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

Okay. So we'll get started. My name is David Karnovsky, I cover media, entertainment and advertising at JPMorgan. Happy to have back at the conference again, Bryan Castellani, Exec VP and CFO, Warner Music Group. Thanks so much for being here.

Thanks for having me.

All right. So you've been with Warner Music for just over 1/2 a year now. Early days, but what are you happy with so far? What gets you excited when we look out 12 to 18 months?

Again, thanks for having me. Good to see everybody. It's been 7 months, give or take, and it's really been good. I think about really through 3 filters. One is just music and the industry; two is the company; and three is the team. And music has always been an interesting, fast-moving dynamic space, fun as well. It, I think, is more aligned with the Internet than other spaces in entertainment, it's short form, shareable in nature. When I was joining and thinking about it, the macro setup has been strong in terms of just the sub growth, pricing. The user engagement continues to rise. It's an incredibly -- starting from a great place, I think, just in the consumer value proposition and so really excited about the industry. And then Warner, you have this iconic company with an iconic catalog. I grew up with Van Halen and AC/DC, that's in our deep catalog, and probably doesn't get enough attention, but just an iconic company. And then the team and Robert, in terms of just investing into new skill sets, and tech, in particular, a very embracive, collaborative culture, which plays to my DNA and I've been super grateful for the welcome and the onboard by the team and the company. And so good space, good things happening and excited that we're hungry to keep doing more.

Got it. Hope you meant David Roth, Van Halen and not...

Both. There were some in there that like [ Pama ] and the post David Lee Roth was good too.

Got it. So you and Robert have emphasized a strategy to increase the use of tech and data to drive better decision-making, repeatable results, lower costs. Maybe expand on how this is working through the business, the scale of the impact you're making there?

Yes. And we live in an increasingly if -- in many ways, only digitized world. And so everything we do, we try to really augment with tech. And when we think about our tech investment, we're focused on a few things: one is efficiency; two is data and insights; and three is growth and scale. It all starts with investing into that foundational stability and just efficiency of the operation so that we have reliability and our operators and marketers can deal with the millions of tracks we have and do, whether it's doing automated releases and following DSP best practices. On the data and insight side, how does it improve our discovery, marketing distribution of music? And on the growth and scale, building the platform in a way that we can leverage it not only for our first-party roster, but also expand and grow our distribution business through ADA and better leverage our overall infrastructure across the ecosystem.

Got it. I want to move to recorded music streaming. Normalized growth in the quarter was steady at 11%. There were some noise, moving parts in terms of what accelerated, decelerated. Maybe you can unpack the pieces of it?

Yes, this one got some attention in this last quarter.

It did. Yes. Put it up front.

So it wasn't too long ago, it was 2 quarters ago, through our fiscal '23, we reported 1 number, which was just recorded music streaming, and then we talked about some of the movements within it. We now break out subscription and ad-supported and ad-supported is really 2 pieces, which is the traditional ad-supported, your Spotifys, your YouTubes down to Pandora and then emerging platforms, that is your social networks, Meta, TikTok as well as Fitness, like Apple in there, and so those 3 buckets or those 3 revenue lines, 2 of the three accelerated in our Q2; subscription went from 12% to 13.5%, which was strong. Our ad-supported went from high single digits to low double digits, so sequential acceleration there. And those 2 are roughly 90% of the overall recorded music streaming revenue. And then in emerging platforms, you can get some lumpiness in there based on mix of platforms, deal timing and content delivery. We had some content delivery with one of our platform partners in Q1, that didn't recur in Q2, and that caused a sequential revenue deceleration. Having said that, all 3 of those lines, I think, are poised when you look out over the long term and just the tailwinds and the trends, poised to grow. And so some of that, I would say, 2 of the 3 grew, one decelerated, but you look over the long term and they're poised to grow.

And just on the emerging and some of that lumpiness quarter-to-quarter, is that -- should we expect that volatility to come from time to time? Does that get reduced at any point as these scale up?

Yes. And again, it's about 10% of the overall. And so we see it over the long term growing. Those deals are generally 2 to 3 years shorter term in nature. The platforms are still evolving their capabilities to track and attribute data down to the song level. So you do end up with more of a fixed recognition, but we're always looking upon those renewals to get better reporting and make them -- ideally, move them more towards our traditional subscription-based deals where they do grow with the user engagement over time. And so at the moment, you get some of that fixed. But over time, you expect those to grow.

Do you think the technology has evolved enough that, that could be possible in the coming years? Or is that still a little further away?

Yes. I think it's evolving. I think the best example of that is probably YouTube and looking at how they develop content ID for UGC and how that is able to better track and monetize. And so I think they have the capability. And it's really in every platform's interest to invest in that capability because you want to ensure that for content creators, it's properly monetized. And on the same token, for advertisers, you're able to have attribution for them as well. So I think over time, it evolves.

Maybe just staying on the emerging platforms. A peer of yours just ended a pretty public process with TikTok. Compensation, copyright, AI protection, I think those were the major issues. You talked about potentially future rounds of negotiations. Are you planning to approach things differently? What are the kind of incremental priorities against those, what I think were first round agreements in some cases?

Yes. Listen, every negotiation has its nuances, and it's hard to predict the hypothetical. I think that in any negotiation, we want to ensure that the content experience is good and well represented. We want to ensure that the content is properly protected and there's fair use. And on the same token, we want to ensure there's fair value or reward or monetization of that content. And so those, I would say, are evergreen in nature and then every negotiation has its nuances. And again, they're generally, we in the industry try to continue to move all the deals to better royalty models as well as better attribution and protection around any of the technology and AI considerations.

What are the priorities on the AI side?

Well, on the AI side, we've spoken about -- we want to stay aligned with the platforms because that's where the experience is happening. We want also stay aligned with the engines and ensure that there -- that, again, there is fair use of the content and artists have a choice. And then we certainly also want to stay aligned with the legislative bodies. And I think there you see a number of movements across whether it's the ELVIS Act or others that I think everybody is much more proactive and if you go back 15, 20 years and look at the Napster experience versus where we are today, I think everybody's approach and collaboration around AI is much more forward thinking and much more collaborative. And so that is a good thing.

Okay. As you noted, subscription and ad-supported growth books accelerated in the quarter. Maybe how would you frame the underlying drivers for the business currently, price increases, sub-growth share? And then just for ad-supported specifically, anything can you highlight on the overall ad market at the moment?

Yes. On the -- just the growth in general, again there, we continue to see rising subscribers and sub growth around the world, which is great because that just speaks to the user engagement and the rising tide that in terms of volume can lift all boats. Pricing, Robert made a call -- on the call made the comment that we're talking about the fact that we're starting to lap some of the price increases like YouTube and Apple, and that was the first price increase in 15 years, which is pretty incredible. And then you certainly got to have consistency of slate and the artist roster, and we've had a really strong run here in Q2 with Jack Harlow and Benson Boon, Teddy Swims, Zach Bryan, all performing. And then I think on advertising, advertising is a -- that dual revenue stream, subscription and advertising, is, I think, everybody's goal and certainly supports the overall ecosystem. Advertising by nature is going to be a little more volatile, lumpy, tied to the economic cycle than subscription, because subscription is stickier. But the user engagement and the monetization of advertising continues to grow. And I think we're in the middle of this massive shift from traditional platforms to streaming and the fact that you can do data targeting and optimization on streaming advertising. And so I think we're in a state where, again, I mentioned the earlier sequential improvement. Now some of that's flattered by weakness in the prior year first half of the year across the industry. But overall, poised to grow, and we're encouraged by the trends we see there.

Got it. On the content slate, fiscal '24 looks somewhat back half weighted, not dissimilar to '23. You've stated a goal to smooth out the release timing, reduce volatility. It is a people-driven business, creative process, touring has to come into consideration. How do you balance the artist needs against your desire for more consistency?

Well, first, I want to push back and say that '24 looks like '23. I think that '23, we've acknowledged we had a soft first half, and we've worked really hard to get more consistent. And I think you've seen sequential improvement Q3, Q4, Q1, Q2. And which is all good. It is a human exercise. And so there is some unpredictability in releases and release timing. The music and the content has to be ready first and foremost. It's always been a logistical exercise, but we are focused on trying to have that stability. New releases on their own are generally small in terms of the overall impact to the business. But collectively, they add up and they certainly can lift the shallow catalog, and we've spoken about the business generally being 1/3 new release, 1/3 shallow, 1/3 deep catalog. And so we're focused working with artists on that logistical exercise. We've done it for decades. And it's in everybody's interest to be as thoughtful and planful about those releases because we all want the music to have the space and the opportunity to be promoted and succeed.

Got it. You talked about new releases and what that could mean for the shallow catalog, right? Aside from that, what are some of the ways or things that are in your control to kind of stimulate engagement with the deeper catalog or some of the kind of call it from now to 3 years ago type releases?

Again, starting with our new releases and just having consistency of slate and the ad and the do is lifting the shallow catalog as well. And how do we augment and complement that with tech. And I mentioned a little bit earlier just about all the best practices, whether it's metadata, lyrics, motion art, thumb nails, how do we get better at that. And it's easier to do on the new releases because you're starting with new. It's harder to do on the millions of tracks backwards in the catalog. But we're focused on doing that scalably both forwards and backwards, which can help lift the overall catalog. And then we've seen successes like Joni Mitchell being -- performing at the GRAMMYs and going on tour helping lift her catalog. Cher putting out a Christmas album last December. And so we've always been in the business of mining the catalog and keeping it current, and we'll continue to do that.

Got it. So as you noted, since late '22, the DSPs broadly have engaged in price increases. I think there's a tendency among investors, usually to focus on Spotify, its commentary around churn. Looking more generally though, how do you think the DSPs perceive this initial round? And what are some of the factors that could lead to a more regular pace of increases like we've seen in video, for instance.

Yes. And I think, again, the first price increase in 15 years, starting from a great place of the value proposition. They can -- it's great to see them being more thoughtful and really being more sophisticated about pricing. You can do that via price, whether it's on individual plans, bundled plans. You can also do it on feature sets, whether it's Lyrix, whether it's SuperFans, whether it's different tiers. And so we try to focus and we both want to be pragmatic and they ultimately control the consumer relationship and the price increase. We're able to inform that, I think, productively, through our wholesale relationship and our discussions, but we want them to be thoughtful about it as well. And I think they're digesting these. The first round I think you acknowledged was little to no churn, which positions and encourages everybody, but it's just got to be thoughtful on the go forward, and we think there's room for more.

Got it. Maybe another potential catalyst is the opportunity for articentric models. It is a new concept. I think the definition of articentric can differ depending on the DSP, some DSPs haven't made commitments at all. What do you think the future of articentric look like? What do you want to kind of see at the end of the tunnel with your partners?

Yes. And I think about articentric and there was one price increase in 15 years. A few years ago, articentric wasn't even being talked about. And so the fact that in a few years, we've seen a real embrace of it and some initial movements. Spotify has talked about having a minimum of 1,000 tracks or 50 users for any of the fraud start charging those distributors for them. So those are all good X. These are small in the beginning, and they need to evolve and broaden over time. But it is the right thing to do because I think we all agree that not all content, not all music is created equal. Premium music drives the biggest spikes, the biggest engagement. And so rewarding that differently than all other streams is the appropriate and fair thing to do. And again, I think it's important that the DSPs build their brands not just with consumers but with artists and being a home that fairly rewards premium artists for the premium impact they have.