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Warner Music Group Corp. (NASDAQ:WMG) Q2 2024 Earnings Call Transcript

Warner Music Group Corp. (NASDAQ:WMG) Q2 2024 Earnings Call Transcript May 9, 2024

Warner Music Group Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to Warner Music Group's Second Quarter Earnings Call for the period ended March 31st, 2024. 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. Please, you may begin.

Kareem Chin : Good morning, everyone. And welcome to Warner Music Group's fiscal second quarter earnings conference call. Please note that our earnings press release, earnings snapshot, and the Form 10-Q are available on our website. On today's call, we have our CEO, Robert Kyncl; and our CFO, Bryan Castellani, who will take you through our results, and then we'll answer your questions. Before our prepared remarks, I'd like to refer you to the second slide in the earnings snapshot to remind you 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.

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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. Our references to normalized revenue and adjusted OIBDA are adjusted for items that impact comparability. The details of these can be found in our filings. 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 to 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 : Thank you, Kareem. Good morning, everyone, and thank you for joining us. I am pleased with everything our global team is doing to deliver for our artists and songwriters and drive our business forward. In Q2, total revenue increased 7%, with Recorded Music and Music Publishing increasing 4% and 19% respectively. On a normalized basis, total revenue grew 9%, with Recorded Music up 7%. Recorded Music streaming revenue increased 11%, led by Subscription Streaming growth of 13.5%. This was driven by stronger music performance, as well as subscriber growth and subscription price increases. Total adjusted OIBDA increased 9% or 10% on a normalized basis. In Recorded Music, we continue to break new artists, build global careers, and mine our extraordinary catalog.

This quarter, we saw massive hits from artists across different genres in all stages of development, exactly the kind of mix we want. Benson Boone and Teddy Swims are the standout artist development stories of the year. They are also both signed to Warner Records as recording artists, as well as to Warner Chappell as songwriters. During the quarter, Benson Boone reached number one on the Spotify Global Chart, while Teddy Swims and Megan The Stallion, individually hit number one on the U.S. Hot 100 Chart. Benson, Megan, and Teddy all spent weeks in the Hot 100 Top 10, alongside carryover hits from Jack Harlow and Zack Bryan. Around the world, we also had number ones from Myke Towers, Green Day, [Juliet], and Blessed. We also continued to attract outstanding global talent with recent signings, including India-based superstar Nora Fatehi, top Ukrainian rock band Okean Elzy, and legendary multi Grammy-winning icon Angelique Kidjo.

It's encouraging to see our artists creating bodies of work with real staying power. These new releases are our catalog of the future. Here are some great examples of how our so-called shallow catalog is contributing to revenue growth. Ed Sheeran's Divide, released in 2017; and Dua Lipa's Future Nostalgia, released in 2020, are both in our top earning albums for the quarter. Deep catalog, releases that are more than 10 years old, also remains an important growth area with meaningful untapped opportunity. When we market catalog with the same ingenuity as new releases, it often has significant impact. For example, at this year's Grammys, our recording artists Tracy Chapman and Joni Mitchell both performed classic songs that saw a big boost in weekly audio streams of over 180% respectively.

Our Music Publishing division, Warner Chappell, continues to perform extremely well. Our songwriters contributed to a range of recent hits, from Benson Boone's Beautiful Things, Teddy Swim's Lose Control, and Jack Harlow's Lovin on Me, to Ariana Grande's We Can't Be Friends, and Kanye West and Ty Dolla Sign's Carnival. Top tier songwriters continue to recognize Warner Chapel's momentum. Recent signings include five-time Grammy nominee Coco Jones and Dua Lipa, who joins other superstars such as Cardi B, Zach Briyan, Madonna, and Led Zeppelin, who are represented by our company for both Recorded Music and Music Publishing. As reported, in music and copyright, we outpaced our peers in 2023, growing our global market share in Music Publishing. Simply said, we've executed well on expanding our songwriter roster, strengthening our services, and finding innovative ways for songs to get heard.

Impressively, this growth has largely been achieved organically, not through acquisitions at property multiples, further evidence of our success in identifying world-class songwriters early. A great example is the phenomenal success of British singer-songwriter Raye. She signed to Warner Chapell nine years ago. In March, she smashed records for the most nominations and wins in a single year at the BRIT Awards. In addition to her solo work, she's written hit songs for the likes of Beyonce, Rihanna, and John Legend. Earlier this year, I laid out three strategic priorities, growing engagement with our music, increase the value of our music, and evolve how we work together. We continue to make important progress on all these fronts. First, growing engagement with our music.

This is primarily driven by signing and serving ever-broadening spectrum of artists and songwriters, identifying and investing in territories where local music is gaining global appeal, and helping our talent break through the noise in a cluttered and fiercely competitive environment. Unusual for a company of our scale, most of our biggest stars are homegrown talent who have been with us since the earliest days of their careers, Bruno Mars, Ed Sheeran, Cardi B, and Dua Lipa, among others. We're building on this legacy by nurturing original artists into the next generation of superstars. A great example is Warner Records, who are the hottest label in the U.S. right now due to their focus on genuine talent and long-term artist development. In an industry where it's harder than ever to cut through, Warner Records has bucked the trend with success stories like Zack Bryan, Benson Boone, and Teddy Swims.

And their hot streak shows no sign of slowing down. Last September, we announced a joint venture with 10K Projects, founded by Elliot Grainge. 10K operates as a standalone U.S. label, opening up a whole new channel through which we can bring quality talent to market. From the get-go, this has been successful for Warner Music Group, both commercially and creatively. 10K continues to deliver incredible hits, with Artemus' latest single, I Like the Way You Kiss Me, going number one on Spotify Global Chart. As I've mentioned before, we continue to fuel our growth organically and via partnerships and acquisitions. As part of our mission to be a destination for artists and songwriters at every stage of development, we're expanding our lower-tax services that many independent artists, labels, and songwriters rely on.

As just one recent example, last month, Warner Chapell partnered with BandLab, the social music creation platform. We'll work together to identify and sign emerging songwriters, providing them with access to our comprehensive suite of offerings. We have a clear plan to develop this area of our ecosystem across the company, and we're building solutions in-house while staying vigilant about our M&A opportunities, which could accelerate our capabilities. At the same time, we're expanding our presence in dynamic Recorded Music markets. We've seen impressive results this past year. In Argentina, the fastest-growing market in 2023, we doubled our year-over-year revenue organically. In Sub-Saharan Africa, the fastest-growing region in 2022 and 2023, we were the only major music company to grow share last year.

A team of record producers and musicians in the studio, their creative process on full display.
A team of record producers and musicians in the studio, their creative process on full display.

In India, already the 14th largest market and climbing fast, we were again the only major to grow share in 2023. We continue to find ways to turbo-charge our growth and strengthen our global platform for local talent. Last month, we launched Warner Music South Asia to address a region with 400 million people across Bangladesh, Nepal, Pakistan, and Sri Lanka. Turning to our next strategic priority, growing the value of our music. There are two aspects to achieving this, growing the pie and growing our participation in the pie. Over the past year, there have been some initial steps in the right direction to grow the pie, including the first price increases at all major DSPs. We will continue to advocate for further increases as well as more sophisticated price optimization, especially as DSPs improve their offerings to bring in more subscribers.

We've also seen encouraging early signs in the evolution of royalty models that are aligning economics with premium content, thus growing our participation in the pie. It's important to note that these shifts to more artist-centric models take time to fully implement, and we don't expect immediate impact on our results. We're making every effort to build alignment with our partners, and it's the best way to ensure that the value that music provides to these platforms is properly recognized. Another area where we see great potential to grow the value of music is AI. As I said before, there are three constituents which play critical roles in the evolution of AI, platforms, models, and governments. The concepts of control, monetization, attribution, and provenance are the core of our discussions with all parties in order to protect artists, songwriters, and rights holders.

Last Tuesday, I testified on the promise and perils of generative AI before the U.S. Senate Judiciary Subcommittee on Intellectual Property. Voicing the shared concerns of the creative community, I urged Congress to act this year and pass a federal law that addresses deepfakes. My central message was that the use of people's likeness and voice requires consent and must be subject to free market negotiations. We should not abide by the appropriation of people's identities and the theft of artists' livelihoods. I'll briefly highlight one amazing example of the power of AI when done right. Since 2013, Randy Travis had aphasia, a condition that limits his ability to speak and sing. Last week, the legendary Grammy Award-winning Country Music Hall of Fame was able to release new music for the first time in over a decade, thanks to AI.

We played his new song, Where That Came From, on our pre-call hold music, and you should add it to your playlists right now. Moving on to my third priority, evolving how we work. On our last earnings call, we announced a restructuring plan which will enable us to increase our investment in music, technology, and new skill sets. We are on track. Although the full savings will not be realized until the end of fiscal ’25, the majority of the changes have already been implemented. This includes centralizing certain functions and exiting our owned and operated media businesses. Since we last spoke, we have sold the entertainment websites UPROXX, HipHopDX. We're allowing a strong foundation to accelerate our progress and yield greater value over time.

As part of this, we continue to develop our tech capabilities. I'll give you a few examples of some of our projects. We've made improvements to our royalty systems and the tools used to identify unclaimed revenue. We've overhauled our global supply chain, unlocking our ability to scale our third-party distribution business. And we've transformed our proprietary tools that identify fan trends while building new ways to engage with superfans. Our second half includes eagerly anticipated music from Dua Lipa, who dropped her new album, Radical Optimism, last Friday. And we're excited about our new releases from Twenty One Pilots, Sia, Ghana, Megan The Stallion, David Guetta, Fred again, Charlie Puth, and Maria Becerra. This is an exciting and transformative period for our company and for the music industry.

We're looking forward to building incredible careers and creating dynamic new opportunities in the months and years ahead. And with that, I'll turn it over to Bryan.

Bryan Castellani : Thank you, Robert, and good morning, everyone. Before I get into details of our Q2 results, I want to remind everyone that growth rate comparisons will be in constant currency. The items affecting Recorded Music streaming revenue comparability include the BMG digital revenue roll-off, which was $22 million unfavorable in the quarter. Additionally, the renewal with one of our international digital partners that resulted in upfront incremental revenue recognition of $27 million last quarter, resulted in an unfavorable impact of $4 million this quarter and will have a similar impact in Q3 and Q4. Details relating to these items can be found in our earnings press release. In Q2, total revenue grew 7% and adjusted OIBDA increased 9%, with a margin of 20.9% and an increase of 40 basis points over the prior year quarter.

On a normalized basis, total revenue grew 9% and adjusted OIBDA increased 10%. Recorded Music revenue grew 4% and 7% on a normalized basis. Streaming revenue grew 11% on a comparable basis, with Subscription Streaming growth accelerating to 13.5%, while ad-supported revenue increased 5%. The improvement in subscription growth was driven by stronger DSP sub-performance, along with price increases, partially offset by a deceleration in ad-supported revenue driven by platform mix. Physical revenue decreased 7%, driven by the timing of releases. Artist services and expanded-rights revenue decreased 3% due to lower merchandising revenue partially offset by higher concert promotion revenue in France and Japan. Licensing revenue grew 5%, primarily due to the timing of legal settlements.

Recorded Music adjusted OIBDA increased 9%, with a margin of 22.9% and an increase of 110 basis points. On a normalized basis, adjusted OIBDA increased 10%. Music Publishing continues to deliver impressive results, with revenue growth of 19%, driven by streaming and performance revenue. Digital and streaming revenue increased by 27% and 29%, respectively, reflecting the continued growth in streaming and the impact of digital deal renewals. We also benefited from the continued investment in an expansion of our publishing catalog. Performance revenue increased by 18% due to strong artist touring activity in Europe, while sync revenue increased 2%, driven by timing of legal settlements. Mechanical revenue decreased 6% due to lower physical sales.

Music Publishing adjusted OIBDA grew 8%, with a margin of 26.8%, a decrease of 270 basis points due to revenue mix. Turning to CapEx, we saw a $9 million decrease from the prior year quarter to $26 million due to the timing of tech investment. Operating cash flow decreased to a use of $31 million from a use of $6 million in the prior year quarter due to increased A&R investment and timing of working capital items. Free cash flow decreased to a use of $57 million from a use of $41 million in the prior year quarter. Our goal continues to be to deliver operating cash flow conversion of 50% to 60% over a multi-year period, which we expect to achieve for full year 2024. As of March 31st, we had a cash balance of $587 million, total debt of $4 billion, and net debt of $3.4 billion.

Our weighted average cost of debt was 4.5% and our nearest maturity date remains 2028. In February, we announced the plan to deliver $200 million of annualized run rate cost savings by the end of fiscal 2025. The plan is proceeding according to schedule. We achieved modest cost savings in the quarter, the majority of which were reinvested into tech. Regarding BMG, we estimate the revenue impact to be in the range of $25 to $30 million in both Q3 and Q4, eventually rolling off completely in fiscal 2025. As a reminder, BMG's physical distribution will roll off in fiscal 2025. As we look ahead, Q3 is off to a solid start. As Robert mentioned, we are excited about our upcoming releases. The momentum in music and the business is strong and we continue to position ourselves for long-term success, including to deliver on our goals of healthy top-line growth, margin expansion, and strong cash flow conversion on a consistent basis.

Thank you to everyone for joining us today. We'll now open the call for questions.

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