S4 Capital has issued a profit warning after staff costs climbed ahead of profit and revenue growth, prompting another tumble in the share price of Martin Sorrell’s rapidly expanding advertising start-up.
Shares in the London-listed group lost roughly half of their value on Thursday morning, as the company lowered its full-year guidance on earnings before interest, taxes, depreciation and amortization to £120mn, compared with consensus in the range of £154mn to £165mn.
In order to “better balance” growth in revenue, profits and costs, S4 said in a statement that it had put in place a brake on hiring as part of “significant cost reduction measures”.
The company, which said staff costs had spiraled particularly in its creative departments, added that revenue and gross profit growth remained “robust”.
Sorrell, who was ousted from WPP in 2018 after building the business into one of the world’s biggest advertising companies, has pursued an aggressive acquisition strategy at S4, buying 30 media groups in just under four years.
Many of the deals have been made by offering a 50:50 split in cash and S4 shares, an approach that has become trickier after a delay to the publishing of its results this year prompted a significant hit to its stock price.
The former darling investor has yet to recover its buoyant share price, with the hit on Thursday sending it tumbling to 111p, compared with a peak of 878p last October.
The accounting issue earlier this year, which turned out to be related to the company’s fast growth, had prompted questions around checks and balances at the sprawling business.
Analysts at Citi on Thursday said they were not “too worried” about S4’s profit warning, saying it was a sign of “growing pains”. They did, however, add that it might “perpetuate concerns about the group’s controls given arguably this should have been better anticipated”.
S4 said the “significant” investments in financial controls, risk and governance that it had announced previously this year would not be affected by the planned cost cuts.
However the company said that, as it makes most of its profits in the second part of the year, the “profitability required for the second half of the year to meet market expectations will be even greater”.
Net debt in June was at the bottom end of its previous guidance of £140mn to 190mn.