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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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. You are in Maine or where?
I'm in Edinburgh today.
In Edinburgh, my god you get around. Okay. Anyway. At least the same time zone. All right. So let's go to 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 and maybe longer than du jour from Wesley ter Haar on artificial intelligence, it's the issue or a set of issues, I think we've had the greatest amount of inbound questions and asks about. And then we'll do a session of Q&A. And then you have an appendix attached to the presentation, which is on our website, which gives further details, which Mary will touch on. So kick off with the trading update. Mary?
Thank you, Martin. So good morning. Thank you for joining us today. Our first quarter performance was in line with our expectations, with revenue of £262 million, up 27% on a reported basis and 6% like-for-like. Net revenue of £219 million was up 28% reported or 7% like-for-like.
We maintain our full-year guidance of 8% to 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 the 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% to 16%.
As in previous years, operational EBITDA will be significantly weighted to the second half. Net debt at the end of March was £136 million or 1x operational EBITDA. Our full-year net debt guidance of £180 million to £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 face 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. And 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. And 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. And 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 on generative AI. I think scope 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 or pretty much everything. And from an S4 perspective, we've talked about the change of economics of advertising since the very first day. That would faster, better and cheaper means. So 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, but 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. So 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 going to be massive upside potential.
And 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. So this technology actually bridges that gap. And we suspect it unlocks a massive new wave of opportunity in digital and digital advertising. We do see that as day one now. And we'll talk a bit about the distinction between day one and day zero. But if we go to the next slide, this is what we're seeing in market. No marketer can ignore this technology. And really, that's what our clients need at this moment. They need our support and they need our subject matter expertise.
But if we go to the next slide, this is paraphrasing conversation I had with one of our enterprise clients earlier in the week. The enterprise is about minimizing and managing risk. So I think some of the conversations 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. And then we have clients that are really looking at solving the complexities of day zero before they dive in.
And if we go to the next slide, just 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 earlier in the week to very bullishly about using 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. So 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. And 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 new road map 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 the sort of highly conversational, highly sticky brand interface and customer experience happens. The case will show 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 – and of course, we've been in the in-housing space for a while. We're helping to 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.
And then 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. So something that we see has a huge sort of product we will be able to roll out for more of our clients.
And then when it comes to data and cloud, I think this is really a continuation of whatever we've been saying from this full perspective. It's important to have a single source of proof 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 going to be a competitive advantage moving forward.
So 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. But if you look at our history, we've been talking and thinking about this consistently since 2017 and it's reflected in what we've seen from us in the last six months.
One of the very first top 25 players that I've 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 level – much deeper level detail than anybody else currently has in market and so on and so on. And of course, we talked about this in our 2022 numbers, I think at the level of detail that the rest have not yet. So 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 Plaibooks, our AI Plaibooks. 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. And honestly, the progress that we're making in these last six months or so because 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 in change management operation. It's definitely the biggest we've ever done. [Indiscernible] it's one of the biggest our industry has going at this moment.
And 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 say 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 MonkGPT internally. We are empowering all of our teams to use the tech in a safe and secure way. And really, we have built up a very healthy ecosystem of AI and power tools and workflows.
And 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 in pipeline because it is going to 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 the AI is the great connector, right. It really works if you can bring data, media content and technology into single pipelines. And we believe the winners in this AI disruption will be single companies in our industry, not fragmented teams on P&L islands.
And then if we go to the next slide, it really comes back to our mission. Our mission is faster, better, cheaper. And 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. And Scott has been getting pretty much daily questions on AI, has spun up massively over the last few weeks, of course. So we wanted to tackle some of these head on, make sure everybody on this call has the same level of information, and that might give us a next level of detail as we go to Q&A.
The questions really are centered around three areas: Scale, our sector weight – by the way, 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 going to have to disrupt massive parts of your own organization and ability to make money. So 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. So 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 offers and data. We know what's happening and what's going to happen in the industry ahead of the curve, which means we can help translate that to the use in 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 taking implementation at scale, right, taking all of the technologies and platforms and making them manageable to make that connection to companies and consumers. This is really the next wave of that. And being at the frontlines of the AI revolution, I think, is going to be really meaningful.
Sales. We see this as big a conquesting opportunity as the first year and half of COVID, which was massive for us, but day zero slowed 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. But again, the enterprise is about managing and mitigating risks on all of our clients or all of the clients in the industry will move at the same level of speed. That's us.
We're going to go to Q&A after this, but 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. And just thinking about this scaling, I think, is really, really interesting. Great piece of work by our team, Kiki.
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So thanks, Mary, and thanks, Wes. We're turning out 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. So Priscilla, our operator, can you – any questions, please?
Yes. Sure, sir. [Operator Instructions] 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% to 12% for the full-year when investors expect a macro slowdown? That's my first question. My second question is how can your revenue grow double-digit if your number of employees going down 2%? Historically, there's been a very strong relationship between revenue and number of employees, i.e., revenue per employee broadly flat?
And then last one is another question on AI. Agencies historically have been a cost business. So if the client gives you a budget for 100, you say, right, I'm going to spend, let's say, 85 to get my 15% margin. With generative AI, there's some surveys done by the MIT that says you will be 40% more productive. So you're only going to spend 60. I don't think the client would let you get away with 40 margin, i.e., they're going to say we're going to give you less revenue for the same work. So 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.
So 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. So 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 the first quarter revised forecast, we did at the end of the first quarter into April. And those – actually, there was very little difference between the budget and the Q1 RF. The comparatives in Q2, Q3 and Q4 are "easy." 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. And given what we see in terms of secured revenues at this stage in the year compared to last year and taking 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. So I think on the forecast, I think your first two questions are the same.
The other thing is to say, if you look at Q1, our net revenue increased whether you look at it before or after major account – the one major account reduction, we still have a significant relationship, but it will 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. But 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, Q3 and Q4, they also forecast significant increase despite what you referred to macro slowdowns and 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. So Mary, do you want to add anything more on forecast for that?
No, I think you've covered it.
Okay. All right. So that's a forecast, so anything on forecast Scott, no? Okay. Maybe on the AI question, it's a common question that you've asked on other calls, Julien. I think it's almost exactly the same. And I think...
It is. I'm collecting the answers.
Well, I think you're going to get – I can disappoint you. I think you're probably going to 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 want to comment, Wes, from your perspective on this issue about cost and productivity?
Well, I think we have to be realistic that it's our role to help clients find that efficiency right. So if you're not helping your clients find that efficiency, I don't think you're being good partner. But 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. So 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. And those constitute value that goes beyond an hourly rate. So there are conversations we're having right now with procurement 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 because you have to understand that efficiency is going to be a huge driver of this wave of tech. And that probably answers question two 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 message more and more in the next few years.
On the headcount point, Julien, it may well be that we over hired similar to the tech platforms what you're seeing happening with the tech platforms during the COVID period and the post-COVID lockdown. So I think this is all part of an adjustment that we're making. I mean, 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 are forecasting in that budget and in that Q1 RF that I referred to.
The other thing the point I make is – 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 occupy. So I think this provides us with an opportunity. And I'd just say one other thing, when you look at the clients, that roughly half of the clients are saying, we are full on into this immediately.
And the other half are saying we'll experiment with it, and I think Wes touched on this in one of his slides. They'll experiment with it. So 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, uses a super tool and then impact it on copywriting and visualization. We're starting to see the other half of the clients just experiment. So 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? And we have a lot of clients that look at marketing as an investment. So AI does allow them to invest their money more effectively, but it doesn't mean that they reduce their budgets. So actually, if you look at Wes' 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. So 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.
Yes. Good morning everybody. Thanks for this. Three for me. First of all, you talked 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 April and the second quarter. So are clients having sort of had an SVP 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?
And then 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 post-COVID sort of boom, why they should increase spending with you in this year? Thank you.
Just on the delays and maybe Chris can come in on this from a DDM perspective. But on delays, I think budgets as clients were slower at the end of 2022 and into 2023 to finalize not just marketing budgets, but their operating budgets from which marketing budgets came. So 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. And when we look at pipelines and percentages secured, we're seeing similar patterns to what we saw last year. So I think that's the reason for the delays. Chris, do you want to comment from a DDM point of view 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 and that carried over almost like a hangover into Q1 decision-making and setting budgets. But we're through the first quarter now. And most of our clients have made those decisions, and they have secured the budgets for the year. So the reiteration of that business and the visibility that we have for the end of the year is much stronger than we would have had in Q4 of last year. So only to echo your comments, Martin.
Okay. On the second question, Steve, Brady is having connectivity problems, so no visual, but he is still there on sound. So Brady, do you want to comment on this point about tech services and what Steve is seeing elsewhere in the sector?
Sure, Martin, I lost the last part of the question, you think you could repeat it very briefly?
Yes. So 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 forecast 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. So 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 going to 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 or Q3 and Q4, content accelerates in terms of its like-for-like growth and so does DDM, and tech services' rate of growth is less, but the overall position continues to improve. And then 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, Q3 and Q4.
Just quickly on tech services where I'd add, I think Brady is maybe too modest to talk about it. But I think Brady has done a fantastic job of integrating his business and the Zemoga business together, but also integrating across S4. So we're seeing some early sort of fruits bear from that. And I think that's certainly helping the business.
And just on your question, Steve, about sort of clients cutting back, I think it's – it varies. I mean, certainly, when we look at – and 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 then there are another 14 that we have in the opportunity 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. So 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. But 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 what's happened has taken a bit of a hit. We're not heavy into financials. We do have financial clients. The tech pattern is not clear cut, 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 want to add anything, Wes, from your point of view, from a Content 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 work now, and we're actually seeing some pretty healthy growth in our tech clients, especially. So I think it's not a single narrative. It also depends on your positioning within some of these clients, where I think we're actually well positioned because I think clients are consolidating more and we're – and that's always been our pitch, a great partner to consolidate with. So we're...
I think with macro conditions – 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. And there is a trend, I think, to consolidate when times get tougher. So does that cover your three questions, Steve?
Yes. And just to sort of really I'm trying to get you to hammer home the point a bit on – specifically on the tech clients that just because they're cutting headcount because they overinvested 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 going to cut marketing spend, but that's what we were trying to get at.
Yes, I think the point is most of the cost cutting that they're focused on is rebalancing that headcount growth and getting it in line with their revenue growth. But the reality is 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. So it's not that – I think those two things are not linked.
To be fair, the headcount reductions in the tech clients does cause initial disruption. But once the disruption, let's say, one or two months. And once that disruption, it sort of eases or ceases, what we see is further growth, it moves from, obviously, in-house activity and in-house solutions to outsource solutions or embedded solutions, and we have three basic models, and those are the three. So embedded, there are people who are on-premises or heavily involved with the client or the outsourced sort of classic traditional outsourcing to agencies actually is enhanced.
But if you look at – very few of the tech clients actually break out their ad spend. But if you look, for example, Google does, the Alphabet does, and you can see actually that in Q1, the spend was up slightly. It's sort of flat to up in Q1 of this year. So 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 what AI might achieve. Can you give us your perspective just on how AI might apply to consulting business transformation? And 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 partially lost and the 8% was excluding it. So in actual fact, although you're guiding on the 8% to 12% excluding the impact you're actually reporting – the way you're reporting it is actually including the impact. Is that correct?
That's correct. That's correct. And the other question, he usually comes in three, Matthew.
No, no, just it's a bit though…
Not like London buses. All right. Okay. Brady, do you want to comment on this question of the impact of AI on consulting or on tech services.
Certainly, I think AI is going to drive tremendous efficiencies in terms of the ability to do more with less headcount. I think most of our clients are going to be particularly looking for opportunities to change the way their organizations actually deliver engineering capacity and they're going to need strong hands at the wheel that help them to navigate and trap that future. So I think there's tremendous upside from a business transformation perspective, just helping clients to navigate that future. Then from a delivery perspective, the actual efficiencies around AI augmented engineering are going to help us to change our cost model pretty foundationally. So from my vantage point, a lot of upside.
Okay. Wes, do you want to comment on that from your perspective?
Yes. I think it's same and Brady and myself have been in quite a few of these conversations already. I think the AI conversations that we're having now that are precursors to big digital transformation pushes because it isn't just a high cycle, right? It's paradigm shift type stuff. So 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, 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 it all right? Okay, Priscilla.
Thank you. [Operator Instructions] We'll move on with our next participant, Tom Singlehurst from Citi. Please go ahead. Your line is open.
Yes. Thanks very much for the presentation and thanks for taking the question. Yes, two, I only got two rather than three. And 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. And then the second question for Mary. Just any insights at this stage on the phasing of what sort of margin development, 1H versus 2H and obviously, we would expect seasonality to push margin into the second half in general, but whether there's anything we should particularly look out for as we consider 1H margins? Thank you very much.
Mary?
Yes, sure. Hi, Tom. So in terms of the margin phasing, so I mean, as in prior years, obviously, our seasonality is 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% to 16% margin guidance.
Okay. On new business, let's do a round robin, that's Brady, you want to talk about new business pipeline and whether it will be more expand than land?
Yes, 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 going to continue to drive headwinds. There's definitely softness at the top of the funnel, but 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 could be found certainly.
Okay. Chris, do you want to comment on that in terms of pipeline and land-and-expand?
Yes. 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. But on the expand part, we've only just scratched the surface on expanding into the consolidation opportunities across our existing portfolio. So the continued expansion of our existing whoppers and opportunities. So I'd say we're equal footing on the DDM front in that equation.
Okay. And Wes do on land-and-expand, are you giving up landing? Or is it continuing to land?
No, we'd 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, and we've been able to get quite a lot of them with content revenue as the main driver to workforce. So there is a lot of focus now on getting that next wave. Scope is vaporized, the official term that you use in these conversations.
Yes, you can still use it.
Okay. So there's a lot of focus on making sure we expand because we've done the hard work of landing in some of the world's biggest enterprise organizations. But we have a healthy pipeline. So I – we're always going to look at, what we call, the sort of local euro business. I would say it's probably equal to what Chris is saying 50-50 or maybe slightly more leaning toward to expand because there's so much opportunities on the table there for us.
Yes. I think the thing that we don't like, Tom, particularly is the big pitch situations where you get huge procurement pressure. And going back to Julien's question, procurement can use the AI or the thrusted Julien's question to try and drive price down even further. So we don't like that. So I'd 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. And 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 okay, because I haven't just thought of it. So I'm going to do three questions after all. Earlier on in the call, you mentioned – and I don't know whether you were expressly saying 50-50, but half of the clients are looking at AI and AGI as huge opportunity and half, maybe a bit more reticent. Is there a particular sort of sector or even geographical skew to that? I'm just interested whether sort of, in general, U.S. tech-based clients are more open minded?
Yes. I was at a conference this week in London, actually, there were 300 – supposedly 300 CEOs in the room, and they did a Slido poll and exactly – well, pretty much exactly half were full on and in on AI and AGI in the implications and the other half were sort of waiting and exploring. And I think that's a fair representation what we're seeing. There are people maybe by sector, obviously, the tech companies want to jump in faster, but the – there are others. I mean, one packaged goods company we talked to last week, major global one is jumping in heavily, not experimenting. I think one sports-related major client which we have experience of is experimenting.
So I think – yes, 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 deep mind expert. And they were very hesitant to name sectors as being winners or losers. I know you've just written a note or Citi have just written a note, which I'm sure you participated in which attempted to do that. But we touched on that in the release. There's a lot of people trying to go early putting short baskets in, I think, three banks on the same day issued short baskets related to AGI or AI. And 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 – there are some obvious things, translation. We've seen homework. We've seen call centers, clearly will be displaced. But it's too early to call, I think, where it is. I mean, Wes, do you want to 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. So to Scott's earlier point, we also have a lot of clients that are really looking at maybe mid to long-term upside of better marketing and better advertising. Well, I obviously think it's the internal pressures that, to an extent, define how quick people want to move. I would say it's very early to call winners and losers, except for what Martin just said, there's some very clear places, of course. But 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.
Yes. Good morning, everyone. I've got three actually as well, if possible. So first of all, I 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 Metro and the others and that you guys will [indiscernible] 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? And 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 topline doesn't come in or in line with your current expectations? The second question. And then I couldn't resist Martin asking the question about the full-year guidance, so 8% to 12% is a wide range, where are you currently sitting within the 8% to 12% in terms of where you think you can end up? Thanks.
Stronger than Q1. I think is the answer to the third question. So I think I'll answer that with one word, which is stronger. You can take your pick on the 8% to 12%. On that basis, Mary, do you want to answer the third question on headcount?
Sure. So yes, so you would have seen that our headcount at the end of Q1 was roughly 8,700 and which is down from towards 8,900 at the end of 2022. Now 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. But we will continue to drive as much efficiency as possible through the business. And obviously, were we – and we don't see this at the moment, but were we to see a risk in the topline, we would manage the headcount accordingly.
Okay. So just go back to the first question, which was we can Content or will Content 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. And so 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.
I think – I mean what we've said is we'll try and outperform our addressable market. So the projections still for digital media spend is 7% to 8%. We're still saying we'll grow 8% to 12%. So I think that's...
Yes. And taking into account Q1, that would imply an acceleration.
For both of us.
For DDM as well, so in Q2, Q3 and Q4. Wes, do you want to comment on outperforming the platforms?
Yes, I always think [indiscernible] beat there. I don't know much that I have, but we're expecting – what was the exact term to use to outperform our...
Yes, addressable market.
Addressable market. That's what we're expecting, and that's what we're forecasting based on the current pipeline.
Yes. I mean if you take the guidance that we've given and you look at Q1, whether you look at it including the whopper reduction or not, it implies the reiterating the guidance and implies an acceleration in Q2, Q3 and Q4 and that would lead you to the conclusion that we would outperform what we do not know. I mean, look, we see what the forecasts are from analysts for the platforms. But if you look at those, it would imply outperformance of that.
Okay. Thanks all.
All right. Thank you very much. I think – any more Priscilla, or are we finished. Okay, we're finished.
There are no more questions.
Okay. Thanks, everybody, for joining. We have another analyst call. What time is it?
1:00 o’clock, U.K. time.
1:00 U.K. time with U.S. Okay. So thank you very much. Big thanks to Wes, to Chris, to Brady and obviously, to Mary and Scott here. So thank you. See you next quarter.
Thanks, everyone.
Thank you.