Radhakrishnan
Group CFO & Executive Director at S4 Capital

Technology Services was $29.2 million, down 35%, reflecting longer sales cycles and the expected revenue reduction by a major client, although this will cycle out in the second half of the year. From a regional perspective, the Americas, which include Technology Services, was down 9% and accounts for 79% of our mix. EMEA declined 13% and Asia-Pacific declined 15%, accounting for 16% and 5% of the mix, respectively. Moving on to operational EBITDA by practice on the next slides, again my comments here are all on a like-for-like basis. Marketing Services operational EBITDA was $28.5 million, down 14% with a 9.5% margin, down 90 basis points. The revenue shortfall was partially offset by the reduction in the number of Monks and other cost efficiencies. Technology Services operational EBITDA was $2.6 million, down 57% with an 8.9% margin.

Radhika Radhakrishnan
Radhika Radhakrishnan
Group CFO & Executive Director at S4 Capital

This was primarily impacted by longer sales cycles for new business and, as previously mentioned, the revenue loss from a key client, which will cycle out in the second half of 2025. Moving to the next slide, we continue to maintain a strong balance sheet with sufficient liquidity and long-dated maturities. We ended the period with a net debt of $145.9 million, an improvement of $37 million from $182.9 million as of H1 2024. The month-end average net debt for the period improved by $52 million, around 27%, from $196 million to $144 million. Leverage two times against 12-month pro forma operational EBITDA, an improvement from 2.2 times as of June 30, 2024. There is headroom against the key covenant of 4.5 times pro forma operational EBITDA. The €370 million term loan matures in August 2028, and the €100 million RCF remains undrawn.

Radhika Radhakrishnan
Radhika Radhakrishnan
Group CFO & Executive Director at S4 Capital

€80 million of this facility is extended to February 2028 on the same terms. Moving now to the cash flow slide. There was a working capital inflow of $19.2 million in the first half of 2025 compared to $4.2 million in the prior half year, reflecting the strong focus on working capital management. Capital expenditure of $2.1 million is primarily related to IT equipment. Interest paid includes the lower cost of our term loan, while lower tax paid reflects performance in 2024. Restructuring and other one-off expenses include $6.3 million of restructuring payments and finance transformation projects of $2.6 million. Free cash flow rose to $16 million compared with $3.1 million in the first half of 2024. Net debt bridge. Net debt was $142.9 million as of 31 December 2024, which translated to $160.4 million at the closing exchange rates.

Radhika Radhakrishnan
Radhika Radhakrishnan
Group CFO & Executive Director at S4 Capital

As I said before, the group generated $16 million of free cash flow in the period, contributing to the closing net debt position of $145.9 million, which is two times leverage against 12 months pro forma operational EBITDA. Turning now to 2025 guidance. Full year like-for-like net revenue is now expected to be down by mid-single digits. However, we continue to target like-for-like operational EBITDA to be broadly similar to 2024. We expect a stronger second-half performance with a greater weighting than in the prior year, enhanced by the impact of new business revenue, including wins already secured and further incremental cost reductions, which are currently being actioned. We forecast a net finance cash charge of around $29 million and an effective tax rate of 30% to 32%. Our expectations for net debt for the year-end is in the range of $100 to $140 million.

Radhika Radhakrishnan
Radhika Radhakrishnan
Group CFO & Executive Director at S4 Capital

We continue to focus strongly on cash flow management, and as net debt is reduced and falls below $100 million, our capital allocation policy will return cash to share owners through a mixture of dividends and share buybacks. With that, I will hand over to Scott for the market update.

Scott Spirit
Scott Spirit
Chief Growth Officer & Executive Director at S4 Capital

Thank you, Radhika. Good morning, everybody. Thanks for joining us. In the past two years, we've had some challenges which have impacted both our growth and margins. In 2023, the tech companies unexpectedly pulled back aggressively, with significant redundancies and cost cutting addressing their over-expansion post-COVID. Meta referred to this as their year of efficiency, and others followed suit. Sales and marketing expenditures were reduced across the board, having historically posted strong double-digit growth. Meta's spend, for example, was down 21% in 2023, and their margin increased from 25% in 2022 to 35% in 2023, with their share price surging almost 200%. This approach to cost discipline continued in 2024, driven by their strategy to invest significantly in CapEx, primarily hardware and software related to artificial intelligence.

Scott Spirit
Scott Spirit
Chief Growth Officer & Executive Director at S4 Capital

In 2024, the hyperscalers Google, Meta, Amazon, and Microsoft increased CapEx investment 56% to almost $250 billion, and this meant further pressure on operating and marketing budgets in 2024, with Amazon flat and Google and Meta both down. This affected our competitors too, given we have almost 50% of our revenues in tech, it had an outsized impact on our ability to grow. With our Whoppers, the relationship with Mondelez ended in 2023, and in 2024, First American, a tech services client, saw very significant pressure on their business given higher interest rates, and as a result, decided to ramp down the work streams they had with us. High interest rates and economic uncertainty led to client caution, which impacted our project-based business, especially our ability to win new remitts locally.

Scott Spirit
Scott Spirit
Chief Growth Officer & Executive Director at S4 Capital

We paused our M&A strategy in 2022 after 30 plus transactions in five years, the scale of which posed some challenges for us from an integration perspective and a need to focus internally. With declining revenues, despite the cost cuts and cost controls, our staff cost ratios remained stubbornly high in the 70s versus an industry average of 65%. The challenges we've had with our revenue trajectory made it difficult for us to align costs with revenues. The first half of 2025 has continued to be challenging, but we have been addressing these issues to rebuild our foundations for growth and have seen progress, which makes us more optimistic moving forward. Firstly, the pace of tech client spend cuts has slowed.

Scott Spirit
Scott Spirit
Chief Growth Officer & Executive Director at S4 Capital

Whilst the investments in CapEx continue to grow at a significant pace, the operating expense cuts I mentioned earlier have stabilized, with the declines in sales and marketing expenditures moderating towards the end of 2024 and stabilizing so far in 2025, particularly at Google, our largest client, as they start to invest in differentiation for their AI products in a highly competitive market and illustrate some ROI on their CapEx investments. Secondly, we've continued to innovate our product. We originally launched our AI platform, MonksFlow, at CES in January 2024, and over the course of the past two and a half years, we've continued to innovate, win awards, bring on board partners such as NVIDIA, Adobe, and Runway, and implement at scale with existing clients such as Google, BMW, SC Johnson, and Amazon.

Scott Spirit
Scott Spirit
Chief Growth Officer & Executive Director at S4 Capital

We've also developed and started to convert a specific AI-focused sales pipeline, and there'll be more from this later from Wes. Thirdly, clients. The Whopper client losses are mostly out of our comparables, and we have had a stronger pipeline and new business performance recently. Starting with General Motors a year ago, we've had a regular cadence of significant wins, including T-Mobile, Amazon, PIF, and more recently, a leading U.S.-based FMCG, which we will announce soon. Fourthly, people. Whilst the overall number of Monks has declined, we have continued to hire across country and regional management, capabilities, growth, and client leadership. These are all talent who are now driving those new business wins. We've also made hires with an operational focus, focused on the optimization of pricing, utilization, billability, and improving our margins and getting our staff cost ratios in line. Fifthly, centralization and cost control.

Scott Spirit
Scott Spirit
Chief Growth Officer & Executive Director at S4 Capital

From an integration perspective, the mergers are all now fully integrated, and we go to market as a single brand, Monks. We've centralized key functions such as finance, legal, HR, and IT, and the company operates on the same platforms such as Slack, Salesforce, Workday, and Google Workspace. Our migration to a single ERP is well underway and will be completed in early 2026. We've simplified the business around Marketing Services and Technology Services, and we have a clearly articulated organizational structure based around geographical leadership and capability expertise. We have and continue to implement cost controls with the goal of getting our staff cost ratios in line with the industry average. Overall, with positive new business trends and some stabilization in tech company spend, continued progress in our artificial intelligence product offerings, and a strong focus on cost, we anticipate an improved performance in H2.

Scott Spirit
Scott Spirit
Chief Growth Officer & Executive Director at S4 Capital

We reiterate our EBITDA guidance for 2025 and are set up well for 2026. From a client perspective, we have a really compelling client list with some of the world's leading and most innovative companies. In 2024, nine of them were what we call Whoppers, that's with revenues of over $20 million, which is a differentiator for a company of our scale. Most of our direct competitors have a much more fragmented client list with smaller relationships. As you can see, we continue to have significant presence in the tech industry, but you can also see the impact that the General Motors win has had on our auto share, and other recent wins have been in telco, financial services, and FMCG. These are strong relationships that help us to attract and retain talent to work on them.

Scott Spirit
Scott Spirit
Chief Growth Officer & Executive Director at S4 Capital

The continued softness we had seen in technology client spend and the First American decline in our Technology Services practice have had a negative effect on the average revenue size of our top 10, 20, and 50 clients. This is primarily driven by reductions in spend rather than lost business and is stabilizing. Now I'll pass over to Wes for an update on our artificial intelligence initiatives.

Wesley ter Haar
Wesley ter Haar
Co-founder, Chief AI & Revenue officer at Monks

Thank you, Scott, and hey everyone. I'll spend about 10, maybe 15 minutes on our AI update. As we just heard from Radhika and Scott, we are seeing compression in the traditional parts of advertising marketing services. I think where we differ is an aggressive focus on the opportunity that the AI disruption offers and the strategic changes we're making to pretty much our whole business, team size, organizational structure, and operating model to take full advantage and capitalize on these trends. We're currently in the midst of reshaping our business to be AI-enabled. The current cost reduction exercise is a part of that approach, and it improves our cost rate setting into H2, as we just heard. I think it also sets us well for 2026. It will allow us to keep building our own transformations, strengthening our new capabilities.

Wesley ter Haar
Wesley ter Haar
Co-founder, Chief AI & Revenue officer at Monks

I'll talk about a few of those in a moment, further scaling our own MonksFlow platform, and then the ongoing upskilling of our full workforce. As you can imagine, AI is quite a disruptive sort of force at the industry level. It causes, I think, quite a lot of anxiety. We have always said that this is about growth. We said this on day one, slide one of our very first AI update nearly three years ago. AI changes the economics of advertising. The services we launched then are the key drivers of our current new business growth. Our consultancy revenue is up strongly year over year from a small base, but we expect that interest to continue. We've also added two significant clients in the last 12 months, with both Data & Digital Media and the FMCG clients Bob mentioned earlier, choosing us because of our industry-leading AI offering.

Wesley ter Haar
Wesley ter Haar
Co-founder, Chief AI & Revenue officer at Monks

A really key point to that, why have we been so focused on this for quite a long time now? The reality is AI is eating the agency business. We don't believe it's controversial to say that AI collapses the cost of creativity and media management. Whether agency leaders admit it or not, clients know that this is true and they want it. We personally estimate about 65% of the tasks agencies get paid for currently could be done by AI agents with today's technology. Keep in mind that today is the worst that technology will ever be. This brings me to one of the most powerful go-to-markets we've ever seen, agencies to agents, which is our promise to help clients reduce the cost of their full marketing supply chain by adopting and adapting to AI.

Wesley ter Haar
Wesley ter Haar
Co-founder, Chief AI & Revenue officer at Monks

If we go to the brave slide, doing this takes bravery because it takes full commitment from clients. They need to adopt the technology, with people in the lead. They need to adapt their organization to have people in the loop. With clients that have chosen this path, we're on a path to what we call mass marketing as a service within the next three years or so. We often have the conversations with analysts, where does the money go? We're seeing it play out in a few different ways. Our most forward-thinking clients are moving away from paying for time and material. The idea that the hours a person spent are a good proxy for value, I think, is quite antiquated. We're actively initiating a shift to value-based models. That means annual recurring revenue for our software, output-based billings for our services.

Wesley ter Haar
Wesley ter Haar
Co-founder, Chief AI & Revenue officer at Monks

While that's still a relatively small percentage of our current revenue, we clearly see that as the future. It aligns our business with the broader shifts of corporate spending towards AI automation, AI intelligence, and away from the human hour. Another part of the strategy is our consultative efforts and our system integration skill sets. A key part is our ability to monetize the partnerships we have with some of the world's largest technology companies. They're not just our clients. We also partner with the likes of NVIDIA, Google Cloud, AWS, and Adobe as a system integrator to the AI economy. It doesn't just happen at the enterprise level. Also, the emerging players like a Runway, like a Luma are part of that offering.

Wesley ter Haar
Wesley ter Haar
Co-founder, Chief AI & Revenue officer at Monks

There really is no future, we believe, for Marketing Services without deep technological expertise and the ability to act as a system integrator at scale, both of which are core capabilities of Monks, which really makes us a change agent for the modern marketer. I think it's important to look at the industry reputation here. Last year, we were the first-ever AI Agency of the Year for Adweek. This year, we were The One Show's first-ever AI Pioneer. We also recently added AI awards from Digiday. If we go to the next slide, we have another one that's currently under embargo, actually came in a few days ago, specifically for MonksFlow. Hopefully, we'll be announcing that in the next week or so. What this confirms is that we are innovating at a substantially higher clock speed than our competitors in both the agency and the consultancy landscape.

Wesley ter Haar
Wesley ter Haar
Co-founder, Chief AI & Revenue officer at Monks

A change of this magnitude is never easy. I think I speak for our whole team when I say we would like nothing more than to move faster. The markets where we are most progressed in our own transformation are showing positive results, a significant increase in year-over-year pipeline, and a clear up-leveling of our strategic importance to clients. I think a good illustration of that is how our sort of team members support our clients in industry events. Since we last met, members of our team have been the key AI speaker at well over 50 client and industry events. We get to what I would say is role and responsibility. Why do clients choose Monks? If we massively simplify it, it's two reasons: our agents and our expertise. Let's start with agents first. We were the first to launch an AI solution for marketers with MonksFlow.

Wesley ter Haar
Wesley ter Haar
Co-founder, Chief AI & Revenue officer at Monks

I think it's important to go back to the reason we called it Flow. We have been consistent in our strategy that this is about transforming workflows. It's quite interesting to see that being a more, I would say, accepted strategy. The importance of this was actually recently confirmed by MIT. They reported that 95% of GenAI pilots fail because generic tools may be slick for a demo, but too brittle for enterprise adoption at scale. If we go to the next slide here, this is where the MonksFlow ecosystem shines. A large technology client actually put MonksFlow through a very rigorous testing and benchmarking process recently. We're very proud to say they now recommend it strongly to their team, which shows that we're not able to just compete, but actually beat industry peers making much-awaited $300 million plus AI investments.

Wesley ter Haar
Wesley ter Haar
Co-founder, Chief AI & Revenue officer at Monks

If we go to the last slide of this section, if you were a client of ours this year, you'll know that we were also the first to launch fully functioning AI agents as part of MonksFlow, operating across the full marketing supply chain. Our focus on workflows has made the adoption of agentic workflows a very natural evolution. It means we can keep innovating at a higher clock speed. It also means we're now packaging our talent and machines, which we call the new T&M model, as managed services delivering faster, better, cheaper, and more for our clients. The adaptation workflow is a very popular one, of course, because it's also a lot of speed and scale and spend complexities in digital marketing. We have these across the marketing supply chain, from insights to creative to media deployment. We're currently updating MonksFlow almost weekly.

Wesley ter Haar
Wesley ter Haar
Co-founder, Chief AI & Revenue officer at Monks

The next big milestone update will be at CES, where we'll make it even easier for brands to move from agencies to agents across the big six, from insights to strategy to creative to scale adaptation, all the way into media and performance. If we go to expertise, this isn't just about technology. Our clients need expertise to make change happen. That means our consultative efforts allow our clients to identify and prioritize AI use cases that will have the most immediate impact for them. Then we model and drive a change agenda across the entire organization. I would say this is less and less a challenge of technology. This is a challenge of adoption and adapting. That's an essential capability that we're putting into the landscape. That capability is connected to deep marketing expertise that's required to support the CMO.

Wesley ter Haar
Wesley ter Haar
Co-founder, Chief AI & Revenue officer at Monks

We understand the jobs to be done because we spent well over two decades doing them. When you start bringing these capabilities together, you get outcomes like our recent agentic film work for Google Pixel. We'll show this video in a moment. What's interesting with this video is it showcases the power of Google Gemini LLM stack, shows the power of the VO3 video model, all of it truly best in class. What you'll see isn't just a video that is generative output, right? Everything you'll see is generative. I think it makes clear we're past the uncanny valley of generative output. The pre, post, and actual production was heavily done by agents. Script writing, storyboarding, directorial shots and decisions, we're able to massively compress post-production.

Wesley ter Haar
Wesley ter Haar
Co-founder, Chief AI & Revenue officer at Monks

If you start scaling this, work like this has the potential to save companies, depending on their size, millions to tens of millions to hundreds of millions of dollars, all while still meeting the highest creative standards in our industry. Quick video.

Those little moments, even when the light's not on your side, but the colors just pop. Pixel gets those just right, seeing everyone's real beauty the way you actually see it, framing the perfect shot for that blink and you miss it moment. Capture it all, the big stuff, the small wins, and everyday life. Google Pixel.

Wesley ter Haar
Wesley ter Haar
Co-founder, Chief AI & Revenue officer at Monks

Thank you. Not just all AI generative output, also, a massive amount of pre-production, production, and post-production was done by agentic workflows. The combination of agents and expertise is why clients trust Monks to help them navigate what I would say is the most important shift they've seen in their business for perhaps a generation. I'll end it with a question behind our efforts. Do you think the future of media, marketing, and advertising will involve more AI services and spending or less? Our belief in this space is extremely clear, and it's driving every decision we make. With that, I will hand it back to Sir Martin.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Thank you, Radhika. Thank you, Scott. Thank you, Wes, for the sections. Just a brief summary and comments on the outlook before we open up for Q&A. Focusing on net revenue for the first half, we were down 12.7% in reported currency and 10% like-for-like. Our full-year expectations for net revenue are a decline of mid-single digits on a like-for-like basis, mainly due to macro-economic uncertainty and continued client caution around the tariffs or final level of tariffs. Our operational EBITDA for the first six months was just under £21 million, in line with expectations. More importantly, we maintain our full-year target guidance for EBITDA, which is expected to be broadly similar to 2024 on a like-for-like basis and is driven by the phasing of new business revenue and further incremental cost reduction actions which are being taken.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Wins such as General Motors, Amazon, T-Mobile, PIF, and a leading U.S.-based FMCG, which will be announced shortly, are expected to ramp up in H2 in the second half of 2025, supporting the general greater second half weighting that we have in the second half of the year. Free cash flow in the first half was £16 million versus £3.1 million last year. We maintain our 2025 target net debt range of £100 million to £140 million. Last year, the company paid a first-time final dividend of £0.01 per share on the 10th of July, which amounted to just over £6 million. The board will consider an enhanced final dividend for 2025 if the second half performance and liquidity targets are delivered. As you've just seen, we're seeing our AI initiatives produce much more effective and efficient solutions for our clients.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

This capability is driving significant opportunities for new business and broadened relationships with existing clients. Generally, clients are spending well in excess of 10% of their media costs on creative costs. We think the industry is going to see a significant reduction in the proportion of creative costs to media costs over time, driven by macro-economic uncertainty and by the tariffs and the need to be more efficient and disciplined. We maintain a disciplined approach to managing our cost base, and we continue to focus on greater efficiency, on greater utilization, on billability, and pricing. Finally, we remain confident in our strategy, in our business model, and in our talent, which together with our scaled client relationships position us well for growth in the longer term. With that as background, we can now open it up to Q&A. Thank you.

Operator

Thank you, sir. If you would like to ask a question, please press star one on your telephone keypad. If you change your mind and want to withdraw your question, please press star two, and please ensure your lines are unmuted locally as you'll be prompted when to ask your question. Again, to join the queue for questions, please press star one on your keypad. Our first questions today come from a line of Laura Metair from Morgan Stanley. Please go ahead.

Laura Metayer
Laura Metayer
Equity Research Analyst at Morgan Stanley

Good morning. Thank you for taking my questions. Two questions, please. The first one is on MonksFlow. Can you talk a little bit about what's your revenue model here? Is it, are you already licensing or, or should I say offering this, this software, this as a kind of subscription, or is it early days? The second question is you mentioned that you expect agents to replace ad agencies. Is any of your revenue today at risk from this? If so, how much? Are you confident you can make up for this potential revenue at risk with your AI offering? If you can help us with how you're thinking about this, that would be really helpful. Thank you.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

I think, to be fair on the first point on the revenue model, it's in early stages of development. If you take our General Motors contract as an example, there are three elements to it. The first is retainer. The second is payment for full-time employees. The third element of it is around a model about asset utilization, so payment for asset utilization. The answer, I think, is on the revenue model we're trying to shift from a time-based model to an asset pricing model. As far as your agents to agencies and the extent of our revenues in terms of traditional activities, we have very limited traditional activities. If you look at the content and content development, it's almost 100% digitally based. If you look at our media planning and buying, it tends to be more around small and medium-sized enterprises rather than the bigger enterprises.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Our data work is very much focused on the digital area as well. In terms of cannibalization, we think the impact of AI on our business base is limited. Our Technology Services practice, which is about 10% of our revenues, obviously is dedicated to moving models away from traditional models to new models. I would say proportionately very small. I don't think we can identify how much it is, but the point of your question is really important. What we're basically seeing is in the traditional content development model, costs coming down extremely rapidly and time taken to produce coming down significantly too. TV commercials, which used to cost $2 million or $3 million and would take three or four months at least to produce, can be reduced in terms of cost to 20% or 30% of that number and be done within a couple of weeks.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

One of our major packages clients currently takes 200 days on average to produce creative work in the FMCG area. An FMCG company that's taking that sort of time to produce creative work obviously can be rapidly displaced or the market can change within that period of time. Moving to this model, whether you call it from agencies to agencies or whatever you call it, is becoming increasingly significant.

Laura Metayer
Laura Metayer
Equity Research Analyst at Morgan Stanley

Thank you.

Operator

As a reminder, if you'd like to join the queue for questions, please press star one on your keypads. The next question comes from a line of Steve Lichte from Deutsche Numis. Please go ahead.

Steve Liechti
Steve Liechti
Media Analyst at Numis Securities Ltd

Good morning. I'll take three, please. First question, thanks for your comments on the changes from the traditional content model. Just in terms of the $2 million to $3 million cost of a TV commercial going to 20% to 30% of that, is it too early for you to say where that saving is ending up? I.e., is the client taking it all? Are they spending more on other stuff? What is happening to that difference? It might be too early, but I'd be interested to hear your views there. Second question, just on technology, to be clear in terms of your messaging, you're saying it's stabilized. Any visibility or green shoots or thoughts about the second half? What are your assumptions for the tech client base in the second half? The third one is on the debt guidance.

Steve Liechti
Steve Liechti
Media Analyst at Numis Securities Ltd

Given we're in mid-September now, we've got three and a half, four months to go in the year. What's the difference between $100 million of net debt and $140 million of net debt from your perspective? Thanks.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Okay. Do you want to deal with the pricing? Bruno, do you want to talk about where you see clients spending the efficiencies more generally?

Bruno Lambertini
Bruno Lambertini
Co-CEO - Marketing services at Monks

Yes, yes. It depends on the clients, it depends on the industry, and it depends on where they are now. I would say that growth clients are focusing on taking that money back to the top line and to awareness. Other clients are focusing more on savings and moving that money to the bottom line. At the end of the day, I think that in any case, all savings that are being made by AI and these innovations, embedding innovation, is impacting mostly the bottom line of their numbers. I can take the second one as well, if it's okay.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Go ahead.

Bruno Lambertini
Bruno Lambertini
Co-CEO - Marketing services at Monks

Where do we see tech clients? I would say that, as Scott said before, we are getting to a very stable place with Google, which is very good news for us. With a couple of them, like Amazon, we are very positive and growing this year. Thanks to everything that Wes shared before, we are seeing very good opportunities with the other few. Those opportunities are based on our four go-to-markets. Number one is the one that Wes shared before, agencies to agents. The second one where we are seeing the most traction with tech clients is orchestration, the orchestration partner. I think that Scott shared this in the last quarter earnings call, where it's all about streamlining and simplifying the process, their marketing ops. Our third go-to-market that is real-time brand is all about relevance at scale.

Bruno Lambertini
Bruno Lambertini
Co-CEO - Marketing services at Monks

When you think about technology players trying to find those unique places, that's taking a big part. The final one is glassbox media, which is all about efficiency and effectiveness on the media space. I would say that not only are we positive about Google and Amazon, but with those four go-to-markets, we can see a lot of new opportunities coming our way.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Yeah, just to amplify on the first answer that Bruno gave, I think there are two verticals where we see AI shifting more rapidly than other verticals, and that's basically due to outside competitive threats. In the auto industry, where Chinese EVs and AVs are a big threat, a BYD can produce an AV at $10,000 pre-tariffs, with God's eye, or an EV at $25,000. Tesla, I think their latest introduction is priced at $35,000. The Chinese EVs are very competitive. The major fossil fuel traditional auto manufacturers are under huge competitive threats. Lowering creative costs to, let's say, 10% of media costs or lower is a priority to maintain spending on media or to minimize reduction as the competitive threat increases from Chinese EVs. The second area is financial services, where we see exactly the same phenomenon.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

The big financial services companies that have heavy branch banking activities, which are under attack from the fintech platforms. You take a Latin America and a Nubank being an example, which is attacking the traditional financial services businesses. They again are looking at how they can reduce their creative costs and indeed make their media investment even more effective. I think that sort of amplifies a little bit what we see happening on the impact. As Bruno said, it varies from client to client as to what the reaction is. The interesting thing about tariffs so far, and it may be early days because it takes a long time for tariffs to feed through, and images might have been built up in advance. The interesting thing is that margins don't seem to have been affected by the increase in tariffs so far. It may come through.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Part of the explanation for that is that we think that clients are looking at their supply chains very aggressively, and that applies to us too. Therefore, the savings and efficiencies that can come through from AI over time will become increasingly important. I think Bruno has dealt with the stabilization of tech as we see it. We see a little bit more buoyant. On the third point, what's the difference between 100 and 140? It's $40 million lower in simple words. It gives us a little bit more flexibility to look at our capital allocation policy. We had a small buyback, as you know, historically. We paid a similar size, actually, to the 1P dividend.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

The board feels that once we get to the levels that we're indicating for the year, which is the range of $100 million to $140 million, or even lower if we're more successful in our free cash flow generation and managing our working capital, that'll give us much more flexibility for an enhanced dividend for this year, which we would look at in March of next year and beyond. I think it will give us, Steve, a little bit more balance in the capital allocation policy. Is that okay?

Steve Liechti
Steve Liechti
Media Analyst at Numis Securities Ltd

That's great. Can I just follow up on your comments on the two specific things, the auto and financial services? Just to be 100% clear, are you saying those guys are taking the savings in the creative side and they're reinvesting it in media? Net net, if you take their overall spend, it's probably the same, yeah, rather than taking it to the bottom line.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

They know that in both cases, actually, CMOs in both cases have said they want to take their creative costs down in order to maintain their media budgets. Savings from creative go into media effectively. In both industries, I think, feel under huge pressure. One of the things that we're wrestling with is why clients are generally hesitant. We are involved in a huge number of audits, workshops, tests in order to implement AI. There is that saying, "Turkeys don't vote for Christmas." I think management is somewhat, particularly middle management, is somewhat reticent to implement because they're concerned about the implications, or indeed, to be fair, the risk that they don't know. They're not 100% certain that implementing AI in all its forms is going to be wholly successful.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

When you look at the Google Pixel work that Wes showed, there's a myriad of other pieces of film that we could show, probably five, six, seven, eight examples. I think we're at the moment, last time I checked, we're producing 21 films, agentic films, mainly in the Americas and in Europe, but in Asia too, for clients who are experimenting with agentic development. The issue is, where do we get wholesale change? I would say that the wholesale change that we're seeing first is in companies which face external threats. The auto category and financial service category, I think, are the two which come to mind. There are companies also that I can think of one, for example, that spends $2 billion on media, and its creative costs are $300 million, just its creative costs. That's 15%.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

I can think of another company spending €4 billion on media with creative costs well in excess of 10%. I use 10% as a guide because historically, our industry was paid 15%. Agency fees probably have shrunk to about 10%. When agencies allocate between creative and media, if it's 10%, it used to be, let's say, 10 to creative and 5 to media. When agencies' fees shrank to 10%, we probably allocated 5 and 5, maybe even less to media and more to creative. The point of that is that creative costs have really grown too far. In many of the companies that I'm talking about, they probably have too many brands and too many split structures, branding structures which make the costs more intense.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

We're running experiments at the minute with major clients where we're taking a brief, an agentic brief, and the client is going to compare the result of the agentic brief against the same brief being executed on a traditional basis. To give you a specific example, without naming the client, a $2.5 million cost over four months is being replaced by a $500,000 cost over three or four weeks, and the results are being compared. It's going to take time for it to feed through. My own personal view is that once tariffs bite, or once we know where tariffs end up in 2026, we're going to see significant pressure from clients to reduce creative costs. That's going to have, that's for us, a significant opportunity.

Steve Liechti
Steve Liechti
Media Analyst at Numis Securities Ltd

Great, thank you.

Operator

We currently have no questions coming through. As a final reminder, if you'd like to ask a question, please signal now by pressing star one on your keypads.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Anybody else?

Operator

There are no further questions, so I'll hand back to Sir Martin for closing remarks.

Martin Sorrell
Martin Sorrell
Executive Chairman at S4 Capital

Thanks, Bruno, for getting up early. Thanks, Wes. Thanks, Scott. Thanks, Radhika. Thank you, everybody, for joining us. We have another call at 1:00 P.M. London time. If you want to join us then, again, look forward to it. Thank you very much.

Executives
    • Martin Sorrell
      Martin Sorrell
      Executive Chairman
    • Radhika Radhakrishnan
      Radhika Radhakrishnan
      Group CFO & Executive Director
    • Scott Spirit
      Scott Spirit
      Chief Growth Officer & Executive Director
Analysts
    • Wesley ter Haar
      Co-founder, Chief AI & Revenue officer at Monks
    • Laura Metayer
      Equity Research Analyst at Morgan Stanley
    • Steve Liechti
      Media Analyst at Numis Securities Ltd
    • Bruno Lambertini
      Co-CEO - Marketing services at Monks
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