Universal Music Group N.V. (UMG) Earnings Call Transcript & Summary

Very good. Excellent. We're ready to start. Well, thank you very much, everyone, for joining us. You're in day 1 of Morgan Stanley TMT. The next session is with the Universal Music Group. We are due to end this session at 2:40 p.m. local time. I do plan to spend some time at the end of the meeting to offer questions from the floor. If you do have a question, then please raise your hand at the time, and we will send a mic your way. So we're ready to start. We're delighted to welcome Boyd Muir, CFO of Universal. Boyd, welcome.

Thank you. It's good to be here.

So you just passed your first anniversary as a public company. It seems that -- maybe it seems longer than that. How would you describe how you've done?

Well, if you were ever to choose a year to make your first as a public company, this was the year. So I mean, incredibly volatile year across everything that you folks know only too well. I think for us, I think the reality is performance has been good. It's strong. The fundamentals of our business are good, are operating well. And I think that has stood us in good stead. We were recently referred to as a safe harbor -- door is going to go slam again. But as a safe harbor, and I never thought in my life that I would hear the music industry or Universal describe the safe harbor. But I guess, with everything that's going on in the world, for us to have strong prospects, predictable revenues, positive cash, the metrics are very much in our favor. So although we were negatively impacted by what's going on in the world, less so than many others, so it's been good. That was the part that we didn't envisage. The part that we did envisage was getting our first-ever rating from the credit agencies, our first-ever Annual General Meeting, entering the bond market and the joys of quarterly results calls. Did that sound sarcastic? It might be a little sarcastic, sorry.

Yes, no, okay. Well, we'll get you over the quarterly results call issue. But let's turn to your...

Do you know the only reason that I kind of -- I raised that point and it's something that I'm -- I suspect that it was going to be the case when we went through it. But the level of attention on a quarterly basis surprises me somewhat because I guess it's somewhat alien to how we think. We're thinking very much long term, not even annually, but multiyear. So this constant being pulled back into the quarter is a little bit jarring. Just surprising to me. It is what it is.

Yes. So why is your quarterly sub growth -- subscription revenue growth X rather than Y, right?

Yes.

Yes. Okay. All right. Well, we'll come on to that. I will ask you one of those questions as well, but let's just talk long term about paid streaming. In general, how do you approach your relationship with the paid streaming platforms? Would you describe them as friends or enemies or frenemies?

I think we view our relationships really positively. Can't get into friends, enemies, whatever. But the -- I think very positively, we've got a very active engagement with all of the partners. We don't like being overly passive. We like to try and influence what the future is going to look like. So we interact with them in a very kind of active way, helping them develop new products, helping them with information with regard to their customers. So it's a very positive relationship. Often, people want to try and get into the are you enemies or are you -- and the reality is just that we've all got too much -- we've got all got so much to gain by collaborating together. So it's positive.

And is that the case as long as the market overall is growing? Everyone knows the pie is getting bigger, so you all cooperate? Is that the way we should think about it?

Yes, I don't know. I haven't thought about what happens when it stops. But the -- for now, it feels great. I mean the -- all of the attention really from our perspective so far has been to change the way that people listen to music. You were an early -- you were ahead of your time really in predicting what was going to happen with music subscription. And really, we're now in a situation where more than 500 million people around the world are consuming music by paid subscription. And there's a lot more people in the world than 500 million. And that has been the most important aspect of this evolution so far, getting more people into the ecosystem and consuming music this way. So you're right, we're all aligned. I mean there's a number of partners which is good. They all compete with one another, which we like. But that subscriber growth is still of incredible importance.

Yes. Okay. Let's talk about pricing. So Apple's price rise has obviously captured a lot of investor attention. I think they did 10% on the individual plan, 13% on the family plan. Did you assume that DSPs would raise prices when you issued your medium-term guidance last year?

No. When we issued that medium-term guidance, which was high single-digit revenues in the CAGR in the midterm, we didn't assume price increases.

So that would be...

We didn't know about the timing of that, the sequencing of that. So this will be incremental.

Yes. Incremental to that, okay. Would you anticipate other DSPs will follow that lead? Or do you not know yet? Is that a question for them?

No, we don't know yet. I mean if we go back to -- we think that music is a very low-cost customer proposition. We think it's undervalued. Our research indicates it's undervalued. Platforms who have increased pricing have experienced no churn. It's not even no churn. So all of that is very, very encouraging. And I think the platforms need price increases as much, if not more than us.

Yes. Do you think this is the right time for platform DSPs to be raising prices, though, given the market is still growing? Is it really the right -- do you think it's the right strategy for them, kind of annual price rises? Or...

Well, I mean the -- again, to overly simplify it a little bit, the $9.99 price point has been in the market for 10 years. All of the customer offerings from all of these platforms are significantly better than 10 years ago. So it has felt for us for some considerable time that the market could support higher price than the $9.99. But you make -- your point is well made, though, the growth of the ecosystem, the 500 million subscribers has been the most important initiative for us. The price increase is following. I think there's an inevitability of that. Looking into the future, I think I would urge a little bit of caution not on pricing itself, but we tend -- there's a tendency to assume that what is here today will exist tomorrow in the same format. It won't. These things have already evolved, will continue to evolve. And I think, again, what gives us confidence is that music is at the core of these platforms. And you can look at the level of consumption, and it gives us great optimism for the future.

And just the last question on price rises though, do you think functional improvements in these services will drive price increases over time, so things like spatial audio, high-def, that kind of stuff?

Yes, I think so. I mean I think to the point that it's a compelling customer proposition, the pricing is less -- the pricing point is less sensitive. And I think these platforms have to be competitive with each other. And given they're not competitive in the repertoire that's on these platforms because they have all repertoire, which is another point that we can maybe touch on later, the way that they will enhance the relationship with the customer will be through their product features.

Yes. Okay. I want to talk about non-DSP revenue, so revenues that you generate from digital platforms outside of the core paid streaming platforms. How do you think about the growth opportunities there?

Not trying to be delusional, but very optimistic. I often use the phrase that technology for many years was not our friend as we were going through a period of disruption where consumers could access music for free is pretty compelling. We've actually shifted where technology is now is our friend. It's actually unlocking opportunities for us that we would never have envisaged those years ago. So every day, we are seeing new opportunities, and that's why it's incredibly exciting. And we tend to like to get involved early. We like to steer the direction of where these new innovative platforms go. We're obviously self-serving because we want music to be right at the core of all that they do, which, just because of the magnetic impact of music, this is not something we have to sell particularly hard. This is something that the platforms are embracing. So be it social, be it fitness, be it health, be it gaming, every day, there's just more and more opportunities.

So when you think about those opportunities, fitness, social, health, gaming, where are the biggest ones?

Well, I think biggest -- social is clearly a very, very big category for us. It's not mature, but it's been maturing for a little bit longer. What we did with originally Facebook, now Meta, was a very interesting deal, which was renewed not so long ago. So that has matured as a service offering, which takes you into perhaps a platform as exciting as TikTok, which comes with a number of issues, predominantly lack of monetization for us or for the industry. But the level of engagement on that platform is truly remarkable. And music is right there and everything that goes on with TikTok. So who would have thought of TikTok 3 years ago, maybe doing $10 billion of revenues this year compared to $5 billion last year, a phenomenal growth. Again, so that's a big opportunity.

Okay. I want to talk specifically about TikTok in a moment. But maybe before we do that, it'd be interesting to hear your overall philosophy on how you deal with these new non-DSP platforms. Because I guess one of the frustrations that investors generally have is that with TikTok, in particular, you don't make much revenue, right? But there's a big value gap. So how do you approach ensuring that the value of your content is adequately reflected in where I get paid?

Right. Do you look at it as a value gap? Or do you look at it as a complete upside?

Well, you don't...

So is that glass half full or glass half empty? We look at it as an opportunity. We're not naive. I mean there is a problem here. We will move TikTok in a direction where there's greater alignment financially based on the contributions that are made into the platform. So how we do that is complicated. And please don't expect this will happen in Q4 because it's a journey. And I was speaking with someone earlier today, one of the few benefits have been around -- of having been around a long time is that you can see other situations that you've come through in the past. The last time we really heard the conversation value gap was all about YouTube, and let's call that 10 years ago. And at the time, there were all of these cries of you must take your music down from YouTube, this is unacceptable. And clearly, we had frustrations at the time. Roll on now, YouTube's aspiration is to be the biggest generator of revenues for the music industry. And they have 80 million subscribers in the paid subscription service today. Who would have thought back then that the value gap would turn into this? Now can we get TikTok to the same place? Hopefully, yes. Can we get TikTok to the same place in less than 10 years? Hopefully, yes. But we'll get there. We will get there.

So would it be fair to say that you generally look to get monetization to where you want it to be over a few cycles?

Yes. Yes.

Yes? Okay...

It's just -- I mean things -- just in life, things don't really happen in short blunt steps. It takes navigation and steering and collaboration, and none of that happens quickly, but the end result is so much better when you do it that way.

Can I ask you about the structure of those deals without going to specifics? 1 of the 2 elements, I guess, in terms of the way that you get paid is, generally, it's a buyout, fixed fee. I think with the Meta deal, you introduced a bit more sort of variability. Can you talk about that sort of -- at what point will you ever be fully variable, for example?

We would like to be fully variable. That's really the goal because I think when you're fully variable, it means that you've gone on a journey of sophistication. When we did our first deal with Facebook then, they didn't have the capability to be able to report to us on a basis that variable pricing or variable revenue share would work for them. It's the same with TikTok today. But our goal is to move to revenue sharing because at that point in time, your interests are aligned with one another, and I think that's incredibly important. So if there's a generalization, we start with fixed. We work with the platform in order to help them build the capability, help build products, help building their own reporting and then we'd like to move into the variable rev share model.

I'm going to ask a specific take-up question, and I have one. I think from the work we've done, I think they generate or they pay the industry about $100 million a year and they do, as you say, $10 billion a year in revenue. What's the end point? Given how much monetization is driven by music on their platform, how should we frame that, not for you specifically, but for the industry overall? Could we see that revenue going up 10x? 15x? What do you think?

Well, that $100 million number seems quite low. The number that I have in mind, but again, reading external, not revealing our own, is that it's in the region of $200 million to $250 million across the industry. But still, relative to a $10 billion revenue business, it's a small amount of money. Again, I think you look at -- I look at that as upside. Can we get from where we are today to where we are with YouTube? Yes. And YouTube reports billions of euros of revenues now.

Yes. Okay. All right. Let's go on to artist discovery, the core of your business. So if you look at the cash expenditure on advances to artists, it's gone up a lot over the last few years. I think 2018 to '19, you're averaging about $150 million a year. Last, say, 2020-'21, you averaged $475 million, okay? What's driven that increase?

We've entered into new agreements with a number of household name superstars, the ones that are announced: Taylor Swift, Drake, Weeknd, J Balvin, Justin Bieber. And what we've done over this last 3-year period, I mean there's been a sentiment out there that the big superstar artists need record companies less and less. And we've been seeing the complete opposite where they have got to a stage in their career where they actually want to do more with us. And so what we picked up in the case of -- one, it doesn't matter which one we pick up the record -- usually what happens, we have the record deal. We pick up music publishing. We will add e-commerce rights in terms of helping them with their website and monetization through that. Could be audiovisual, could be documentaries, whatever, there's a whole host of activities in which we are adding capability to offer a broader range of services. So that $150 million number that you gave is still a pretty good number today. It's not the number you see because you see the higher number. But the reality is it's coming from very -- relatively few number of very big household names. And not only do you broaden in terms of the service offering, we're getting more product commitments. Some of these deals are forever deals in terms of artist creativity and output we'll have them for the rest of their careers. So maybe that was a kind of COVID moment that money was important, and they gave us broader rights as a result of it. Because when I look at the -- and let's just stick to that $150 million number, that still is kind of the right number. Although the gross number is going up, so are our earnings against that gross number, and you're still netting out in the range of that $150 million with the exception of these big deals.

So presumably, there's a finite number of these big household names that you can sign these deals to, right? So are they done?

I'm never quite sure what done means because as soon as you think you're done, there's another one. But you're right, the point is how many of these can we actually do and how many there are. And I'm hopeful that we're reaching a point where most of them are done.

Yes. Okay...

But again, when you have an opportunity to broaden your relationship with a household name with rights you don't have to date, we should do it.

Yes, yes. And as you say, you have more revenue opportunities against that advance that you get to exploit. What about royalty splits? How would you describe in general royalty splits that you're negotiating with artists and maybe differentiate between superstars, mid-tier and long-tail or others?

Nothing has really fundamentally changed because, again, this will frustrate you and probably the entire audience, general is hard because they're all quite unique in what they require and what they're looking for. And there have been various types of deals around forever. There's nothing really that comes through that's new or different. Clearly, the bigger household names are in a position to have more attractive financials for them. The converse of that, though, when you're looking at those deals, the risk is lower. It's just the case of they're a proven entity, a proven quantity. So although, again, the gross amount may be higher, maybe the royalty splits are higher, the risk is lower.

Risk is lower because you have more opportunities to make money?

More opportunity to make money and you got more certainty about the level of performance because you can look to the past, which is a pretty good indicator of what the future will bring.

What about master's reversion, does that happen much?

Does it happen much, how do you define much?

More than once or twice.

It has been around since the very beginning. This is not a new concept at all. And on music publishing, it's often the case that the writer owns their own rights and that the publishing company has them exploitation for a defined period of time. On recorded music, we own the vast majority of the catalog that we have. We still do master deals. We do, do life of copyright deals still today. We do joint ventures, we do license, we do distribution deals. There's a whole host. And that metric is not actually a particularly helpful metric when it comes to returns or financials. It doesn't really make that much of a difference.

Okay. Because?

Well, because your returns, if you're licensing a music for a 20-year period, you're exploiting that, your returns are based on that. Other deals that you do, which are for life of copyright, may take a bigger investment. You then have an ownership cost now you have the ownership. So the day-to-day, the P&L is not impacted really by those kind of metrics in terms of dealmaking.

Okay. I will return to margins. So...

Can't wait. It's such a long time coming.

It will be wrong of me not to ask about this. So one -- okay, first of all, you obviously described in great detail what it is that's driving your margins to be flat this year versus the expansion that we've seen before. One of those is the growth that you're seeing in artist services and distribution, right?

Yes.

So let's talk about that first. So on the distribution side, you're building up your distribution business. You -- I think you announced on -- we talked on your earnings call about the Virgin Music business you set up. What's the opportunity there? And why is that an area that you're focusing on?

I think it's important that we offer what is being asked for in the marketplace. It would seem wrong not to offer what has been looked, what has been requested. But for us, I think this is a very important area for us to stay very connected with entrepreneurs, labels, local labels, local business operators because just having that connectivity with them -- and these are businesses that have got their own capability. They don't need everything that we have, other than they tend to be very localized. So if they need to do something outside their home geography, if they need some help, we can provide that as help. But we're establishing relationships. We'll have connective tissue with these businesses. And we believe that events change over the years, circumstances change, relationships evolve. And you can even go back to the olden days, Chris Blackwell, who founded Island, I mean he -- his business was a localized business in the U.S. and in the U.K., primarily licensed his music elsewhere to other companies. Then he came into what was the PolyGram family. And lo and behold, we now own Island. And that has happened with many entrepreneurs over the years. And we like entrepreneurs because I think they're very good for creativity.

So -- okay. So it helps you keep that connection.

Yes.

So why is that particularly growing now? Why is it that this year, you've -- it's grown as much as it has and have this dilutive effect?

We've been in it for a while. We had a business called Caroline that offered this kind of service. We have a business called Ingrooves that offered this service. But we are the keeper of the Virgin Music brand, and we just think it's a wonderful brand and that we could do something that was a little bit different with that and going back a little bit to the spirit of the olden Virgin days, which was a little bit controversial back in those times in terms of how they've built this little bit of a scutwork. And we like that, and it's a strong brand. It's a global brand. So we're aggregating our desperate -- desperate is not a very good word, is it? But we're aggregating our businesses in that area under the division or the banner of Virgin Music Group. And we're pushing it. It's going to help in a number of geographies around the world, geographies that if you look back over time, monetization in certain geographies were very, very difficult largely due to piracy. We restricted our investment in those markets because there's no monetization, would have lost money. So that didn't really make sense. So some of those markets, our market share is lower than in other markets. We would like to get back up to the position in those markets that we enjoy across the rest of the geography. This is a quick way of doing it.

Okay. So you talked about 2 headwinds to margins this year: you have finally the distribution business; the other is the kind of the tourings part services business, which is obviously dilutive as well. Should we assume that those headwinds don't reappear next year? Maybe not...

Well, I think there's another headwind. There's a headwind at the moment in the advertising...

I'm sorry, and that part as well. Yes.

Okay. On that, I mean this is no surprise because of what's going on in the world. There's nothing really surprising in that what we see, the activity is fantastic. TikTok is an example. And as we come out from this current economic situation, the advertising dollars are going to return of that. I have no doubt whatsoever. So midterm, that looks good. The live business, which was our biggest connection towards live, is really through our merchandise company. We do, do some live touring business in Latin America and Asia, but it's relatively small to the totality. But our company, Bravado, which does perform or sell merchandise around live events, that's a strategically really important business because it's about how you connect the fan with the artists, with the products, very, very important to us. But the way that, that business has evolved over the years in touring is very low margins, about an 8% gross margin. But we have that infrastructure there. So we should do it because their incremental profits is not loss-making. There isn't risk, but it's a very, very low return. That will hopefully continue. The journey for that part of our business is to migrate it towards a direct-to-fan or direct-to-consumer business. That's an important objective for us over the coming years.

Yes. Okay. But then if you think about the core driver of margin historically, which has just been the drop-through from the core paid streaming business, and then you take also the new platform revenue, which again, presumably will have similar characteristics, is there anything changing there? Should we -- when we're thinking about medium-term revenue growth coming from those 2 areas, is that going to drop through at the same rate as we've seen before or something changing?

No, I mean you should have a positive pickup as a result of price increases because price increases, we shouldn't be spending more marketing dollars to chase a price increase savings in terms of our A&R investment. That should remain relatively stable, not driven by price increase. So I'm hopeful that we'll see a positive impact that comes from price increasing. The other fundamentals, if they change, they will evolve and there won't be anything that's radical or fast.

Yes. Okay, very clear. Let's talk about use of capital. So you've spent -- you're still spending an elevated amount of money on catalogs...

Well, there's 2 -- yes, just to pick up the 2 different bits. We touched upon the net content for it, but you're now wanting to focus specifically on catalog...

Exactly. Let's level set the audience, the way you described this is you have total net content investment, which is the advances, the gross advances, net recruitments. And then you also have separately the catalogs, right? So when you think about the catalog investments, can you talk about how you see -- how do you approach your -- when you're making an investment in the catalog, why do you do it?

Simple question, complicated answer. Why do we do it? Multitude of reasons. Financial return, you're talking to the CFO, so it's financial return. There's been a kind of perfect storm in this space. Like those catalog acquisitions -- there have been catalog acquisitions over the years, but this momentum hasn't existed before. And I think it is kind of a perfect storm, leaving aside recent developments, an abundance of capital, incredibly low cost of capital, growth in the music industry, growing valuations has attracted investment that we have from outside that we haven't seen before. I'm screwing up my face. People over there won't see why I'm screwing up -- by that, I am screwing up my face, but it does surprise me. We see most deals, Omar. If there's anything competitive going on, it's very good for whoever to have Universal's name on the list of -- so we get to see everything. We don't do 90% of -- in fact, more, we probably don't do 99% of the deals because we can't make sense of them financially. And from our point of view, it's hard to understand because we have a skill set, we have a skill set to monetize. It's what we do. It's very hard to understand how structures that don't have the capability can actually make these level of investments at these valuations and for it to have a good ending. It just is very versed. And again, we have so much data, which, by the way, probably makes us know too much. And there are several deals that we can look at the data, we can marry the data up to the evolution or the stage of evolution of the subscription in that market. We can look at where the repertoire is being consumed. We can be predicting on a very track-by-track, geography-by-geography basis. And as a result of that, maybe we see things that others don't, and that makes us more cautious in our valuation.

What sort of things do you look to do to a catalog to improve its returns?

Well, it's often the case of review, particularly on the publishing side, the songwriter side, in that writers are often -- not often, that's maybe the wrong one, but there are occasions where writers are reluctant to have their works exploited. And that might seem strange, but it's not uncommon. So for a couple of those deals that we've announced, we've been able to look at the activity and that we know that under our ownership that we can do much more with the asset. We won't say no to ourselves. And so when you own the asset, you've got -- if you've got that unfettered ability to monetize, that's a critical component for us in terms of whether we do deals or we don't do deals. It doesn't mean that you're inappropriate with your ownership because we've got a reputation. So we got to be respectful of the creativity and the body of work, but there's so many things that can be done in advertising or in documentaries that you can really can enhance, not just necessarily from that income stream in itself, it's the knock-on effect of what that income stream does in terms of the visibility and the profile of the repertoire, which means you can be earning money from other platforms as well. So we're good at that and others are not, and that's kind of the dilemma that makes it difficult for me to understand why there's been so much activity in this space.

Yes. You've got a very strong balance sheet. Maybe you're under-levered. What do you think about...

I like being under-levered today, kind of that feels like the right...

The right place to be. How do you think about the appropriate level of leverage for the company?

Well, the -- what do you do with the money you borrow? I mean there's a few things that we look at. First of all is investing in the business. And through Vivendi's ownership, we invested well in the business, and they were a very good shareholder. And moving out from that, I think as the management, it's our responsibility because, again, I think we've got the best experience to determine what's an appropriate level of investment for the future health for the company. I think that's, as management, the single most important. However, we've given a commitment to pay a dividend. It's quite significant. That dividend commitment will be EUR 800 million this year. So that's kind of quite substantial. And certainly, over this past period, there's been debate about share buyback and should we be undertaking a share buyback program. That's something that the Board is considering. We got the authority at our last AGM to undertake a share buyback program. And we'll see what place your buyback does have in our overall capital allocation.

Okay. That's very clear. I need to ask about the LTIP. So what is the current status of the LTIP? Who's going to be in it? How large is it going to be? And how should we think about scoping that?

So again, we have approval to dilute up to 5% of the company over a 5-year period for the purpose of establishing a long-term incentive plan, which is to align the management and employees of the company with the interest of the shareholder. It will take time to roll out because part of this is clearly a trade, which is your cash package today is X, your package tomorrow is now X plus equity. So there's a lot of conversations to be had about how we reset, how we rebalance the totality of the remuneration package. We've started rolling it out really in the last 3 months or so. So it's early days yet. It will be the entirety of the senior management of the organization. But ultimately, we want to have this down through certainly 1/4 of our company. Ultimately, we would like all employees to own shares in our company, and we have gifted some shares to all of the employees of the company. But again, it sounds as though I'm lacking ambition, I'm not, I promise you. These things do take a bit of time, and we only got authority in kind of May to roll out the equity plan.

Got it. And so sorry, but I can't believe we've almost run out of time. And I've got to ask one last question, which is about your priorities for next year. So it's a two-pronged question. First of all, how recession-resilient do you expect Universal to be? And in that context, what are your priorities for investing next year?

Well, maybe rather than Universal, how resilient is music? I think when we look through the course of time, when times are hard or have been hard, music has actually been incredibly resilient. It's a low-cost form of entertainment, perhaps the lowest form of media entertainment. So we think it's very appropriately maybe undervalued. And I think as, again, the research that we do, the subscribers value very much their music subscription. And what will we go through if there is a recession, you guys tell me.

There will be one.

There will be a recession. The reality is we've never been through that whilst there's been music subscription, which I think is going to be even more resilient because people have got their playlists, people have got their routines, the people have got it coordinated with their cars. And really, if you switch that off, how are you going to access music? There may well be some who are comfortable with advertising, freemium-type models, but you get limited functionality there, which is going to make the experience less compelling. So I think it will -- music will continue to be resilient even in times of recessions.

And priorities for investment next year?

Breaking more artists, it's the most important thing. It's the lifeblood of our industry. The day that we lose sight of that, then that's the day it's all over. That obligation to find new talent and bring it to the world is really what drives the company every day. Moving the subscribers onwards from 500 million and trying to contribute towards that, I think that's incredibly important. The super fan, connecting the fan with the artist with the product. But these things are not just 2023 and then we're done. The reality is, is that these are multiyear, multi -- breaking artists is forever. But these are all initiatives that will take time. Growing our market share in the high-growth markets, that takes time to do. Enabling more platforms, we haven't even talked about metaverse, I mean maybe less so for '23, but over the next 5 to 10 years, the metaverse will not be silent.

Glad to hear it. That's a...

It's so not going to happen. And we will be there right in the middle of it. We'll work on products. We'll work on all the possibilities. And again, it's perhaps the most exciting opportunity that technology will unlock for us.

That's a great place to end, Boyd. Thank you very much indeed. It's been a fascinating conversation as always. Great to have you.

Thank you.