Warner Music Group Corp. (NASDAQ:WMG) Q4 2023 Earnings Call Transcript November 16, 2023
Warner Music Group Corp. beats earnings expectations. Reported EPS is $0.34, expectations were $0.25.
Operator: Welcome to Warner Music Group's Fourth Quarter Earnings Call for the period and fiscal year ended September 30, 2023. At the request of Warner Music Group, today's call is being recorded for replay purposes, and if you object, you may disconnect at any time. Now I would like to turn today's call over to your host, Mr. Kareem Chin, Head of Investor Relations. You may begin.
Kareem Chin: Good morning, everyone, and welcome to Warner Music Group's fiscal fourth quarter and full year earnings conference call. Please note that our earnings press release and earnings snapshot are available on our website and we plan to file our Form 10-K during the week of November 20. On today's call, we have our CEO, Robert Kyncl; and our CFO, Bryan Castellani, who will take you through our results. They will then be joined by Eric Levin for the Q&A portion of the call. Before our prepared remarks, I would like to refer you to the second slide of the earnings snapshot to remind you that this communication includes forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance.
We plan to present certain non-GAAP results during this conference call and in our earnings snapshot slides. And have provided schedules reconciling these results to our GAAP results in our earnings press release. All of these materials are posted on our website. Also, please note that all revenue figures and comparisons discussed today will be presented in constant currency, unless otherwise noted. All forward-looking statements are made as of today, and we disclaim any duty to update such statements. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs and projections will result or be achieved.
Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties and other factors that can cause actual results that differ materially from our expectations. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our filings with the SEC. And with that, I'll turn it over to Robert.
Robert Kyncl: Thanks, Kareem, and good morning, everyone. I'd like to warmly welcome Bryan Castellani, who joined us as CFO last month. Bryan spent more than two decades at Disney, most recently as CFO of Disney Entertainment and ESPN. We're excited he's part of our team now. I'd like to say a heartfelt thank you to Eric Levin, who's been our CFO for the past nine years. Eric has brought smart steady financial leadership to WMG during a transformational period for the industry and our company. Given this quarter was his last the CFO, who will be available for Q&A. I have no doubt you'll join me in wishing him the very best as he moves into retirement in January. I'm happy to say our Q4 performance continued to deliver on the second half improvement that we promised on our Q1 earnings call.
Led by an acceleration in our streaming revenue, Q4 revenue and adjusted OIBDA grew 5% and 18%, respectively. We also saw robust margin expansion of 230 basis points. For the full year, we reached a key milestone in eclipsing $6 billion of revenue for the first time ever. Our revenue and adjusted OIBDA grew 4% and 10%, respectively, and we delivered 120 basis points of margin expansion. Importantly, operating cash flow conversion was 56% of adjusted OIBDA. With industry tailwinds at our back and a solid slate of new music to start the year, we've headed into fiscal '24 with strong momentum. As always, everything we accomplished begins with our amazingly talented artists and songwriters. In recorded music, the diversity of our artist roster was showcased by a range of success stories from the global phenomenon of the Barbie soundtrack to the breakthrough countries superstar, Zach Ryan, with whom we also signed for publishing this year.
Warner Records artist, Kenya Grace, scored a global hit with strangers, which rose number one on Billboard’s Dance and Electronic chart. In the U.K., we celebrated the number one albums from Ed Sheeran, Bernard Boy, Lar and Liam Gallagher. And in Japan, MiSaMo made up of members of the super group Twice its number one with their first album. We continue to bolster our local success in multiple territories across the globe. We have number one hit by Gabz in Denmark, Kjartan Lauritzen in Norway. AIVA, ANA and CapoPlaza in Italy; Elva Hsiao in China; and Jasleen Royal in India just to name a few. At the same time, we brought bold inventive thinking to attracting new fans to our legendary artists and classic recordings. Recent examples included a new deluxe edition of talking had stopped making sense.
The 15th anniversary of Slipknot’s All Hope is Gone and the 20th anniversary of Linkin Park Meteora. With Madonna on tour, it's been a pleasure to find new ways to create cultural moments around her iconic career. These include a series of remix albums, the special pride edition of her box at containing 15 number one tracks and the celebratory viral campaign We Love Madonna. In Music Publishing, our powerful momentum continues as Warner Chappell writers contributed to 8 out of 14 Billboard number one spots in Q4, including Zach Ryan, I Remember Everything and Last Night by Morgan Wallen. We're always expanding our publishing roster and have recently signed hotly contested deals with up-and-coming stars Kaliii and Laufey and Maria Becerra.
We're always reinvigorating our incredible publishing catalog, which includes evergreen copyrights from composers such as George Michael, who was just inducted into the Rock & Roll Hall of Fame, Gamble and Huff, Van Morrison and Stephen Sondheim. As we speak, there are three Sondheim musicals running in New York, including a revival of Sweeney Todd, starting Warner record star Josh Groben, which was just nominated for a gram. Looking forward to a new fiscal year, I'm even more optimistic than I was when I started. We're excited about the trends we're seeing in the industry and energized by our plans to capitalize on them. Let's start with the industry. Advanced repeating, music is the most popular form of entertainment and it's only getting bigger.
Our addressable market encompasses virtually everyone on the planet. Growth in the music business is now well aligned with the opportunities constantly being created by the ongoing global penetration of smartphones and Internet service. Ever since I arrived at WMG, I've been laser-focused on how we can realize the true value of music. I'm grateful to all of our partners who are leaning in and figuring out how we make positive changes together. We're taking a two-pronged approach. First, price optimization, I see this as the most immediate and impactful growth lever for our industry. A more sophisticated and dynamic approach to consumer pricing will benefit the streaming platforms, music companies, artists and songwriters, the entire ecosystem, driving greater investment and innovation.
In the last year, we've seen the first round of subscription price increases across every major DSP and we strongly believe there is a greater pricing opportunity in the future. Second, the evolution of royalty models, we've been consistently clear that streaming services should ascribe more value to what their customers value most. It's the creativity of popular artists and songwriters that deliver subscriber engagement and growth. To state the obvious, premium music should be better compensated than low-quality filler or functional music. We were delighted to work with Deezer to help shape their new approach to rewarding premium music. Look out for similar developments with other partners in the coming months. While these proof points represent a good start, they are just that.
We will continue to work collaboratively with our partners to align behind the long-term growth of the industry. I just told you why we're excited about the music industry. Now let me explain why we're excited about Warner Music Group specifically. The future of music will be forged at the intersection of creativity and technology. With that in mind, we're carving out a distinctive proposition through the combination of the following. One, a deep iconic catalog as well as up and coming talent and thriving superstars; two, global scale with strong local capabilities and the discovery and promotion of talent; three, the ability to use technology as a force multiplier on the previous two attributes. Our commitment to each of these key areas is always underpinned by our focus on financial discipline, and we're constantly challenging ourselves to operate more efficiently and effectively.
As a rule of thumb, our recorded music revenue is evenly split among three release vintages. New releases, which are less than three years old, shallow catalog, which is more than three, but less than 10 years old and deep catalog, which is more than 10 years old. We invest in A&R and marketing across each of these vintages to create a consistent flow of music from our artists and songwriters all around the world, past, present and future. We pride ourselves on discovering original talent and unique voices with long-term potential. We provide them with tailored approaches to become standout global success stories. Think one-of-a-kind genre defying artists like Bruno Mars, Ed Sheeran, Cardi B, Dua Lipa, Zach Ryan and many more. The beauty of the streaming universe is that every time one of our superstars releases a new album or goes on the tour or scores a big same placement, the fan engagement spikes across their entire body of work.
Equally, in the world of playlisting and social media and a track from our catalog can go viral at any moment. These big hits from legends like Fleetwood Mac, Boney M and Madonna explode on multiple platforms, introducing these artists to a new generation. For instance, my 20-year-old daughter discovered Fleetwood Mac when their 1977 hit dreams went viral on TikTok two years ago. They are now her favorite band of all time. To fuel, maximize and monetize this uplift in engagement requires real expertise and a wide network of relationships. This is how we demonstrate our value and our relevance in the entertainment ecosystem, not just by discovering talent and promoting their latest works but by thinking holistically about their careers and growing their legacies.
Our entrepreneurial culture extends to how we select which companies to invest in or acquire. A perfect example is our new venture with 10K projects, which brings us a dynamic artist roster, fresh catalog and a visionary team led by Elliott Branch. Investing in our core business is in just about the recordings and compositions that we own. It's also about leveling up our distribution business in ways that delivers profitable growth. We created more capacity for ADA to focus on developing new distribution partnerships and for our technology team to build scalable solutions to enable these partnerships. In the last year, we signed deals with a range of labels, including Australia's last ride records, the U.K.'s LAB records and the U.S. Rostrum records which launched the careers of hip-hop stars like Mac Miller and Wiz Khalifa.
Let me turn now to our approach to global expansion and emerging markets. For some time now, our goal hasn't been just to market Anglo-American repertoire in local markets. Instead, we signed and develop local talent that can have regional or global success. As I've mentioned before, we're making great inroads in fast-growing territories like China, the Middle East and Africa. India is a great example of this strategy in action. With a vast population of 1.4 billion people and its huge diversity of demographics, India has an endlessly evolving music scene. According to IFDI India has more than doubled its recorded music revenue over the last five years, and it also has the highest growth of any top 20 country in 2022 at 48%. We've made huge strides since first launching our local office in Mumbai in 2020.
This year alone, we've grown our presence thereby acquiring e-positive and Indian management and live events company. Launching a new JV, 91 NORTH RECORDS and expanding our partnership with Sky Digital an aggregator of Punjabi music. Our team in India is attracting massive stars, including hip hop artist King who became the first Indian performer to hit Spotify's global top 30. The music ecosystem is healthy and has a number of exciting growth drivers, with price increases happening across all major DSPs, royalty models evolving to reward quality and emerging markets gaining traction. We're very confident and positive about the path ahead. We're excited about our new releases for fiscal '24 and including some that came out just last Friday from David Guetta, Jack Harlow, PinkPantheress, and of course, Dua Lipa, who had her biggest global launch to date with her new single Houdini.
There are also eagerly anticipated projects from Green Day, Kenya Grace, Cardigans, Gabby Barrett, Maria Bechara; and Myke Towers among many others. We've been working hard to build a WMG that will excel in the music industry of tomorrow. Our work is already beginning to bear fruit, and I assure you that there is much more excitement to come. And now, here's Bryan to walk you through our financial results.
Bryan Castellani: Thank you, Robert, and good morning, everyone. I am extremely excited to be here, and I'm looking forward to engaging closely with the investment community. In my brief time at Warner Music Group, I've been impressed with the work that we are doing. We are investing in our already strong core and leveraging technology, which will continue to augment our growth through a rapidly changing music industry. We have strong momentum ahead and we'll share regular updates with you as our progress continues. Now turning to our Q4 results, as Robert highlighted, our performance in the quarter was underpinned by a solid release slate and a recovery in ad supported streaming, which drove sequential acceleration in our recorded music streaming growth.
This fuels our second half improvement which combined with our disciplined cost management enabled us to deliver robust adjusted EBITDA growth and margin expansion for the full year. There are a couple of items throughout the quarter and the year that affected comparability. These include the impacts from the CRB mechanical royalty rate increase a copyright settlement and an extra reporting week. The details and adjustments relating to these items can be found in our earnings press release. I will provide growth rates in constant currency and normalized for these items. In Q4, total revenue grew 5% and adjusted OIBDA increased 18% and with a margin of 20%, an increase of 230 basis points over the prior year quarter. On a normalized basis, total revenue grew 6% and adjusted OIBDA increased 31% with a margin of 19.9%, an increase of 370 basis points over the prior year quarter.
Recorded Music revenue grew 2% and 5% on a normalized basis. Despite a challenging comparison to the prior year quarter, our streaming revenue grew 9% and an improvement from the 7% we reported in Q3. Subscription streaming revenue grew by approximately 10%, representing healthy growth over the 13% we delivered in the prior year quarter and was in line with Q3. Ad-supported revenue increased by 7%. Physical revenue increased 6%, driven by strong performance in the U.S. including from new releases like the Barbie Soundtrack, 50-50, G-idle and Mac Miller. Artist services and expanded rights revenue decreased 11% and -- the decrease was due to lower merchandising revenue in the U.S. tied to timing of touring cycles and economic headwinds in Europe that continue to impact our E&P business.
This was partially offset by higher concert promotion revenue. Licensing revenue grew by 7% due to higher broadcast fees. Recorded music adjusted OIBDA grew by 23%, with a margin of 21.8%, an increase of 370 basis points. On a normalized basis, adjusted OIBDA increased by 32% with margin expansion of 450 basis points. Music Publishing continues to deliver impressive results with revenue growth of 15%, driven by strength across all revenue lines. On a normalized basis, revenue grew 13%. Digital revenue increased 19% and streaming revenue increased 26%. On a normalized basis, Digital revenue grew 15% and streaming revenue increased 17%, reflecting the continued growth in streaming and the impact of digital deal renewals. Mechanical and performance revenue increased by 42% and 2%, respectively, while sync revenue increased by 3%, primarily due to stronger performance in the U.S. Music Publishing adjusted EBITDA grew 19% with a margin of 24.8%, an increase of 90 basis points.
On a normalized basis, Music Publishing adjusted OIBDA grew 17% with a margin of 24.9%, an increase of 80 basis points. Moving to our full year results. Total revenue grew 4% and adjusted OIBDA grew 10% with a margin of 20.5%, an increase of 120 basis points. On a normalized basis, total revenue grew 6% and adjusted OIBDA grew 17% with a margin of 20.4%, an increase of 190 basis points. We over-delivered our margin expansion guidance even as most of the cost savings from our March restructuring were reinvested to drive our business forward. Recorded music revenue increased 2%. Within Recorded Music streaming revenue increased 4% and adjusted OIBDA grew 7%, with margin expansion of 120 basis points. On a normalized basis, recorded music revenue increased 4% and streaming revenue grew 6% with adjusted OIBDA growth of 13% and margin expansion of 180 basis points.
Music Publishing revenue increased 15%, and adjusted OIBDA increased 28% with margin expansion of 270 basis points. On a normalized basis, music publishing revenue increased by 16%, and adjusted OIBDA increased by 28%, with margin expansion of 270 basis points. We continue to successfully launch certain components of our financial transformation program in select territories. The program remains on track to meaningfully roll out later this fiscal year and into FY '25. Once fully implemented, we expect the program to yield annualized run rate savings of $35 million to $40 million. Q4 CapEx of $38 million was the same as the prior year quarter. Q4 operating cash flow decreased 17% and to $338 million from $406 million in the prior year quarter.
The decrease was primarily driven by working capital items, which included higher royalty advances and the timing of digital deal renewals. Free cash flow decreased 18% to $300 million from $368 million in the prior year quarter. For the full year, operating cash flow decreased 7% to $687 million and free cash flow decreased 8% to $560 million. We delivered operating cash flow conversion with 56% for the full year, in line with our target of 50% to 60% over a multiyear period. As of September 30, we had a cash balance of $641 million, total debt of $4 billion and net debt of $3.3 billion. Our weighted average cost of debt is 4.1% and our nearest maturity date is in 2028. While growth was muted in the first half as we had some release scheduled softness, we recovered to end the year on solid footing and already have momentum in 2024.
We are off to a strong start with new releases from Dua Lipa, David Guetta, Jack Harlow, PinkPantheress and many others. As we look ahead to the fiscal Q1, I want to call out a couple of items that will impact comparability. First, we announced that our digital distribution agreement with BMG will end. To frame the impact, the total revenue contribution from BMG in fiscal 2023 and was approximately 4% of total recorded music digital revenue with negligible contribution to adjusted OIBDA. BMG has already started to bring its digital distribution in-house, and it will be largely rolled off by the end of October 2024. The impact to our Q1 24 recorded music digital revenue will be approximately $15 million as both Spotify and Apple will transition this month.
This impact will increase in Q2 and beyond as we will see the full quarter impact from the roll-off of these DSPs and as BMG gradually brings other digital partners in-house. We will also discontinue BMG's physical distribution by the end of October 2024. The BMG's physical distribution revenue represented less than 2% of our recorded music revenue in fiscal 2023. We will provide details going forward and disclose normalized growth adjusted for the impact of these items. Second, we have granted a licensing agreement extension for a catalog that will have a onetime favorable impact on recorded music licensing revenue and adjusted OIBDA of approximately $70 million in fiscal Q1 2024. While this is a multiyear licensing agreement extension, the revenue and adjusted OIBDA will be fully recognized in Q1.
Our goal is to deliver healthy top line growth margin expansion and cash flow conversion on a consistent basis. 2024 has started with much stronger momentum than we had entering 2023 and we expect our slate throughout the year. We will invest more heavily in A&R and marketing in 2024 to ensure the success of our slate. We still expect to deliver approximately 100 basis points of margin expansion for the full year, which will be back half weighted as well as 50% to 60% of operating cash flow conversion on a multiyear basis, in line with our targets. The momentum in the music entertainment business is strong, and we continue to position ourselves for long-term success and growth. Before I close, I also want to take a moment to thank Eric. His contributions to Warner Music Group and leadership of the finance team have been measurable.
I'm grateful for his and the team's support and such a smooth transition. Thank you to everyone for joining us today. We'll now open the call for questions.
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