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System1 profits tumble as marketing spend cut
Marketing agency System1 saw annual profit decline 68% in what chief executive John Kearon called "quite a year" as clients cut spending on market research and corporate costs rose as the company shifted its focus towards lower-cost, higher-margin products.
Gross profits fell 18% to £22.2m, in line with pre-close guidance, with pre-tax profits tumbled to £1.99m, but at the top of its £1.6-2m guidance range. Revenues fell back 18% to £26.9m as part of a financial performance the AIM-quoted group referred to as being "disappointing".
System1 continued to generate strong cash flow throughout the year, returning £4.19m to shareholders by way of dividends during the twelve months ended 31 March and proposing to pay a further dividend of 6.4p per ordinary share as a result of its solid position.
System1's cash balances dropped 30% to £5.78m, however, the group remained completely debt free.
John Kearon, System1's chief executive, said, "2017/18 was quite a year. We were slow to appreciate the speed and scale of change occurring in our market, with painful consequences for investors and staff alike."
"The realisation that client budget-cuts were significant and probably permanent galvanised us to react, rethink and reinvent. The result, we believe, is a more competitive and scalable offer, with the potential to build a much larger and more stable business over the years to come," he added.
Kearon also warned investors that its current trading year would continue to be a "period of transition" as the group sought to sell its new and modified product offers against a "challenging market backdrop", including development of an ad testing database to be launched in the second half.
As of 0930 BST, System1 shares had tumbled 11% to 267p.
Broker Canaccord said that while materially down year-on-year, the results were better than expected.
"It has been hit by a slowdown in spending from the major FMCGs (fast moving consumer goods companies), at a time when it is transitioning towards lower cost but more scaleable (and higher margin) products, which should improve revenue visibility. There is a long lead time for new sales, and FY19 will be another transitional year," analysts said.
The shift towards more automated, high speed/scale products "should provide a more stable revenue mix, and the ability to drive up margins with scale", they added, with products aimed at generating efficiency in marketing spend, "which should resonate with clients". There have been some more positive signs. Q4 revenues were up 18% on Q3 (albeit this could be impacted by seasonality). And the group took out costs through H2 (headcount fell 5% YoY in H2, having been up 12% in H1). Overall, it is too early to call the turn.