Warner Music Group Corp. (NASDAQ:WMG) Q1 2024 Earnings Call Transcript
Warner Music Group Corp. (NASDAQ:WMG) Q1 2024 Earnings Call Transcript February 8, 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 First Quarter Earnings Call for the period ended December 31, 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 first quarter earnings conference call. Please note that our earnings press release, earnings snapshot, and the Form 10-Q are 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 will answer your questions. For 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 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 I've 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's 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 contained in our filings with the SEC. And with that, I'll turn it over to Robert.
Robert Kyncl: Thank you, Karim. Good morning, everyone. Thank you for joining us today. We're moving at velocity to seek the growth opportunities that exist in the music industry today and we see in the future. I'll talk about how the industry is transforming, the unique opportunities here at WMG, and how we're laying the groundwork to propel our growth for the next decade. But first, I'll start with Q1 results. My references to year-over-year growth rates will be in constant currency, and references to normalized revenue and Adjusted OIBDA are adjusted for items that impact comparability. The details of these can be found in our filings and Bryan will provide commentary as well. I'm happy to report that the momentum we saw in the second half of 2023 has not only continued, but accelerated into Q1 with both our recorded music and music publishing segments generating record high quarterly revenue.
Total revenue increased 16% and on a normalized basis 11%. Recorded music revenue accelerated to 15% and on a normalized basis revenue grew 9%, streaming grew 11% and subscription streaming increased 12%. These results reflect solid new release and catalog performance, which were supported by DSP price increases. Music publishing continued to deliver impressive results, with revenue growth of 20%, driven by streaming growth of 30%. Total adjusted OIBDA increased 33% or 10% on a normalized basis. I am thrilled with the momentum we're building with recorded music, driven by our ability to deliver great hits across multiple labels and geographies. Recent artist successes and developments include Atlantic's, Jack Harlow, who topped Billboard Hot 100 with his single, Lovin on Me, Warner Records' Kenya Grace, who climbed to number one in the UK.
CHER, whose album Christmas debuted at number one on the Billboard Top Holiday Albums chart. Myke Towers, whose recent album went to number one on Spotify's Top Albums Debut for both Global and USA charts. Korean Group Fifty Fifty who had the biggest hit of the year on TikTok with Cupid and King who had the most streamed track of 2023 in India. We are firing on all cylinders across many territories around the globe. We had number one hits by C Gambino in Sweden, Bennett in Denmark, Viktor Sheen in Czech Republic, Cira in Germany, and Smolasty and Doda in Poland, just to name a few. In music publishing, our strong performance and momentum continued with the fifth consecutive quarter of accelerating year-on-year growth. Warner Chappell was named number one Hot 100 publisher on Billboard year-end charts, with its songwriters [indiscernible] number ones on the Hot 100 Hot R&B and Hip-Hop songs and Hot Country Songs charts to name a few.
Our songwriters contributed to massive songs, including I Remember Everything by Zach Ryan and Kacey Musgraves and Miley Cyrus' Flowers, which both won Grammys, and First Person Shooter by Drake featuring J. Cole. We're always expanding our publishing roster. Earlier this week we signed a deal with country superstar Morgan Whalen. We recently signed deals with Kenya Grace and with Swedish band BOLAGET, both Warner Music recording artists. We also enter into agreements with GABITO BALLESTEROS, one of the most in-demand Mexican music stars, and with Boef, the most streamed artist in Netherlands in 2023 for Spotify Wrapped. We are in a very unique asset class of our own. The short form nature of music means it's well aligned with the day's discovery and consumption trends, which are driven by the algorithms of the large platforms and user sharing playlists with each other.
Music has the highest repeat consumption of any medium. Music is evergreen. You'll still want to go back to your favorite songs 30, 40 years later. And music is easy for fans to create with. Users of the world's largest social media platforms love using music to soundtrack their own content, further increasing the reach, virality, and popularity of our catalog. And as the music business has grown larger, faster, noisier, and more complex, with the marketized distribution creating a flood of content on platforms, the role of large music companies is growing exponentially more relevant. It's harder than ever for anyone artist to break through the clutter. And that's where we come in. We collect and process large volumes of data and make it usable and actionable, driving repeatable results, a task that is very difficult for any individual artist or a small business, because of the resources and skill sets it requires.
Our global marketing footprint and expertise, combined with deep technical capabilities to build systems and data insights, enable us to differentiate ourselves in this regard. In fact, looking at the last quarter, songs from the major music label groups represented 94% of the songs on Billboard Hot 100. Additionally, our ability to aggregate large volumes of rights across recorded music and publishing provides individual artists and songwriters with more collective bargaining power when dealing with complex existing and new distributors and technologies. This will be even more crucial in the age of AI, because everyone wants the most popular music of today and an iconic catalog. WMG is a thriving company in a unique and growing industry. We're in a position of strength at a pivotal moment in the music business.
And that's the smart time to change, innovate, and lead. Yesterday, we announced the plan to free up more funds to invest in music and accelerate our growth for the next decade. To do that, we have to make thoughtful choices about where we put our people, resources, and capital. We will realize approximately $200 million in annualized cost savings by the end of September 2025, the majority of which will be reinvested into our recorded music and publishing businesses. Our plan includes a reduction of our workforce by 600 employees, or roughly 10%, most of which will relate to our owned and operated media properties, as well as corporate and various support functions. Yesterday, we began exiting these media properties as well as our in-house ad [sales] (ph) function as they operate outside our core responsibilities to our roster.
We're in an exclusive process for the potential sale of the news and entertainment websites, Uproxx and HipHopDX, with more to say on that soon. After a thorough exploration of alternatives, we have decided to wind down the podcasting brand Interworld Presents and the social media publisher IMGN. Brian will provide more details on the financial implications of the plan. But I'd like to tell you a little bit more about it and how we'll be using these cost savings to deliver on our three strategic priorities, which are: to grow engagement with music; to increase the value of music; and evolve how we work together. To grow engagement with music, we're signing and developing the most talented artists and songwriters, sharpening our focus on high-growth geographies and vibrant genres, and using our data and insights to help original talents stand out.
Look at the great artists that often success stories like Dua Lipa, Jack Harlow, and Zach Bryan. We're also thinking a more holistic approach to the management of our deep and shallow catalog. We're doing the detailed work of priming our entire catalog so it achieves maximum impact on the DSPs. At the same time, we're identifying select albums for targeted campaigns, similar to those we run by Frontline Repertoire. Resetting samples of successful catalog projects include 30th anniversary of Green Day's, Dookie and the 40th anniversary of [Darking] (ph) had stopped making sense, which drove 33% jump in annual revenue across the band's entire catalog. We're expanding our distribution and administration by building scaled and effective infrastructure to efficiently cater to larger and larger volumes of aspiring artists and songwriters.
You've heard me say many times that music remains significantly undervalued, especially when compared to video. The most recent step in the right direction came from Spotify. We're pleased they're introducing a new royalty model, which better aligns economics with the quality content that drives engagement. We view this as just the beginning, and we're continually engaged with our partners to drive faster growth. Another lever to increase the value of music is by strengthening our artists' direct relationships with their superfans. We'll accelerate the building of our new products and experiences as it's an area that's relatively untapped and under monetized. Everything we do is in service of our artists and songwriters. And we're evolving how our company is structured in order to maximize our impact on their behalf.
In today's global economy, where scale and speed matter, shared services are often the best way to pool our resources and promote best practices. We already made moves in this direction by centralizing our technology, finance, and business development themes last year. At the same time, in a creative industry like ours, instincts, relationships, and subject matter expertise can make all the difference. So we're working hard to find the right balance so that we'll become more efficient, increase operating leverage, and free up more funds to invest in music and tech, which, in turn, will drive further sustainable growth. Above all, we're positioning ourselves to be: first, to be different; and to be exceptional. We look forward to keeping you updated as we make progress.
Our amazing roster of artists and songwriters, combined with our strategy to stay several steps ahead of our fast-evolving industry, will enable us to thrive. Q2 is already off to a strong start, and it was great to celebrate all of our wins at the Grammys this past weekend. Fresh off of signing a new deal with Megan Thee Stallion, she skyrocketed to number one on the Billboard Hot 100. This week, we have five of the top 10 artists on the chart, including Jack Harlow, Teddy Swims, Zach Ryan, and Benson Boone. We also have some massive artists dropping later this year, including releases from Cardi B, Coldplay, Sia, Charlie XCX, Gunna and Benson Boone. We're incredibly optimistic about the future of the music industry in general and the Warner Music Group in particular.
With a refreshed leadership team that is gelling incredibly well and our significantly upgraded tech capabilities that are starting to drive results, we're laying the building blocks for future success. The music ecosystem is healthy and growing, and we're excited about the industry's continued progress in realizing the true value of music. Now, here's Bryan to walk you through our financial results.
Bryan Castellani: Thank you, Robert, and good morning, everyone. In Q1, we returned a healthy double-digit growth on a recorded and normalized basis, that was underpinned by strength across both recorded music and music publishing. Before I get into details, I want to remind everyone that our references to normalize will adjust for items that impacted year-over-year comparability. The previously disclosed items affecting comparability include the BMG digital revenue roll-off, which was $13 million unfavorable in the quarter, and a catalog licensing agreement extension, which had a favorable impact to recorded music licensing revenue and adjusted OIBDA of $68 million and $67 million, respectively. In addition, there was a renewal with one of our international digital partners that resulted in upfront incremental revenue recognition of $27 million in the quarter.
This favorably impacted recorded music streaming revenue. The adjusted OIBDA associated with this renewal was approximately $10 million. The details relating to these items can be found in our earnings press release. In Q1, total revenue grew 16% and adjusted OIBDA increased 33% with a margin of 25.8%, an increase of 330 basis points over the prior year quarter. On a normalized basis, revenue grew 11% and adjusted OIBDA increased 10% with a margin of 22.6%, which was in line with the prior year quarter. Recorded music revenue grew 15% and 9% on a normalized basis. Additionally, streaming revenue grew 11.4% on a normalized basis, an improvement from the 9% we reported last quarter. Subscription streaming revenue grew 14% or 12% on a normalized basis, supported by DSP price increases.
Ad-supported revenue increased by 10%, reflecting sequential improvement from traditional formats as well as the impact of the TikTok renewal, which went into effect last quarter. Physical revenue increased 13%, driven by strong releases in the U.S., Japan, and UK, including releases from Prince, Kiyosuke Himuro, and [Share] (ph). Artist services and expanded-rights revenue decreased 4% due to lower merchandising revenue, partially offset by higher concert promotion revenue in France and Japan. Licensing revenue grew by 81%, primarily due to the aforementioned catalog licensing agreement extension, as well as the timing of new licensing deals primarily in the U.S. Recorded music adjusted OIBDA increased 36% with a margin of 28.5%, an increased to 440 basis points.
On a normalized basis, adjusted OIBDA increase by 11% with a margin of 24.8%, an increase of 50 basis points. Music publishing continues to deliver strong results with revenue growth of 20%, driven by strength in streaming and performance. Digital revenue and streaming revenue increased by 30% reflecting the continued growth in streaming and the impact of digital deal renewals. Performance revenue increased by 11% due to strong artist touring activity in Europe, while mechanical and sync revenue were flat. Music publishing adjusted OIBDA increased 18% with a margin of 28.3%. Turning to CapEx, we saw an $8 million increase from the prior year quarter to $29 million, due to increased spend in technology. Operating cash flow increased 40% to $293 million from $209 million in the prior year quarter.
Operating cash flow conversion was 65% of adjusted OIBDA. Free cash flow increased 40% to $264 million from $188 million in the prior year quarter. The increase in operating cash flow and free cash flow was primarily driven by strong operating performance and timing of a DSP renewal. As of December 31st quarter end, we had a cash balance of $754 million, total debt of $4 billion, and net debt of $3.3 billion. At the end of the quarter, our weighted average cost of debt was 4.6% and our nearest maturity date was 2028. We always look to take advantage of market conditions to optimize our capital structure. To that end, on January 24th, we repriced our term loan, extending its maturity date to 2031 and lowering our go-forward average cost by 25 basis points.
As Robert mentioned, we just announced a plan that will enable us to sharpen our focus on core areas of our business and accelerate our go-forward strategy. I will provide an overview of the financial impacts, and you can also refer to the 8-K we filed yesterday for further details. The plan will deliver $200 million of annualized run rate cost savings by the end of fiscal 2025, including benefits associated with our previously disclosed financial transformation initiative. We will allocate a majority of the cost savings to increase investment in our core businesses, as well as new skill sets and tech capabilities. The plan will result in a pre-tax charge of approximately $140 million, which is composed of $85 million in severance costs and a $55 million non-cash impairment charge related to the businesses we are exiting.
The net after-tax charge is estimated to be $105 million. For the remainder of fiscal year 2024, the foregone revenue impact to recorded music artist services and expanded rights is estimated to be approximately $45 million, with negligible impact to adjusted OIBDA. Approximately $120 million of the pre-tax charge will be incurred by the end of fiscal 2024, of which, $55 million relates to the previously mentioned non-cash impairment charge. The remaining $65 million will be related to severance costs, which based on the timing of payments, will have a cash impact of $35 million in this fiscal 2024. We believe that our plan will position us to focus on mission-critical areas, bringing up more capital to deploy at the highest return opportunities, ultimately driving shareholder value.
As we look ahead and as Robert said, Q2 is off to a solid start. Our Q2 release slate will feature new music from Dua Lipa, Megan Thee Stallion, Sia, Green Day, Benson Boone, Gabby Barrett, Peter Fox, and the Black Keys, among many others. We are excited about albums that we have planned from some of our superstar artists scheduled for later this year as well. Regarding the BMG roll-off, we expect the revenue impact to increase to approximately $25 million in fiscal Q2. This amount will increase to a quarterly run rate of approximately $35 million by Q4, fully rolling off by the end of fiscal 2024 as BMG gradually brings other digital partners in-house. As a reminder, this continuation of BMG's physical distribution will occur by the end of October 2024.
In closing, our goal remains to deliver healthy top-line growth, margin expansion, and strong cash flow conversion on a consistent basis. Both the strategic actions we're taking, as well as our stronger release slate will position us favorably to deliver on these objectives in 2024 as well as for the long term. Thank you to everyone for joining us today. We'll now open the call for questions.
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