Warner Music Group Corp.
Q3 2021 Earnings Call Transcript

Published: 3 Aug 2021

[Operator:]

Welcome to Warner Music Group's Third Quarter Earnings Call for the period ended June 30, 2021. 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. Welcome to Warner Music Group's fiscal third quarter earnings conference call. Please note that our earnings press release, earnings snapshot, and the Form 10-Q we filed this morning will be available on our website. On today's call, we have our CEO, Steve Cooper; and our CFO, Eric Levin, who will take you through our results, and then, we will answer your questions.

[Steve Cooper:]

Thanks, Kareem. Good morning, everyone and thanks so much for joining us. Just over a year ago, we took our company public. We were confident that our business would remain resilient during the pandemic. Thankfully our confidence was well founded. Today, we're really fortunate that in looking back over our third quarter, we can celebrate the extraordinary achievements of our global team, our artists, our songwriters and our partners during this really crazy time. Entertainment consumption habits have been changing swiftly during COVID and the growth in new business models have been accelerating. We continued to keep pace through our constant evolution, and as a result, we've grown stronger than ever. After we review our quarterly results, I'll focus some additional remarks on three areas, first, how we're driving our core business by investing in new and established artists and songwriters; second, how we continue to innovate to deliver long-term growth; and lastly, how we're playing the game differently through our unique portfolio of media brands. Our continued momentum led to impressive results this last quarter. Total company revenue growth was 27%. While some of the year-over-year comparisons are distorted by COVID, these results reflect the strength of our release schedule and the recovery in certain of our COVID affected revenues. Digital revenue grew 23% and now represents roughly 70% of total revenue. Adjusted EBITDA grew by approximately 49%, while our margin improved to over 21%. Recorded music delivered revenue growth of approximately 28% marked by growth across digital, physical, licensing and artist services. Streaming revenue within recorded music grew 27%. This increase was driven by successful new releases and strong carryover performances, a rebound in ad supported revenue and the continued strong growth in revenue from emerging platforms.

[Eric Levin:]

Thank you, Steve, and good morning, everyone. We are extremely proud of our third quarter results, which were marked by strong growth across all components of streaming, recovery in several areas that had been negatively impacted by COVID and adjusted EBITDA growth that meaningfully outpaced our revenue growth, highlighting the strong operating leverage in our business. While some of the companies or some of the comparisons to the prior year quarter are distorted given the impact that COVID had on certain areas of our business, I will do my best to contextualize them. Our total revenue was up approximately 27% on a constant currency basis, and up almost 33% on an as reported basis compared to prior year quarter. These results are underpinned by growth across all of our revenue lines, with the exception of performance in music publishing. Adjusted OIBDA increased by over 58% to $263 million with margin improving from 16.4% to 19.6%. This improvement was driven by revenue mix and strong operating performance. Adjusted EBITDA increased almost 50% to $282 million, with margin improving from 18.7% to 21%. This increase was largely due to the same factors that drove adjusted OIBDA performance pushing our adjusted EBITDA to over $1 billion on an LTM basis. Please refer to our press release for calculations and reconciliations related to adjusted OIBDA and adjusted EBITDA. In recorded music, revenue increased approximately 28% over the prior year quarter. Digital revenue grew by almost 24%, driven by a 27% growth in streaming revenue. Our streaming revenue was propelled by growth from traditional platforms, as well as emerging platforms, resulting in robust growth across all of its components. Subscription streaming, which is by far the largest contributor showed accelerated growth this quarter. Ad supported streaming, which was impacted by COVID in the prior year quarter continued its strong recovery with growth more than doubling that of subscription streaming. And our revenue from emerging streaming platforms continues to grow at an extraordinary pace and is now running at approximately $235 million on an annualized basis and that's for recorded music alone. Physical had an impressive recovery with revenue growth of over 136%. This was driven by a resurgence in global demand for vinyl and increasing retail sales, as businesses reopen, as well as comparisons against the prior year quarter that was severely impacted by COVID. While the increased demand for vinyl has been welcomed, we continue to believe that physical will be in secular decline on a normalized basis.

[Operator:]

Thank you. Our first question comes from Matthew Thornton with Truist Securities. Your line is open.

[Matthew Thornton:]

Hey, good morning, Steve, good morning, Eric. Thanks for taking the question. Maybe two quick ones, if I could, I guess. First, I guess around some of the recent price increases at Spotify, obviously it's still early. I think they are really the only DSPs that -- that's taken that initiative. I'm curious kind of what your sensing out there in terms of feedback either from -- from other DSP receptivity, from consumer receptivity and whether this can kind of continue looking forward. I guess, that's the first question. And then, just the second question, again the DSP, they're starting to talk a little more about the opportunity to really accelerate live both virtual and in-person as well as merchandising just by driving better awareness, conversion and consumption of these revenue buckets. And I'm curious, if you're looking at that, if you're embracing that, if you think again, there is the opportunity here by partnering with DSP to really drive an inflection and growth in some of those revenue streams. Any thoughts there? Thanks, guys.

[Eric Levin:]

So I'll respond to -- I can respond to most of that, Matthew. So Spotify has increased rates, and I think they've said that their rates are -- rate increases are performing well with consumers, and they kind of met their expectations for the quarter. We have no reason to believe that to be anything, but completely true. ARPUs will continue overall to decline, as the mix of emerge -- as roll out of subscribers in emerging markets, which are lower rates, will decrease the overall pool. Within developed markets, the ability to start to see rates increase, we think is a meaningful opportunity. So we are really pleased that Spotify is taking the initiative and starting to take really positive steps there. Regarding other DSPs, what we can say is that we've been vocal over the years that there is real price upside opportunity, and we think the steps that Spotify is taking is very indicative of that. And we would be highly supportive of other DSPs, evaluating their subscriber base and looking at taking similar steps that are appropriate for their platform. So we think there are opportunities there, but we don't speak for other DSPs, and I wouldn't want to speak for them in that area. With regard to live and merch, the first thing, I would say is that one of the kind of consumer platforms that we have acquired and been running successfully for several years is what called Songkick. Songkick provides listings of where artists are performing live, and in the COVID affected world, where they are performing live online. They are a significant input provider and data provider for that -- for Spotify, as well as other services. And so we really believe in live and live online. We've also recently announced the partnership with Wave, which is a leader in that space, and we have been doing a series of online concerts part of our relationship with Roblox's been a series of concerts, whether it's Royal Blood performed at the Bloxy Awards or Why Don't We or Ava Max performing on there and we've done, that's just the start. We've done a whole series of events. We've also talked about the Ed Sheeran launch event on TikTok, which was a live streamed event. So we think there's a lot of opportunity there, certainly to reach audience and build awareness and promote artists and music. The monetization of those platforms is very, very early, and there will be a lot of experimentation, but we are an active player in that equation, and see there is real opportunity that we're really leaning into, and we'll see how it develops both from a monetization and commercial standpoint. But we do see it as an active meaningful part of the future for music going forward.

[Matthew Thornton:]

Very helpful. Thanks, Eric.

[Eric Levin:]

Thanks, Matthew so much.

[Operator:]

Our next question comes from Michael Morris with Guggenheim. Your line is open.

[Michael Morris:]

Thank you. Good morning. I have two topics, one on the subscription streaming revenue strengthened, one on artists relationships. First, I'm hoping maybe you could unpack the strength in the subscription streaming side a bit more between what was maybe share gains, given the strength of your portfolio and what was just health of that business overall. And if you think about what's driving strength in -- in the business overall, I'd love to hear, if you have any insights on particular platforms, particular geographies anything that -- that stands out to you there. And on the artists relationship side, Steve, you referenced this partnership with David Guetta, as very long-term partnership. And my question, yes, I really love to just hear some more detail, and the context is, I think there is concern in the marketplace that eventually technology disintermediates the label value and we've talked about that a lot, you guys have addressed that. But having an established artists strike a long-term partnership with you clearly show some two way commitment. And so, I'd love to just hear what's in it for each of you, as you -- you establish something long term like that? Thanks guys.

[Eric Levin:]

Sure.

[Steve Cooper:]

So I can start.

[Eric Levin:]

No, go ahead Steve. I can tackle the first…

[Steve Cooper:]

No, no, why don't you do subscription strength first, then, I'll deal with artists relations.

[Eric Levin:]

Super. So thanks for the question, Michael. So first, I would say that the subscription revenue growth or I would say the streaming revenue growth is really multilayered. It is driven by subscription growth both in developed and emerging market, supplemented by the price increases that have started to roll through. We've actually seen a modest acceleration in the subscription growth side. Ad supported revenue has -- grew, as we said twice at the rate of subscription streaming indicating that ad supported, which was affected in the early days of COVID has really fully rebounded. And the emerging forms of streaming continued their solid growth, as new deals are signed and the existing platforms continue to grow. Now, talking about share gain versus market growth, what I would say is a lot of this is driven first and foremost, we have said from the beginning of the year that our release schedule was back half loaded. Steve indicated in his comments, some of those artist, whether it's Ed Sheeran, Silk Sonic, the Bruno Mars, Anderson.Paak partnership, Cardi B, Coldplay, but also artists all over the world, whether it's Aya Nakamura in France or Capo Plaza in Italy, it's not just the superstars, it is the global superstars, but it's also stars from all over the world, as well as breaking artists like Tion Wayne and others. So it's a broad reach that is really helping drive our business forward. The market is recovering from COVID in areas that have been affected and the areas that were unaffected like subscription streaming continue their strong momentum. So it's really Michael, kind of a broad reach of release schedule having an impact, but also the market overall performing well. And you put the two together, it creates a nice environment for growth. Steve, I'll hand it to you.

[Steve Cooper:]

Great. Thanks, Eric. So Michael, on the -- on the artists relation side, the benefit that artists see by way of continuing to partner with -- with a record label is that despite the tools that are available in the digital world, the ability to effectively utilize those tools and amplify an artists career, their music, their social presence through an organization that has a global and local footprint literally around the globe can't be underestimated. There are tens of thousands of tracks that are uploaded every day to streaming services around the world, literally tens of thousands of tracks. And the number probably now is somewhere between half a million to three quarters of the million tracks a week that are being upload. The value a label brings to an artist is the ability to help them cut through the noise of a 0.5 million or three quarters of the million tracks and separate their music and their career from literally all of this noise. And when you look out really, really well established tremendous global superstars, all of whom have had the opportunity to pivot away from labels, utilize the digital tools available and go solo so to speak by way of moving their career long. Virtually none of them -- none of them have taken that decision to pivot away from the labels because at the end of the day it is -- it is not that easy to separate the really great music and the great artists without an organization, such as ours behind that. It is really, really hard work. And so when enter into these partnerships or we have these long-term arrangements with our artists, they are arrangements that are mutually beneficial, where -- where the artist sees the value that we bring, and we see a genius and greatness in these artists, so that it allows with an enormous amount of enthusiasm and our own creativity to get behind these artists and they see the value that we bring to them in their careers. So it's a mutually symbiotic relationship, Michael.

[Michael Morris:]

Great. Thank you, both. Appreciate it.

[Eric Levin:]

Thanks, Michael.

[Operator:]

Our next question comes from Meghan with Credit Suisse. Your line is open.

[Meghan Durkin:]

Hi, good morning, guys. I wanted to talk about the emerging platform revenue line. You've given us the number for Recorded Music, how much would including Music Publishing increase this run rate. And then, Facebook, I think announced that they're going to be spending $1 billion on creators. I wanted to know what you think music is going to be as a percentage of that spend? Thanks.

[Eric Levin:]

Okay. Well, I'll take the first one, Meghan. Well, nice speaking, Meghan. So obviously we don't release the publishing number. I think you can look at relative proportions Recorded Music and publishing digital revenue and get a general feel. So it -- Recorded Music is call a five-ish times what the size of revenue of digital revenue than publishing plus or minus ballpark that are logically return to what the emerging streaming platforms be in publishing. What I would say is, we -- on publishing, we don't release the number, but we are just as active in developing relationships with these platforms and helping support their growth, but also being a partner and helping lead the way in helping innovative platforms get launched, find traction and hopefully generate long-term sustainable business models and -- and licenses with both recorded music and publishing. Steve, do you want to discuss the Facebook side.

[Steve Cooper:]

Sure. Hi, Meghan. So you're right, Facebook -- Facebook has announced that they are going to be focusing our investments in creators. This is a response to what they see other platforms, YouTube and TikTok doing. While I won't venture a guess at any specific number, what I would point out is, when you look at the platforms that Facebook wants to compete against. When you look at other changes that they have initiated recently by way of example, Instagram Reels, what they're doing is responding to different use cases for short form video, most of which, not all, but most of which include the utilization of music. And what we would expect to see is that whatever the specifics are, by way of how they channel that billion dollars to creators, those creators in the main -- will utilize in some way shape or form music, and they will continue to amplify the use cases, and the growth of the new music ecosphere . So -- so I would expect that we along with the creators, songwriters, music publishers and other labels will be in -- in many ways beneficiaries of that additional spend maybe.

[Meghan Durkin:]

Okay. And congrats guys on Megan Thee Stallion, the other Megan getting the Sports Illustrated cover that was critical.

[Steve Cooper:]

Thank you, Meghan.

[Operator:]

Our next question comes from Ben Swinburne with Morgan Stanley. Your line is open.

[Ben Swinburne:]

Thanks. Good morning. Eric if I look at the first nine months of the year, at least on an OIBDA basis, margins are up, I think a couple of hundred basis points year-on-year, you guys are tracking into this -- nicely to this 20% plus number. Could you just talk about your confidence in margin expansion looking out over the next several years, you guys see anything that -- that the rails, at least the -- the trend line. And -- and if you want to -- if you want to talk numbers, feel free, but I think you probably won't? And then Steve, just on the M&A front. You guys continue to sort of acquire not just labels, but also technology assets and other thing. Could you remind us of sort of how you're thinking about deploying cash flow, as we move into '22 and '23 because your leverage is coming down, and I don't think the company is looking to delever. So just sort of remind us where your -- what your M&A strategy and what your focus is ? Thank you.

[Eric Levin:]

Sure. I'll take the first one first, so on margins and good to hear from you, Ben. So yes, look, when we went public, which is just 13 months ago, we said, three years, four years out kind of 2023, 2024, 2025 timeframe, we expect a low to mid -- it's really, we said low 20s. As we are now a year out, we're already low 20s margin and there are couple of factors. One is executing on the plans that we had laid out, continuing to work on cost containment, whether it's through our technology innovation and automation and efficiency programs. We also have our financial transformation, which will be going live in the next year with the bulk of the savings commencing in fiscal '23, continuing to gain leverage on scale, as we continue to grow our revenue and gross margin faster than we're growing our underlying cost base. Overtime, we would say the shift from physical to streaming, although, this quarter the physical result was obviously up substantially. So for this quarter that doesn't quite hold. So we continue to believe that on a long-term basis, continuing to improve our margins above where they are now into the mid 20s is reasonable and where we're heading. However, we will say in the short term, as we recover from COVID and specifically when concert touring and comes back, our concert promotion businesses and our tour merch businesses, which are the two businesses that haven't recovered yet are some of our lower margin businesses. So as those recover, we could expect to see some moderation in the growth in margins in the short-term, but long-term, all the fundamentals are in place for continued growth of margin from here forward. And we continue to focus on that as a key business driver both in terms of efficiency in our business and scale. Thanks, Ben. Steve, I hand it to you on the M&A question.

[Steve Cooper:]

Thanks, Eric. So Ben, first of all on our M&A strategy and our pre-cash flow deployment. First of all, as a broad envelope, we are very, very disciplined with respect to our investment strategy, which includes M&A, you know, but -- whenever we do, I need to . When we look at A&R, when we do M&A, our financial discipline and thoughtful financial metrics always guide our decisions, and you can see this frankly materialize, when you look at our -- our conversion from OIBDA, EBITDA to cash flow. It becomes evident that we remain very disciplined. Relative to our specific strategies, we plan on continuing to invest both organically and through M&A in our core business and expanding our global footprint. We continue to invest in both our own technological capabilities, as well as into third party technological capabilities. And -- and in those third party investments, we not only through commercial relationships brought these investments, work with them to define, how we -- how we move our music maybe to broadly diversified revenue streams and that will continue to also be a priority for us. So core music business, diversified revenue streams and future proofing us by both internally and externally, investments in new technology. When it comes to our free cash flow, you're right, we have no intention at the moment to pay down debt. With the full support of our Board, we look first at reinvesting in our business both with respect to organic, as well as M&A opportunities. Secondly, to repatriate to our shareholders excess cash through dividends and presumably over time through modest dividend growth. And if and when we run out of opportunities to invest or to repatriate to shareholders, we will then look to debt -- debt reduction but I don't see that in the near future.

[Ben Swinburne:]

Thank you, both.

[Eric Levin:]

Thanks, Ben.

[Operator:]

Our next question comes from Tim Nollen with Macquarie. Your line is open.

[Tim Nollen:]

Oh, thanks very much. I'd like to pick up on this discussion about the new technologies and opportunities. Last earnings call, we spoke for the first time about Wave and about Genies and about Dapper Labs and now you're introducing this concept of this virtual idol. And I'm just curious, no pun intended, but how real is that. How much of a Chinese specific opportunity is it? How well positioned are you to benefit from any growth there? And could that be something that -- that takes hold outside of -- outside of China or Asia? Thanks.

[Steve Cooper:]

Well, Tim, I think that -- that it's already taken hold or -- or it is certainly -- it's certainly approaching taken a hold, not only in China, Japan, other Asian countries, but globally. When -- when you look at -- when you look at social gaming and these metaverses, we are already talking about dealing in the virtual world, where people have their own avatars, they -- they have their own communities in these virtual worlds, and -- and these virtual worlds reflect, who people believe they are or they want to be between the real world. Creating virtual only beings is not an illogical next step. And while this has been predominantly the domain of certain Asian countries, the -- the wonderful thing about it is, you can create these characters, and you can create a tremendous fan base relative to these characters. I'll give you something that's a bit analogous, even though it's not quite all in the digital format. When you watch a Marvel movie, you're talking about characters that don't exist in real life, and you're talking about computer generated imaging that doesn't exist in real life. But yet when you look at the success of these -- of these characters, you look at the success of Marvel, you look at the success of many of the sound tracks, which in many cases we provide, and you look at the fan base for these characters being able to do this in a virtual world is really not a massive step, Tim, and it's a step, where we're determined to lead the crossovers of these virtual beings into the world of music. So, I don't think it's a flash in the pan. I think it's here to stay. And not only do I think it's here to stay, I think it's here to grow. Hopefully, that answers your questions.

[Tim Nollen:]

That's great. Thanks very much.

[Operator:]

Thank you. Our next question comes from Kannan Venkateshwar with Barclays. Your line is open.

[Kannan Venkateshwar:]

Thank you. I apologize, if this has been asked already. I joined a little bit late. But on the M&A side, I guess, a slightly different aspect of what's going on in the industry is just the catalog acquisitions and Spotify seems to be a function of where rates are . But is there an opportunity for you guys to potentially look at monetizing that could drive a higher multiple because today you don't seem to get the credit for that side of the business compared to what some of these transactions are doing in the marketplace. So, is there an opportunity for you guys to think about that business slightly differently? Thanks.

[Steve Cooper:]

So Eric, let me take the first part, then, you can take the second part, I'm sorry. I didn't catch your name.

[Kannan Venkateshwar:]

This is Kannan from Barclays.

[Steve Cooper:]

Okay. I'm on a cellphone. So it's still difficult anyway. So -- so let me give you kind of a top view, and then, Eric will give you a -- from the financial perspective. From kind of an overview, when you -- when you look at some of these multiples to us, it looks like a movement in capital from fixed income to what people believe there is a sexier form of fixed income. And many of these financial players are buying assets with no organization or no capability to activate those assets. We also agree with your observation, it may be a function of rate. But what we don't see is us turning into asset managers and moving away from being a proactive music entertainment company, and we're looking to the long-term, and our long-term growth. And while, it's always possible, you know, if our shareholders and Board desired to pack in certain assets and continue to manage them. But frankly, we do that already. And you're right, while we don't trade at a 30 or 35 time multiple. When you think about buying assets at that multiple and not having an organization to not only activate, but turbocharge the cash flow attributable to those assets from our perspective, that just seems not like a business that we're inclined to be in at the moment. Eric, do you want to add to that?

[Eric Levin:]

Yes. I would just supplement that with a few quick thing. One is, we have been active this year in acquiring music rights both in the recorded and the publishing side. We announced earlier this year that we acquired for $338 million assets, with a run rate or OIBDA of $37 million. And we've done other deals throughout the year as well. But we are always financially disciplined. We are not looking to compete at the highest price for the sake of competing. We look at assets that are accretive to our business. And as Steve said, we are always looking for assets, where we can drive incremental value, whether the opportunities are in reenergizing and re-releasing masters catalog, looking to improve sync opportunities. So when we put all together, we think we've found an effective array of assets to acquire this year that we've been able to put to work, as Steve said and generate even higher revenue and returns. And we'll continue to look for opportunities in the market that meet our criteria. But we'll always apply our same financial discipline to it, Kannan.

[Kannan Venkateshwar:]

Thank you, both.

[Eric Levin:]

Thank you.

[Operator:]

Thank you. And this concludes the question-answer session. I would now like to turn the call back over to Steve Cooper for closing remarks.

[Steve Cooper:]

Again, I want to thank everybody for taking the time to join us today. And please look for our future announcements, as -- as I mentioned during the during the -- during the presentation part of the call. And please everyone continue to enjoy the summer, but stay safe because it really remains a crazy, crazy world. So thanks, again, speak to you soon. Bye-bye.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect.