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

Okay. Let's get started with our next session here. Thank you, everyone, for taking the time to join us today. For those of you who don't know me, my name is Stephen Laszczyk and I'm the lead analyst for the music, sports and live event sector here at Goldman Sachs. We are excited to welcome back to Communacopia this year, Steve Cooper, Chief Executive Officer of Warner Music Group. Steve, thanks for being with us today.

Thank you for the invitation. Appreciate it.

Great. So I wanted to start off here. The last 1.5 years has been particularly busy for Warner Music between navigating the pandemic and the launch of your IPO last year. As you look back, I was curious to hear in what ways you think both Warner Music and the music industry more broadly have changed? And then looking ahead, what most excites you about the business and the industry going forward?

Well, let me break that down to music, Warner, and going forward. I try not to talk for my competitors. With respect to music, what I've seen over the last 18 months is just its tremendous potency. In fact, I'm more convinced than ever that music is just embedded in our DNA. It's the -- it's become even a greater cultural force everywhere in the world, day in and day out, it feeds our emotions. And in virtually every form of consumer entertainment, we're seeing music now as a critical building block. With respect to Warner, the last 18 months has really provided us with a number of opportunities. It's provided us with the opportunity to accelerate our transformation into a digital-first company. It's allowed us to immerse our organization in a strengthened tech-enabled infrastructure environment, and it's allowed us, from my perspective, to secure our music leadership position at the intersection of gaming, social and fitness. On a go-forward basis, what I see is a very long runway for growth. I see a continuing shift from a singular line of subscription streaming to an explosion of different streaming touch points. As I said, I see music as the cornerstone in virtually every consumer-facing entertainment business model. I see a strengthening our collaboration and partnerships with our artists to span their entire careers. And while others, I think, are beginning to see the industry through the same lens that we do, I continue to see Warner as the organization that is really going to lead the charge into music's digital future.

That's a helpful overview. And I want to dig deeper into each of those parts. But before we do, I wanted to maybe address for a moment the elephant in the room, that is Universal Music has now officially spun out of the Vivendi publicly trading earlier this week. I was curious, what does that mean for Warner Music? And does it at all change how you intend to operate your business going forward?

Well, just to state the obvious, before we went public and UMG was spun out of Vivendi, we've been successfully competing in the music sector and vis-a-vis Universal or Sony for decades. I think with respect to us that because of our One Warner approach, our global scale and particularly our artist-friendly agility, I think that we are actually better positioned than our competitors to take advantage of the dynamic changes that have and will continue to take place in music landscape over the next couple of years. This ability is also supported by our legacy as a private company, our focus on financial discipline, and return on investment. And you can see this all reflected in our strong conversion of EBITDA to cash. With respect to Universal, I think their spinout is good news for the music sector. It -- and the market reaction has validated the favorable global trends around music. Having another pure play music company in the public eye will enhance investor education around the value that major music companies really provide. And I think it's especially nice that Universal agrees with our vision of the future.

That's helpful. Maybe turning back to your business and maybe getting deeper into some of the drivers in the bases around Warner Music. Streaming has been the largest and fastest-growing part of your business as it has for Universal, as you mentioned, as well, you're benefiting from similar things. But what do you think is the long-term streaming opportunity for Warner Music as you look out across both developed and emerging markets?

Well, traditional streaming, we believe still has an enormous amount of runway. And we see every day another array of vectors for growth. With respect to traditional streaming, the markets ought to have, over time, much more penetration than they do now. On average, in the developed markets, penetration is roughly 30%. Many people studying the industry believe it can grow to 70%. In the emerging markets, there is lower penetration and ARPU today, but meaningful upside, all of which will be incremental. With respect to the emerging markets, these platforms have provided an entree point for people not only to listen, but to ultimately pay for music, much better than piracy. And even with reduced rates and lower ARPU, 50% of something is better than 100% of nothing. We also see that, as I mentioned a minute ago, that both existing and new business models in consumer entertainment are utilizing music as a foundational building block with respect to the users' experience, and we see that a lot of these alternative used cases are growing faster than traditional streaming. In addition to that, what the last 18 months, I think have shown not only in music, but in consumer entertainment is that users have demonstrated a willingness to pay for content, including music, and that willingness at least to me, appears to be at an all-time high and growth. So that's how I see growth for the future. With respect to the DSPs in particular, Spotify, Amazon, Apple, YouTube, Tencent, our relationships remain very healthy, very collaborative, mutually beneficial. The streaming market, the traditional streaming market continues, as I said, to grow, and we believe that both the traditional market in these alternative use cases will be bolstered by price increases, which should become more regularized and should have potential meaningful upside. I think that these higher prices over time will arrest so to speak, and turn the ARPU curve back to positive territory year-over-year. I also believe that we have reached a point or approaching with the DSP split stabilization, by way of -- by way of what we share in by way of the subscriptions. This has given the solid music base, the DSPs, the opportunity to add new content by way of example, podcast. And that even with a company like ours, since we're content providers, podcasting gives us new avenues for collaboration, content and revenue opportunities. In fact, we are actually collaborating with a number of the more substantial streamers to provide them with podcasts. These enhanced offerings by the DSPs, I believe, will drive additional subscriptions. That will increase the consumption of music and ultimately, it turns into a virtuous circle. I also see that given that music has now had a decade-long history with these streamers, that our value has been proven. And I think we are pretty well isolated and insulated from dilution by way of DSPs wanting us to subsidize other product lines. And in fact, I think that many of them are doing a very good job in building relationships with consumers to monetize these additional forms or content.

You mentioned the value of music having a very apparent value in the marketplace and the risk of dilution probably being small for you. Would you say now that you're maybe more willing to give some greater economics to the DSPs in terms of pricing upside to the extent that they can prove to you that they're adding value with things like podcasting and other non-music content?

Well, I guess my answer is we're adding value every day. When you look at Warner, when you look at Universal, Sony, all of the indies, we as the content providers are spending billions of dollars annually to bring to the streaming world and ultimately, the consumers and music, the fans, an enormous amount of money to find new artists, new music, accelerate the careers of artists that are already on our rosters. And one of the benefits we provide is the constant replenishment of the DSPs offerings with not only the rich deep catalogs we have, but every year, when you think about -- when you think about it is just a loaf of bread we're adding slice and slice and slice by putting our own capital to work for the benefit of the DSP. So I can't see a compelling logic, Stephen, as to why we would -- we would not continue to keep that at the forefront of our minds when we negotiate the licenses for our services.

You mentioned earlier the opportunity in emerging streaming platforms, and they continue to grow at an extraordinary pace. As of your last earnings call, I think you called out that these platforms generated $235 million in annualized recording music revenue for Warner. Could you maybe elaborate a little bit more on what exactly are emerging platform revenue streams? And how large of an opportunity you see this category becoming for the company over the long term?

Well, the way we define it, first of all, let me just put it under an envelope as to why we look at these things. Our goal at Warner is to empower innovation, to grow the music ecosystem in all possible directions because ultimately, what we want to do is optimize the value of music for our artists, songwriters and shareholders. So when we talk about alternative streaming platforms, what we're talking about are alternative offerings that create new used cases for music, and they're popping up on both well established as well as new platforms primarily in the areas of social, gaming and fitness. So by way of example, Facebook, which is an established platform has begun to utilize music in new and interesting ways over the last couple of years. A couple of years ago, nobody ever heard of TikTok. They have a use case, which is primarily very short musical clips. And even if you're showing somebody how to construct a strawberry shortcake or build a cabinet, there's typically musical themes that run in the background. We've got Peloton, which is a phenomenon that's only sprung up in the last couple of years. They've utilized music to drive digital fitness and we got Roblox by way of example, which is a metaverse where music is used not only in its traditional forms, but in a metaverse where you can interact with artist avatars, you can go to virtual concerts so on and so forth. And what we see in these areas are a constant flow of new deals. We've recently signed a licensing deal with a company in Asia called Kuaishou, it's a short-form video platform that already has more than more than 1 billion users worldwide. So at present, our run rate on a recorded music side is about $235 million a year annualized, up from virtually 0 a couple of years ago. And on the music publishing side, it's running at a proportionate rate. You got to keep in mind though, that in all of these areas, metaverses, gaming, live streaming, utilization of avatars, NFTs, they are all in their infancy, but many of them have a potential to become the next global platform. And in fact, many of them are already moving in that direction. We believe that this intersection, that I mentioned earlier between gaming, fitness, social, digital, will drive substantial revenues in the future. At the moment, it is difficult to size, but we are -- we have been early to this game by leveraging these platforms with strategic partnerships and investments. We intend to continue to invest well beyond traditional streaming. And we do see that over time, they should provide tremendous incremental revenue and opportunity for the music sector. Instantly, one last point. We also see, and we're looking at the household differently than we did 5 or 6 or 7 years ago. And 5 or 6, 7 years ago, we thought about the family plan. Now we think about a household as the parents are listening to rock on Spotify or hip-hop on Peloton, the teenagers are dancing with the clips on TikTok and the young kids are interacting with bands on Roblox. So we see the opportunity to bring music from not only the traditional touch points, but these new touch points into everybody's household where it becomes a normal part of their lifestyle day in and day out.

Good overview. I wanted to pivot a little bit and talk about the investments that you're making in your core business. You've often said that investing in A&R is the lifeblood of your business. And one of the concerns we most often hear from investors is that A&R costs are set to increase as the music industry becomes more competitive. How should we think about Warner's A&R strategy? And do you think your current levels of A&R investment are sustainable over the long term?

That's actually an interesting question that we spend a lot of time on inside of Warner. So to start with, we know that artists have a lot of choices. It would be nice if we were the only music company in the world, but unfortunately, we're not. But we want to be able to support every type of artist in every type of deal at every stage of their career. So when we talk about A&R investment, our current view is that we will continue to keep it in line with revenue growth. And we'll put that investment to work in really several different ways. One, obviously, by signing artists directly. And that will continue to be a meaningful part of our core program. The second will be to acquire labels and catalogs as a component of our ongoing growth strategy. And the third will be to continue to operate effectively in the distribution space and continue to have commercial deals with the independent labels and independent artists. So that's one aspect. At the same time, we are building long-term strategic partnerships with a broad array of our music legends, a broad array of our music legends where we have career spanning recorded music and publishing rights. And that's also becoming an important aspect of our go-forward strategies. Now it is true that some deals are getting more expensive. But that's the nature of success that deals do tend to get more expensive. That being said, we operate our business in many respects, as a portfolio. And in that context, we're confident that our revenue growth is going to more than keep pace with our increased investment levels in those various aspects of A&R.

Understood. The way you discovered development from your artist has changed a lot over the last few years. Could you talk more about some of the ways, and I think you mentioned this a little bit earlier in the conversation. But the way you use data-driven tools and new distribution mediums, whether that's social or the metaverse, you mentioned Roblox, how they're changing the way you discover, develop, and permit artists?

Sure. I'm going to start by giving you what I find to be just a mind boggling statistic. We process every single day over 4.5 billion lines of data from our partners, 4.5 billion lines of data that inform us about our artists, our music, our geography, on and on and on. So our music is ubiquitous we are on hundreds of services. And you can tell from that statistic, we get data from all of them. So what we've done and what we've accelerated during the pandemic are the development of our tech capabilities to, as you said, aid in discovery, marketing, creator support and other key areas. The issue isn't so much to have the data. That's important, but as, if not more important, is to have the tools, which can organize, slice and dice that data to -- otherwise, you're trying to boil an ocean every day but move it to useful information or real insights about what's happening in music. And what we've done over the year is develop a number of proprietary tools. And then I'll swing back to some of these alternative used cases. So we've got a number of tools that are all proprietary awarded. We've got a tool called Sodatone, which our people use globally to discover new artists and new music. And I can't tell you technically about how we do all this, but what I know is that we can connect dots, points, this data, and information in a cogent way that has now allowed us on a regular basis to approach in a first instance, these emerging artists, that's Sodatone. We've got a tool called ARROW, which allows our songwriters to demo with artists looking for new materials. They can demo their material through this app and match it with material that recording artists are looking for. We've got an extensive marketing tool that on a real-time basis tells people what's happening to artists, their tracks, the geography, the time of day, the intervention of their tweeting, a beam on a late night show of giving a concert and how that moves the needle. We've got artist portals where we share data, again, on a real-time basis with our artists, sync tools that allow easy licensing so that we can maximize our sync revenue. We were the launch partner with a company called Adaptr, which facilitates innovation relative to things that our organization can't deal with on a live basis. And one of our acquisitions from a couple of years ago, Songkick as soon as the pandemic hit, they pivoted from providing global concert information to live stream information, and we now feed that into Spotify every day. These other platforms, social media platforms and metaverses, have also become incredibly important vehicles for artist promotion and development of these alternative revenue streams. Ed Sheeran, a couple of weeks ago, had the premiere of Bad Habits, his latest track on TikTok, it was via a live TikTok performance, which drew over 5.5 million people in the first 24 hours, 5.5 million unique interviews. Incidentally, on Ed's last tour, which took a year or so, he sold a bit over 5 million or 6 million tickets over a year. This was 5.5 million unique interviews in 24 hours. Bella Poarch her video for her first single, we debuted on YouTube, it's called Build a Bitch and it was the biggest debut ever on YouTube for a new artist and the way we market it, she got in a very short period of time, 200 million views and we're still counting. Twenty One Pilots last weekend did a concert on Roblox, all virtual. It was the most international event on Roblox to date. It reached more than 160 countries, it was the first of its kind nonlinear experience and Roblox partnered with developers behind 3 of the biggest games on that platform, which have collectively over 400 visits to create deeper engagement. We've also just signed an artist named [ Ha Jiang ] to Warner Music Asia. She has 100,000 followers in China. Her first release is coming at the end of this month, and by the way, she's a virtual idle, literally. And in China, there is -- this is a huge phenomenon and a huge overlap between Chinese top stars, fans and the fans of virtual live events. So we are now also moving into that category. So as you can see, the dynamics of the world are changing so rapidly that part of our mission is to be able to adapt and adopt just like that.

I want to pick up on a thread that you touched on a lot there. And that was sort of the internationalization of music and the ability for a lot of this content to spread globally so quickly. You've invested in growth by buying record labels, especially to expand your geographic presence. Can you talk a little bit more deeply about your strategy on an international basis? And how does M&A play into that?

Sure. So when you look at -- we've said, I mean, for quite a while now, that great use can come from anywhere at any time and travel everywhere all the time. And that statement proves to be more accurate, literally every day. So when you look at virtually every country streaming and virtually every country on a globe, local repertoire is more than 50%, and in some cases, almost 100% of the content listened to by people in those markets. So it's critical to have a footprint in the world's biggest, fastest, most vibrant growing markets. You just have to be there. And our strategy that we've had in place for some time now is to ensure that we move from an Anglo-centric to a global music entertainment company because the web, the net, globalizes music, even if no one listens to it, it globalizes the availability instantaneously. And part of what we do is to take local repertoire and help to blow it up to make it global music. So we built our presence around the world in 3 key ways. Strategic investments, where we take a position that leads to control at the local level. Incidentally, we've also done this just to get it said, on an organic basis, where we just start a new office in a new market, fully staffed because we're looking to increase our local presence and our frontline capabilities. But anyway, strategic investments, key partnerships, commercial agreements and licensing in these fast-growing vibrant markets. We've concentrated over the last several years in Africa, where we have established ourselves as a market leader in a music environment that's just exploding. We picked up -- we've invested in Africori, which is the most influential independent label in Nigeria. And in fact, by utilizing our footprint, one of their artist CK is now literally one of the most streamed -- he's got one of the most streamed songs in the world right now. And we've been able to do that by utilizing all of these other marketing and promotion outlets that we just discussed. We are partnering with Africori, which is Africa's largest leading digital music distribution company, music rights management and artist development company. In fact, one of their artists, Master KG's Jerusalema, went to #1 in countries around the world, and he's already racked up 0.5 billion streams. We've got a 360 partnership with East Africa's #1 artist, Diamond Platnumz. We've acquired another independent South African label Coleske. We've launched Warner Music in India. We've invested heavily with Ziiki Media in Punjabi Music. We just signed an exclusive distribution agreement with Sky Digital India. We signed with Tips, a hugely popular Bollywood music company. And earlier this year, we launched 4 in records, which is a vehicle that will bridge the gap between India's exploding music scene and the rest of the world. China, likewise, all the way back to 2014, we acquired Gold Typhoon, which gave us one of the largest modern Mandarin catalog in China. Since then, we partnered with [ wet records in Juanes ], which represent our dancing hip-hop labels in the region, and I've already mentioned Kuaishou. Russia, the same way we acquired Gala in 2013. We just supplemented that with the acquisition of Zhara, now Atlantic Records Russia, and we're now the largest music content company in Russia.

I want to pivot and ask a quick question on margins. Back during your IPO, your long-term guidance called for adjusted OIBDA margin expansion with margins going from the mid-teens to the low 20% range by 2024. Could you talk a little bit more on your updated confidence in margin expansion looking out over the next several years? And how will the recovery in revenues that have been impacted by COVID over this past year impact that trajectory of margins over the next year or so?

Sure Well, we are currently at margin rates that are either at or higher than we projected during our IPO investor meeting periods. And we continue to believe our margins because in the main, revenue mix and cost management will continue to grow. Now the growth rate will moderate because as merchandise returns, physical music, touring and ticketing, they are obviously high revenue but lower-margin businesses. And so we do expect some moderation in the growth of our margin. That being said, we do think, over time, there will be an ongoing favorable revenue mix shift because digital will just become a larger and larger piece of our business, we see our financial transformation, which will have its first wave of implementation in 2022. We still see that as generating tens of millions of dollars in recurring annual savings. We have established a full-time transformation office to drive incremental efficiencies not just on a big ticket basis, but looking at everything we do by way of process by way of utilization of AI, robotics, so on and so forth. And we will hold on to pandemic generated savings because we're now conducting our business in different ways. So we'll continue to hold on to a meaningful amount of our T&E savings. We will, over time, have a smaller but far more purpose-driven real estate footprint and with the acceleration of our utilization of digital tools, I have an expectation that how we make decisions and how we spend our money in A&R marketing and promotion as well as our back office will continue to have a tightened tighten, tighten, laser-like focus which should drive better statistics in A&R marketing and promotion. So bottom line, I think that favorable long-term trends in the industry, plus a growing array of opportunities should equal margin upside potential and relatively confident to very confident that there's going to be upside to our IPO targets.

That's helpful. And then we just have a few minutes left here. But before we go, I wanted to ask a question about some of the social issues at Warner Music leading on. Can you talk a little bit more about how you view your role as a global entertainment company in addressing some of these issues related to social justice and equality, diversity?

Sure. We are a company that is fortunately in the business of creating and impacting culture. So to us, it's very, very important that not only within our company that we focus on diversity, equity and inclusion. And we've got an enormous amount of diversity inside of our company, but we can always do more, and we can always do it better. And it's very important to us. We want Warner to be a destination for people that want a rewarding and inclusive environment. We have a global head of DEI that reports directly to me. We are -- we have virtually around the world employee resource groups overseen by an Executive Diversity and Inclusion counsel. We established the Warner Music Group and Blavatnik Family Foundation, which is funded with a $100 million of commitments. We've already made grants to Howard University School of Business, the Ashe Cultural Arts Center, the Black Cultural archives in the U.K., and it's designed to be a long-term foundation so that we keep investing in the right places for the right amounts of time as opposed to a one and done. On the ESG front, we've recently hired a Head of ESG because diversity, equity and inclusion really is a subset, and we've got to do more about making sure that we do our fair share of contributing to the environment, our fair share of governance up and down the line with our suppliers to ensure that a world, which frankly doesn't look so great at the moment from a number of aspects becomes a better place. And it's important to us and we think that with our artists, our music, our organization, we can be a very powerful force in the world, and we can be change agents. And we want to be change agents for the better. You know there's enough -- there is enough of the worst running around, the violence, the divisiveness, the racism, the hate, I mean it's important that we do what we can to correct that.

It is a good place to end. Steve, thank you for your insights as always. And thanks for taking the time to join us today.

Thanks so much again for the invitation. Have a wonderful day.

You too.