Is there more operational leverage in the digital business at S4 versus traditional agencies?

Probably a little. We were talking about it with an institution yesterday. I think, when we add an account like Mondelez – Mondelez is an existing client, but we add in the area of content – or when we add BMW and MINI, in Europe, each one is going to add more than 10% to our revenues. We are 3,200 people at the minute and we’ve hired around 300 people and, in that number, a few are the hiring for BMW MINI, but we’ll probably be at about 3,600 - 3,700, in fairly short order, excluding deals, which will drive us over 4,000. I would say, when we add an account like BMW MINI, we are adding people at pretty much the same rate.

Within BMW MINI and Mondelez, in addition to the scope of the business we’ve won, we’ve already added, in a few weeks, additional assignments and in that, that’s where you get the operational leverage. Your operational leverage is better when you do land and expand, which is win a project, add a project – you have to add people – add a project, add a project. Our revenues are around $400 million, trending upwards, obviously, from that level. A whopper, to us, is about $20 million, about 5% of our revenues. The biggest whopper we have is Google; our second biggest is a major tech communications company. You can guess who it is; one of the most valuable companies in the world, but we can’t say because of an NDA. Third and fourth would be BMW MINI and Mondelez; they would be vying between one another, I would think. The fifth is Facebook.

Facebook has come through land and expand. Win a project, grow it. Apple has come through that and Google, to some extent, has come through deals but has, principally, been driven by land and expand. That’s a much healthier way, I think. In terms of big pitches, Mondelez took nine months and BMW MINI took a year and a week. These are great drains on resources. For the bigger agencies, they’ve got more resources, but we’re getting there; we’re getting able to do it. We very carefully assess the likelihood of us winning, before we get involved.

On the operational leverage point, if you just look at Omnicom’s or WPP’s EBIT margin, for the last 20 years, it’s very sustainable between 11% to 13% margin, so very little operational leverage.

We were targeting 20% when I was at WPP. I think we got up to the heights of 17%, 18%. In this plan today, they’re talking about 13% to 15%, I think.

That’s their high end?

It’s not, historically, the case. For gross profit on net revenues, 15% seems to be where they are all aiming for. I think that indicates, to some extent, a commoditized business. I think a “good” professional services business should be doing 20% plus. There was one account that WPP actually won recently, where they basically offered guarantees on $160 million of media and they offered 120 days payment terms. Any mug can win or keep pieces of business if you offer those sort of trading terms. Finance and procurement do well in these sorts of environments. I was talking to our companies in Australia, just now, and they were saying how 2020 was the year of the CFO, because the CFO managed to exercise tremendous control over what was going on. I think the margins should be 20%, 20% plus.

You think S4 could get some more operational leverage, from a higher base?

Limited. If Peter Rademaker, our CFO, was on, he would say that there is 22%, 23%, 24% that you could get, depending on where the plans come from. Obviously, if you are doing deals, it depends on what the margins of the deal company is. It so happens that in stuff that we are looking at, at the moment, margins are north of 20%, but we’ll see. I’m satisfied with 20% and I would sacrifice a little bit of margin over 20%, 21%, 22%, for top-line growth.

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