Warner Music Group Corp. (WMG) Earnings Call Transcript & Summary

Great. Thank you so much for taking the time to join us. My name is Heath Terry. I cover the Internet sector for Goldman Sachs. We're really excited to have with us today Stephen Cooper, Chief Executive Officer of Warner Music Group. Stephen, I know it's an incredibly busy time for you and your teams. So thank you for being here.

Happy to be here. Thanks for the kind invitation.

Great. So Steve, just to cover some of the basics for people who are watching that are maybe new to Warner or still getting to know the company, what's the right way for an investor to think about what it is that you and your teams are building at WMG?

Well, let me start with a quick overview of the music ecosystem, and then I'll turn to Warner. We're convinced that music is the only global language, and it's literally being woven into every aspect of our daily lives, like every aspect. And what's happened is that the evolution of the utilization of music has really created a myriad of diversification and growth opportunities for Warner. Music has gone way beyond singles, albums and videos. Subscription streaming is just the beginning of a new era in music entertainment. And what we're finding is in addition to these subscription models, music has also become the cornerstone for a whole host of new business models, from social media to in-home fitness to new utilization in TV and film. So what we're looking to do is be the leading 21st century digital music entertainment company that works globally as well as locally. And the way we add value, Heath, is with the speed at which the music ecosphere is changing and a growing complexity that it brings to the ecosphere. We and other major labels and our publishers are now the people that enable our artists to cut through the noise. 40,000 or 50,000 tracks of music are uploaded every day to Spotify, twice that number to SoundCloud. So we not only are the experts at cutting through the noise, we become the connective tissue, the vital connective tissue between artists, music services and fans around the globe. So we have both the expertise to identify and nurture this talent and the next generation of superstars, but we also have the ability, given the breadth and depth of our business, to reach fans across virtually every consumer touch point. That's added to the strength of our relationships with the streaming services, and this mutually supportive relationship is vital to their growth and to our growth. When they go into new territories, we go along with them. It's one of the reasons actually that we have invested steadily over the last 5, 6, 7, 8 years on expanding our geographical reach. So the other dynamics we see at play today, at least for Warner, is we're the only pure-play global music company on the planet. We've got no competing priorities, so we can focus solely on music entertainment. We operate as one company. While we have unique brands locally, we communicate, collaborate, cooperate, coordinate on a global basis, which allows us to maximize the advantage of our scale. And we are very agile and innovative by way of integrating all of our corporate strategies with our global and local operations. So that's where we are, and that's where we're heading.

No, that's great. I think that gives us a lot, and clearly some things we want to dig into there. Obviously, streaming is the biggest and fastest-growing part of your business. What do you see driving that growth? And if we're thinking about sort of where we are in terms of the maturity of streaming, where would you say we are in that maturity? And what can Warner do to influence that rate of growth?

Well, streaming is our biggest revenue source. We -- when Access acquired Warner, we saw the future in streaming, and we invested very heavily in that area. It's now our biggest source of revenue, plus 70% of our total revenue, and it's still growing in very healthy double digits. I think personally, we're in the early innings of streaming growth. Roughly 10% to 12% of people with smartphones have subscribed to music. So there's a tremendous amount of conversion still to take place. It's true in the biggest established markets. We're nowhere near yet the penetration in the U.S., U.K., Japan, Germany, France, nowhere near the penetration in the Nordics. And in fact, all of the forward looks believe there's still, in these more mature markets, substantial growth. In emerging markets, growth is faster, but they're in their very nascent stages. So we think that with the mature markets, still an enormous amount of upside. With the emerging markets, tremendous upside. And we do business with hundreds of partners around the world. And as their business grows, both locally and globally, we expand right along with them. We also see that [ the year where ] audio is vastly undermonetized relative to video. And we believe over time that with growth, with changes in pricing, the value of audio will begin to converge with the value of video.

Definitely something to talk more about in a minute. But obviously this pandemic has impacted every business in the world differently. How would you say it's impacted Warner?

Well, it certainly pressure tested our company. We went from work from the office to work from home globally in a 24-hour period, and it was stressful. Fortunately, we did it literally without missing a beat. And so it's done 2 things: a, it reassured us that our organization and our strategies made a lot of sense; and it really reinforced our belief in the future of music. The pandemic, given that we've now been in this roughly 6 months, digital has continued to grow nicely, as I mentioned, continues with nice double-digit growth. And while there was a slight dip at the beginning of COVID, that's recovered. So it's kind of -- it's highlighted the underlying strength and resilience of our business. Nielsen reported double-digit consumption increases for on-demand audio in the U.S. from mid-March to early July. We have had some revenue streams: physical sales, artist services, sync, that have been affected by the pandemic. We're beginning to see those starting to recover, and we think that over some reasonable amount of time, they're going to normalize. Physical obviously was decreasing before COVID, and COVID has accelerated that a bit. But all that being said, we're fortunate to be in a sector that creates something that is so vital to people's lives, day in and day out. It's also important to remember that while streaming is at the moment, by far our largest growth engine, it's only one of our growth engines. And we continue to see enormous opportunities for these new business models, which are showing up every day, and they're using music as really a foundational element of their businesses. You can't really -- or at least I can't imagine Peloton without music. Having a trainer just say, "Pump faster," without the [Audio Gap] would be an entirely different experience. Social media is now delving into music far more heavily. 18 months ago, nobody had heard of TikTok. Now it's one of the largest platforms on the planet, and there would be no TikTok without music. So while we've been impacted, our business has proven to be quite resilient. And in many ways, COVID has accelerated, in a number of these areas, consumer adoption.

Yes. No, that's a fascinating thing to point to. And I think it touches on some of the other things that we want to dig into. How do you think about market share? I mean obviously, looking at the top 10 albums at the moment shows a relatively slanted picture due at least in part to some of the delays in releases that we've seen. But how do you see share progressing, given your release schedule over the back half of the year?

Well, I wish you hadn't brought up the skewed albums, but...

Sorry about that.

No, that's quite all right. One of our core strategies is to keep up a strong, ever-growing flow of new music. And we're just not satisfied to grow in line with the industry. In general, since '11, we've been taking market share, and our emphasis on new artist development has really allowed us to punch above our weight. With COVID, we have unfortunately experienced some shifts in our release schedule due to changes in recording and songwriting schedules. It has given us an opportunity to pursue more aggressively our focus on signing new talent and giving our existing artists and songwriters the tools and the environment they need to continue to create and collaborate. We've got dozens of in-house studios around the world. We've made them safe havens for artists to do their work during the crisis. Where that's not possible, we're trying to be more inventive. We ship out home recording kits, by way of example. We have worked with fan bases to create new videos. With respect to our release schedule, we're very, very excited about our back half of the year as we move into calendar '21. We have some huge artists coming back. They're all at the top of their game. Their new music is being heavily anticipated. And at the same time, we've got some really, really cool, great dynamic new artists coming through our development pipeline. So I'm optimistic that if we had this same discussion a year from now, you'd be saying, "Geez, you guys really are in total command of the top 10 albums."

Yes. Well, I definitely look forward to doing that in a year. We'll be back here for Communacopia 30 then. Broadly, you touched on some of those growth opportunities beyond streaming, things like TikTok and Peloton. Can you quantify for us sort of the contribution that you are seeing for those emerging opportunities? And is there 1 or 2 that you believe we could be talking about that has the potential to become as big as streaming is for you in the future, that we could be talking about in the same way that we do some of those big streaming platforms these days?

Sure. Well, from my perspective, subscription streaming is really just the tip of the iceberg. Granted a big tip, but just the tip of the iceberg because what we do see is just a whole new array of business models that are emerging. And as I said earlier, they all need music to work. Social media, VR gaming, live streaming, original film, TV content, they are all going to grow. I see social media as one of those sectors where the growth of music will be substantial in the short and the intermediate term. We've seen just over the last couple of years, Facebook has moved into music. Instagram has now moved more heavily into music. TikTok exploded literally. Snap and Triller have come online. Facebook just announced the other day their glasses, which will carry augmented reality. That will open up new opportunities for music. VR gaming has begun to embrace music with virtual concerts with artist avatars giving live streaming concerts inside of games. All these represent for us meaningful 9-figure opportunities that we would expect to see in the relatively near term.

No, that's great. Maybe just to dig into the TikTok opportunity because it is such an emerging one. And obviously, there's a lot going on with the company right now. But how do you view that relationship? You do have a renewal coming up this year. What are your goals for that renewal?

Well, our objective with all of our partners is to really do a couple of things. One, it's to work with them to empower innovation, both with established and emerging models; and to ensure that we're growing the music ecosystem in literally all possible directions. When we deal with any specific partner, we look at where they are in their development. Because we believe that we should treat start-ups differently than we treat more established companies that want to utilize music, versus these global giants which already have big business in music. We want to make sure that music is valued appropriately. So we strike a balance based upon where our company is in its growth stages. But our goal is ultimately to optimize the value of music over the long game and pass that value on to our songwriters, our artists, our shareholders and our employees. To answer your question specifically about TikTok, we've got a strong relationship with them. Both they and we have a clear understanding how much music means to their platform. We have had, and we believe we will continue to have, a very strong, mutually supportive relationship and an economic interface with them that appropriately values music. Given their particular situation at the moment, it would be more speculation and probably be inappropriate of me to comment further than that. I do think, though, that it is important to note that while we have a tendency to talk about some big names whether it be TikTok, Spotify, Apple, Amazon, there are other regional and global giants whether it be Tencent, NetEase, AllSaints, Alibaba, JioSaavn, Gaana, that we have partnerships with as well as hundreds of other local streamers around the globe, all of which incidentally we believe we have great relationships with.