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

Welcome back to the conference. Good afternoon here on the East Coast, and good morning on the West Coast. Quick disclosure, for important disclosures, please see the Morgan Stanley disclosure -- research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative. Very excited to welcome to our virtual conference this year for the first time, and their first time as a public company, Warner Music Group. Steve Cooper is their CEO. And Steve, it's great to see you, and thank you for joining us today.

Thanks, Ben. I appreciate the invitation.

So a lot to talk about, a lot of exciting things happening in the music world. One of the lines you used on your earnings call that I thought would be a good kind of launch point for this conversation was you talked about that as you look ahead, your revenue opportunities are vast and diverse. And I wanted to start there as I think most investors think of you as largely tethered to streaming music, which is not a bad thing but a relatively simple story. Talk us through some of the top line opportunities and drivers that you see, that you're excited about, that we should be aware of and paying attention to?

Sure, absolutely. Well, when you look at traditional streaming, and you look at the penetration statistics, streaming subscribers and/or free relative to smart device penetration, even in the well-developed economies in well-developed markets, we believe there's still an enormous amount of runway before we hit saturation points. In the developing and emerging markets, while it is more of a challenge, it's really a good challenge in every way. It's moving people away from privacy on to services. It's people from free to subscription. And while the pricing and the ARPU is less than in the more developed markets, our view is 50% of something is better than 100% of nothing. And as importantly, it's changing people's habits. And all of that is good news for us. As an aside, Spotify is now experimenting with price increases, and they are experimenting in both developed and emerging markets. Amazon is experimenting with higher-priced tiers given added functionality. All of that to us is good news. And that's the traditional streamers. When we look at new business models, including social platforms, fitness and metaverses, they're just getting started. A couple of months ago, I think I reported at one of our quarterly earnings calls that those sources are now presenting us with $100 million of revenue per year. That's now at $150 million per year. So they are very, very fast-growing categories. We also are firm believers in self-help. So as a result, we've continued to globalize. We continue to open new offices around the globe. We've recently opened in Turkey, Vietnam, India. We are forming very, very thoughtful partnerships with very prominent distributors around the globe, Africori in sub-Saharan Africa, Ziiki in India. And we are on a global march by way of expanding our business ADA, Alternative Distribution Alliance, that distributes indies and stand-alone artists. In addition to that, with our D2C investments, EMP, UPROXX, Songkick, they're performing very nicely in our last quarter. All of them had double-digit growth at the top line and, I think, at the bottom line. And last but not least, as we come out of the pandemic, what we see is a springing back of those businesses that we have that were particularly impacted by COVID. Our physical business, our merchandise business, our live performance information businesses, we see those springing back, our sync performance revenue, we see those springing back at a relatively nice trajectory. So given all of that, the ongoing growth of streaming, the new business models, our own self-help and certain businesses of ours that recover from COVID, we see a lot of revenue opportunities coming from a lot of different places for the foreseeable future.

That's a great overview. You touched on pricing, which is something that you in particular had been focused on and, I think, kind of evangelizing the value of music for a long time. I mean Spotify, I think they've announced 25 markets where they're raising prices. They also are introducing a HiFi tier, although I couldn't get them to tell me on Monday when that's coming. I'm sure that's all stuff that you're pretty happy about. Is this an inflection point, you think, for the business? Because this -- we haven't seen pricing move ever really in this area at the consumer level in a long time. And what does that mean for the industry long term, if we do see this as a regular event?

Well, I think that COVID has allowed us all to step back and be far more experimental in various parts of our business. First of all, I'm very heartened by Spotify's moves. I'm very heartened by Amazon's moves. I'm hopeful that others will follow. What I believe people will see is the stickiness of these subscriptions and that small price moves won't result in loss of subscribers and won't result in any meaningful contraction in either free funnels or free trials. The fact of the matter is that I think during COVID and with the introduction, albeit the long-form video model I believe is entirely different, but people are becoming more used to and more willing to pay for entertainment. The wonderful thing about music is it is seriously the only universal language on the planet, and it's ubiquitous. So I think that all of these moves that will begin slowly but steadily to close the gap between the monetization of the ear and the monetization of the eyeballs -- I guess, I should have said ears, plural. Eyeballs, plural, is going to be a very good thing for music, both in the short and the longer term.

You mentioned COVID. And maybe before we move into some of your sort of business segments and drivers, you and I started getting together a little over a year ago before this whole thing. And I'm just wondering when you look back at how the company operated and operates today, the industry, anything surprised you when you think about both Warner, but also your artists and partners?

Well, I think the pandemic took a lot of us by surprise. Fortunately, we had the infrastructure and the architecture that as we move from work from the office to work from home or to work from anywhere, we were able to do it, pun intended, without missing a beat. So I was surprised at the speed with which the pandemic overtook everything. I've been surprised at its persistence. But it has also created a tremendous opportunity, at least in our case, to watch the acceleration of the shift from physical to digital. And that acceleration has actually led us to put our nose, or whatever that phrase is, to the grindstone by way of accelerating our tech capabilities, our tech enablement for our organization, for our artists and strengthen connections through our D2C businesses to our fans. So by way of example, we have added to the muscle mass of Sodatone, which is our proprietary discovery tool, to accelerate their ability to identify artists and music even more quickly. We have added muscle mass to our marketing and promotional analytics called OPUS, so that literally on virtually a real-time basis, our people can make spending decisions in the marketing and promotion realm to either double down or contract based upon real-time reactions that we see in the marketplace. Our D2C people, EMP, UPROXX, IMGN, Songkick have all invested more heavily in tech to take advantage of this accelerating shift to digital. And with the exception of the mental fatigue that this pandemic has taken, with the exception of living on these screens and being exhausted at night, our employees have transitioned seamlessly to a fully remote environment. And when we do return to work, it will be in smarter ways, in more flexible ways, in more employee- and colleague-friendly ways because the new world is going to dictate us being flexible, nimble, constantly adapting our approaches to business.

Yes. No, that all makes sense. You mentioned in there direct to consumer. And one of the things I wanted to ask you about, as we go through what I would argue are kind of the all common debates over your business and your stock that has been the case since the IPO, is around disintermediation and how you avoid that from where you sit at Warner Music. We've seen the video market, an amazing transfer of market value from media companies to the streamers over the last 5 years. Now we're starting to see some of those media companies figure it out and move forward with their own direct-to-consumer plans. But one of the things I like about the audio business is just at least to me, it feels like there's a lot less risk of that going. But I want to let you speak to that because that's one of the most common things I hear from investors as to -- when we talk about investing in Warner Music stock.

Well, just to create the right context, the music model is substantially different from the long-form video model. The music model requires ubiquity that our artists want their music to be everywhere. I mean literally everywhere. And in fact, the industry saw a backlash, I don't know -- the good news about growing old is you lose track of time. But within the last 2, 3 or 4 years, there was a backlash about a number of the streamers trying exclusivity by way of artist events approaches. And it just backfired because artists want their music to be accessible to everyone and accessible everywhere. The long-form video model, which has been this way forever, is all about exclusivity. And what the long-form modelers have done, whether it's Disney going from content to distribution, or Netflix from distribution, the content is far more vertical integration than, I believe, one will ever see in music. Additionally, our music, in conjunction with Universal and Sony, we've all got libraries that go back for decades upon decades, the world's greatest music, still the world's most listened-to music. And those libraries are absolutely essential to any streaming service. So we've got a product which is essential. And we've got frankly a fair amount of competition in the streaming world, the social platform world, the fitness world, the metaverse and gaming world. So my personal view is that in the future, I think the probability of disintermediation is quite low. And I think that the relationships between the content providers and the DSPs are at a place where broadly speaking, it works for both sides. And there really is no incentive to disrupt that. The incentive is to really continue to work together, provide an ongoing stream of great new artists and great new music in a world where the music ecosphere is becoming far more complex and labels and publishers are needed frankly to create those lanes for truly great music and truly great artists to be heard. So I think disintermediation, while it's an interesting conversation, is for music today. It's always on our radar screen obviously, but it doesn't present, at least in my view, a substantial risk.

Got it. Let's go -- next on the hit list of investor debates is around the role of the label, particularly around promoting and driving discovery in an increasingly digital world. It's hard for us on the outside of Warner to understand how you guys go about doing that, whereas as consumers, we can see it on our favorite streaming app. But talk a little bit about the tools that you guys have developed and acquired. And anything on the product road map that can help us understand the way you're leveraging data, technology, et cetera, to drive what is such an important part of your value-add to artists?

Sure. So first of all, again just to give a little context, if you go to Spotify, you can go to their analytics. You can go to Google's analytics. You can -- we get feeds from all of them. And I think we've got deals with several hundred streaming operations around the world in addition to social platforms, fitness. So we are data aggregators. If you think about the individual services, they've all got their data. But Spotify doesn't have Apple's data. Apple doesn't have Amazon. Amazon doesn't have Google. We have it all. And so we can actually see, through that aggregation, a far broader, deeper picture than anyone's service. That's number one. And those feeds go into some of the tools that I mentioned, the new tools where every day, we're enhancing them and adding muscle mass. So as all of those sources flow into Sodatone, they not only see what's generating heat on any individual pipe, Ben, they can see across the pipes. Is it a fluke? Is it gathering momentum? Is it kind of across genres? Who is it appealing to? And that allows us to take a far more focused risk as we see these opportunities emerging. The same is true of OPUS. All of that data feeds into OPUS across all of these platforms so we can see, if our artists post a Tweet or they post something on Instagram, the impact that's having on their fan base and on the movement of their music in a real-time basis. That allows us to make better marketing decisions and better promotional decisions, either invest more or invest less. And it points us as to where we should be investing, not just let's invest more, let's invest more here, let's contract here. We've got a tech tool that we've recently introduced called ARROW. It marries songwriters' demos with artists that are looking for new material to record. And the one thing that I've come to realize about the music world is that it is highly collaborative. And so the tools that we're building to enhance collaboration bring our artists and our songwriters together to allow them to turbocharge their ability to pick and choose. We've introduced our AMP, or Artist Management Portals, so that they can cut data about every one of their tracks, about geography, about their touring options in dozens of different ways so that, in conjunction with the label, they can make better decisions. We're doing the same with Sync, where we're making it -- you can go into our Sync system now, pick something you want, put in your name, your credit card number. You get a license immediately. And just lastly, we just launched with Adaptr. We were their launch partner. It's a way for new emerging models to utilize and license music easily to facilitate innovation. Instead, we also continue to test the tools that the DSPs are developing. And we continue to test those tools by way of results versus our return on that investment. So we are constantly refining our tools, adding to them, testing third-party tools because we are agnostic about the tools that we can incorporate to make money. Whether we've got to buy them or build them, as long as we can see how to effectively use them to convert those investments into ROI, we do it.

Great. That's a good -- that's a very comprehensive answer. I'm going to combine the next 2 in the interest of time to make sure we get through everything, which is really these are both about return on investment. One is people are seeing the business that you're in is a good one. So capital is coming in. We're seeing that in private market deals, like the Bob Dylan sale as an example.

Right.

You're competing now with more pools of capital. So I want to get your sense on how that impacts Warner's ability to make acquisitions accretively. And the other one is on A&R intensity. Sort of the same -- similar kind of question, which is, is the competition for either retaining artists or discovering new ones getting more and more intense where it's going to drive down return? So maybe you could take those 2 at once.

Right. So let me start with the investment activity in the marketplace. First as -- again, just as kind of a broad context, I think that's all great news because it really does point out the value that there is in music, whether it's on the recorded music catalogs, the master recording rights or on the publishing side with copyrights. The good news -- one of the things about talking on a screen all day is I'm now constantly hoarse. But the good news is Warner Music, we're in both of those businesses. We can buy rights, which we've done for decades. And we can, with our artists, create and develop rights, which we have also done for decades. So we're able to effectively play on both sides of the fence. The financial buyers that are coming in and driving many of these acquisitions don't have the infrastructure to monetize those acquisitions in a very effective, efficient or optimal manner. And we administrate a number of catalogs for financial buyers so that while they are acquiring, we are managing and we don't manage for free. So that has provided us with an additional opportunity by way of revenue streams. We've said it historically, and I'll add that with respect to buying, we're very financially disciplined, and we don't buy market share at a loss. The -- part of the driving factor today, particularly in buying publishing catalogs, is they look a lot like bonds, where there is a highly predictable, steady stream of revenue. However, I would argue that after a certain point, these acquisitions are sensitive to interest rates. And you've got to have the right infrastructure around them to make sure to kind of underwrite the ongoing ability to ensure that steady stream of revenue. And when we don't see that, we don't buy market share at a loss. We've also, for what it's worth, in publishing, we've got a specialized unit called creative services that looks to mine our catalogs. And kind of a recent example is they're celebrating the 50th anniversary of a lot of music innovation that came out of Philadelphia primarily driven by Gamble and Huff. And it's on a special Sonos channel. It's utilizing much of our catalog. And it's being hosted by Kenny Gamble, who is an icon in the songwriting world. To your other questions about our acquisitions, the relationship between artists. I guess to top off this last point, before I get to the artists, we announced, I don't know, a month or 2 or 3 ago that we had made a couple of acquisitions by way of going concerns and/or catalogs. I think we spent somewhere around $340 million, and we will get more than $40 million by way of EBITDA. So somewhere around a 9x multiple which, when you look at some of the other multiples you read about in the marketplace, is highly, highly accretive. And it's part of our mission to deliver long-term, stable, growing adjusted EBITDA. On the artists side, we run a portfolio. And that portfolio has artists that we just signed, undiscovered, unproven artists. It's got artists that are emerging. It's got artists that have emerged and have a solid northward-bound trajectory on their way to local, regional or global superstardom. And then we have catalog. And when we invest, we look at that as a portfolio. When you reach superstar status, there's a basis for renegotiation. Typically, that basis goes higher. Ironically or conversely, the A&R, marketing and promotion support that they need drops. With our unproven or emerging artists -- obviously, the royalty rates are lawyer -- lower. Thanks to our lawyers and their lawyers, I guess, the royalty rates are lower. We get 360 deals. Conversely, we've got more marketing and promotion work to do to create and build for those artists a fan base. So when we look at our portfolio, it has remained fairly steady over time by way of margin. With respect to A&R, the budgets have increased meaningfully. But they're increasing in a, relatively speaking, linear relationship with our revenue. And the reason that this is happening is we've been successful in moving from Anglo-centric to far more of a global music company. And what we've discovered over the last 7, 8, 9 years, and what has become obvious with the Internet, there are no longer -- the Internet doesn't recognize geographic boundaries. The Internet doesn't start and stop at certain genres. The Internet is indifferent to where things come from and where they go to. And we've had to respond, both by way of our geographic and partnership footprint, with appropriate upsizing of A&R because today, and we've said this repeatedly, great music, great artists can come from anywhere and resonate everywhere. And in that search, in that hunt for finding new artists, new music and continuing to have an ever-growing stream of great new artists and great new music, we are hunting everywhere. And the partnerships, the geography, the A&R investment is just a mirror of what we're doing operationally.

Got it. That makes sense. And that's a very helpful answer as we think about tracking your performance through this year and onto the future. So unfortunately, we're out of time, Steve. I always enjoy talking the business with you, so I really appreciate you spending this time with us. And looking forward to getting together in person sometime soon.

I'll double on that. And again, thanks for your invitation. And have a great day. Thanks, Ben.

Absolutely. Everybody, have a great rest of the conference.