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

Okay. Good morning, everybody. Welcome to day 4 of our TMT conference. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com. And I am really happy to welcome back to the conference the CEO of Warner Music Group, Robert Kyncl. Robert, great to see you. Thanks for coming back.

Thank you for having me back.

Three years in a row, I think it is.

Yes. Thank you. Really appreciate it.

You must like it here.

I like it here a lot. I like you, guys.

Thank you for coming.

So you guys have been really busy. You and I talked a lot about a lot of the work that's been going on inside of the company. Maybe we could start with sort of the expectations you had when you came into the CEO role a couple of years ago. What's been working? What's been a surprise? What's been more challenging than you thought?

So it's actually -- it's incredibly sort of interesting and intellectually stimulating when you do something like this, right? You come from outside to a company and different industry. And one of the things that I really haven't fully appreciated, which I do now, is the incredible resilience of music. It's the most resilient art form, right, the most distributed across the world, but most resilient to various ups and downs. And I just learned it through just even just seeing the rise of value of catalog over the years, looking at deals that we struck 20 years ago, 10 years ago, et cetera, and how that worked out and through all kinds of ups and downs. So that's been like an incredible learning underappreciated going in. I would say -- and that was very positive. The other part is, which actually I underappreciated even more, was the development story, like artist development story, which is really strong for Warner. Warner -- our reputation is really developing artists from cradle to superstardom. And that's a very difficult process, but it pays all for everybody in the long term and we focused our history with that. And if you just go back to Bruno Mars and Ed Sheeran, Coldplay, et cetera. But even today, last year, Benson Boone, Teddy Swims, it's just like it's in the DNA of our company. We have certain processes that kind of ensure that. So that's amazing to see. I would say on the sort of the things that I learned that were also quite different is that if you think about digital transformation of a business, there are 3 components to it: data, processes and organization, and then technology. And everybody always just thinks about the third one, but it's actually 2/3 of digital transformation is -- has nothing to do with technology at all because the data needs to be clean. It's a manual effort. You got to do that. Organizational structures and processes, you have to change it. That's a leadership thing to do. And the thing that I didn't fully realize going in is to see how the organization, and it's not just Warner, it's across the industry overall, is really set up more in a local manner rather than a global manner, right? And today, the majority of our revenue is derived from global sources, right, from digital service providers. And -- but our organizational structure is much more local, and it needs to be like to a certain extent, but it is less nimble than it could be, right? So there's a lot of work that we've been doing on that front to change that. So that was a surprise.

Yes. Let's talk a little bit more about the management team change because it's been pretty high -- pretty visible to the outside world, both in technology going back a bit with some of the hires you've made, done some restructuring. But then you made some very big changes in Atlantic in the A&R area. What's behind all of this? And if it works, what should shareholders, investors see from the company over time?

Yes. So there are changes that get different things. Obviously, as a business, if you want to scale and you want to scale efficiently, you have to have robust technology. And I just kind of spoke about it and what underpins that. And so initially, we started to make a lot of investments into just fixing our just core infrastructure on our digital supply chain and lots of effectively boring things that you will never hear about. But they're absolutely necessary to drive the business, drive it efficiently and give ourselves optionality for scaling without adding people. And so we've been focused on that quite a lot. Then you focus on building tools that strengthen your value proposition with artists and songwriters. And there was a write-up in, I believe it was Financial Times last year -- last week about Warner Chappell sort of updating data on our client portal and royalty payments being faster than others due to the work of our technology team. And it's just -- it's great to see that seeping out, right, because that is getting at the value proposition. At the same time -- and by the way, we have some of the efficiency gains already have resulted in us being able to invest more money into music, increasing our A&R budgets for this year so that we can drive that, buying the Tempo library, which we just did about a month ago. So we're already in that cycle. We're seeing the benefits of it and paying it forward. And on the A&R front, the changes are really driven at taking greater share of the market. And we've -- I've flattened the organization, removed 2 management layers -- 2 senior management layers, which effectively meant that a lot of our superstar talent, I'll give you 1 example, Alejandro Duque, who runs our Latin American business, is a direct report to me, whereas before he was layered 2 layers down and obviously, change with Elliot Grainge running Atlantic and being able to make significant changes while expanding market share at the same time. And in Japan, we recruited a superstar, local superstar A&R, who is now CEO of our company over there and replaced our long time leader. So I've been working through both refreshing it on the A&R front, right, to take a larger share. On the technology front, obviously recruited a bunch of people who are building tools that allow us to scale efficiently and then plow the money back into the business.

Makes sense. How would you talk about for this audience...

By the way, I forgot a couple more.

Go ahead. I did not even stop you.

I should tell you, no, because it's important actually. And then sort of getting to sort of growing our share, also recruited Michael Ryan-Southern from Goldman Sachs to help us acquire more IP, and the Tempo acquisition was a great example of that. And then obviously, Carletta Higginson, to help us growing the pie with our DSPs and having an intimate knowledge of both Recorded Music and Publishing on the distribution front. So lots of change on the management team, lots of new blood, whether from the industry, from outside the industry. And I think it's -- the team is really gelling and it's very unique now, I think, in the industry and really pleased with it.

Yes. I can tell you guys are energized by the changes. I was going to ask you just about growing the pie and sort of the outlook there because certainly, investors are looking at streaming revenue growth, first and foremost, and they want to get a sense from you as to what you think the long-term growth opportunity is for Warner and the industry because it's certainly debates about where we are in kind of the maturity curve of music monetization and consumption.

Yes. So first, I mentioned in the beginning that music is the most resilient art form and most distributed. While that is true, we're still pretty significantly underpenetrated from a subscription standpoint relative to, let's say, subscription video on demand, right? Even less so versus paid television, right? So if you look at those, there's a lot of room to grow in all markets. Even in the mature markets, we're still underpenetrated versus that. So those are kind of the primary targets that I look at. And the second thing that you start seeing is a lot more price innovation, right, which obviously hasn't been there for the previous 15 years. And a lot of that is unleashing now and it's both on the way up and on the way down. So it's basically audience segmentation and basically optimizing as much as possible along the efficiency curve. So we're quite excited about what's in store for music for the future. And it just has to hinge on innovation. It's just like static approach. Sure, that also grows, but what you need is innovation to really fully explore and penetrate, at a minimum, the way [indiscernible] has.

And by up, you're talking premium tiers and down like the YouTube Lite product that's rolled out?

Yes, exactly. And it's like I just got to look at all of it is, okay, are you making, in total, more money or not and driving greater growth by optimizing around users what they want?

You announced a major new licensing renewal with Spotify on your first quarter earnings call. There was an agreement with Amazon last year. Universal Music Group had recent agreements with Spotify and Amazon. What should investors take from these? How do these renewals sort of move the ball down the field, so to speak, towards what you want to see from a consistent performance monetization perspective for Warner Music Group?

So first, I want to say that it's -- it always feels -- obviously, when you get on the other side of it, it feels great. It's a lot of work. But it's also great evolution in our relationship with those partners and I think that's really important, right? Because in an industry where we're all tied at the hip together, it's really important to approach it collaboratively and build for the future together. And that's exactly what we accomplished. And you have to understand what's important to both sides, right, and how do we accomplish it in the best way. And as I mentioned, I think, on the past few earnings calls, what I always care about is certainty rather than hope. And so we're quite pleased with the certainty that we achieved. And obviously, we didn't get everything that we wanted, right? The eyes are always bigger than the stomach ultimately. But we got -- we're very happy about the certainty that we got, and then we move the ball meaningfully forward on a whole bunch of other items. And so -- and I think that's great for the industry. It's great for us, and it's great to have those kind of relationships.

Is there a way to put some context around what certainty means a little bit in this context? Particularly as we think about 2024, when there was a lot of uncertainty, and then ultimately, I think the view in the market was the labels were sort of being left behind from some of the pricing and value creation moves that, in particular, Spotify made?

I think the -- like the -- what I focus on is make sure that the value of music increases frequently in a reasonable manner, right, and that our distributors' profit as well because then you have a really healthy setup together, right, with incentives to grow. And so if we can achieve that, then that's a good place to be. So I'm really happy that we ended up there.

Okay. Let's talk about your strategic priorities. So we've already talked a little bit about growing the overall industry. I want to start with growing share, which is obviously really important to your growth algorithm and we talked about the A&R changes. How would you sort of size up Warner's market share performance over the last year? And we were talking about some of your superstar artists earlier. What's the outlook from a release perspective as we look out for the rest of fiscal 2025?

So one, our share -- since I joined, our share has improved, and so I'm really pleased with that. But just so you understand how I think about it, I don't just look at our global share. I also kind of double or triple click and see how that is constructed and how it comes together. And then I focus on where the share is coming from, right, because you have markets with different ARPUs, right? And so that's really, first and foremost, kind of what I look at on a monthly basis and making sure that we're moving the levers in the correct way to do that. In terms of our releases, we have quite a lot coming from our artists for the rest of the year. Ed Sheeran is releasing, Lizzo is releasing. And -- but there's a lot coming. Really excited about it. But overall, I just judge our share in totality because it's gone -- everything ties together, new release catalog, catalog from the artists who are releasing, other catalogs. The revitalization of Linkin Park has been incredible and surpassed all expectations. And so we're focused on both things. And one of the things that we've done, even just on some of the structural changes that we discussed earlier is we manage our off roster artists and our catalog separately from frontline with equal focus, right? So we're treating these art forms equally, and it's -- and it drives great results.

You guys have been restructuring the company and investing in technology quite a bit. Are you at the point yet where technology tools that you're giving to your A&R are actually helping to drive market share or is that still down the road?

We're still in the build phase on that. So I think what you see more is efficiency gains that we're having. We -- again, to contextualize it, initially when we -- when I got here and recruited some people to work on technology like Ariel Bardin, we focused on stability of our systems and making sure that they're resilient enough to handle much higher volumes efficiently, right, for the future. And that takes some time and I would say very good people. Then we started to focus on adding sort of business priorities from our A&R executive or the label heads and country heads. And now we're fine-tuning them so that they're specifically focused on value proposition. And I think that's kind of what you're getting at, but it's like, will those things now start yielding basically better deal flow, more efficient deal flow, et cetera? And that is in flight. So efficiency kind of came first and then impact on share comes second and that's [ in flight ].

What's your perspective on the growth of independents and sort of the view out there that at least somehow that the majors are growing more slowly than the overall pie because independent artists, independent labels are taking share at the low cost of production of music, so low barrier to entry. Is this something that you think is happening? If it is, how do you guys go about trying to protect yourself and make sure you take advantage of that rapid growth in kind of DIY and...

So I think it kind of -- it's a topic that sort of mixes a couple of things together, which is it mixes independents and distribution kind of into one thing. And I think -- I've looked at all distribution companies over the last 18 months just in being a responsible steward kind of thinking about this question just as a business decision. And what I can tell you is that we're not willing to grow this at all costs, right? Others are, we're not willing to do it at all costs. We have investment criteria that are important to us. Expanding our margin is important to us. That doesn't mean that distribution isn't important to us. It just comes with specific investment parameters. And we also are in a unique position that we have an incredible technology team that can build things, and they have been building features already for a year and have a little bit more to go. But this way, you get to the same outcome much more efficiently. Takes a little bit longer so you forgo any kind of market share jump and those kind of things in the short term. Takes a little bit longer, but it's a lot more efficient and becomes much more durable. So having said that, we've done acquisitions, whether it's Africori or Qanawat, along those lines, or deals with companies like 360. So we're like full force ahead, but I'm just saying, we're not doing it at all costs. And I think that's a really important -- and maybe that's where we differ from others, but I think it's an important decision.

Got it. Let's talk a little bit more about back to growing the pie. We touched a little bit on the Spotify deal, and I realize you can't go into detail there, but there's a lot of focus on potential innovation at the DSP level. How are you guys able to incent innovation, products, customer segmentation, et cetera, through these deals? And there's a lot of focus on things like wholesale pricing as well. I'm just wondering if you could talk a little bit about the opportunities and goals you have long term from these relationships as you try to move the industry to a place that you think best monetizes content?

It always comes down with both sides sitting down and saying, here's the list of things important to us and why, right? And it's just -- and you will be surprised how often that doesn't happen between companies. So it is like get into negotiation either. But it's really important to just step back and say, what's important to you? Like what are you trying to accomplish? And that seems very basic, but -- so when you do that, then you can start piecing the puzzle together, right? And so it doesn't become a fight, it becomes a collaborative build, right, with constraints, right, because we both have constraints. And for somebody, it can mean going up in price. For somebody else, it means going down in price. And it's okay because there are different services with different value propositions. And you need to figure out, okay, what's the best way that we can enable it and participate in it in a way that's also helpful to us? And so we're just open and flexible. Obviously, we have our investment criteria on returns, et cetera. But we're flexible and innovation is important and one-size-fits-all approach doesn't get you there, right? So it's a lot more work, but that's why we're here. And that's why we have to drive value.

Yes. A year ago at this time, I think Spotify had sort of announced or opted into a publishing deal in the U.S. where they were taking advantage of a lower rate structure as part of the CRB. You guys announced a direct deal with them. Does that sort of rectify, in your mind, sort of whatever value leakage was happening in that area or...

So I can't speak about the specifics of the deal, but I can tell you, one, we are very, very strong supporters and defenders of songwriters and all the associated rights, and we're very, very happy with our deal. And I'm very appreciative of Spotify.

Got it. You've made the argument, I think, quite compelling in the past around music being undermonetized and particularly, in many cases, underpriced. What's the data behind that? How do you think about articulating sort of what, I don't know, market value would be or what you'd like to see from the DSPs in terms of rectifying some of these discounts?

By the way, anything that I say, don't take it as law or this is exactly how things should be because everything that always has to be -- then what you have to do is you have to layer the retailers, the DSPs priorities and like what it is that they're trying to achieve, but the foundation -- like what you saw with FAX, right, which is if you don't have any price increase for, let's say, 10 or 15 years, you lag inflation severely. If you do comparisons on time spent versus, let's say, video and then you look at the share of wallet that video has versus audio, it's significantly higher. But -- so you can look at it through multiple different lenses and do the math and say there's a lot of value to be had. And even when you saw the retail price increases over the past 18 months, we have not seen increased churn rates, right? So it's kind of supportive of that. At the same time, the industry is obviously trying to -- on both sides, trying to balance growth and price. So it always comes down to those things, right, just balancing them. But I think there's quite strong evidence that there's a lot of room to grow on pricing, especially in penetrated markets, which still have -- mature markets, but they still have room to grow, those markets still have room to grow on penetration. So it's just -- all of it is more work, right? Obviously, as you -- lots of large numbers, everything is harder as you go towards the top, but there's still a large opportunity.

You guys guided this year, as I'm sure you know, to high single-digit growth in subscription streaming in fiscal '25. You did 6.5% roughly in Q1. The comps do get harder as we look out through the rest of the year. I guess I'm asking what drives what seems to be implied acceleration through fiscal '25? And are there DSP price increases kind of baked into your outlook?

Yes. So I think on our last earnings call, I kind of explained how we thought about it, which is the math we had was 75% volume, 25% price increase, but the price increase was also done in a portion over multiyear basis because obviously, we don't have visibility at that time like what happens and when. So that's the basis of our calculation. As you said, we have tougher comps in Q2 and Q3, which then ease meaningfully in Q4, and then in the following year, we'll have benefits of the certainty that we've achieved in some of our deals.

I want to make sure we also talk about ad-supported streaming and emerging streaming. These are areas that, at least back when we -- when Warner Music went public, were growing quite rapidly. We've seen a lot of deceleration. Are you still optimistic about the opportunity in these 2 areas? And can you talk a little bit about how much of it's macro versus sort of structural headwinds that those 2 channels are fighting through?

Yes, I think -- look, I think there are like 2 forces in play. One, there's always the macro one, whether there's ups or downs, which happen in the industry. And look, that could be reactions to tariffs, right, and marketing budgets, right? So like that kind of stuff can happen unexpectedly and pass. So that's one. There's nothing we can do about that, right? So I don't really worry about it other than keep track of it, but that's out of our hands. And then there's also a trend of consumption moving to much more super bite-sized content, right, in feed consumption, and away from, I'd say, music videos or -- but it's not just music-related. It's like in general, right, in that way. So we have these 2 forces in the ad markets and obviously, that showed up in different growth rates for us.

Yes. What about emerging streaming? I mean, we've seen Meta and Snap and other companies sort of experiment with different kinds of music rights and music offerings. Are you still bullish that sort of over a multiyear period, we can see completely new use cases and new monetization opportunities pop up that we're not even sort of focused on today?

I do, but I think they'll be sort of AI-related. So there's a lot of innovation that can happen on that front that just drives new experiences. And this is like a little bit of what I was talking about when I said that music is the most resilient art form and sort of, in general, most distributed, that new innovations happen generally take advantage of music first because it's very -- it's bite sized, it's global, it's global appeal, and it's super fast and it's very fluid. So I think we'll see a bunch of positives coming from this front.

I mean, most of the AI-related music products that I can think of are in copyright battles right now. Is the regulatory copyright industry structure-ready for AI innovation around music that can actually drive your business anytime soon?

Yes. So I generally say there are 3 constituents for us as it relates to AI. The distribution platforms, where all the content ends up mostly. The AI engines. Sometimes distribution platforms have those 2, right? And then the third one is government. And it's in this order, in this descending order of priority. But you have to work on all 3. Having said that, even when I was at YouTube myself, we went above and beyond the law of safe harbor to develop a licensing regime for content that was uploaded by users, developed Content ID to track it and commercialize relationships with copyright holders. And I think what will happen in AI is a similar thing, which is platforms want to be on the right side of copyright holders because it ties to identity. And so it's not a music-only issue, it's an issue for basically all people. And so they'll want to be on the right side of it. So that's why our collaborations are important on that front. But obviously, we don't sort of sleep on our laurels and we want to make sure that regulation around the world is reflective of copyright protection. And much of it is unresolved today, and so we focus both on partnerships as well as on regulation at the same time.

Right. Maybe one more on the pie and then we could talk about efficiency. The business, historically, the economics of music streaming have been built on revenue share and essentially treating every stream is worth the same roughly. I mean, there's been a little bit of innovation on artist-centric, but does that make sense? And how do you think about innovating the model so that you maybe have more differentiation around monetization from a per stream basis?

Yes. So without going into too much detail, it was that and it's a per subscriber minimums that exists, so it's always been sort of a two-pronged thing. I think there's room for a lot more innovation and differentiating content over time. It's not there today, but that is certainly how the world works in general across all industries. But there's nothing new that I would have to announce on that today. But the current setup has worked incredibly well for the music industry and for the past 15 years and has returned it to growth. And it's just important that we -- and I truly mean it, we, as in both our distribution partners as well as ourselves, just don't think statically, right, like things just need to keep on evolving. And that's why I'm happy that we have such strong partnerships like Amazon and Spotify that really lean into that.

Okay. Let's talk about sort of the third priority, which is about becoming more efficient. We've talked a little bit about some of this already in the conversation. But how do you guys -- how do you and the management team think about finding cost opportunities, reducing headcount, but also investing back in the business and delivering margin expansion, which is something investors are expecting from Warner Music?

At the beginning of our interview, I was talking about sort of the 3 levers for digital transformation and -- which is cleaning data, realigning the organization setup and the processes, and then actually building the technology itself. So you're kind of asking about the middle one, right? And I think it's important. We're in a business that is a service business and that is an IP ownership business, right? We're in both of those. It's like very unique. And a majority of our revenue comes from global distribution platforms. Obviously, there's lots of other local revenue. So what's important is that the more creative the job is, the more local it needs to be. And the more sort of a left brain it is, the more centralized it needs to be. And then you have scale advantage and load balancing and you're being both highly effective and have centers of excellence, but also you are very, very efficient. And so that's something that we've been down the path on and continue to work on. And as you do that, then you just drive ongoing efficiencies, which then give you the optionality to either reinvest into the business or drop to the bottom line or some combination of those 2. But what's important for that is to actually have a team that understands this and is willing to do that, right? Because then you don't have friction or resistance to do that. And I'm really excited about the leadership team that we have in Warner today because it actually exemplifies this. This is hard work to do that. Change management is hard and doing it while you're public is hard, okay? But those are the cards that we play. And I'm really excited about the team. And again, it's a combination of having institutional knowledge with a whole bunch of leaders having new blood from other leaders, mixing it all together and having a safe space to basically argue it all out and move the ball forward and not following others, charting our own path. And I'm very, very focused on that. I do not worry about what the others are doing. I'm focused on how can we deliver the best for artists and songwriters and for shareholders.

Got it. Maybe for our last topic, I want to ask you about kind of capital allocation and M&A. So you mentioned Tempo. I think you described this on the earnings call, Robert, as an evergreen catalog. And in general, you've, I think, spoken quite favorably about acquisitions on the catalog front, but it's an active market out there and there's bid-ask spread and a lot of that stuff. You've staffed up your M&A team, as you mentioned, with some new hires. What's the philosophy around acquisitions? We talked about distribution assets. Let me focus on how you think about acquiring catalogs, what they do for the business and how you make sure you're paying the right multiple?

Yes. So one, we always -- obviously, we always want to make sure that we have double-digit returns. We have certain criteria to meet. We have an investment framework, which incorporates global potential of local repertoire and where that consumption happens. So it's weighted based on -- it's ARPU weighted specifically. And so all of those things are very important. There's a lot to be had out there. Obviously, there are a lot of people competing for different things. But the capital also is not infinite for everyone. And it helps to be in the distribution business and the administration business on the publishing side to also uncover lots of things that people may not be competing for. So we're very, very much focused on this. It's definitely a good way to grow the business. But as I mentioned before, we're not growing at all costs. It's just a very important principle because that is the strategy that you can have. It is not our strategy. And we're fiscally responsible, and I think you can see it from the moves that we're making.

Yes. You guys sounded like you feel Tempo is a really attractive acquisition. What is it about this catalog and this deal that we can take and say this is what they're trying to accomplish on a go-forward basis?

It's like, one, there is a long-range ROI, right, that you look at that's attractive, but this one was also attractive in the near term, too. So that obviously helps, right, when it's accretive both from revenue and OIBDA perspective in the near term. And at the same time, as the distribution of those or administration, whichever it is, Publishing or Recorded, as it moves away from other distributors, there's actually more and more that is going to flow to us. So it's something that's got growth built in. So that makes it very attractive.

Good. So visibility sounds pretty good there?

Yes.

Great. Well, we're running out of time. Is there anything you'd like to wrap up with as we close it out, Robert, for the audience?

We are on an exciting journey in a obviously growing industry, which still has a lot of potential. Again, I just keep on going back to if television can grow this much, music can grow more, right? But right now, we're still behind in many places. So that's a great opportunity, whether it's a developing market or a developed market. And unlike long-form content, film, TV, which seem to be more maxed out on both ARPU and distribution, we have room on both, on ARPU and distribution. And no matter how hard our jobs may be, that is a great place to be when you have those 2 things. So on the demand front, it's great, and we need to make sure that we're like sorting out supply correctly. And when we do that well, we grow our share of the pie, we grow the overall pie. And we constantly improve our efficiency so that we have the optionality to either reinvest into the business or drop it to the bottom line for shareholders or a combination therefore. So that's what we...

That's the plan.

That's the plan.

Great. Well, thank you very much. Thanks, everybody.

Thank you.