Warner Music Group Corp. (NASDAQ:WMG) Q1 2023 Earnings Call Transcript February 9, 2023
Operator: Welcome to Warner Music Group’s First Quarter Earnings Call for the Period Ended December 31, 2022. 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 first 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, Robert Kyncl; and our CFO, Eric Levin, who will take you through our results and then we will answer your questions. Before our prepared remarks, I’d like to refer you to the second slide of the earning 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 earning 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 will turn it over to Robert.
Robert Kyncl: Thank you, Kareem and good morning, everyone. I’m pleased to be here speaking with all of you for my first earnings call at Warner Music Group. I’ve been on the job for five weeks and I’m grateful to our Board of Directors, and our employees, artists and songwriters for giving me such a warm welcome. I would especially like to thank my predecessor, Steve Cooper for everything he has done to position the company for long-term success. And for all his insights as I’ve been getting up to speed. Thanks also to you, our valued shareholders and everyone who follows the company for your continued support. So let’s get into Q1 results. I am committed to maintaining straightforward and consistent communication with the investor community.
So in that spirit, I want to immediately and clearly acknowledge that this was a tough quarter. Like most companies, WMG has been dealing with macroeconomic headwinds and the impact of currency exchange rates. It’s important to note that last year’s Q1 included an extra week of reporting, as a result, this quarter’s comparisons need to be adjusted to provide an accurate picture and I’ll be discussing our results in that context. Eric will give you more detail, but here are the headlines. Total revenue in Q1 grew 2% and adjusted OIBDA increased 13%, with 210 basis points of margin improvement. Recorded Music revenue was flat as the strength of our global performance was offset by a softer quarter in the U.S. We had a tough comparison with the prior year quarter, which included releases from some of our superstar artists.
We’re expecting a stronger release schedule in the back-half of the fiscal year, which will feature new music from Ed Sheeran, Cardi B, David Guetta, Aya Nakamura and BeBe Rexha. Music Publishing had another strong quarter with revenue growth of 14%. Our operating cash-flow growth was healthy, despite some of our revenue lines coming under pressure. This further underscores our disciplined fiscal management, as we navigate this challenging business environment. I’d like to spend some time on this call, proactively addressing two questions that often been asked. Specifically, why I chose to go into the Music business and why I joined the Warner Music Group after 12 years at YouTube and seven years at Netflix. YouTube drives the intersection of creators and technology, which means that I had many options to choose from in planning my next chapter.
I chose Music first and foremost, because everyone loves music including me. It’s embraced by 100% of global population. In an increasingly digital world, music makes people feel and it brings them joy, hope and comfort, plus in an increasingly divided world, music brings people together. That engagement is very powerful and valuable and we expect the evolution of monetization models to reflect that. On top of that, music’s global appeal is matched by its ubiquity. This industry has achieved something rare. It’s build mutually beneficial, long-term partnerships with many of the world’s biggest companies. Amazon, Apple, Google, Meta, Spotify and Tencent, among them. As successful as music has become, there is still meaningful upside ahead for three reasons.
Photo by Dylan McLeod on Unsplash
One, as technology opens up emerging economies, the industry’s addressable market will continue to expand even further. Two, innovation is constantly creating new use cases for music, giving us the opportunity to diversify our revenue sources. Three, music is still undervalued, especially when compared to other forms of entertainment like video. I’d like to expand a bit on that last point. Since 2011, the subscription price of Netflix’s standard service has roughly doubled. Data shows that almost 80% of U.S. households subscribed to at least three streaming video services. This means that the average household is spending more than four times per month on a combination of digital video services that isn’t even a comprehensive offering. In contrast, the price of the music subscription has stayed the same since streaming was introduced over a decade ago.
Most consumers subscribe to a single-service that carries virtually all the music ever released. Against this backdrop, it is encouraging that we’re seeing first steps in the right direction by Apple, Deezer and Amazon. The other question I often get us, is why WMG? First and foremost, it’s the artists and songwriters and powerful catalogs that are the lifeblood of this company and it’s such a pleasure to bring this creative work depends around the world. The new generations of stars like Lizzo, Dua Lipa and Aya Nakamura. Global superstars such as Ed Sheeran, Bruno Mars, Coldplay and Neil Young. Songwriters and composers like Lin-Manuel Miranda, Gamble & Huff and John Williams and legends such as John Coltrane, Led Zeppelin, Aretha Franklin and Prince.
Second, it’s the people at WMG. This company has a consistent decades long history of finding and developing unique voices that change culture globally and then increasingly complex uncluttered world that originality is an essential ingredient of our success. Third is about size. WMG is big enough to drive meaningful change in the industry, but small enough to have plenty of room for growth. As just one example, the company has been taking thoughtful approach to global expansion. WMG has made world time moves that lead front the competition and dynamic fast-growing markets such as China and the Middle-East. This approach has also delivered record-breaking global first, with audits like Anita from Brazil, Paulo Londra from Argentina, King from India and CK from Nigeria.
I wanted to briefly address what we’re doing to architect the next phase of growth. I’m only five weeks in, but I’ve been very intentional about how we’ve gone about this. I made two significant appointments, both of which tell you something about our priorities going-forward. I hired Tim Matusch my former colleague at YouTube, as our new EVP of Strategy and Operations, which is a new role at WMG. Tim will be critical to facilitating our strategic vision and ensuring operational execution. I also hired Ariel Bardin, as our President of Technology. Ariel’s career includes 16 years at Google, where he built, launched and let some of the company’s most successful products, including YouTube’s creator tools, memberships and content ID. He will drive the development of the systems, infrastructure and products needed to support our growth.
As I’ve said, I’m committed to clear and straightforward communication on our progress. I also want you to know, I’m a big believer that actions speak louder than words and I’m laser-focused on execution. Right now, I’m working with leaders across the company to develop our plans for the future. We’re already exploring some exciting ideas and initiatives and we will provide you with updates as soon as appropriate. That said, many of the fundamentals will remain the same. The foundations of this company are very strong and the music industry is rich with opportunities. We will continue to invest in new artists and songwriters, our catalog and our global expansion. At the same time, we plan to thoughtfully reallocate some resources to accelerate how we use technology and data to empower artists and songwriters, as well as drive greater efficiency in our business.
As subscription revenue continues to grow, as supported recovers and we explore the possibilities of new technologies and business models, it’s essential we structure our deals smartly and strategically. I am approaching this next phase of growth with the unique benefits of having been on both sides of the table. I am proud that over the last five years at YouTube, we developed a very collaborative mutually beneficial relationship with the music industry, after years of rocky ones. I plan on bringing in the same approach to the WMG and the industry, so that our interests are aligned with our partners and that our artists and songwriters gain maximum participation and monetization. Now, I’ll pass it over to Eric, who will take you through our results and then we’ll answer your questions.
Eric Levin: Thank you, Robert and good morning, everyone. As Robert mentioned, our year-over-year comparisons should take into account the impact of the extra week in fiscal Q1, 2022. Adjusting for the extra week, we delivered growth across key metrics, including revenue, adjusted OIBDA and adjusted OIBDA margin. Additionally, we saw strong operating cash-flow growth and strong cash conversion as a percentage of adjusted OIBDA, despite a challenging macro-environment. Total revenue declined 2.7%, but increased 2% when adjusted for the impact of the extra week. Adjusted OIBDA was flat and increased 12.8% when adjusted for the extra week. Adjusted OIBDA margin was 22.5% compared to 21.9% in the prior year quarter. Adjusting for the extra week, margin increased 210 basis-points.
These increases were primarily due to disciplined operating performance and the impact of currency exchange rates. Recorded Music revenue declined 5.6%, that was roughly flat when adjusting for the impact of the extra week. Streaming revenue decreased by 2.6%, after adjusting for the extra week Streaming revenue grew by 5%, as subscription streaming revenue grew by high-single-digits and was partially offset by ad-supported revenue declining in the mid-teens. Physical revenue declined 27%, adjusting for the extra week, Physical declined 22%. Our Streaming and Physical results reflect a lighter release schedule we had this quarter compared with the prior year period, which included releases from Ed Sheeran and Coldplay. Artist services and expanded rights revenue decreased by 4%, due to macro-economic pressures affecting our E&P business and lower advertising revenue.
Licensing increased 17% due to an increase in broadcast fees, synchronization and other third-party licensing. Recorded music adjusted OIBDA decreased by 6% with margin of 24.1%, which was roughly flat compared to the prior year quarter. Excluding the impact of the extra week, adjusted OIBDA grew 7% and the margin improvement was approximately 150 basis-points. This was driven by disciplined operating performance and the favorable impact of currency exchange rates. Music Publishing continues to deliver strong results, posting 14% growth, driven by strength across digital, performance and mechanical. Digital revenue grew 16%, reflecting growth in streaming, which increased 17% driven by continued growth in streaming services and timing of new digital deals.
Performance revenue increased by 29%, due to continued growth from bars, restaurants, concerts and live events. Mechanical revenue increased by 17%, due to growth in France and Sync revenue decreased by 5%, due to lower commercial licensing activity in the U.S. and the timing of legal settlements. Music Publishing adjusted OIBDA increased 36% to $72 million with margin increasing 460 basis points, driven by strong operating performance and the favorable impact of currency exchange rates. Q1 CapEx decreased to $21 million as compared to $34 million in the prior year quarter, mainly due to lower facilities investments. We anticipate some acceleration in the coming quarters, driven by IT infrastructure facilities and financial transformation investments.
Our financial transformation program remains on-track to meaningfully rollout in fiscal 2024 and expand globally in the following years. The program is expected to deliver annualized run rate savings of $35 million to $40 million once fully implemented. Operating and free-cash flow growth and conversion were robust in Q1. Operating cash-flow increased 62% to $209 million from $129 million in the prior year quarter. Free-cash flow increased 98% to a $188 million from $95 million in the prior year quarter. Operating cash-flow conversion was 62% in Q1, the strong performance was driven by the timing of working capital items. While working capital will fluctuate from quarter-to-quarter, our goal remains to deliver a conversion rate of 50% to 60% over a multi-year period.
As of December 31, we had a cash balance of $720 million, total debt of $3.9 billion and net-debt of $3.2 billion. Our weighted-average cost of debt is 3.7% and our nearest maturity date is in 2028. As we look ahead to the rest of the year, our goal is to release amazing new music from our talented roster of artists and songwriters. While some of the macro and release schedule driven pressures we saw in Q1 will impact Q2, our slate in the back-half of fiscal 2023 is strong. Featuring releases from some of our biggest stars, as well as our next-generation of talent from across the globe. There’s no question that our industry is feeling the impacts of the macro-economic environment. From currency fluctuations and a dislocated ad market to the short-term choppiness inherent in our business, there are a number of variables that can obscure our underlying health.
However, our resilience through challenging times has been proven and we remain confident in our future growth. Against that backdrop, we are resolved to capitalize on the powerful tailwinds that will drive our company forward. Thank you to everyone for joining us today and we’ll now open the call for questions.
See also 10 Penny Stocks that will Make You A Millionaire and 12 Best Performing S&P 500 Stocks in the Last 5 Years.
To continue reading the Q&A session, please click here.