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

All right. So let's get this started. Everyone. I'm Ben Black, I co-head the Internet franchise here at DB, and this morning, we're extremely excited to welcome back Warner Music at the MIT conference. Today, we have Bryan Castellani, thank you so much for joining.

Thanks for having me.

So big picture question here. You've been in the role for about 6 months in a sense, and I guess a good way to sort of kick things off will be -- can you give us a sense of what attracted you to Warner in the first place?

Yes. And I'd like to think about these things as like the space, the company, the team, and I've been at Disney almost 3 decades and so around the media and entertainment space and always admired the music space. And music, I think some would say was the canary in the coal mine on the transition from traditional to digital and it really got through the other side, healthy, too. And so from the space, I was looking at it as, hey, music, it's fun, it's ubiquitous. It's everywhere, easy to love. As an industry, the macro setup was attractive. And then a company like Warner, well-known, iconic, content, IP, music. I grew up with the Van Halen and the AC/DCs, and so that was easy to love. And then on the team side, Robert, I felt like had a really differentiated vision and was building a team and really looking to evolve and transform Warner. And so for me, even though I was at Disney for all that time, I had probably over a dozen jobs, roles, different leaders. I like change. And so to join Robert and the team in that evolution was just too good to pass up, and I'm thrilled to be there, and it's been a lot of fun. And so that was the calculus going in.

Awesome. Well, you're now 6 months in, I have said, so it would be great to get the half year report. So what's the price to the upside? What was perhaps more of a challenge than you previously [indiscernible]

Half year, okay. All right. Again, I think when you take a step back and you look at the industry and just the -- to the upside, the macro drivers, whether pricing and sub growth and those underlying trends continue at pace, and there's a lot of headroom still. I think we were all favorably impressed with how well the price increases translated. And that on the company side, we have really established a new strategy, a new leadership team and the integration of whether cultures, teams, that has been very easy and natural and welcome. And so I think to the upside, the pleasant surprises have been just the continued healthiness and I would say, constructiveness across the industry and then at a company level, just the integration of cultures and momentum inside the company.

All right. Well, if we look back to 2023, it was a bit of a challenging year. You had the software slate to begin the year. You had a leadership transition. You came in [indiscernible] right, a softer macro environment. But it seems like you've turned the corner, right. Slate coming along, price step-ups that you mentioned, seemingly well digested. And now the focus seems to be shifting to technological investments. So maybe just give us a state of the slate, right now in terms of why you're bullish on the prospects from here on going forward?

Yes. And -- I wasn't there, but I think the lessons of the first half last year have galvanized the organization in terms of just being more intentional and consistent about the slate and the content. And we finished -- as articulated, we finished the back half of last year strong. We started this year strong, number of artists in the top 10, in the top 200 charts whether it's Zach Bryan, Megan Thee Stallion in last month, Jack Harlow. So continuing to do well there. And then I said, Robert has really articulated a strategy of grow engagement with music, increase the value of music and evolve how we work. And with that -- with the industry healthiness, really with clarity of strategic priorities, and I feel like we're being proactive within that. And our restructuring plan speaks to that, that -- from a position of strength, we're really proactive here trying to set the company up for success. Robert has spoken about like this year being the first of the next 10. And so that's what gives me bullishness.

Right. Well, there's a new topic that's emerging in the conversation, obviously, sort of last week, there is the announcement around your interest in Believe. So could you perhaps sort of talk us through your thinking here? What's the strategic rationale? And why do you think it fits so well in your portfolio?

Yes. I guess there's been a little bit of news. And so I'll say a few things. Let me first say that our respect and admiration for Denis and what he and the team built is tremendous. I mean, obviously, that's what catalyzes our interest. Two, in terms of the strategic rationale, when you look at Believe and you look at Warner, both in terms of geographic footprint and complementary in terms of they being strong in Europe and Asia and emerging markets and our growing scale there. And then also from an infrastructure and technology standpoint, that I'm a big believer in, can you be better together and grow faster? And when you think about trying to offer a broader range of services to artists and labels, there's everything from the traditional artist license deal, to do-it-yourself independent artists or label. And then there's flavors and colors in between. And our being able to do that better together, we think will offer greater growth, more value for artists, songwriters and labels. And so that's the strategic rationale. The third, I would say that our interest indicated was on publicly available information. And so I think some of what you're seeing in terms of play out in the press is, our going public with that to really get at a deeper level of due diligence to determine if how we formalize our indication. And so those are the 3 things I would say, maybe just a bonus one. We've always shown ourselves to be, I think, good stewards of capital and demonstrate fiscal discipline, and we've had a history and a track record of improved leverage as well as lower net debt and that anything we do has to fit that lens of how does it fit with the fiscal discipline and really being able to create value together that will be healthy for both businesses and both sets of shareholders.

All right. Fantastic. On to the fundamentals of your business spends. On the recorded music side, I think investors appreciate the share gains, the improving underlying trends within subscription streaming. I guess, question is what's next? And I know you've spoken about this, a stronger slate towards the back half of the year. But what gives you the confidence that you can maintain your current share and even grow it in the back half? Taylor Swift does have a new album coming out. I'm sure you're aware.

So yes. So what gives us greater conference -- confidence is that -- I'm at a conference, so conference is in my mind. But what gives us greater confidence is our just intentionality about being able to invest and are freeing up funds to do that and grow our A&R and marketing investment, and also into things that will serve the music like technology and using technology as a force multiplier and something that can give us operating leverage. And so as we talked about the first half of last year, also just giving greater focus through being more consistent about that investment so that we can be more consistent about the release slate, as well as we have a great and deep catalog to mine that also provides continuity and consistency. And so putting all those things together gives us greater confidence.

And then if we look past the near-term share gain story and those generations, I guess, what's a good way to frame sort of the growth algorithm for recorded music streaming, the P versus Q, how fast is the industry growing subscribers? How should we think about pricing longer term?

Yes. And if only it we're as simple as P times Q, right? There's many versions of P, there's many versions of Q, and there's also a share, so whether it's P times Q times S. But on the pricing side, we talked a lot about the opportunities for price optimization. And again, that can be continued increases on individual and bundled plans, what I would call as kind of the rack rate on the retail side. But there's also ways to be more sophisticated and tier or segment offerings. On the Q side, certainly sub growth is healthy and has headroom around the world. I think global penetration is about 12%. And by the end of the decade, that's supposed to go to 20%. And that when you look at developed markets, it's maybe 40 going 60 and in emerging markets, I think it's more like going from mid-single to low double-digit amount. And so emerging markets are likely to see more sub growth, whereas developed markets are more likely to see price growth. Now having said that, that's on like the retail component of it. But within that, we're on the wholesale side, right? So we don't control the frontline price change or retail. But our wholesale relationships can inform that. And when you think about the royalty models evolving -- well, let me say it first, like on the retail side, the P and the Q growing the pie. And then on the wholesale side, how do royalty models and what we can offer to DSPs help us participate better within the pie. And so if we can get both of those things growing, I think those are positives.

And then I mean sticking on some of the pricing theme here, we had pretty much most of your major DSPs raised pricing last year. I mean, I guess, how do you feel that those were digested? [ Do we look ] quick postmortem on those? And then when should we expect the next round of increases, probably my next question. Sort of what's that like an optimal scenario for you with regards to pricing, the price increase every year, every other year, a steady cadence, is there something else that your looking for?

Yes. I don't know that we would say we think about it mechanically in terms of -- it just can roll and sequence. I think these recent price increases were absorbed well. And again, using Spotify as an example, they've commented, I think, little to no churn and even exceeded subscriber growth, which speaks to the value proposition. And we're coming off a decade, right, with no price increases and just a couple of years ago started at $1. And I think if music had inflated like other forms of entertainment, it's under monetized underpriced relative to other forms like video would be closer to $20, and you're getting an incredible offering for that headline individual plan of $11. And so I think that the recent price increases went well. They set us and DSPs up well for future ones. But I think the -- everybody needs to be pragmatic and thoughtful and those take time to figure out, okay, how do you cadence, how do you sequence and how do those percolate through the ecosystem.

Yes. I know leading up to the price increases there. We could sense a level of frustration that they weren't coming fast enough. And so a question that we've been getting from investors have been all right, you as a label, what's your appetite to perhaps beat a little bit on the economics of the incremental economics of price change to incentivize the DSPs to be more proactive in testing pricing tiers or higher price [ incentives ]?

Yes. I'd be remiss to negotiate publicly. And so -- but -- and as Robert has said, like every negotiation we go into, we want to be holistic about it and really find win-win relationships, win-win outcomes. I think he demonstrated that at YouTube, but I think we had demonstrated that in our early deals here at Warner. And we're going to be thoughtful about that with them, so that we both can grow the ecosystem and participate better within it.

Good job not negotiating. I'm sure everyone is listening in. But okay, another sort of interesting topic here is artist-centric models. Last year, Deezer moved first, Spotify, more recently. Are you satisfied with the changes that have been made? Or do you feel that there's more work to be done on those?

Yes, listen, I think it's really encouraging. And as I say, if you rewind 2 years ago, there was a little discussion on price, and there was little discussion on artist-centric models. And here we are 2 years later, and we got through around the price increase and artist-centric models are starting to formulate. I think Spotify has commented on how they will reallocate roughly a couple of hundred million dollars a year over the next 5 years to premium music. And so I think we're at the beginnings of that. I think there will be more to come as people really think about how do we value premium music versus functional music or uploaded tracks that are raindrops or static or what have you. All streams are not created equal. And I think it's healthy that the industry is having that discussion around okay, we know that the biggest artist drive the biggest spikes. And how should that be valued? Generally, you think about advertising, you pay a higher CPM on certain contents, more premium than others. You think about cable TV and distributors reward networks and content differently. And so I think that differential value will start to evolve as we evolve these royalty models.

Then if you look into the crystal ball and look much further out, how do you think the distribution models need to change? What's a good outcome?

Yes. I think that there's more I think they can do in terms of evolving the offering. It has been a wonderful buffet of music you get within those plans. Are there opportunities for them to tier? Are there opportunities for them to upsell? Are there opportunities to better segment consumers? There's a lot of talk about superfan, which I think is good because your superfan is like your 20-80 rule that they are a super minority of maybe the users, but they're the ones that are driving the highest levels of engagement. And there's not -- if you're a superfan and the artist comes to town, there's a live event. But outside of that, there's merchandise, there's vinyl, but there's not a lot of ways that the superfan can really exploit their share of wallet. I think as we move forward on those distribution -- how we evolve distribution is, are there ways to better segment and monetize the engagement.

Not to bounce around, but AI is a big topic, transformational technology. And maybe could you highlight or unpack how it could be sort of a meaningful opportunity for you guys, relative to potentially being a threat as well and how you balance those two?

Yes. AI, a lot of discussion around it and Robert has articulated really 3 priorities or areas of focus there. One is the platforms, because that's where the engagement happens. Two, are the AI engines that those models are working with labels and artists in order to protect it and give artists a choice, and three, are the legislative bodies because we need some level of consistency about protecting name, image, likeness, voice. And so I think the momentum and discussion around AI is super constructive. Perhaps hardened or encouraged or lessens of the Napster area and download and piracy and using this moment in time to work together to use technology as the creative tool that it can be. I'd like to say that technology is like the great enabler of supply and demand, right? Like it can explode supply and it can improve on demand. And we certainly have opportunities to use AI and technology in managing and improving upon supply. And at the same time, how can AI help better target consumers and make their listening experience more rewarding. And so I think it's both a creative tool, but it needs to have the proper guardrails around it so that everybody uses it in the right way.

Okay. Now last year, you struck a pretty interesting deal with TikTok. Now one of your peers is in a big public dispute and I'm sure we can all speculate as to what the real ground of that dispute are. But that's not the point of this question, really, it's about your agreement. So maybe if you look back in your agreement, what was really important -- the economics side? What's really important for you in that deal? What was really important for TikTok? It'd be interesting to hear sort of how that [ should go ].

Listen, we've said a couple of our priorities are growing the engagement with music and increase the value. And our deal with TikTok, that negotiation started over a year ago, a different time, different place, different contexts. We achieved both of those objectives. These deals are not long term. They're not an [ end state ]. There's always progress to be made. We -- as I said, when we look to get fair value of the music, we want to make sure our artists are rewarded and well represented and that their content, the platform -- the quality of the platform, right? You want to get fair value and you want the quality of the platform and the experience to be in recognition of that premium content. And so we achieved those objectives. But as I say, these are not forever deals, and there's always progress to be made.

And going back to the fallout, not you, but the UMG, but could it have an impact on you guys from either a competitive standpoint, maybe even from a financial standpoint? I mean one thing folks are talking about this TikTok save-to-music-app functionality is now likely funneling more of your content, more selling content towards DSPs, which could have share implications in the near term.

Yes. Just take the financial piece of that, and maybe I should have mentioned it as part of the other one is -- our economics and our artists are protected in our TikTok deal. And we hope that UMG and TikTok come the resolution and a good collaboration that's healthy for the ecosystem. To the extent that there's greater prominence on TikTok, like greater prominence is a good thing. TikTok is a great marketing and promotion platform and tool. And so whether that is prominent on or off platform, that is a good thing, and we will work to continue to have a good relationship.

Right. And then I think one of the base points has been many of your -- what was previously called the emerging platform deals are fixed in nature. And I think there's an appetite for that to move over towards consumption-based models, but you're more aligned. What are some of the variables that are going to dictate and how quickly you can get there?

Yes. Those -- the emerging platforms, and I think we're maybe in cycle 1, maybe cycle 2 on some of these deals. So it's still early. And a lot of the fixed versus variable depends upon the measurement and tracking capabilities of the platform. And so I would expect over time and over cycles of deals is those eventually more matched the user engagement, but where we are -- and therefore, grow with those as well. But where we are today is more a fixed nature as we're both learning and growing together to establish the right baseline.

All right. Maybe we can shift over to the ad supportive side of streaming. And totally understood last year, there's pretty significant macro challenges. But it seems like your trends are slow to rebound in some of the major digital platforms that we track. So the question is why is that the case? Maybe it would be great to hear an update on sort of the ad environment has been sort of early on in 2024?

Yes, so definitely more headwinds last year improving. Why the case, what you can see and read through is, I think it's important to keep in mind that in the portfolio we have and then in the portfolio the DSPs have, advertising is a vertical across many, right. It's not just music streaming advertising. Take YouTube as an example. It's part of a advertising vertical that yes, sells music, but also has video as does Apple. And so it's not a perfect read through in terms of advertising into music streaming. In terms of last year, whether post pandemic as well as the economic uncertainty, headwinds were much stronger last year. We have continued to see quarter-to-quarter and sequential improvement, which is good. I think there is the ongoing shift from traditional platforms to digital platforms as well as economic uncertainty. So there may be some volatility or lumpiness to that. But over time, the trends in music streaming and the growth and engagement as well as DSPs being D2C and having data and targeting capability, that lends well to continue to play into the shift from traditional platforms to streaming platforms.

And then longer term, the ad support side of the business, how do we think about the growth profile?

I would expect that to grow with the engagement, right. And to the extent that we continue to deliver great content and that drives subscribers and engagement that offers the platforms more opportunity to target and sell and translate through. Our ad-supported is -- ad-supported and emerging platforms, which we've said is generally lower than 1/3 of the overall subscription streaming revenue we have. So it's meaningful, but the impact is limited in the near term, but we expect it to grow.

Right. Okay. And then let's move over to publishing and Chappell has been -- it's been probably a bright spot for you guys and unfortunately, off and overlooked as well. So just curious, what's -- the source of that of durability of strength? And how do you supercharge that even further?

Not overlooked by us. A real credit to the leadership team there, Guy and Carianne and the team, that they have just done an amazing job. And I think we said this last quarter, like 5 consecutive quarters of double-digit growth. It's been really, really strong. And they've done a few things there to really diversify and expand the revenue base. And number one is the number of copyrights over the last 4 years, I think, has grown by like 45%. And so in acquiring publishing rights and catalogs, it's allowed us to expand our share and it allows us to play beyond just our frontline roster. And as I said, grow share. They also have been leveraging, I think, just our investment in the technology and the ability to have a better supply chain, better discovery, better sync, and it is allowed for more efficiency and leverage into that business. And the other thing I'd say that I think they've done really, really well is to really make a name for themselves in Warner Chappell Music in the community, and even things like the songwriting camps that they put on and really being able to support songwriters and artists in that way, and you take Miley Cyrus' Flowers, came from one of those song writing camps. And so it's everything from the little things to the big things. But they continue to do it well, and it is by no means undiscovered by us.

Miley Cyrus' Flowers is a great song, kids love it, too. Maybe sort of taking a look at the macro environment and interest rates have obviously sort of much higher than they were a year ago. Has the calculus changed around catalog acquisition? Has there been sort of a shift in the competitive landscape there?

For us, I don't think so. I think our calculus has always stayed true of seeking double-digit IRRs in the high teen ROICs that we've had a track record of delivering and staying consistent to that. I think higher interest rate, maybe evens out the playing field a little bit. And what we bring, there's financial players and then there's financial and strategic players. And I think we bring value beyond just the financial aspect of it and having a catalog and rights that we can mine, that we can sync, that we can market, that we can distribute and really adding value to it. And so I don't think the calculus for us has changed. We still have, I think, a meaningful deal flow. And our restructuring goes to that point of freeing up funds to allow us to continue to invest, because we do see those opportunities, and we want to be proactive about it.

And speaking of the restructuring -- to the big restructuring last quarter, that was on top of a reduction for us last year. Right now, where we're sitting today, how do you feel positioned from a cost perspective?

Yes. And we did last year's program and this year's program, both meaningful and not to lose the human element of it because it's really hard work, and we're grateful for everything the team has done and continues to do. But I think it sets us up, as we said, Robert came in. He's now been there about 15 months. I've been there almost 6, and new leaders -- the market has evolved, the company has evolved. And so I think it's at a natural stage to kind of take a holistic view of the strategy. We have now set that and at the same time, identify ways that we can free up those funds to invest in the music and the things that serve the music, like the technology or shifts from traditional marketing to digital marketing. And so from a cost perspective, I think it just gives us greater flexibility and we're set up well.

Yes. And I think you mentioned $200 million in savings. How should we expect that to sort of phase in over the next few years? And what are the exact -- sort of exact -- what's your general thought on sort of the reinvestment plans? And if we add up the low-margin businesses you exit, the BMG termination, that's a considerable amount of firepower that you guys have. So where do you think the biggest opportunity is to sort of reallocate those funds are?

Yes. And so we have said that the plan will deliver $200 million of cost savings by the end of our fiscal '25, so September '25, with the majority of those delivered by the end of this fiscal as we particularly -- it's in [ part led ] and we've announced the divestiture and wind down of some of our media businesses as well as our direct sold advertising, which those, when you just kind of looked at where the market was, where it is now, where we're going, where we can invest for the greatest returns, that those weren't necessarily the highest use of capital. As we look to the future and you think about the investment, we have a framework that Robert has spoken about, about being much more intentional in terms of geographic, type of copyright, genre. And that typically, we should see our investment and our revenue growth move in line to be more consistent about that. Having said that, like investment, whether an acquisition or like sometimes it's not always linear, right? The timing doesn't line up. But I think as we move forward on this and deliver the savings, we'll continue to capitalize on the deal flow that is out there.

Okay. Helpful. And then on the last call, Robert mentioned something to the fact that you guys ingest a ton of data, you process it, you make it usable and you make it actionable to drive repeatable results. I guess, can you just dig into that a little bit more? What should be expecting sort of -- can you give us some concrete examples of what that means?

Yes. I mean on the technology front, Ariel, our Head of Technology has really spoken about 3 areas of focus. One being efficiency, when you think about our digital supply chain, and I'll come back to your question on that, two being data and insights and then three being growth. And when you think about -- like Robert has used, I think the thumbnail or the live motion art example, and you think about the millions of tracks we're trying to manage, distribute, market. And on a platform, that live motion art or lyrics attached, like that may move engagement 1% or 2%. But when you add that up and by DSPs, all the regions, all the millions of tracks, like that can be meaningful. But you can't manage that manually, right. Like it's just too much for an individual. And so how do we use technology or even AI to automate that, to have more efficiency and make it easier for the team and give us operating leverage so that we can scale, right? Because like the volume of content and the opportunities and the platforms is only growing. And then you got to attach metadata to it. And then you got to bring it back and ingest it and you got to learn and kind of repeat the cycle that you get this virtual cycle of learning and improvement.

One thing that I was thinking about, too, is -- is there an element of leveraging the tech and data that you're getting to just be better at identifying talent? And could that potentially sort of supercharge your A&R efficiency, actually longer term?

Yes, for sure. And so the second piece, I had mentioned there's 3 being efficiency, data and insights and growth. And on that data and insights piece, when we think about our first-party data, whether there's third-party data, being able to ingest all that and get that in a usable actionable way, whether you're trying to discover. And something like we're doing at 10-K is very much focused on digital discovery. But as well as across the organization like using those insights so that we can better discover. But like we also have to keep in mind that the technology and the data is one of many inputs, right. There is still a relationship component and the cultivation of artists that takes time and you look at Zach Bryan, who was in the Navy a few years ago, and now he's like a top charting artist. And so absolutely, opportunities to better use the data and technology and AI, but married with our strength in, I would say, finding and cultivating our artists.

Okay. And shifting over to the margins a little bit and last quarter, you reiterated the expectation for 100 basis points of underlying OIBDA margin expansion this year. Last year, you had a much more challenging macro backdrop, revenue backdrop and still manage close to 200 basis points of margin expansion. So what are some of the incremental sources of investment this year in particular that -- I'm not saying 100 is little, but 200 is more.

And so no change in guidance, right? And last year, that first half, we were much more disciplined on the cost side in both marketing and A&R. And that gave us some cost benefit, and we had the benefit in the second half of the stronger slate in the revenue. So the combination of those 2 things allowed for that over-delivery. As we go forward, we're always looking for more efficiency, more operating leverage and being proactive about it. By all means, like I want technology in these things to improve, what that could be, but it would be premature for us to say, hey, it's going to be greater before these things launch, before we actually have some runway and cement weight. And so I think we remain focused on growing that top line, driving margin expansion and cash conversion, all of which will continue to create substantial shareholder value.

I can continue this conversation, but the clock struck zero and you need to go too. Bryan, thank you for your time. Thank you for your insights, very, very, very valuable. And hopefully, we can welcome you back next year as well.

Thank you. Thanks for having me and thanks, everybody.