Warner Music Group Corp. ($WMG)

Okay. We'll get started. I'm happy to have back at the conference this year, Warner Music Group. On my left is Armin Zerza, CFO and COO. Armin, thanks so much for being here.

Thank you. Thanks for having me.

Great. So you've been at Warner Music for almost exactly a year now, initially as CFO, on top of which you've now added COO to your responsibilities. So how has your day-to-day focus changed since you've arrived? And how do you expect it to continue to evolve from here as you take on this broader operational mandate?

Yes, David, in fact, I took on most of the responsibilities that I have today very early in my job. So my focus hasn't really changed. What we are focused on and what I'm focused on as a team is ensuring that we develop and execute against plans that can deliver value to all of our key stakeholders, so our fans, our artists and songwriters, our partners and of course, us and our shareholders. And as you know, I'm personally very focused on ensuring that within that context, we deliver against our growth model, which is high single-digit or higher revenue growth, double-digit profit and EPS growth, and then stronger cash conversion. And to do that, I've been personally engaged in a few key initiatives for the company. The first one is making sure that we have a very strong growth culture in the company. And I'm personally spending a lot of time, as we just discussed before this meeting, with our teams here in the U.S. and around the world to make sure that we have strong growth plans in place, but also the leadership and the teams to ensure that we can execute against them. So that's our first key priority. The second one is ensuring that we work with our partners, and those are DSPs and AI companies to grow value for the industry. We still think that the industry is significantly undermonetized. So there's a huge opportunity for us to increase value. And the third one is to ensure that we drive productivity in everything we do. And interestingly, I come from gaming, and looking at the music industry, I believe that, frankly, the music industry was a little bit slow to adapt to kind of the digital reality of the business. So in my view and in our view as a company, there is years for us of additional productivity to drive going forward. And last but not least, it's all about people, as you know. So I'm very focused on making sure that as we travel around the world, we have the right people and the right capabilities in place. So excited to be here and very confident in our plans.

Got it. So you recently reported fiscal Q2 earnings with a lot of investor focus on subscription streaming growth, which accelerated at Recorded Music from around 8.5% to 15%. I think there's a couple of different components to unpack here, but I thought we'd start with 6% to 7% growth in subscriber volumes. Can you help frame the underlying health of sub growth globally and how you view the TAM?

Yes, for sure. Well, first, I'm very happy with the progress that we are making and with our results. As you all know, we have delivered 4 quarters of consistent growth in line or ahead of our growth model, as I mentioned before. And that's really important for us because we want to deliver what we commit to you as our shareholders. In terms of industry growth, this has been and continues to be a significant tailwind for us, frankly. Now if you just look at 2025, there were more than 800 million global subscribers to music premium services, and that was up about 10% versus '24. Now we just got yesterday the data from IFPI, which showed that in the first quarter of this calendar year, subscriber growth was up 9%, which is great to see. So as we look to the future, we think this continues to be a significant opportunity. Penetration is still very low, as you know, in our industry, and we think we can continue to grow that with our partners on the DSP, but also on the now AI new entrant side. So we expect that by 2030, the industry will have well north of 1 billion premium subscribers. That's a growth rate of about 7% versus today. Now that's only volume growth, remember. We're still working on pricing and tiering and any ideas are all accretive to that. So we are very confident in this tailwind that it will sustain over the long term, and that's why we're so excited about our growth plans.

So let's touch upon pricing. At earnings, you highlighted 3 percentage points of growth contribution last quarter from PSM increases as deals with a number of DSPs kicked in. I guess, first, can you help us unpack what's included in that number? And then what should roll on through the fiscal year? And then you touched upon this earlier, but just stepping back, how should we understand the price opportunity for this industry just more broadly?

I'll start with the last part of your question, and I mentioned this earlier in my remarks, this industry is dramatically undermonetized. And why do I say that? When you look at the subscription price of our industry globally, it's about $4 a month. In developed markets, it's around $6 to $8 a month. That's the value of one Starbucks coffee. So for the value of one Starbucks coffee, you get all the music in the world. I think it's unimaginable, frankly. The other parallel I will draw is that when I left gaming in 2024, the digital gaming industry was about $200 billion in size globally. The music industry today is less than $50 billion in size. So the last time I checked, I don't know when you checked that, there's more people listening to music than playing games. So this doesn't make any sense. So we believe that there's an enormous opportunity to grow value in this industry by one, more frequent pricing; two, by innovating into premium tiers; and three, working with our partners to innovate into new business models and think about downloads that will allow consumers to do, to a certain extent, free, but then to a certain extent, also paid. So we're very excited about the opportunity going ahead in terms of not just volume growth, but also value growth. From a pricing perspective, the 3 points of pricing that we saw in quarter 2 was primarily driven by one of our largest DSPs. So there's more to come. You should expect another bump in quarter 4 when another big DSP is increasing pricing. But in our view, that's just the start of value creation that will perpetuate over the next few years in the industry.

I should say, on your price point, I'm old enough to remember when I used to pay $17 for 10 songs, 9 of which I didn't listen to. Maybe just continuing on with subscription streaming. So market share also contributed about 2 to 3 percentage points to growth. You've described gains as coming from new releases and catalog in various regions and through a range of strategies. Can you give us some deeper insight into what's going under the hood to drive this improvement? And then we've gotten this question a bit since earnings, but how structural are these gains? And how much runway do you see for continued growth on some of these drivers?

Yes. Again, super happy with the results. We have grown share globally across vintages, across DSPs, across labels and across regions. And that broad-based growth should give you confidence that it's more sustainable over time. So it wasn't just a blip in one of our business units. What's driving that is the people and the capabilities that we have put in place across those labels, businesses, regions and vintages. Recall, we put new leadership in place on Atlantic. We put new leadership in place on our catalog businesses, so one of our vintages. We put new leadership in place in Asia more recently to help address the opportunity in that region and so on and so forth. And we are starting to see the progress against those interventions, and we have very strong leadership in place in all of our other businesses. So the leadership, the capabilities and the teams we have around the world are really working to our advantage today. The second thing is we have been very disciplined and continue to be very disciplined in how we allocate capital. And I've mentioned this many times in our earnings calls, what we do is we don't look at individual projects anymore, but we look at the whole portfolio of projects that we own on a rolling 12- to 36-month basis now. So we understand where are the biggest opportunities, where are the most profitable and most likely opportunities that can generate the best return. And using that framework, working with our creative teams, with our commercial teams, regional teams and operational teams, we can flow the money where the biggest and most profitable opportunities are. And that really has worked well for us and also has enabled us to grow the business while actually spending less in A&R in percent of revenue. And that's the type of productivity mindset that I mentioned before. Last but not least, we are really confident in our future pipeline. Obviously, a lot of this is driven by our innovation pipeline or release pipeline, as we call it here. We have a very strong release pipeline. We have very good visibility on that over the next 12 to 36 months. And we have, frankly, many elements to build on. One is our M&A work that we have been doing that is starting to kick in, as you know, then all the AI work we have been doing, which is starting to kick in. And then we also just acquired Revelator, a capability in the distribution space to help us grow our business. Having said all of this, all of our growth to date pretty much has been organic, which is also exciting. So there's many opportunities to build on that.

Just on the catalog point that represents about 65% of recorded music streaming revenue. Can you just walk through some of the scalable tools you developed there to help drive listenership of your content?

Yes. This is the interesting part. Catalog is not only 65% of our business. It's also the most profitable part of our business. In fact, as many of you know, those businesses typically have 50-plus percent margins. So as a CFO and now also COO, this is the top priority, and that's why we put a dedicated leader on it. Now this business hasn't been growing for a long time. We put a dedicated leader on it about a year ago. And surprise, surprise, the business is now actually growing share and one of our key growth contributors. Now how do we do that? We basically split the business in 2 halves. One is what we call our top 200 catalogs, which represent about 50% of our business. And on that part of the business, we've been implementing always on marketing. We've been implementing releases and so on and so forth, which are really implemented by the team that is dedicated to our catalog business and that has started to grow share in the overall business. Now then there's a long tail of the catalog, which represents the other half of our catalog business. And these are thousands of catalogs, millions of songs that frankly, humans can't touch every day. So what we did is with all our tech investments, we developed a proprietary technology, which can not only identify opportunities in this type of catalogs, but also develop marketing assets to drive engagement around those businesses. That work just started, and we tested it. Now that we have done successful testing, we're going to roll that out at scale. So that's another growth driver for us going forward.

I guess separate to organic growth, Warner recently deployed $650 million of capital through the Bain joint venture to acquire recorded music and publishing catalogs, over $300 million announced for the Red Hot Chili Peppers library. Can you discuss a bit your framework for deals here in terms of ROI, growth synergies?

Yes, sure. First, I should say we are very happy with our partner that is Bain. Why? Because they know and understand the music industry, and they have a very similar mindset to us in terms of investments and approach. So that joint venture is really working well for us. As you mentioned, we deployed about $650 million so far. Now we can't really talk about specific investments since we have confidentiality agreements in place. But what we can say is that all of our investments are focused on iconic high-margin catalogs where we have an ability to grow that business. And that's how we deliver the type of returns that we are talking about. And the threshold for us are 15% in developed markets and 20% in developing markets, reflecting a higher risk profile there. And the reason why it's working is because we have a good partner. We have the right thresholds. We also have a dedicated team. So the same dedicated team that I talked about before takes on those businesses and helps us grow those businesses, and that's where we can generate real good returns. So we're really excited about the partnership. We have a great pipeline in place. And confident that this business will start to contribute meaningfully to us. Now to put it in a perspective, in our growth model, it's about 1 point of growth. So most of our growth will still come from organic growth.

I guess when you look at the deal landscape, it seems like music industry multiples are holding up with increasing private market investments even as maybe AI concerns weigh on public market valuations. What are the private markets seeing the public markets aren't? How do you -- how does that gap get closed?

Well, first of all, we agree with you that our public valuation does not reflect our underlying value, especially given the results that we have been delivering and will continue to deliver. And frankly, I'm sure many of our investors in this room will agree with that, plus obviously, highly sophisticated investors around the world agree with that. And you've heard it recently from one large investor as they looked at our industry. The second thing I will say, it's actually great to see that private valuations hold up because it shows that investors continue to value music assets as an attractive asset class. Now those investments are primarily focused on iconic catalogs and key artists. And frankly, if anything, we believe the value of those iconic catalogs and key artists will go up. Why? Because as people start to engage with this content with AI, more of the activity will be focused on those specific assets. So that's why we are really excited about the stewardship of those assets and the assets that we own because they will actually stay with the majors. And that's a good opportunity for us. So really excited about owning a lot of these assets. Now how will we kind of bridge that valuation gap between our public value and the underlying value of our company? It's really by delivering consistent results. And you can see that over the past 4 quarters, we have delivered consistent results and our share price is up significantly, and we plan to continue to do the same in the future.

So Warner Music delivered over 200 basis points of margin expansion last quarter. That's ahead of the full year target, which you raised to the high end of 150 to 200 basis points. Can you put this performance into the context of your medium- and longer-term goals for profitability? And how much should we think of this growth as structural costs or AI-driven efficiencies versus operating leverage or mix shift?

The first thing I want to mention is that we are focused on overall shareholder value creation. We're not just focused on margin. And that's really important because what we're really looking for is ensuring that we grow revenue high single digit or faster, that we expand margins and improve cash productivity at the same time. And why is that important? Because by working on margin and cash productivity, we actually create the fuel to invest and at the same time to continue to expand margin and productivity. And that's a flywheel that we have started to implement now about 12 months ago, and it's really working well for us, and we'll continue to push that flywheel for years to come. So that's really our philosophy. From a margin perspective, we are very happy with the progress that we are making. Fiscal year-to-date, we have now delivered about 270 basis points of margin improvement, which is actually ahead of our objective of 150 to 200 basis points. So that's great to see. What's driving that is, one, focus on what we call profitable growth. I've said this many times, we're not interested in just driving revenue growth. We want to see profitable growth. Number two, cost savings that was primarily driven by a reorganization of the company from what was a very local organization to a global, regional, local organization. And I'm really proud that the team, while we did all of this, continue to accelerate growth and obviously, operating leverage. We'll do more of the same in the future because we have a big opportunity, as I mentioned, to drive more productivity, especially behind ensuring that now we have a global organization, we have a globally integrated data architecture, and operating processes are standardized, so we can automate them and put AI on top of them. That, frankly, is years of productivity to come, and we'll talk more about that in the future. In addition to that, we talked about margin-accretive M&A, margin-accretive AI items, pricing and value creation in the industry. So we have plenty of opportunity to continue to drive margin up. We are very confident about our high 20s margin, while at the same time, making sure we continue to deliver the growth that you would expect from us.

So digging deeper into AI, you've talked recently about opportunities to work with DSPs on premium tiers that incorporate elements of AI. What's the consumer opportunity here? And assuming the technology is largely in place, what are the main gating factors to getting agreements over the finish line?

First of all, we are really excited about AI. We believe it's the biggest value creation opportunity that this industry has seen for a long time. Why is that? Because AI will enable consumers or fans to directly engage with the content of their favorite artists or bands or songwriters. And when you think about that interactivity, we know from other industries like gaming, I come from gaming, that the more time people spend with content, so the more they engage, the more they actually spend, okay? So it will not just be a great consumer experience, it will also enable us to deliver better economics. And that's why when I talk about AI deals, they are mostly variable and accretive. And accretive because people will spend more time, we'll be able to innovate with our partners into new business models that drive average pricing up over time in a way that consumers are delighted. That's obviously important. And then the third thing is that, obviously, AI, as I mentioned before, will help us to actually deliver better services to our key stakeholders at lower cost. So we're really excited about this opportunity, what's kind of in the way of getting to final agreements. One, if we talk about DSPs, we -- and DSPs obviously think this is a critical topic based on what I just discussed. So we all stepped back and said, "Hey, how do we make sure that we look at our entire relationship, not just at a new AI tier so that we can rework this entire relationship." And those -- these type of discussions take time. But I think I'm pretty confident to say that in the near future, 1 or 2 of those DSP partners will launch a premium AI tier.

On the earnings call, Warner discussed the rather small listener share for AI-generated music to date, given the number of tracks getting uploaded daily, which I think is in the tens of thousands. How would you explain that dynamic?

Yes. David, this is not a new dynamic in our industry. Remember, many of our DSPs have publicly said that over the past many years, even before AI, the amount of content that has been uploaded to DSPs has multiplied, yet it hasn't really changed the consumer dynamics because consumers are still very focused on iconic catalogs and core or top artists. In fact, when we look at our business, less than 5% of our songs represent more than 90% of our revenue on DSPs. That gives you kind of the idea how concentrated consumer behavior really is in music. So we feel very good about our position in the industry with or without AI. AI, we think is a big value creation opportunity. Now we also know that from Deezer, who is -- which is a DSP that is primarily French-based and owned by -- partially owned by our parent company, that there are 75,000 songs uploaded daily, that is AI songs, daily on to Deezer, which represents almost half of the uploads into Deezer, yet those songs represent a very small percentage of the listening behavior, which again reinforces the whole idea that consumers don't create relationships with songs or artists at scale. They establish relationships on a one-on-one basis and create emotional connection. So that's why we have that confidence in investing into core assets will continue to help us grow and even more so in an AI world.

A concern we've also sometimes heard from investors is that allowing remix tracks at scale could dilute economics for labels, assuming there's a required share with nonrepresented artists or someone who uses those AI tools. Is that a fair critique?

It isn't at all. In fact, quite the opposite. So when we look at remixes, which are really remixes of existing songs from an existing artist or band, we're really talking about derivative music. As I mentioned before, when people interact with derivative music of their favorite artist or band, they actually spend more time with that. They're actually going to spend more money with that, as we know from many other industries. So we actually think it's one of the biggest opportunity for us to work with our partners. And obviously, the artists and songwriters who want to opt in to create more value for the industry, so not just for us and our DSPs, but also for artists and songwriters.

So Warner has taken a lead in forging partnerships with Gen AI music platforms like Suno and Udio. I think some of your label peers seem to be moving on a more cautious path, at least based on announcements to date. Can you speak to what gives you confidence in your "pragmatic experimental approach" as you've termed it? And how should investors view financial contribution from these platforms in fiscal '27?

Yes. I did mention that we believe that AI is one of the biggest opportunities going forward. Now it's one of the biggest opportunities if we approach it responsibly, and that's important. That's what we do. That means we have key principles, which are aligned pretty much across the industry now, but certainly with our DSP and AI partners. What that means is we only license content to licensed partners, so partners with license models, where we get fair compensation and our artists and songwriters get fair compensation and where we are legally protected and our artists and songwriters are protected. That's really critical for us. All our agreements that we did to date are consistent with those principles. The other thing that's important for us is that these agreements are variable and accretive in nature. What that means is that as those platforms grow, we grow and participate in that growth. And in many, we also have equity stakes or participation, as you know. And then two, we also make sure that we develop accretive business models, which are accretive on a by stream basis to us. And why is that? Because they were introduced already with multiple pricing tiers. In many cases, also with in-app items like paid downloads and so on and so forth. So those agreements will be not just variable to us, but also accretive to us, as I mentioned. So we're really excited about the opportunity, and that's what we're leaning forward.

Maybe switching gears a bit. You have a stated goal of 50% to 60% conversion of OIBDA to operating cash flow. Can you discuss the factors that underpin your confidence in that and how you think about managing royalty advances within that target?

Yes. I mentioned a little bit on cash conversion, but the net of it is our target is 50% to 60%. We are very focused on that. And you can see in the first half of this fiscal year, we delivered an average cash conversion ratio of about 65%. So we feel very good about the progress we are making. What's behind that is really 2 things. One is making sure that we continue to drive margin up because while we reinvest some of that margin, some of that also flows to profit and cash and obviously improve cash conversion. Number two, we are also very, very disciplined in our capital allocation across everything we do. I talked about A&R and our global ability to look at projects now on a 12- to 36-month basis so we can actually direct capital to the biggest and most profitable opportunities. We do the same with capital spending. We do the same with all other spending in the company. We have a global view now and make sure that we allocate capital in the most efficient way. And that's really driving a significant reduction in percent of revenue on our overall capital spending and therefore, is improving our cash conversion. So we are very confident that with the plan we're currently having, we can actually improve our cash conversion over time.

I want to touch upon ad-supported. So in fiscal second quarter, you reported accelerated growth from low single digits previously to over 11% within Recorded Music. How much of this outperformance was also share related versus factors relating to the broader ad environment or agreements with emerging platforms?

Yes. So when we look at our ads business, it's basically concentrated around 2 large DSPs and our social platforms. If I talk about the 2 large DSPs, one of them is obviously an ads business, and they are growing double digit, and we have been growing share in that. So that was really also organic growth of that specific platform, accelerated by the share growth that we saw. The other DSP is very focused on improving the ads business over time. Obviously, we grew also share in that DSP, so we grew a little bit faster. But on average, we grew our ads business on DSPs actually higher than double digits, which is great to see. And we are very confident that the second partner I talked about with the focus and the management team that they have, will continue to improve that over time. So it's one of the biggest opportunities really. And on social platforms, I mentioned this early on in my time here. We have been reworking at least one deal, and that deal was also accretive to the prior deals. So we also saw stronger growth.

Got it. So back in February, you noted that following a strategic review of Warner Chappell, you have confidence in delivering double-digit growth through several region- and discipline-specific initiatives. Can you bit -- can you discuss a bit what underlies your outlook here in the music publishing space?

Yes. I actually believe that music publishing as a business has been underappreciated for a long time. When I look at what our team did when we did our strategic review, they doubled the business in 5 years. So they grew 15% plus every single year over those 5 years, by the way, top and bottom line, just to be clear. So we are very happy with the team. We are very happy with the progress they have made. They continue to grow double digit on average every quarter, which is great to see, including last quarter. So basically, what we're going to do going forward is, and we have talked a 5-year plan for them, is making sure that we double down on what's working, so continue to invest into their proven A&R strategy. But we are also making sure that we activate new pillars that they haven't been working on as aggressively in the past. One of them is kind of what we call regional expansion. A great example, but many more is kind of doubling down on Latin America as a region where we see big opportunities for us given the strong Recorded Music business we have there. Two is, obviously, they will benefit from all the M&A and AI deals that we're doing because publishing is, of course, part of all of those deals. So we are very excited about the opportunity. We have an amazing team there and have high confidence they can continue to deliver these type of results.

I want to touch on Warner's distribution business. Maybe first, can you help level set for investors kind of where this sits within your broader Recorded Music segment? And then can you discuss the growth opportunity here and how acquisitions like Revelator or partnerships like with TuStreams play a part in that?

Yes. So distribution is a business that represents about 45% of our industry. So it's an area we have to play in, but we have to play in a way that's profitable given our focus on profitable growth overall. There are really 2 things that we were missing to do that. One is the right leadership. And two is the right capabilities. And when we looked at leadership around the world, we identified our Latin America leader by far the best leader for that business. Why? Because Latin America is basically a distribution business as an industry. And our Latin America leader and his team have grown that business on average 15% every single year for the past 5 years at almost company average margins. And that second part is really important. So we wanted to make sure that the leader we put on that business can grow distribution, but do it in a profitable way. So that was the first part, and that leader has started to work on the business around 6 months ago. And when we talk to that leader, we said, "Look, what's the biggest gap we have apart from leadership?" That was really capabilities. And capabilities means for us the capability to ingest content efficiently, but also to serve independent labels and artists in a highly efficient way because when you work on the business, it's by nature lower margin. You need to have a very efficient operating structure. And Revelator was really that. Revelator was basically an acqui-hire for us with not a lot of revenue attached to it. And it allows us -- or will allow us -- we're in the process of closing that transaction, will allow us to ingest content highly efficiently, but also serve artists and labels in a highly efficient way. So the combination of that, the leadership and the capabilities that we acquired will enable us to grow that business in a profitable way, so it fits kind of to our overall portfolio.

Okay. Maybe to round things out, you mentioned the pipeline a couple of times. Anything you'd want to highlight for the release slate, rest of this year, next fiscal year, how we should think about the comp set up?

Yes. I can't talk about all the release slate, but I will say that we were very happy with what we saw in quarter 2. Very, very strong release slate, including from Bruno Mars with a lot of #1s, Don Toliver, PinkPantheress and so on and so forth. And there's some notable releases in quarter 3 coming up, including from Charli XCX, Sombr, Teddy Swims, Myke Towers, PinkPantheress again. And Madonna is coming back. So I hope you have listened to some of her songs. So really excited about the opportunity. Thank you.

Great. Armin, thanks so much for being here.

Thank you.