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

I think we're on time, so we'll begin. Nice to have a good full room to welcome Boyd, who's the COO and CFO of Universal Music Group. Thanks so much for coming to Barcelona to see us.

Ed, thank you very much. Nice to be here. Hello, everyone.

So very recently, you held a Capital Markets Day where I think we've got a good feel for UMG's midterm targets. And as part of that, you allocated -- you sort of targeted 8% to 10% of subscription revenue growth within that. Can you talk a little bit more about what you're calling Streaming 2.0? And how are you going to achieve that subscription target, which unquestionably is the bit that you focus on the most within that?

Yes. No, I mean it's very clear. The -- so we guided -- for those of you who weren't at the Capital Markets Day, we guided on subscription revenues, an 8% to 10% CAGR over -- through the period to 2028. We did try to emphasize at the time, this is likely to come in waves as opposed to every quarter will be between 8% and 10%. But the thinking behind this is really kind of twofold. One is that we -- in some of the more evolved markets, the more developed markets that have kind of in the subscription business for, let's say, 10 to 15 years, the level of subscriber uptake is actually slowing. It's no surprise. There's an inevitability about it. However, so what we were seeing in terms of the 8% to 10%, approximately half would still come from continued subscriber growth. But half of it, the kind of 4% to 5%, would actually come from ARPU improvement. So that ARPU improvement is most likely to come in the more evolved markets and the subscriber growth. There will still be subscriber growth in the more evolved markets. But a larger share of that subscriber growth is going to come from whether we call them high growth, high potential kind of market. So we're really going to see, I think, and we're calling it 2.0 because we didn't realize there was 1.0 beforehand. But 1.0 has been around for 10 -- no longer nearly 15 years now. A natural original proposition, which was $10 a month for all of the music ever created, for everyone on whatever device, very, very compelling not only does financially kind of proposition to consumers is a very, very convenient way to access all of that music. And that basic model survived right through till today, but it's never really evolved in any kind of great -- in any significant way. It does need to evolve, it does need to pivot. So Streaming 2.0 is a multitude of different things. It's a moment to -- for the platforms to talk to their subscribers to identify things like tiering, changing the product availability, a premium tier, maybe a more simple free tier in terms of mobile. A number of different product offerings. And out of all of that, 2 things will happen, hopefully, continued subscriber acquisition, but also the price point will change and the ARPU will improve. So kind of here is the moment 2.0 is upon us.

And I suppose that ARPU improvement is -- you can either look at it that it's partly coming from -- or the overall revenue growth coming partly from subscribers, partly from ARPU, or that the ARPU improvement covers the mix effect of new subscribers who are coming at a low price point. But whichever way you look at it, ARPU is clearly a very important driver within that framework. And I think it's fair to say a lot of investors feel like that lever is in the hands of the DSPs rather than it's in your hands necessarily. So what's your response to that? How are you going to ensure that, that sufficient ARPU to make that target work is going to be achieved?

Yes. Well, I think when it comes to different product offerings, clearly, we are critical in helping the platforms develop these new offerings to the customers, the premium tier being a prime example of that. So there's a very kind of iterative process back and forth where we're helping them improve the product offering. In terms of simplistically price increases, this isn't the platform's interest to increase prices. And so I think it's a very, very important consideration here in totality is what is the price point? The -- as just said, platforms have been around or subscription has been around for 15 years, 40% inflation in 15 years, 10% increase in subscription prices. So we're not even tracking at inflation. The price offering in the first place was very compelling, and now it is remarkably compelling. So everyone knows that. And the platforms need price increases as much as we think we deserve price increases. But it's just going to be nuanced. There's been quite a few questions this morning already about -- because we've made some statements about wholesale prices, and I think it's probably worth just trying to mention that. Forgive me, I know you do the questions, and I do the answers. But let me just see. Wholesale -- and our pricing with all of the DSPs, we have a 3-metric commercial model. And basically, we get paid on the higher of revenue share, which everyone kind of seems to understand and seems to know. But it's the higher of revenue share, a per play rate. So we get paid every time there's a play and there's a rate set for that and also per subscriber rate. When I'm thinking wholesale prices, I'm thinking our minimum subscriber rate. So we have that -- always have had it. We've used it very judiciously, but we have that right in our contracts to charge what we believe is appropriate for the value that we deliver.

I think it's right to talk about it. It was going to be -- it was sort of in my questionnaire because you, I think, alluded to it at the Capital Markets Day and perhaps a bit more detail on the last call. And I think there are sort of various phases that was around sort of ensuring as a content owner you get the right remuneration for it, right?

And the reason we kind of used wholesale pricing or per subscriber minimums judiciously that first wave, Streaming 1.0 was all about getting to where we are today, which is more than 600 million subscribers paying an amount of money per month for the music. So the behavior of the consumption model has changed. So we've achieved that first wave objective that we had.

You also mentioned products. So I think you've talked about the need for continued evolution of tiering in the offering and you've been talking quite a lot recently about super premium tiers coming into the offer. So when should we expect those to be available? Clearly, you said you work with DSPs, you have some sort of sight into that. So when can we expect those to be available? And how should the economics of those tiers work from your perspective?

Yes. I mean, 2025, you'll see the first of those offerings. Spotify is already talking about what they call Music Pro. So that's out there. We're talking to all the platforms about what their premium offering might look like. They're all a bit different. The types of things we're talking about are early release of music, things like premier events around music, things like chat room between artist and fan, collectibles, premier -- not premier, privileged access to ticketing. And each of the platforms has a slightly different angle. When it comes to physical products, there's one platform, you can imagine, prides themselves in their delivery to your house within few hours. So they may be more focused on some of the physical aspects and the other platforms are more interested in other things. So 2025, the first iterations of premium will be in the marketplace.

And how much...

Sorry, and just in terms of sharing, it will be broadly the same metrics that we have in place today on the current product. So it will be some kind of combination of rev share and per minimums.

So essentially, whatever the mix of price increase that comes through, you should proportionately benefit from that?

Yes. Yes.

And what about the adoption? What proportion of customers do you think are interested in this? And how do you think about how quickly that adoption can play out?

Yes. We've done lots and lots of consumer research on this because it's been very important to us, and we've done 6 different rounds with our consumer panels that we're regularly in touch with. But also to that now, all the platforms are doing their own research, and it's all kind of colliding the range somewhere between 20% and 30% of today's existing subscribers. We'd be prepared to pay up to 2x or twice today's price for a premium offering. It depends a little bit on which of these features are in the service, but 20% to 30% are prepared to pay double of what they pay today. And that might take a minute for us to get there. And I think a minute in terms of the product offering being complete enough to support that kind of price increase. And then secondly, inevitably, it will take some time to migrate the subscribers, which may well take the kind of same profile or cycle as artist releases. But I would envisage that within 2 to 3 years, you could be attaining that kind of penetration.

So sort of approximately half of the period, your targeting from the CMD has got that kind of tailwind to it and the way of thinking about it?

Yes.

Okay. Another aspect that's come up a lot in investor conversations is around the disparity in growth rates amongst some of your partners comments. Some are clearly doing very well and some have done less well. So what gives you the confidence, as you put these targets together, that the likes of Apple and Amazon, which is broadly what's been alluded to, will invest more into their product to be able to drive strong growth to their platforms?

Yes. I mean the -- all of our conversations with all of them are incredibly positive. I sometimes get asked are Apple and Amazon, in particular, losing interest in the category? But the conversations between us are very, very different. I think in particular, Amazon have made some announcement over the last few days. So they've been -- we would -- I'd say, quite quiet and now they're back, maybe a little bit reactive because it took Spotify to do the audiobook bundle when that really should have been Amazon's play. So they're being reactive, but they will go beyond that in terms over the coming years. So it's good. It's stimulated them into pursuing developments that we're very, very encouraging of. Music has always been at the core of Apple. It's never very far away from Apple. Now it may well be that they've got a self-serving objective because it's kind of helps with all of their hardware. But we're very, very close. All of their campaigns for new products always have a very significant feature. So the Apple 16 that was one our artists the weekend that was basically the face of that campaign. So it's never going to be far away from Apple. And I don't think you ever underestimate a company that's one of the most successful companies in the history of commerce. But they were not -- they're just not all going to come sequentially and equally with the same. They're competitive. They cannot afford to lose the category.

And I think that's interesting. You sort of touched on it there. But again, one of the things that comes up with this, I guess, mindset about whether all the platforms are incentivized around price increases because yes, rationally, they are. But as you mentioned with Apple and hardware there as an example, they also have their own other incentives in terms of user bases in ecosystems and loyalty and the rest of it. But it does strike me that with super premium, it feels like that's an offer that once it is in the market, you sort of have to have to have a competitive offer. Is that how you would see that in terms of their interest in that product...

It's exactly how I see it. The hope and the ambition is this is so compelling that they cannot offer and no one platform cannot offer this to their subscriber base because they run the risk of having churn to the other platforms that do have it.

Artist-centric, it's an initiative that's been going for a little bit now. Can you just give us an update more broadly what partners are on board? What's the progress being?

Yes. Good. Would we like it faster? Yes, we would because we -- everything we do, we like to happen quickly. They're just going through the kind of the sequencing of this teaser with the first platform that embraced artist centric with us. They made a comment the time that they saw the opportunity for 10% to move from long tail to the more professional artists, the data would tend to support that on Deezer. Spotify was the first of the larger platforms to come on board with their own version of it. It's been live for about 2 quarters. So far, quite difficult to see anything within the data that would -- that is worth sharing with you at this stage. But the reality is it's a first step. And again, I think this is a journey that all of these platforms are going to go on. There is an issue with fraud. There's a very real issue with fraud. And for the sake of our artists and our songwriters, we're going to be very active in working with all of the platforms to eliminate fraud at least to the best extent kind of possible. But there's a number of bad actors out there that need to be held liable for their actions. And so we will continue with that. And that's something that the platforms are all -- they're all nervous about reputationally what does this mean when their subscribers are going for listen to Lady Gaga but find out it's Gaaga, and it's not the actual wonderful Lady Gaga herself. That's not a good customer experience. But just with the ease of distribution these days, it's a very real problem. And it's money that's leaking out of the pool on going to where it shouldn't be going. So I think good so far, but quite a long way to go would be my kind top level or top line assessment.

Are there any areas that are resistant to it or have you sort of won the argument in terms of receptivity from the partners and it's more about then the actual execution in the nuts and bolts phase? Is that also a fair summation? Or are there any areas...

I think there's still some denial out there, that doesn't happen on our platform. So the efforts are about, "Well, I'm sorry, but here is Lady Gaaga. You are this legendary platform, your reputation is important. Your customers are important." So there's a little bit of kind of denial. But once the facts are presented, there's action -- the action is taken.

Ad-supported a little bit. A bit of weakness in recent quarters. Can you give a bit of color on what's been driving that? And how should we think about ad-supported going forward?

Yes. I think the major reason that it's been flattish for the last few quarters, I think it's more of it's more a subset of a broader issue in terms of macro economy and advertising. So that's definitely a very significant component. When we look on platform, the activity level is still exploding, which bodes very well for the future. The only other point that I would make is really if you look at within certain of the -- particularly on the social platform side, Meta -- in our new deal with Meta, they do not want to have the license for what they call long-form video in Meta because a 3-minute video clip that goes with a song. When you're me, long-form video is 1.5 hour concert live show, but it's just the way the world is going, it's getting shorter and shorter. So they didn't want the 3-minute videos. So our new deal with Meta lost that part of the revenue stream. But encouragingly, the monetization in the shorter form content was increased. So there's an evolution that's going on there. But I still think, ultimately, here, when you look at ad-funded where there's audience, the dollars will follow. There's still a migration -- very significant migration going on between traditional media and digital media. So I think the long time horizon is very encouraging. And what we're seeing, I think, is more about the specific dynamics of what is going on today.

Okay. We talked about in terms of premium and super premium tiers, but you're also looking to expand your D2C category? It doesn't get a lot of air time, probably nothing outside of the subscription does really very much. But can you talk a bit about your approach there and what we could expect that side of the business?

Yes. Well, I think we kind of came out in Capital Markets Day for the first real time with us really talking about it. We've been quietly kind of building this as a revenue stream for a good few years now. And the way that we do this business is that we have roughly 1,300 stores. Most of them are artist stores in terms of taylorswift.com or whatever. But a large number of stores we're building an audience that were basically interacting fans. We have roughly 100 million over on -- sorry, of audience right now, 50 million is artist-centric, and therefore, a different meaning of artist-centric, but audience and about 50 million Universal Music Group owned audience where fans have opted in to receive kind of communications from us. So combined, 100 million. And a fan of one artist -- there's no such thing as a fan of just one artist. So far, we've seen very encouraging migration opportunities where artists -- I'm sorry, fans are kind of opting in to Universal Music Group. So building that audience is meaningful. And again, one of my colleagues who may or may not be in this room, often refers to this is that we've got demand in search of a product and has always resonated with me because when we develop a product and we connect the fan with the artists with the product, the demand is breathtaking. And so we're very encouraged, and I think we revealed at Capital Markets Day that this revenue stream for us is now over EUR 0.5 billion. So we were quietly, quietly building, but now it's a very, very meaningful or becoming increasingly meaningful in a very, very important strategic initiative for us.

And as you scale the business, how do you, as a CFO and COO, but how do you think about the margin profile as you start going there? What the merchandising margins look like going forward?

Yes. Well, my least favorite subject merchandising margins. I'll just give you the kind of merchandise splits into what I call 3 revenue streams: touring, when you go to see a show. Margins -- gross margins, by the way, 8% to 10%. Talent takes all of the money. When it moves towards retail, margins move to the kind of 15% range. And then when you move into direct-to-consumer, you're up over the 25% kind of margin. However, who knows how far this is -- we're going to be able to take this because we've got specific examples of very high-priced products where the demand has been exceptional. So as we migrate this business into direct, the margin profile changes significantly. We're also we're investing quite a lot of capability in terms of headcount and resources and also CapEx on the facilities just to improve the customer experience.

Okay. Let's move on to something you spoke about at the CMD at some length, which was around the drive to invest in high-growth, high-potential emerging markets. Can you sort of talk a little bit about your framework that you're using for that? And which of the markets you're most excited about?

So we have a category that sometimes we call high growth, sometimes we call high potential, but it's very approximately 17 geographies. You can guess most of those geographies from Latin to Asia to Middle East and they're high -- kind of demographically high populations, historically very poorly monetized that we now see an opportunity for significant monetization improvement. When you look at our market share, our market share in those kind of category or basket of geographies is approximately half what it is in the more evolved markets. And again, as I was saying earlier, it's not because we're incompetent and we forgot about them. The reality is the monetization historically really didn't justify the investment. We're seeing it differently now, which is all about new subscribers paying an amount per month. So we need to take our market share from half of what it should be to what it should be. And that's going to take M&A activity, which is a little bit cumbersome in the sense of it is geography by geography because it's local language, local culture. So there's not a kind of easy fix here where one size fits all. So we've got a long list of targets, and we will embark over the next -- we've started. But I think it's probably at least a 5-year journey to get to where we need to get to.

So when we think about multiples, returns, payback rates, part of what you're describing, I think, is sort of acquiring into being able to have the right traction to global growth in music over the next decade or maybe even sort of beyond that. So how should we think about the payback period? And you said, obviously, they're all very different businesses and very intellectual. So as a sort of rule of thumb for people to think about that investment, what's your criteria in terms of multiples and returns?

I'm looking at it, by the way, now as a portfolio. And if you're looking at 17 geographies, 100 targets or whatever the number is, but it's approximately that. We want to move at a pace. And I think the right thing for me as a CFO to look at this on a portfolio basis. And that means that perhaps in certain geographies, we would pay a higher multiple than we would do otherwise. But again, it's all to do with having line of sight towards the future growth. And so therefore, something that may well be quite expensive on a look-back basis will become incredibly inexpensive on a look-forward basis. So I think for the company, that is the best place for us to be investing our capital.

And just to be clear, your targets, you've given the 7% revenue, 10% EBITDA target, just to be clear. Those investments are necessary or not necessary...

They're not necessary. Some of them are little tuck-ins in individual countries, so they may well never get the visibility that you might be looking for. But we'll see how quickly we are able to execute on this objective. And at the right time, I think we'll need to update the markets on how we are performing.

Let's talk about publishing. It's been a real positive spot within the company. It's delivered exceptionally strong growth. So as you look forward, can that continue to materially outpace the growth you've seen in recorded music? What are the drivers that lie behind that?

Yes, I hope so. We didn't guide on publishing revenue growth, but very approximately, there's a kind of metric out there as that growth should be around 8% over the coming years. What we have done -- our publishing company is run by Jody Gerson. They've been very, very successful at capturing market share from their competitors. And the market leader is Sony, and we are #2 to Sony. We don't like that. I'm sure they can feel us coming. But the reality is, is that what Jody and the team have been able to do, they've captured market share and they're getting very close to Sony in terms of a leadership position. And I wouldn't underestimate her ambition. So hopefully, we can keep pushing forward and outpacing the growth -- kind of market growth.

Okay. And Virgin, there's obviously been a few changes there with the recent reorganization. So why is that an important business for UMG to be in?

So I mean we have this wonderful brand internally in the company, which should kind of -- just kind of lost its luster and I think it's fair to say. So we decided to recreate hopefully some of the entrepreneurial spirit that goes back to Richard Branson's time as the owner of Virgin. And it's run by Nat and JT, and their purpose is really to create services and a service offering that's very compelling to entrepreneurs and to labels perhaps in some of these high-growth markets as well as in other markets because we like bringing in entrepreneurs into our ecosystem. And once they're in things -- good things happen typically. We recently acquired a company called Mavin out of Nigeria. They already had a relationship with Virgin with an artist called Rema, which was distributed through Virgin. With proximity came the opportunity. So we like that. It's not really the -- they're not -- as soon as you say that, I can think of an example. But they're not out there making individual artist deals. This is really about bodies of work, labels, entrepreneurs, businesses and we want to aggregate and collect.

I want to ask one on your targets. It was a lot of focus, I think, historically on the way your targets are set up coming out of Vivendi revenue and EBITDA margin as to targets. And you've, completely understandable, I think, moved away from it. Perhaps it's worth just laying out a little bit in terms of why you think that's an important change to where you run your targets. And then what difference does that make from the sort of the company's attitude to walk away from it.

Yes. I mean the confusing part was the EBITDA margin was given coming out from under Vivendi, the kind of guidance Vivendi put into the marketplaces that we would have -- we have moved towards an EBITDA margin or adjusted EBITDA margin in the mid-20s. And I think it was very well intentioned, but the specs and the circumstances changed. And I -- most people I spoke to, I would found myself continually try to explain why our EBITDA margin had gone up or had gone down. And the reality is, as I think when you give the absolute guidance basically that we have, it's just much more transparent and why is some of this confusion around is there a problem with the mix of the business? Is the core business' financials changing the dynamic? The reality is there's lots of different aspects to our business, all of which are incredibly positive, but may well be slightly dilutive to an EBITDA margin. But we're still on course. We're still on course. We still have great operating leverage. We're still expanding our margins. Still feel good about that, the intention behind that original guidance.

So I think that last point is important because I think people look at it to say, "Well, subscription is the best proxy to sustainable music revenue growth," so that's what I'll focus on. And then that business should demonstrate good operational gearing by its nature. So honestly, good subscription growth and good gearing of that, then I sort of believe in the health of the ecosystem. So I guess that's the point around confidence that you do see operational gearing where you can demonstrate to the market and show that that's still coming through. So is that kind of your mindset to be able to show those people...

Completely. I mean that part of our business is exactly as we had envisaged when we embarked on this journey.

One of your largest shareholders has recently -- and he sits on your Board as well, recently disclosed that he will take his option to force UMG to list shares in the U.S. in 2025. What are your plans for U.S. listing?

So just in case anyone in the room doesn't understand -- not your question, your question was very clear. But the -- when Pershing acquired 10% in our company from Vivendi, Vivendi granted Pershing Square a right to force us, to use that word, to register in the U.S. So Pershing Square does have that right. In order to benefit from that right, Pershing Square does need to make $500 million of their equity available for the listing. So the working assumption is that we will continue on that path unless circumstances change between now and then. One thing that didn't come out in the various tweets at the time is there is no right to force us to have primary listing in the U.S. There's no comments about whether we do it by way of as an FPI or as ADRs. So the reality is the Board will work through what that is going to mean over the coming months.

Okay. I'll pause there if there's any questions in the audience. We've got a very full room, so I'll give everyone an opportunity. In which case, with a few minutes we've got left -- sorry, please.

I wanted to understand better, you were discussing price increases that your DSPs are having introduced or plan to introduce going forward. Should I expect that these price increases will be proportionate in terms of how it's split with UMG going forward as it has been in the past or that share might be shifting as well?

Look, I think if history is an indicator of the future, it will be exactly as you suggested. It would be commensurate with the history. The only thing I would point out, in our commercial relationships with all of the partners, we do have incentive plans embedded into those commercial agreements, which are to encourage certain behaviors or certain actions, be it to grow above a 13 percentage or to reduce churn and on and on and on. But broadly speaking, I don't really see a reason for why it would change. Again, think about there's 3 financial metrics per play per subscriber as well as the revenue share and it's the higher of any of these individual metrics.

I guess just on the U.S. listing point down there. What would be the reason to not make the U.S. your primary listing?

I don't think there's any real meaningful reason. There's not an obstacle per se. There's additional work. There's additional costs, et cetera, et cetera. But there's no major obstacle to that. I think this is something that's a Board decision. We've got some significant investors that will -- that we will listen to in terms of the construct. Yes, nothing to get much to add.

Perfect. Roughly on time. Boyd, thank you so much for joining us, and thank you, everyone, for attending.

No. Thank you, Ed. Thank you, everybody.