Warner Music Group Corp. (NASDAQ:WMG) Q1 2023 Earnings Name Transcript February 9, 2023
Operator: Welcome to Warner Music Group’s First Quarter Earnings Name for the Interval Ended December 31, 2022. On the request of Warner Music Group, at present’s name is being recorded for replay functions and should you object, you might disconnect at any time. Now I want to flip at present’s name over to your host, Mr. Kareem Chin, Head of Investor Relations, you might start.
Kareem Chin: Good morning, everybody. Welcome to Warner Music Group’s fiscal first quarter earnings convention name. Please notice that our earnings press launch, earnings snapshot and the Type 10-Q we filed this morning shall be out there on our web site. On at present’s name, now we have our CEO, Robert Kyncl; and our CFO, Eric Levin, who will take you thru our outcomes after which we’ll reply your questions. Earlier than our ready remarks, I might prefer to refer you to the second slide of the incomes snapshot to remind you that this communication contains forward-looking statements that replicate the present views of Warner Music Group about future occasions and monetary efficiency. We plan to current sure non-GAAP outcomes throughout this convention name and in our incomes snapshot slides and have offered schedules reconciling these outcomes to our GAAP ends in our earnings press launch.
All of those supplies are posted on our web site. Additionally, please notice that each one income figures and comparisons mentioned at present shall be offered in constant-currency until in any other case famous. All forward-looking statements are made as of at present and we disclaim any obligation to replace such statements. Our expectations, beliefs and projections are expressed in good religion and we imagine there’s a affordable foundation for them. Nevertheless, there may be no assurance that administration’s expectations, beliefs and projections will end result or be achieved. Traders mustn’t depend on forward-looking statements, as a result of they’re topic to a wide range of dangers, uncertainties and different components that may trigger precise outcomes that differ materially from our expectations. Info regarding components that might trigger precise outcomes to vary materially from these within the forward-looking statements is contained in our filings with the SEC.
And with that I’ll flip it over to Robert.
Robert Kyncl: Thanks, Kareem and good morning, everybody. I am happy to be right here talking with all of you for my first earnings name at Warner Music Group. I have been on the job for 5 weeks and I am grateful to our Board of Administrators, and our staff, artists and songwriters for giving me such a heat welcome. I might particularly prefer to thank my predecessor, Steve Cooper for every little thing he has completed to place the corporate for long-term success. And for all his insights as I have been getting up to the mark. Thanks additionally to you, our valued shareholders and everybody who follows the corporate to your continued help. So let’s get into Q1 outcomes. I’m dedicated to sustaining easy and constant communication with the investor neighborhood.
So in that spirit, I wish to instantly and clearly acknowledge that this was a tricky quarter. Like most firms, WMG has been coping with macroeconomic headwinds and the impression of foreign money alternate charges. It is vital to notice that final 12 months’s Q1 included an additional week of reporting, consequently, this quarter’s comparisons must be adjusted to supply an correct image and I will be discussing our ends in that context. Eric gives you extra element, however listed below are the headlines. Complete income in Q1 grew 2% and adjusted OIBDA elevated 13%, with 210 foundation factors of margin enchancment. Recorded Music income was flat because the power of our international efficiency was offset by a softer quarter within the U.S. We had a tricky comparability with the prior 12 months quarter, which included releases from a few of our celebrity artists.
We’re anticipating a stronger launch schedule within the back-half of the fiscal 12 months, which can function new music from Ed Sheeran, Cardi B, David Guetta, Aya Nakamura and BeBe Rexha. Music Publishing had one other sturdy quarter with income progress of 14%. Our working cash-flow progress was wholesome, regardless of a few of our income strains coming beneath stress. This additional underscores our disciplined fiscal administration, as we navigate this difficult enterprise setting. I might prefer to spend a while on this name, proactively addressing two questions that usually been requested. Particularly, why I selected to enter the Music enterprise and why I joined the Warner Music Group after 12 years at YouTube and 7 years at Netflix. YouTube drives the intersection of creators and know-how, which implies that I had many choices to select from in planning my subsequent chapter.
I selected Music at the start, as a result of everybody loves music together with me. It is embraced by 100% of worldwide inhabitants. In an more and more digital world, music makes individuals really feel and it brings them pleasure, hope and luxury, plus in an more and more divided world, music brings individuals collectively. That engagement may be very highly effective and precious and we count on the evolution of monetization fashions to replicate that. On high of that, music’s international attraction is matched by its ubiquity. This business has achieved one thing uncommon. It is construct mutually helpful, long-term partnerships with lots of the world’s greatest firms. Amazon, Apple, Google, Meta, Spotify and Tencent, amongst them. As profitable as music has change into, there may be nonetheless significant upside forward for 3 causes.
Picture by Dylan McLeod on Unsplash
One, as know-how opens up rising economies, the business’s addressable market will proceed to develop even additional. Two, innovation is continually creating new use instances for music, giving us the chance to diversify our income sources. Three, music continues to be undervalued, particularly when in comparison with different types of leisure like video. I might prefer to develop a bit on that final level. Since 2011, the subscription worth of Netflix’s commonplace service has roughly doubled. Knowledge exhibits that just about 80% of U.S. households subscribed to a minimum of three streaming video companies. Because of this the typical family is spending greater than 4 instances monthly on a mix of digital video companies that is not even a complete providing. In distinction, the worth of the music subscription has stayed the identical since streaming was launched over a decade in the past.
Most shoppers subscribe to a single-service that carries nearly all of the music ever launched. In opposition to this backdrop, it’s encouraging that we’re seeing first steps in the proper route by Apple, Deezer and Amazon. The opposite query I typically get us, is why WMG? At first, it is the artists and songwriters and highly effective catalogs which are the lifeblood of this firm and it is such a pleasure to convey this inventive work relies upon all over the world. The brand new generations of stars like Lizzo, Dua Lipa and Aya Nakamura. International superstars reminiscent of Ed Sheeran, Bruno Mars, Coldplay and Neil Younger. Songwriters and composers like Lin-Manuel Miranda, Gamble & Huff and John Williams and legends reminiscent of John Coltrane, Led Zeppelin, Aretha Franklin and Prince.
Second, it is the individuals at WMG. This firm has a constant a long time lengthy historical past of discovering and growing distinctive voices that change tradition globally after which more and more complicated uncluttered world that originality is an important ingredient of our success. Third is about measurement. WMG is sufficiently big to drive significant change within the business, however sufficiently small to have loads of room for progress. As only one instance, the corporate has been taking considerate method to international growth. WMG has made world time strikes that lead entrance the competitors and dynamic fast-growing markets reminiscent of China and the Center-East. This method has additionally delivered record-breaking international first, with audits like Anita from Brazil, Paulo Londra from Argentina, King from India and CK from Nigeria.
I wished to briefly handle what we’re doing to architect the following part of progress. I am solely 5 weeks in, however I have been very intentional about how we have gone about this. I made two important appointments, each of which inform you one thing about our priorities going-forward. I employed Tim Matusch my former colleague at YouTube, as our new EVP of Technique and Operations, which is a brand new position at WMG. Tim shall be crucial to facilitating our strategic imaginative and prescient and guaranteeing operational execution. I additionally employed Ariel Bardin, as our President of Know-how. Ariel’s profession contains 16 years at Google, the place he constructed, launched and let a few of the firm’s most profitable merchandise, together with YouTube’s creator instruments, memberships and content material ID. He’ll drive the event of the programs, infrastructure and merchandise wanted to help our progress.
As I’ve stated, I am dedicated to clear and easy communication on our progress. I additionally need you to know, I am an enormous believer that actions converse louder than phrases and I am laser-focused on execution. Proper now, I am working with leaders throughout the corporate to develop our plans for the long run. We’re already exploring some thrilling concepts and initiatives and we’ll give you updates as quickly as applicable. That stated, lots of the fundamentals will stay the identical. The foundations of this firm are very sturdy and the music business is wealthy with alternatives. We are going to proceed to put money into new artists and songwriters, our catalog and our international growth. On the identical time, we plan to thoughtfully reallocate some sources to speed up how we use know-how and information to empower artists and songwriters, in addition to drive larger effectivity in our enterprise.
As subscription income continues to develop, as supported recovers and we discover the chances of recent applied sciences and enterprise fashions, it is important we construction our offers neatly and strategically. I’m approaching this subsequent part of progress with the distinctive advantages of getting been on each side of the desk. I’m proud that during the last 5 years at YouTube, we developed a really collaborative mutually helpful relationship with the music business, after years of rocky ones. I plan on bringing in the identical method to the WMG and the business, in order that our pursuits are aligned with our companions and that our artists and songwriters achieve most participation and monetization. Now, I will go it over to Eric, who will take you thru our outcomes after which we’ll reply your questions.
Eric Levin: Thanks, Robert and good morning, everybody. As Robert talked about, our year-over-year comparisons ought to take note of the impression of the additional week in fiscal Q1, 2022. Adjusting for the additional week, we delivered progress throughout key metrics, together with income, adjusted OIBDA and adjusted OIBDA margin. Moreover, we noticed sturdy working cash-flow progress and powerful money conversion as a proportion of adjusted OIBDA, regardless of a difficult macro-environment. Complete income declined 2.7%, however elevated 2% when adjusted for the impression of the additional week. Adjusted OIBDA was flat and elevated 12.8% when adjusted for the additional week. Adjusted OIBDA margin was 22.5% in comparison with 21.9% within the prior 12 months quarter. Adjusting for the additional week, margin elevated 210 basis-points.
These will increase had been primarily because of disciplined working efficiency and the impression of foreign money alternate charges. Recorded Music income declined 5.6%, that was roughly flat when adjusting for the impression of the additional week. Streaming income decreased by 2.6%, after adjusting for the additional week Streaming income grew by 5%, as subscription streaming income grew by high-single-digits and was partially offset by ad-supported income declining within the mid-teens. Bodily income declined 27%, adjusting for the additional week, Bodily declined 22%. Our Streaming and Bodily outcomes replicate a lighter launch schedule we had this quarter in contrast with the prior 12 months interval, which included releases from Ed Sheeran and Coldplay. Artist companies and expanded rights income decreased by 4%, because of macro-economic pressures affecting our E&P enterprise and decrease promoting income.
Licensing elevated 17% because of a rise in broadcast charges, synchronization and different third-party licensing. Recorded music adjusted OIBDA decreased by 6% with margin of 24.1%, which was roughly flat in comparison with the prior 12 months quarter. Excluding the impression of the additional week, adjusted OIBDA grew 7% and the margin enchancment was roughly 150 basis-points. This was pushed by disciplined working efficiency and the favorable impression of foreign money alternate charges. Music Publishing continues to ship sturdy outcomes, posting 14% progress, pushed by power throughout digital, efficiency and mechanical. Digital income grew 16%, reflecting progress in streaming, which elevated 17% pushed by continued progress in streaming companies and timing of recent digital offers.
Efficiency income elevated by 29%, because of continued progress from bars, eating places, live shows and reside occasions. Mechanical income elevated by 17%, because of progress in France and Sync income decreased by 5%, because of decrease industrial licensing exercise within the U.S. and the timing of authorized settlements. Music Publishing adjusted OIBDA elevated 36% to $72 million with margin growing 460 foundation factors, pushed by sturdy working efficiency and the favorable impression of foreign money alternate charges. Q1 CapEx decreased to $21 million as in comparison with $34 million within the prior 12 months quarter, primarily because of decrease amenities investments. We anticipate some acceleration within the coming quarters, pushed by IT infrastructure amenities and monetary transformation investments.
Our monetary transformation program stays on-track to meaningfully rollout in fiscal 2024 and develop globally within the following years. This system is anticipated to ship annualized run fee financial savings of $35 million to $40 million as soon as absolutely carried out. Working and free-cash move progress and conversion had been sturdy in Q1. Working cash-flow elevated 62% to $209 million from $129 million within the prior 12 months quarter. Free-cash move elevated 98% to a $188 million from $95 million within the prior 12 months quarter. Working cash-flow conversion was 62% in Q1, the sturdy efficiency was pushed by the timing of working capital objects. Whereas working capital will fluctuate from quarter-to-quarter, our purpose stays to ship a conversion fee of fifty% to 60% over a multi-year interval.
As of December 31, we had a money stability of $720 million, complete debt of $3.9 billion and net-debt of $3.2 billion. Our weighted-average price of debt is 3.7% and our nearest maturity date is in 2028. As we sit up for the remainder of the 12 months, our purpose is to launch superb new music from our gifted roster of artists and songwriters. Whereas a few of the macro and launch schedule pushed pressures we noticed in Q1 will impression Q2, our slate within the back-half of fiscal 2023 is powerful. That includes releases from a few of our greatest stars, in addition to our next-generation of expertise from throughout the globe. There isn’t any query that our business is feeling the impacts of the macro-economic setting. From foreign money fluctuations and a dislocated advert market to the short-term choppiness inherent in our enterprise, there are a variety of variables that may obscure our underlying well being.
Nevertheless, our resilience by way of difficult instances has been confirmed and we stay assured in our future progress. In opposition to that backdrop, we’re resolved to capitalize on the highly effective tailwinds that can drive our firm ahead. Thanks to everybody for becoming a member of us at present and we’ll now open the decision for questions.
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