Welcome everybody to S4 Capital's Q1 2023. I'm joined in London by Scott Spirit and Mary Basterfield. We have Wesley ter Haar in Amsterdam. We have Chris Martin, I think in Boulder, Colorado, and we have Brady Brim-DeForest. I don't know where you are, Brady. Are you in Maine or where?
I'm in Edinburgh today.
In Edinburgh. My God, you get around. Okay. At least the same time zone. All right. Let's can we go to term, a brief presentation on the numbers by Mary, and then we'll have an update by what is the, I guess the flavor du jour or maybe longer than du jour, from Wesley ter Haar on artificial intelligence. It's the issue or set of issues I think we've had the greatest amount of inbound questions and asks about. Then we'll do a session of Q&A. Then you have an appendix attached to the presentation, which is on our website, which gives further details, which Mary will touch on. Kick off with the trading update, Mary.
Thank you, Martin. Good morning. Thank you for joining us today. Our first quarter performance was in line with our expectations, with revenue of GBP 262 million, up 27% on a reported basis and 6% like-for-like. Net revenue of GBP 219 million was up 28% reported or 7% like-for-like. We maintain our full-year guidance of 8%-12% net revenue growth on a like-for-like basis after adjusting for the reduction in scope of one Whopper account. On this basis, the growth in net revenue for Q1 was 8%, and in Q2 we expect net revenue growth to be within the guided range. Given current economic uncertainty, we continue to manage our cost base tightly and to take selective cost actions with a focus on operational efficiency.
We also maintain our full-year operational EBITDA margin target of 15%-16%. As in previous years, operational EBITDA will be significantly weighted to the second half. Net debt at the end of March was GBP 136 million or 1x operational EBITDA. Our full-year net debt guidance of GBP 180 million-GBP 220 million is unchanged as we have yet to make the final payments related to prior year combinations. With merger payments fully met in 2023, net debt is expected to decrease in 2024, given our current capital allocation strategy. Moving to the next slide, let's take a look at our Q1 net revenue by practice and region. My comments here are all on a like-for-like basis.
Our net revenue growth in the quarter was led by the technology services practice, which grew 57%, driven mainly by expansion of our revenues with existing clients. Both Content and DDM faced slower addressable markets and net revenues were up around 1% on a strong quarter in 2022, when Content grew 33% and DDM 35%. Many of our major clients continue to grow activities strongly with us, though it is clear that 2023 has started cautiously and we have seen sales cycles lengthen, particularly for regional and local clients. From a regional perspective, the Americas grew fastest, with net revenue up 11%, driven by technology services. The Americas accounted for 79% of the mix. EMEA was down 5%, reflecting slower market conditions and strong prior year comparators.
In APAC, we saw net revenue for the quarter down 10%, with slower sales cycles in Japan and Korea, and China emerging slowly from the COVID lockdown. We have again included information in the appendix on outstanding contingent consideration, expected share count and invested capital. We are happy to take any questions on these at your convenience. Thank you very much. I'll now hand over to Wes for the update on artificial intelligence.
Thanks, Mary. Hey, everyone, we're back with our recurring AI updates. We did one of these six weeks ago. We'll keep doing them. What was interesting when we did it six weeks ago, before that meeting, there weren't many or maybe even any conversations that we were having with our analysts and investors around generative AI. I think Scott is only having those conversations at the moment, and we understand why that's happening. If we go to the next slide, let's be clear, and this is why we've been so bullish on it and so fast and first. AI will change the economics, not just of advertising, but of pretty much everything. From an S4 perspective, we've talked about the change of economics of advertising since the very first day. That's what faster, better and cheaper means.
From our perspective, we couldn't be more excited. We see this as the inevitability of our model. I would like to speak up for our industry, though. I know there's quite a bit of angst. When you look at this level of disruption that will happen in culture, in commerce, and in technology, our industry really is the first port of call. While there will be clearly losers and winners in this space, and the losers will be those that don't adapt, that aren't agile enough, that don't really understand the reality of the moment, there's also gonna be massive upside potential. If we go to the next slide, that isn't just related to that disruption.
It's actually also related to what this wave of AI is going to be able to bridge when it comes to the original promise and intent of digital. If you look at that original promise in digital advertising, it's really been about deep personalization at scale. It's been about white glove, long tail loyalty. It's been about conversational interfaces, and it hasn't quite materialized at the level of fidelity that's needed. This technology actually bridges that gap, and we suspect unlocks massive new wave of opportunity in digital and digital advertising. We do see that as day one though, and we'll talk a bit about the distinction between day one and day zero. If we go to the next slide, this is what we're seeing in market. No marketeer can ignore this technology. Really, that's what our clients need at this moment.
They need our support, they need our subject matter expertise. If we go to the next slide, this is paraphrasing a conversation I had with one of our enterprise clients earlier in the week. The enterprise is about minimizing and managing risk. I think some of the conversations that are happening now around the speed with which this will happen, it's important to understand that the speed won't be equally distributed, right? We have clients that are moving very quickly, and we're helping them move very quickly. We have clients that are really looking at solving the complexities of day zero before they dive in. If we go to the next slide, just to dig into what day zero means. The complexity sits in quite a broad landscape, right?
If you look at the communications piece, we're seeing issues here pretty much every other day. I think we had Wendy's earlier in the week talk very bullishly about using the AI to the market and then have a bit of an internal revolt. There is a lot of gray area in copyright. I think brands really need to define their own ethics around using technology at scale, plays into brand safety conversations. There's, I would say, a whole new wave of digital transformation coming when you look at this technology, and potentially a wave that washes away the previous one. Those are big decisions to make. Plays into security, plays into data privacy. It's relatively early in the landscape to pick a winner when it comes to partners. Then operationally, this is also a massive change management and training exercise.
If we go to the next slide, that doesn't mean there isn't value to unlock right now, though, and that's really our focus at this moment. We have end-to-end packaged AI offerings, a few more on the way, and these are currently in play with clients. quite a few of them with our Whopper clients, but it's also leading to some interesting new logos. We'll show a project at the end to give you a sense of what some of this work is, but it comes down to a few things. Brand advisory, that's really that communication framework, the ethical component, understanding what the roadmap is and being able to manage through that complexity. Creative fatigue, I think, is a really interesting one. We're doing this with one of our big platform partners.
Creative fatigue is really that concept that if content doesn't get refreshed enough in digital advertising spaces, it pulls down conversion. Generative AI gives us an opportunity to solve that at a much lower price point because of less manual labor, so you can solve one of the big digital advertising problems, really. We hope to see the output of that work in time for our next meeting. Brand experience, this is where I think more about day one. This is where that sort of highly conversational, highly sticky brand interface and customer experience happens. The case we'll show at the end really hints at day one. I think it's really great work by the team. In-house agencies, this I think is a really strong offering where we're helping... Of course, we've been in the in-housing space for a while.
We're helping disrupt that space because this really plays into today's, I would say, macroeconomic focus, which is headcount. The ability to compress headcount but still keep output at the same level or even scale it. Virtual production is really a continuation of innovation. We've been very active in what I would call real-time production using things like the Unreal Engine. Combining that with Generative AI is amazingly powerful. We reviewed some work yesterday that we're doing for one of our top five clients, and I think the output is pretty amazing. Something that we see as a huge, huge sort of product we will be able to roll out for a lot more of our clients.
When it comes to data and cloud, I think this is really a continuation of a lot of what we've been saying from this full perspective. It's important to have single source of truth when it comes to data, clear taxonomy, accessibility, so you can actually use it in meaningful ways. That need just became an imperative because without that data, you won't be able to train the algorithms on your own datasets, which is definitely gonna be a competitive advantage moving forward. Let's go to the next slide. I think it's good to tackle the question head-on, and I know Scott has been having some of these conversations. The main question, of course, is why us? Why S4?
If there's going to be a massive amount of disruption, and there will be winners and losers in our industry, the big question is, why are we winning? We go to the next slide. I think the important takeaway here is we're not surprised. We have been talking about this and thinking about this in meaningful ways for a while now. This image was not generated by AI. This was me a while back before I had to worry about analyst questions about generative AI. If you look at our history, we've been talking and thinking about this consistently since 2017, and it's reflected in what you've seen from us in the last six months. One of the very first top 25 players that talked about it meaningfully with our report to market, The Revolution Will Be Generated.
One of the very first that had ethical guidelines published at a much deeper level of detail than anybody else currently has in market, and so on, and so on. Of course, we talked about this in our 2022 numbers, I think at a level of detail that the rest have not yet. This space moves very fast. I think we're proving that we are the fastest player to move along with that space. If we go to the next slide, that also means that all of our existing workflows are already impacted and influenced and augmented with AI. We call these our playbooks, our AI playbooks, and we have this for all of our end-to-end teams and all of our talent communities.
The push is to implement AI into all of our work and workflows, honestly, the progress that we're making in these last 6 months or so, 'cause that's really where there's been a huge shift change, are impacting the efficiency of our work. We look forward to sharing that throughout the year. This, of course, is a massive training and change management operation. It's definitely the biggest we've ever done. Adobe , it's one of the biggest our industry has going at this moment. If you go to the next slide, it's important to understand that we're also solving key issues that other companies are actively struggling with. Let's take the ability to use ChatGPT, right? There's data and security issues. We've seen other networks block the use of it.
We've seen big enterprise companies ban it for their talent base. We've already launched MunchGPT internally. We are empowering all of our team to use the tech in a safe and secure way. Really, we have built up a very healthy ecosystem of AI-empowered tools and workflows. Honestly, if you would ask me, I don't think you can be a winner in this space if you're not building your own tech and pipeline, 'cause it is gonna be imperative. Which brings me to the next slide, which is really about our foundational difference. We've beaten this drum from the very early days of S4. It has to be single P&L. A single company, a single brand that can actually implement and operate as one because AI is the great connector, right?
It really works if you can bring data, media, content, and technology into single pipelines. We believe the winners in this AI disruption will be single companies in our industry, not fragmented teams on P&L islands. If we go to the next slide, it really comes back to our mission. Our mission is faster, better, cheaper. To make that happen, we will be the most empowered AI player in our industry, and I think we're showing that we can make true on that promise. One more slide before we show a case, and this is really, Scott and me talk often. Scott has been getting pretty much daily questions on AI, has spun up massively over the last few weeks, of course.
We wanted to tackle some of these head-on, make sure everybody on this call has the same level of information, that might get us a next level of detail as we go to Q&A. The questions really are centered around three areas: scale, our sector, weight, right? We weigh quite heavily into tech and then sales. Let's start with scale. We're around 9,000 people. We believe the perfect size for what needs to happen right now. Big enough with enough global footprint and diverse subject matter expertise to be a real player for global enterprise clients, which of course is reflected in our client portfolio, but not at the size where we're carrying a lot of legacy teams and legacy commercial models, right?
It's a lot easier to be disruptive at 9,000 than at 90,000, where you're gonna have to disrupt massive parts of your own organization and ability to make money. We're very bullish on that space. If you look at sector, heavily weighed on technology. The interesting piece is if we're looking at our numbers and client portfolio, we're actually seeing healthy growth there. We know there are macro worries, but we're not seeing that reflected in our client base. The second piece is this closeness to the sector, both massive clients and really deep partnerships, means we are first into pretty much all of the alphas and betas.
We know what's happening and what's gonna happen in the industry ahead of the curve, which means we can help translate that to the use and business cases for other industries and other types of clients. I think if you look at our role in the industry, historically, it's been tech implementation at scale, right? Taking all of the technologies and platforms and making them manageable to make that connection between companies and consumers. This is really the next wave of that. Being at the front lines of the AI revolution, I think, is gonna be really meaningful. Sales. We see this as big a conquesting opportunity as the first year and a half of COVID, which was massive for us. Day zero slows some of that down, right? Day zero, there's a lot of complexity, and the work is a bit more consultative.
As that spins up into longer work streams, big digital transformation projects, big brand experience opportunities, we expect that to grow and grow. In our mind, we can get to day one quickly enough. Again, the enterprise is about managing and mitigating risks, not all of our clients or all of the clients in our industry will move at the same level of speed. That's us. We're gonna go to Q&A after this, first we want to show a quick video, which I think is a great example of day one. It hits at real-time conversational, the ability of being more personal in the instant communication. Just thinking about this scaling, I think is really, really interesting. Great piece of work by our team, Kiki.
Thanks, Mary, and thanks, Wes. We're turning now to Q&A. We have obviously Scott here, and we're joined by Chris for the DDM practice, data and analytics and digital media, and Brady for technology services. Priscilla, our operator, any questions, please?
Yes, sure, sir. Ladies and gentlemen, if you would like to ask a question or make a contribution on today's call, please press star one on your telephone key. We'll pause just for a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Julien Roch from Barclays. Please go ahead. Your line is open.
Yes. Good morning, everybody. The first question is on full year guidance. Why will organic accelerate from 7% in Q1 to close to double digit to get to 8%-12% for the full year when investors expect a macro slowdown? That's my first question. My second question is, how can you revenue grow double digit if your number of employees is going down 2%? Historically, there's been a very strong relationship between revenue and number of employee, i.e., revenue per employee, broadly flat. Last one is another question on AI. Agencies totally have been a cost business.
If the client give you a budget for GBP 100, you say, "Right, I'm gonna spend, let's say, GBP 85 to get my 15% margin." With Generative AI, there's some surveys done by the MIT that says you're gonna be 40% more productive, so you're only gonna spend GBP 60. I don't think the client would let you get away with a 40 margin, i.e., they're gonna say, "We're gonna give you less revenue for the same work." Do you agree with that? Do you disagree? What do you think the kind of financial impact will be of significant efficiency gains? Thank you.
We'll deal with Julien, the first two questions on forecasts first, and then maybe we'll respond on the AI. Wes can respond in part on that. We'll have some comments on that too. On the forecast, I mean, I think Julien, it comes to our latest forecast. We obviously had our budget, and then we had our Q1 RF, which we did first quarter revised forecast. We did at the end of the first quarter into April. Those actually, there was very little difference between the budget and the Q1 RF. The comparatives in Q2, Q3, and Q4 are quotes unquote easier. I mean, you go from 35% or around that figure in the first quarter of last year. It drops down to 25%, 23%, 29% for Q2, Q3, and Q4.
Given what we see in terms of secured revenues, at this stage in the year compared to last year, and take into account the macro slowdowns that you referred to, we think those forecasts have veracity. We've hedged the forecast from the bottom-up forecast as well at the center to some degree. I think on the forecast, I think your first 2 questions are the same. The other thing is to say, if you look at Q1, our net revenue increase, whether you look at it, before or after major account, well, the 1 major account reduction, you still have a significant relationship, but it would reduce. Whether you look before or after, it's very similar to what we saw with the platforms in Q1.
If you look at the average, and this is an unweighted average for the platforms, driven up actually significantly by Amazon's inclusion, which was up I think about 21% in Q1. The average for the platforms, taking that into account, even taking that into account, was about 6.4%. When you look at the forecast for the platforms for Q2, 3, and 4, they also forecast significant increase despite what you refer to macro slowdowns. Our conversations with the platforms, as late as yesterday, indicate that growth in search and the associated areas continues to accelerate actually going into 2, 3, and 4. Mary, do you want to add anything more on forecast to that? No, I think you've covered it. Okay. All right. That's forecast. Anything on forecast, Scott? No. Okay.
Maybe on the AI question, it's a common question that you've asked on other calls, Julian. I think it's almost exactly the same. It is. I'm collecting the answers. Well, I disappoint you. I think you're probably gonna get a very similar answer from us. I think Wes has tried to point out, probably much more forcibly than others, the opportunity here. Do you wanna comment, Wes, from your perspective on this?
Yeah.
This issue about cost and productivity?
I think we have to be realistic that it's our role to help clients find that efficiency, right? If you're not helping your clients find that efficiency, I don't think you're being a good partner. In every situation that we see, playing that role actually grows our revenue and revenue potential, right? Because it takes work away from partners that aren't implementing technology and getting to day zero opportunities quickly enough. The second piece is, there's output-based value. There are components to what we do and what I suspect every agency will end up doing that sit in proprietary technology. It sits in talent and the training of that talent, and it sits in data sets. Those constitute value that goes beyond an hourly rate.
there are conversations we're having right now with current teams what that means, but I think it's important that we are at the front of those conversations, and I think in many ways, leading those conversations. 'Cause you have to understand that efficiency is gonna be a huge driver of this wave of tech. That probably answers question 2 as well. Headcount growth isn't as organically tied to revenue growth as it used to be, which I think is something that you'll see messaged more and more in the next few years.
Yeah. On the headcount point, Julien, it may well be that we overhired similar to the tech platforms, what you're seeing happening with the tech platforms during the COVID period and the post-COVID lockdown. I think this is all part of an adjustment that we're making. I mean, when our headcount went to about 8,700 in Q1. When we look at the forecast for the year, it's a pretty stable headcount that we're forecasting in that, in that budget and in that Q1 RF that I referred to. The other thing I'd point I'd make is we're and Wes touched on this in his presentation. We're not encumbered by analog history. We view this as a major disruption opportunity.
We have a very small market share of any of the addressable markets that we, that we occupy. I think this provides us with an opportunity. I'd just say one other thing. When you look at the clients, roughly half of the clients are saying, you know, "We're full on into this immediately." The other half are saying, "We'll experiment with it." I think Wes touched on this in one of his slides. They'll experiment with it.
You've got sort of two camps at the moment, one that is jumping in full on, starting to make changes and improvements along the four areas that we referred to in the release, from hyper-personalization through to its impact on media planning buying, used as a super tool, and then impact on copywriting and visualization. We're starting to see the other half of the clients just experiment. You've got two buckets really, one where they're full on in and one where they're experimenting.
I'd just add on the AI thing, Julien. I think we're very fortunate that not all clients look at this from a purely cost lens, right? We have a lot of clients that look at marketing as an investment. AI does allow them to invest their money more effectively, but it doesn't mean that they reduce their budgets. Actually, you know, if you look at Wes's proposition that AI can actually bring digital marketing's proposition truly to life, I think we, in our client base, have a lot of clients that are really interested in that, and if it comes true, could potentially spend more on marketing. I think that's an important point to note as well.
Okay. Thank you very much.
Thank you. We'll move on with our next participant, Steve Liechti from Numis. Please go ahead. Your line is open.
Yeah, morning, everybody. Thanks for this. Three from me. First of all, you talk about slower general markets in the first quarter and elongated sales cycles. Can you sort of talk us through how you're seeing that changing, if at all, with any visibility that you have into, what, April and the second quarter? You know, are clients having sort of had an SVB dip, sort of now changing the way they're thinking about spend? That's the first question. Second question is just talk us through tech services, given sort of Digital transformation operators have been growing very, very strongly post-COVID, but are now seeing quite a material slowdown in that growth.
Just how you're thinking about tech services in that context, given it's been very, very fast growth, certainly in the first quarter as well. The third one, on tech clients, sorry to go on about this, but just walk us through or talk us through your thoughts in terms of spend for the year, bearing in mind they are cutting back generally, you know, post the COVID sort of boom, why they should increase spending with you in this year. Thank you.
Okay. Thanks. Just on the delays, maybe Chris can come in on this from a DDM perspective. On delays, I think Clients were slow, slower at the end of 22 and into 23 to finalize not just marketing budgets, but their operating budgets from which marketing budgets came. I think what we saw is sort of in January and February, some hesitancy picked up in March. We haven't had the numbers for April, but I think it's picking up in April as well from what we hear. When we look at pipelines and percentages secured, we're seeing similar patterns to what we saw last year. I think that's the reason for the delays. Chris, do you wanna comment from a DDM point of view from what you've, from what you've seen?
Only to echo your comments. The second half of last year was a moment of indecision for many clients that had needed to make choices on their marketing spend in Q4. That carried over almost like a hangover into Q1 decision-making and setting budgets. We're through the first quarter now, and most of our clients have made those decisions, and they've secured the budgets for the year. The reiteration of that business and the visibility that we have for the end of the year is much stronger than we would've had in Q4 of last year. Only to echo your comments, Sir Martin.
Okay, fine. On the second question, Steve. Brady's having connectivity problems, so no visual, but he's still there, on sound. Brady, do you wanna comment on this point about tech services and what Steve is seeing elsewhere in the sector?
Sir Martin, I lost the last part of the question. Do you think you could repeat it very briefly?
Yeah. Yeah. The question was that Steve was saying when he looks at other tech services companies, they've come under pressure in the last quarter, and their forecasts for the year have been taken down. Our tech services business as everybody can see, had a very strong Q1 and maintenance of what we saw maintaining the position last year. Why the difference?
I think it's a very fair question. I think for us there's a tremendous amount of long-term focus on transformational opportunities inside of our existing portfolio. These are multi-year bets that our clients are placing, and they're taking a very bullish perspective on economic recovery over the next 24 months. They're not gonna take their foot off the gas in terms of continuing to invest in these large-scale transformational opportunities that are already in flight. That's driving a lot of our bullish perspective on the second half of the year.
I think it's also fair to say, Steve, that when we look out into Q2 and Q3 and Q4, content accelerates in terms of its like-for-like growth, and so does DDM. Tech services rate of growth is less, but the overall position continues to improve. The other point that we've already made is the comparatives are easier for ourselves, running from about 33%, 34% in Q1 of last year to anywhere between 23% and 29%, I think it was, in Q2, three and four.
Just quickly on technology services as well. I'd add, I think Brady's maybe too modest to talk about it, but I think Brady's done a fantastic job of integrating his business and the Zemoga business together, but also integrating across S4. We're seeing some early sort of fruits bear from that. I think that's certainly helping the business.
Just on your question, Steve, about sort of clients cutting back, I think it's It varies. I mean, certainly when we look at, we mentioned this in the release. When we look at our top clients, what we call Whoppers, and then the clients, so there are 10 of those and there are another 14 that we have in the Whoppertunity category. When we look at those, it's not true to say that all tech clients are cutting back. You used the phrase, "Clients are cutting back." Talking to the platforms, as late as yesterday, it was quite clear that certain categories, like leisure and travel and others are coming back quite strongly and quite apart from the geographical issues that we see in Asia, around China, indeed other markets in Asia.
I'm not sure that you can say in a blanket way that all clients are cutting back. I mean, there is a lot of macro uncertainty around all the issues that we're well versed in, geopolitical inflation, interest rates and everything. I think there are pockets, or more than pockets. There are sectors and verticals that maybe have come from a low base because of COVID and pandemic and disruption. But also, I mean, financials obviously, given us what's happened, have taken a bit of a hit. We're not heavy into financials. We do have financial clients. The tech pattern is not clear cut. You know, to say that tech clients are cutting back would be inaccurate, certainly on the basis of what we see in Q1 and what we see in our forecast.
Do you wanna add anything from Wes, from your point of view, from Content's point of view on clients and cutting back?
Well, I think it sort of echoes what Chris said. We have seen clients be a bit slower with their budgeting, but that seems to be mostly on Whopper now.
We're actually seeing some pretty healthy growth in our, in our tech clients especially. I think it's not a single narrative, right? It's, it also depends on your positioning within some of these clients, where I think we're actually well-positioned 'cause I think clients are consolidating more. That's always been our pitch, right? A great partner to consolidate with.
Macro position. I mean, just a point about consolidation. When the macro conditions tighten, clients do tend to look at the number of agencies they use and the number of units within their companies that have the ability to hire different agencies. There is a trend, I think, to consolidate when times get tougher. Does that cover your three questions, Steve?
Yeah. Really, I'm trying to get you to hammer home the points a bit on, specifically on the tech clients. That just because they're cutting headcount, because they over-invested in headcount in COVID and coming out of COVID, I guess what I'm trying to sort of work out is that doesn't automatically mean they're gonna cut marketing spend.
No, that's correct.
That's what I'm really trying to get at.
I think. Yeah, I think the point is, you know, most of the cost-cutting that they're focused on is rebalancing that headcount growth, and getting it in line with their revenue growth. The reality is, you know, these tech clients are still perhaps more than ever, right, you see the sort of speed of product launches from some of these clients and the competitive nature, particularly around AI, and that obviously creates work for marketing. You know, it's not that. I think those two things are not not linked.
To be fair, the headcount reductions in the tech clients does cause initial disruption. Once the disruption, you know, let's say 1 or 2 months, and once that disruption, it sort of eases or ceases, what we see is further growth. It moves from, you know, obviously in-house activity and in-house solutions to outsourced solutions or embedded solutions. We have 3 basic models, and those are the 3. Embedded, where our people are on premises or heavily involved with the client, or the outsource, the sort of classic traditional outsourcing to agencies actually is enhanced. If you look at, you know, the Very few of the tech clients actually break out their ad spend. If you look, for example, Google does. Alphabet does.
You can see actually that in Q1 their spend was up slightly. It was sort of flat to up in Q1 of this year. I think there are some guideposts to where spending is a bit more resilient than some have suggested.
Perfect. Thank you very much.
Thanks, Steve.
Thank you. We'll move on to our next participant, Matthew Walker from Credit Suisse. Please go ahead. Your line is open.
Hi. Good morning, everyone. Thanks for taking the questions. The first is just on the AI impact, specifically on business transformation, tech services, consulting. I mean, obviously there's been a lot of negativity around consulting in particular, as a result of, you know, what AI might achieve. Can you give us your perspective just on how AI might apply to consulting and business transformation? The second one was just on, just to be clear on the organic growth calculation, was basically the 6.8% including the reduction in revenue from the client that was-
Yeah.
Partially lost, and the 8% was excluding it.
Right.
In actual fact, although you're guiding on the 8 to 12 excluding the impact, the way you're reporting it is actually including the impact. Is that correct?
That's correct.
That is correct, yeah.
That's correct.
Yeah.
Brady, maybe. Any other questions? It usually comes in threes, Matthew.
No, just it's.
Okay. it's not like-
Yeah, I'm a bit tired, so maybe just this.
not like London buses. All right. Okay, Brady-
Maybe just these ones.
No. Brady, do you wanna comment on this question of the impact of AI on consulting or on tech services?
Certainly. I think AI is going to drive tremendous efficiency in terms of... Pardon the noise. In terms of the ability to do more with less headcount. I think most of our clients are going to be in particular looking for opportunities to change the way their organizations actually deliver engineering capacity, and they're going to need, you know, strong hands at the wheel that help them to navigate and chart that future. I think there's tremendous upside from a business transformation perspective, just helping clients to navigate that future. From a delivery perspective, the actual efficiencies around AI-augmented engineering are going to help us to change our cost model pretty foundationally. From my vantage point, a lot of upside.
Okay. Wes, do you wanna comment at all on that from your perspective?
I think it's same. Brady and myself have been in quite a few of these conversations already. I think the AI conversations that we're having now, they're the precursors to big digital transformation pushes because it isn't just a hype cycle, right? It's paradigm shift type stuff. I think there's massive upside from a digital transformation perspective. I've seen the discussions around what the potential impact is on consultancy. I would say our consultative offering is a bit more hands-on, like we're not just putting PowerPoints together. I'd be a bit more worried if our consultative output was just slides, but that's not what we're doing.
Okay. Matthew is all right? Okay.
Thank you.
Priscilla, yeah.
Once again, ladies and gentlemen, if you would like to ask a question, please press star one. We'll move on with our next participant, Tom Singlehurst from Citi. Please go ahead. Your line is open.
Thanks very much for the presentation, thanks for taking the question. I'm going to go for 2 rather than 3. First one, just very simply, new business pipeline. Any sort of broad comments? I mean, should we think about the emphasis being much more on expand rather than land in the short term? That was the first question. The second question for Mary, just any insight at this stage on the phasing of what sort of margin development, one H versus two H. I mean, obviously we would expect seasonality to push margin into the second half in general, whether there's anything we should particularly look out for as we consider one H margin. Thank you very much.
Okay. Mary, margin.
Yeah, sure. Thanks. Hi, Tom. In terms of the margin phasing, I mean, as in prior years, obviously our seasonality is very, very back half weighted, and we would expect our margin trajectory during H1 and H2 to reflect that, as it has done in prior years. Obviously building towards our 15%-16% margin guidance.
Okay. On new business, let's do a round robin. Let's Brady, you want to talk about new business pipeline and whether it'll be more expand than land?
Yeah, certainly. I think, right now, as I said before, our clients are looking at very long-term, large-scale transformational work inside their organizations, and it's gonna continue to drive headwinds. There's definitely softness at the top of the funnel, I think that should shift as we head into the back half of the year, as we continue our push around the integrated brand offering across the four pillars. I think, upside to be found, certainly.
Okay. Chris, do you wanna comment on that in terms of pipeline and land and expand?
Yeah, if I'm speaking specifically for DDM, I think we're equal weighted going through the year through consolidation and brands looking for partners in the media space that are really tying together creative efficiencies, media scale, as well as technology implementation and measurement. We, in the efficiency push for 2023 across the land part of the equation, we are seeing a lot more interest in inbound questions and RFIs. On the expand part, we've only just scratched the surface on expanding into the consolidation opportunities across our existing portfolio. The continued expansion of our existing Whoppers and opportunities. I'd say we're equal footing on the DDM front in that equation.
Okay. Wes, do you want on land and expand it? Are you giving up landing or are you continuing to land?
We still like to land. I would say the way we're looking at it is we have really large upside potential in our existing client base. We've been able to get quite a lot of them with Content revenue as the main driver to Whoppers. There's a lot of focus now on getting that next wave scored. Is Whopperize the official term that you use in these conversations? I'm not sure.
Yeah. You can still use it.
There's a lot of focus in making sure we expand because we've done the hard work of landing in some of the world's biggest enterprise organizations. We have a healthy pipeline, so we're always on the lookout to add what we call the sort of local hero business. I would say it's probably equal to what Chris is saying, 50/50 or maybe slightly more leaning towards expand because there are so much opportunities on the table there for us.
Yeah. I think the thing we don't like, Tom, particularly is the big pitch situations where you get huge procurement pressure. Going back to Julien's question, procurement can use the AI or the thrust of Julien's question, to try and drive price down even further. We don't like that. I would say land and expand continues, as we pointed out in the release, to be the best way of expanding, given the consolidation opportunities that Wes and I mentioned and we talked about earlier. I think land and expand continues to be where we should be. Actually AI and AGI gives us a chance to demonstrate what we can do on initial project basis that gets us in. Okay?
Okay. I actually had a quick follow-up if that's okay.
Yeah.
Only because I only just thought of it, so I am gonna do three questions after all. Earlier on in the call you mentioned, and I don't know whether you were explicitly saying 50/50, but, you know, half of the clients are looking at AI and AGI-
Yeah
...as a huge opportunity and half maybe a bit more reticent. Is there a particular, sort of sectoral or even geographical skew to that? I'm just interested.
No, I.
...sort of in general, U.S. tech-based clients are more-
I don't mind it.
I was at a conference this week in London, actually. There were 300, supposedly 300 CEOs in the room, they did a Slido poll, pretty much exactly half were full on and in on AI and AGI and the implications, and the other half were sort of waiting, exploring. I think that's a fair representation of what we're seeing. That there are people maybe by sector, you know, obviously the tech companies want to jump in faster. There are others. I mean, 1 package goods company we talked to last week, major global 1, is jumping in heavily, not experimenting. I think 1 sports-related major client which we have experience of, is experimenting. I think, yeah, I think it's roughly half and half.
People are very hesitant, Tom, for the obvious reason for. I mean, at that conference I was at, there was an Alphabet DeepMind expert, and they were very hesitant to name sectors as being winners or losers. I know you've just written a note, or you or Citi have just written a note, which I'm sure you participated in, which attempted to do that. You know, we touched on that in the release. There's a lot of people trying to go early, you know, putting short baskets in. I think 3 banks on the same day issued short baskets, related to AGI or AI. I think there's a general hesitancy to do that because it's Wes described it as day zero. It's too early to call, I think, as to where.
Yeah, there are some obvious things. Translation we've seen. Homework we've seen. Call centers clearly will be displaced. It's too early to call, I think, where it is. I mean, Wes, do you wanna add to that? What you see with clients? I mean, you've touched on it.
I mean, clients that have more internal pressure on costs are a little more aggressive when it comes to wanting to move. To Scott's earlier point, we also have a lot of clients that are really looking at the maybe mid to long-term upside of better marketing and better advertising. I honestly think it's the internal pressures that to an extent define how quickly people want to move. I would say it's very early to call winners and losers. Except for what Sir Martin just said. There are some very clear places, of course. Broadly, I would say it's a bit early.
Okay. Priscilla?
Thank you. We have our last question from Omar Sheikh from Morgan Stanley. Please go ahead. Your line is open.
Yeah. Morning, everyone. I've got three actually as well, if possible. First of all, wanted to ask about Content and DDM. Could you tell us whether you're expecting to outperform your client group in terms of growth in the balance of the year? I mean, normally in the past you've said that there's a kind of a growth rate you should assume for Google, Meta and the others, and that you guys will Is that still the case? That's the first question. Secondly, maybe for Mary, could you give us a sense of what you're expecting to do on headcount for the full year? Perhaps if you could just talk about what...
How much flexibility you think you have in terms of freelance and other sort of levers you might have in the event that maybe the full year top line doesn't come in sort of in line with your current expectations? The second question. I couldn't resist asking Martin the question about the full year guidance. 8%-12% is a wide range. Where are you currently sitting within the 8%-12% in terms of where you think you're gonna end up? Thanks.
Stronger than Q1, I think is the answer to the third question. I think I've answered that with one word, Omar, which is stronger. You can take your pick on the 8-12 on that basis. Mary, do you want to answer the question on headcount?
Headcount. Sure. Yeah, you will have seen that our headcount at the end of Q1 was roughly 8,700, which is down from towards 8,900 at the end of 2022. That reflects the work we continue to do in managing the headcount very carefully. We still have our tight controls on headcount and our assessment with each head that comes into the business, against the revenue that is secured against it, ensuring that we're driving maximum operational efficiency. As I think about the full year forecast, our expectation is that headcount may rise very slightly as we get towards the back half of the year to support the growth. We will continue to drive as much efficiency as possible through the business.
Obviously, were we, and we don't see this at the moment, but were we to see a risk in the top line, we would manage the headcount accordingly.
Okay. Just go back to the first question, which was, you know, can Content or will Content or, and/or DDM outperform the platforms? Chris?
I won't comment on directly outperforming platforms. I think certain platforms are going to do better over the next year. I would say that we are doing well against Google and Amazon when it comes to how much work we do with them and how much momentum they provide to us, especially during this moment of increased transformational change and opportunity. I think that we are, as a services organization, going to perform quite well within the tech ecosystem that we are currently very well coupled to. From a DDM perspective, we are reiterating guidance for the year. I think that's all I can say on that.
Yeah, I think I mean, what we've said is we'll try and outperform our addressable markets. Omar Sheikh, the projection still for digital media spend is 7%-8%. We're still saying we'll grow 8%-12%. I think that's.
Yeah, taking into account Q1, that would imply an acceleration.
For both of us.
... for DDM as well. In Q2, 3 and 4. Wes, do you wanna comment on outperforming the platforms?
Yeah. I always think Chris's call sort of hit the beats there. I don't have much to add, but, we're expecting. What was the exact term, Omar, did you use to outperform our.
Yeah.
Addressable markets.
Addressable.
Addressable market. That's what we're expecting, and that's what we're forecasting based on current pipeline.
I mean, if you, if you take the guidance that we've given, Omar Sheikh, you look at Q1, whether you look at it including the Whopper reduction or not, it implies the reiterating the guidance it implies an acceleration in Q2, 3, and 4, and that would lead you to the conclusion that we don't know. I mean, we've looked, we see what the forecasts are from analysts for the platforms. If you look at those, it would imply an outperformance of that.
Very clear. Thanks all.
All right. Thank you very much. I think. Any more, Priscilla, or are we finished? Okay. We're finished.
there is no more questions.
All right.
Yes.
Okay. Thanks everybody for joining. We have another analyst call. What time is it, Chris?
1:00 U.K. time.
1:00 U.K. time with the U.S. Okay. Thank you very much. Big thanks to Wes, to Chris, to Brady, and obviously to Mary and Scott here. Thank you. See you next quarter.
Thanks, everyone.
Thank you.