Q3 2021 Warner Music Group Corp Earnings Call
Today's conference is scheduled to begin shortly please continue standby and thank you for your patience.
No.
[music] sooner and you know you got it.
Oh yeah.
Thank you.
Thank you.
[laughter] yeah.
[music] credit.
[music].
And <unk>.
And then.
Okay.
Welcome to Warner Music group's third quarter earnings call for the period ended June 30th 2021.
At the request of Warner Music Group today's call is being recorded for replay purposes, and if you object. You may disconnect at any time now I would like to turn today's call over to your host Mr. Kareem Chin head of Investor Relations you may begin.
Good morning, everyone and.
Welcome to Warner Music group's fiscal third quarter earnings Conference call.
Please note that our earnings press release earnings snapshot and the form 10-Q, we filed this morning will be available on our website.
On today's call, we have our CEO, Steve Cooper, and our CFO, Eric Levin, who will take you through our results and then we will answer your questions.
Before our prepared remarks I'd like to refer you to the second slide of the earnings snapshot to remind you that this communication and while its forward looking statements that reflect the current views of Warner music group about future events.
Financial performance and financial performance, we plan to present certain non-GAAP results. During this conference call and the earnings snapshot floods and have provided schedules reconciling these results to our GAAP results and our earnings press release.
All of these materials are posted on our website.
Also please note that all revenue figures and comparisons discussed today will be presented and constant currency unless otherwise noted.
All forward looking statements are made as of today and we disclaim any duty to update such statements.
Our expectations beliefs and projections are expressed in good faith, and we believe those reasonable basis for them. However.
However, there can be no assurance that management's expectations beliefs, and projections will result or be achieved.
Investors should not rely on forward looking statements because they are subject to a variety of risks uncertainties and other factors that can cause actual results.
Differ materially from our expectations.
Information concerning factors that could cause actual results to differ materially from those and the forward looking statements is contained in our filings with the SEC.
And with that I'll turn it over to Steve.
Thanks, Karim good morning, everyone and thanks, so much for joining us.
Just over a year ago, we took the company public we were.
We're confident that our business would remain resilient during the pandemic.
Thankfully our confidence was well founded.
Today, we're really fortunate that and looking back over our third quarter. We can celebrate the extraordinary achievements of our global team.
And our artist or song writers and our partners. During this really crazy time.
Entertainment consumption habits have been changing swiftly during COVID-19 and.
And the growth and new business models have been accelerating.
We've continued to keep pace through our constant evolution and as a result, we are growing stronger than ever.
After we review our quarterly results I'll focus from additional remarks on 3 areas.
First how we are driving our core business by investing in new and established artists and songwriters.
Second how we continue to innovate to deliver long term growth.
And lastly, how we're playing the game differently through our unique portfolio of media brands.
Yeah.
Our continued momentum led to impressive results this last quarter.
Total company revenue growth was 27%.
While some of the year over year comparisons are distorted by Covid.
<unk> results reflect the strength of our release schedule and the recovery and certain of our Covid affected revenues.
Digital revenue grew 23% and now represents roughly 70% of total revenue.
Adjusted EBITDA grew by approximately 49%.
While our margin improved to over 21%.
Recorded music delivered revenue growth of approximately 28%.
Marked by growth across digital.
Physical licensing and artist services.
Streaming revenue within recorded music grew 27%.
This increase was driven by successful new releases and strong carryover performances.
A rebound and AD supported revenue and the continued strong growth and revenue from emerging platforms.
Physical revenue also saw a major resurgence growing 136%.
This reflects the increasing popularity of vinyl across the globe.
Licensing revenue showed a significant rebound returning to growth of approximately 28%.
Artist services was up slightly.
As double digit growth that our E. Tailing company E&P was mostly offset by the continued disruption and live concerts and tour related merch.
As always the Central story is a fantastic new music we've been releasing.
Here are some highlights.
We're happy to have new music from global Superstars, like Ed Sheeran and Coldplay.
Debuted his new single bad habits on tick tock.
Shattering the platform's record for live music performance with over 5.5 million unique viewers.
And while Coldplay debut their new single higher power with a special broadcasts from outer space.
Thanks to the cooperation and the international space station.
Dance music icon, David Guetta continued and incredible year, scoring multiple top 10 hits around the world.
In June we announced the signing of a new career spanning partnership with David.
And that includes both his legendary recorded music catalog and future releases.
Performers and his level can choose any route to release their music.
And our new partnership is a great endorsement of the value we offer the creative community and I'd.
All stages of their careers.
Warner record sign Bella porch wanted to tick Tock Global stars.
Video from her first single buildup pitch.
Had the biggest debut ever on Youtube for a new artist with over 200 million views and counting.
Other highlights included net.
Cash goes Gabby Barrett, becoming the first female solo artist and 5 years to go number 1 on Billboards country charts with her first 2 signals.
Russ millions and Atlantic Records, Tianhe Wayne taking over the world with their single body.
Soaring to number 1 and multiple countries and rolling out a major international hits from JJ Lin.
Now from Euro and Master kg.
And there is more fantastic music to come this year from Ed David Litho Cold place Soak, Sonic and trust and key lease to name a few.
And publishing we delivered revenue growth of 21%.
This impressive showing was due to 20% and 55% increases and digital and sync respectively.
We're seeing a return for normal sync with television and film production recovering nicely.
However performance revenue remained nearly flat year over year.
Due to the ongoing restrictions for bars restaurants clubs and concerts.
In Q3, Warner Chappell had a share and 37 number 1 zone across the U S Billboard streaming and radio charts.
That's up from 23 last quarter.
And according to Billboards publishers quarterly we increased our share and both U S radio airplay and and Hot 100 songs.
Notable songwriters signings included for time Grammy winner Anderson pack.
Multi platinum record producer Vinyls, RMB, Hitmakers, Sean Garrett and legendary Mexican Star Marco Antonio Soulless.
And April Warner Chappell as creative and commercial momentum was recognized with a prestigious ASCAP pop publisher of the year Award.
We're achieving all of this success by making smart investments and our artists and songwriters.
1 of our primary goals is to grow our core business through a constant flow of amazing new music.
Driven by financially disciplined anr and M&A strategies.
We continue to have size agility and focus working for us.
Our agreement to purchase 12 total music announced in July is just the latest example of and immediately accretive investment.
12 cones roster includes recordings by Anderson pack Christian music Superstar, Laura and Daigle breakthrough electronic artist to Lenny and music ledge, and Dolly Parton and hit Asia and collected 88 rising.
Turning now to innovation.
We're continuously transforming to become a tech enabled digital first company.
In order to deliver long term growth.
As I've said many times before the music Echo spirit, so much more than albums singles and videos.
We want to be everywhere. The fan zone. So we're focusing on quickly adapting to new trends and staying ahead of the change curve.
While subscription stream.
And has a long runway ahead of it.
We're also positioning ourselves at the center of the converging worlds and social gaming digital fitness and music.
We've continued to build our portfolios of relationships with best in class partners like roadblocks wave and Dapper labs.
Recently, we deepened our engagement and the gaming space with Bella porch, becoming the first Filipino artist to be featured and a fortnight dance mode.
And Bibi Rex returning to the Sims for and in game Music Festival.
As part of our ongoing efforts to expand our presence in China, We launched dance label Wet Records last month wet signed 6 artists.
1 of whom was hot tea on a virtual idol, who exists only online.
These digital stars are phenomenon and in countries, such as China, and Japan with huge social media followings.
And with Hot tea on Warner is leading the virtual idol crossover into the music business.
As a result of our digital first strategy.
Our revenue from emerging platforms, such as Facebook tick tock and peloton.
And is now running at roughly $235 million.
On an annualized basis, and that's just from recorded music.
Look for more announcements to come and the near future.
New investments partnerships and collaborations.
Okay.
We've also spoken in the past about differentiating ourselves and the market by.
By building and influential network of consumer destinations.
Each brand has music and its DNA and commands and zone independent audience of loyal fans.
Our strategy to turbocharge growth included bringing together our owned media channels.
Under our newly formed digital advertising and creative content unit.
These coordinated channels, which include upped rocks.
<unk> IMG and hip hop Dx and cover nation.
Have all seen accelerated growth over the past year.
And so powerful thing for us to control our own network and media brands.
It is something unique to the Warner Music group.
These assets not only drive digital ad revenue.
They give us a real edge in terms of understanding fan behavior quickly catching new trends and identifying cultural shifts.
Last month, we were pleased to welcome Nancy Dubuque.
Yield Vice media group to our board of directors.
Nancy was also named chairperson and the audit Committee and a member of the Executive Committee.
A dynamic leader she has wide ranging experience and visual programming and digital entertainment and.
And is already proving to be an excellent addition.
At the same time.
Thomas H Lee announced that he was stepping down from the company's board of directors after more than 17 years.
In light of his many contributions Thomas speaking given the title of director Emeritus.
On behalf of everyone at <unk> I'd like to thank Tom and say how grateful we are debt will continue to benefit from his expertise.
Last month we.
We also issued the first annual report for the Warner Music Group.
<unk> family Foundation, Social Justice Fund.
So far to fund has chosen and 9 amazing organizations to support <unk>.
Including the Black Cultural Archives, Howard University, and Meek Mills reform lines.
It's important to note that this fund is just 1 aspect of our long term dedication.
2 improving diversity equity and inclusion within our company our industry and our society.
Although we are making progress. We also understand this is an effort that requires sustained commitment.
As part of this we recently hired Samantha Sims are first VP of ESG.
Sam joined Us from PVH, the parent company of Calvin Klein.
He will work closely with our global management team, including key leaders.
<unk> is our global heads of people and dei share.
To help build programs that will drive meaningful and sustainable change.
We look forward to updating you on our progress.
Let me wrap up by saying that our first year as a public.
Publicly traded company.
Despite home confinement has been 1 of the most satisfying and my career.
Our amazingly creative artists and songwriters.
Backed by our outstanding team have accomplished so much during a very trying time.
Above all I'm really excited.
Cited by what's to come and Theres.
And there is so much great music innovation and growth on the horizon and all of this has been supported by our shareholders for which we are all deeply appreciate it.
So stay tuned as we continue to lead the way into the music future and.
And with that I'll turn it over to Eric.
Thank you, Steve and good morning, everyone.
We are extremely proud of our third quarter results, which were marked by strong growth across all components of streaming recovery and several areas that had been negatively impacted by Covid and.
And adjusted EBITDA growth, but meaningfully outpaced our revenue growth.
Lighting and the strong operating leverage and our business.
While some of the companies of some of the comparisons to the prior year quarter are distorted given the impact that COVID-19 had on certain areas of our business I will do my best to contextualize them.
Our total revenue was up approximately 27% on a constant currency basis, and up almost 33% on and as reported basis compared to prior year quarter.
These results are underpinned by growth across.
All of our revenue lines with the exception of performance and music publishing.
Adjusted OIBDA increased by over 58% to $263 million with margin improving from 16, 4% to 19, 6%. This.
And this improvement was driven by revenue mix and strong operating performance and such.
And EBITDA increased almost 50%.
$282 million.
With margin improving from 18, 7% to 21%.
This increase was largely to the same factors that drove adjusted OIBDA performance pushing our adjusted EBITDA to over $1 billion on an LTM basis.
Please refer to our press release for calculations and reconciliations related to adjusted OIBDA and adjusted EBITDA.
And recorded music revenue increased approximately 28% over the prior year quarter digital revenue grew by almost 24% driven by a 27% growth and streaming revenue.
Our streaming revenue was propelled by growth from traditional platforms as well as emerging platforms, resulting in robust growth across all of its components subscriptions.
Subscription and streaming which is by far the largest contributor showed accelerated growth this quarter.
Supported streaming which was impacted by Covid and the prior year quarter continued its strong recovery with growth more than doubling that and subscription streaming.
And our revenue from emerging streaming platforms continues to grow at an extraordinary pace and is now running at approximately $235 million on an annualized basis and Thats for recorded music Cologne.
Physical had an impressive recovery with revenue growth of over 136%.
This was driven by a resurgence and global demand for vinyl and increasing retail sales as businesses reopen.
And as well as comparisons against the prior year quarter debt.
Severely impacted by Covid.
The increased demand for vinyl has been welcome. We continue to believe that typical will be and secular decline on a normalized basis.
Licensing revenue returned to growth of almost 28%.
Due to higher synchronization revenue and broadcast is as businesses began to recover from Covid.
Artist services revenue was slightly up.
And as double digit growth at E&P was partially offset by lower revenue associated with concert promotion and tour related merchandising.
Recorded music adjusted OIBDA grew by more than 52% over the prior year quarter to $254 million.
Driven by revenue mix strong operating performance and the impact from recent acquisitions adjusted OIBDA margin increased 2.6 percentage points to 22%.
Music publishing revenue increased by over 21% driven by growth and digital sync and mechanical revenue.
Digital revenue increased by over 20% for.
Collecting the continuing share.
And to streaming and timing of new digital deals with digital service providers.
Synchronization revenue increased by almost 55% due to greater motion picture and commercial income.
Mechanical revenue decreased 30%.
Businesses began to recover from Covid related disruption.
While performance revenue was down 4%.
Through the ongoing effects of the restrictions for bars restaurants concerts and live events.
Music publishing adjusted OIBDA grew by over 29% from $34 million to $44 million.
With margin improving from 22, 8% to 23, 3%. This was due to revenue mix and restructuring and the prior year quarter.
Operating cash flow decreased from $123 million and the prior year quarter to $91 million. The decline was driven by strong operating performance more than offset by continued investment anr and timing of working capital on a year to date basis operating cash flow was up 40%.
3% from $287 million to $410 million.
Free cash flow decreased to negative $71 million from $87 million and the prior year quarter, largely due to an increase and investment activity as well as lower operating cash flow.
Capex of $20 million was flat compared to the prior year quarter and includes costs associated with our financial transformation program.
The total investment associated with our financial transformation program is expected to be about $20 million and fiscal 'twenty, 1 with annualized run rate savings of approximately $35 million to $40 million once fully implemented in 2023.
For fiscal 'twenty, 1 we continue to expect total capex to be and the range of $90 million to $100 million.
Cash taxes were $37 million and the quarter and as of June 30, and we've had a cash balance of $442 million and net debt of around $2.9 billion and.
Over the last year, we have actively managed our capital structure, reducing our weighted average cost of debt from 4% to 3.4% and extending maturities with our nearest maturity now in 2020.6.
In July we see for credit rating upgrade from S&P to double B, plus and recognition of the continued health and stability and our business.
I'm incredibly proud of our third quarter results and.
All of our progress and growth during our first year as a publicly traded company.
We look forward to bring you some new and.
Amazing music and the coming months.
And thank you for joining the call today, and we will open the call for questions.
Thank you for the question you will need to press star 1 on your telephone to withdraw your question press the pound key.
Please standby, while we compile the Q&A roster.
Our first question comes from Matthew Thornton with true Securities. Your line is open.
Hey, good morning, Steve Good morning, Eric Thanks for taking the question.
Maybe 2 quick ones, if I could I guess.
First I guess around some of the recent price increases at Spotify, obviously, it's still early I think theyre really the only DSP. That's that's taken that initiative I'm curious kind of what.
And you're sensing out there in terms of feedback either from from other DSP receptivity from from consumer receptivity and whether this can kind of continue looking forward I guess, that's the first question.
And then just the second question.
Again, the DSP and are starting to talk a little more about the opportunity to really accelerate live both virtual and in person.
And as well as merchandising by driving better awareness conversion and consumption.
Of these revenue buckets and I'm curious if you are looking at that if youre embracing that if you think again there is the opportunity here by party with DSP to really drive an inflection in the growth and some of those revenue streams and any thoughts there. Thanks guys.
So I'll respond to banking and responsive.
Most of that Matthew so.
Spotify has increased rates and I think they've said that their rates are.
Our rate increases are performing well with consumers and the kind of met their expectations for the quarter.
We have no reason to believe that to be anything but completely true.
<unk> will continue overall to decline as the mix of emerge as rollout of subscribers and emerging markets, which are lower rates will decrease the overall pool within developed markets the ability to start to see rates.
Increase we think is.
A meaningful opportunity. So we are really pleased with Spotify is taking the initiative and starting to take really positive steps there.
Regarding other DSP.
What we can say is that we've been vocal over the years debt there is real.
Price upside opportunity and we think through steps and Spotify is taking is very indicative of that and.
And we would be highly supportive of other DSP.
Evaluating their subscriber base and looking at taking similar steps that are appropriate for their platform. So we think there are opportunities there, but we don't speak for other DSP and I wouldn't want to speak for them and that area with regard to live and merged the firsthand says that 1 of the kind of consumer platforms that we.
<unk>.
Wired and been running successfully for several years, there's 1 called socket.
<unk> provides listings of where artists are performing live and the Covid effected world, where they are providing.
And performing live online.
They are a significant and put provider and data provider for that for Spotify.
As well as other services and so we really believe and live and live online. We've also recently announced the partnership with weighted.
Which is a leader in that space and we have been doing a series of.
Online concerts and part of our relationship with roadblocks has been a series of concerts, whether it's Royal blood performance for block C Awards or why don't we are in the Max performing.
On there and we've done that is just the start we've done a whole series of events results. We've talked about the edge here and launch event on tick Tock, which was alive screens of them. So we think theres a lot of opportunity there certainly to reach audience and build awareness and promote our dosing music the monetization of those platforms is very.
Very early and we'll be a lot of experimentation, but we are an active player and that equation.
And.
It's either this or opportunity that really leaning into and we'll see how it develops both from a monetization and promotional standpoint, but we do see it as an active meaningful part of the future for music going forward.
Very helpful. Thanks, Eric.
Thanks, Matthew so much.
Our next question comes from Michael Morris with Guggenheim. Your line is open.
Thank you and good morning, I have 2 topics 1 on the subscription streaming revenue strength and 1 on the artist relationships first I'm, hoping maybe you could unpack the strength and the subscription streaming side a bit more between what was maybe share gains given the strength of your portfolio.
And what was just health of that business overall, and if you think about whats driving strength in the business overall.
And to hear if you have any insights on.
Particular platforms particular geographies anything that fits that stands out to you there and on the artist relationship side, Steve you referenced this partnership with David Guetta at.
It's very long term partnership.
And my question I really love to just hear some more detail and the contact is.
I think there is concern in the marketplace that eventually technology dis intermediate label value and we've talked about that a lot you guys have addressed that but having an established artist.
And you know strike a long term partnership with you clearly show some 2 way commitment and so I'd love to just hear what's in it for each of you as you establish something long term like that thanks guys.
Sure so income tax.
And as Doug and tackle them for them.
Why don't you do subscription strength first and I'll deal with artist relations Super So.
Thanks for the question, Michael So first I would say that the subscription revenue growth.
I would say the streaming revenue growth is really multi layer.
It is driven by subscription growth both in developed and emerging markets supplemented by the price increases.
Started to roll through we've actually seen a modest acceleration.
And the subscription growth side AD supported revenue has grew as we said twice at the rate of subscription streaming, indicating that AD supported which was affected and the early days of Covid has really fully rebounded.
And the emerging forms to scream and continued their solid growth as new deals are signed and the existing platforms continue to grow now talking about share gains versus market growth.
I'd say as.
A lot of this is driven first and foremost we have said from the beginning of the year that our release schedule was back half loaded.
Steve indicated in his comments some of those artists, whether it's Ed Sheeran silk Sonics and Bruno Mars Anderson partnership Cardi B Coldplay, but also artists all over the world, whether it's INR Gomorrah and France.
A couple of Plaza and Italy.
And not just the superstars as the global Superstars, but it's also stars from all over the world as well as breaking and artists like <unk> and and others. So it's a broad reach that is really helping drive our business forward. The market is recovering from COVID-19 and areas that has been affected and the areas.
We're unaffected like subscription and streaming continue their strong momentum. So it's really Michael kind of a broad reach of release schedule, having an impact but also the market overall performing well and you.
For the 2 together and creates a nice environment for growth.
Steve I'll hand, it to you.
Great. Thanks, Eric So Michael on the on the artist relations side.
<unk>.
Yeah.
The.
The benefits.
That artist C by way of continuing to partner.
With with a record label.
Is that despite the tools and are available in the digital world.
The ability.
Sure effectively utilize those tools and amplify and artists career.
Their music their social presence through and organization.
That has a global and local footprint literally around the globe.
Can't be underestimated.
There are.
Tens of thousands of tracks.
That are uploaded every day to streaming services around the world literally.
Tens of thousands of tracks.
And the number of probably now is somewhere between.
5 million to 3 quarters of 1 million tracks a week.
Being uploaded.
The value of label blades.
2 and artist.
Is the ability.
To help them.
True.
And the noise of a half and millennium.
Or 3 quarters of 1 million tracks.
And sector right.
And their music.
And their career.
From literally.
All of this noise.
And when you look at really.
Really well established.
Tremendous global Superstars, all of who and all of whom have had.
The opportunity.
To pivot away from labels, Utah.
Utilize the digital tools available.
And go solo so to speak by way of moving their career long virtually none of them.
None of them have taken.
That decision to pivot away from the labels.
Because at the end of the day.
It is it is not that easy.
2.2 separate you know.
The the really great music and the great artists without and organization such as ours behind them.
It is really really hard work.
And so when we underwrite these partnerships or we have these long term arrangements with our artists.
They are arrangements.
And that are mutually beneficial.
Where where the artist sees the value that we bring.
And we see a genius and the greatness and these are just so that it allows.
With an enormous amount of enthusiasm and and our own creativity to get behind these artists and they see the value that we bring to them and their careers.
So it's a mutually symbiotic relationship Michael.
Yes.
Great. Thank you both I appreciate it.
Thanks, Michael.
Our next question comes from Meg and with Credit Suisse. Your line is open.
Hi, Good morning, guys and I wanted to talk about the emerging cash.
<unk> revenue line.
Given us the number for recorded music and.
How much would including music publishing increase this run rate.
And then.
Facebook I think announced that theyre going to be spending $1 billion on creators I wanted to know what do you think music is going to be.
Percentage of that.
And spend thanks.
Okay for uptick the first 1 and Megan and I.
Speaking Megan so.
Obviously, we don't release the publishing number I think you can look at relative proportions.
Recorded music and publishing digital revenue and get a general feel so.
Recorded music is call it 5 ish times.
And the size of revenue digital revenue and publishing plus or minus ballpark that would logically be too to what the emerging streaming platforms would be and publishing what I would say is the on publishing we don't release the number of what were just as active and developing relationships with these platforms and <unk>.
And support their growth, but also being a partner and helping lead the way and helping innovative platforms get launched find traction and hopefully generate long term sustainable business models and.
And licenses with both recorded music and publishing.
Steve do you want to discuss the Facebook side.
Sure.
Hi, Megan.
So youre right Facebook Facebook has announced that.
They are going to be.
Focusing our investments.
And creators.
This is a response to what they see other.
Platforms, Youtube and and Ticktock doing.
While I won't venture.
Adjusted any specific number what I would point out is when you look at the platforms that Facebook wants to.
Compete against.
And when you look at other changes that they have initiated recently.
By way of example, Instagram rails.
And what Theyre doing.
Is responding to different use cases.
For short form video most of which not all but most of which include the utilization of music.
And what we would expect to see.
Is that.
Whatever the specific solid by way of how they channel that $1 billion to creators.
<unk> creators and the main.
We'll we'll utilize in some way shape or form new sick.
And they will continue to amplify the use cases and the growth of the music ecosphere.
So so I would expect that we.
Along with to creators.
Song writers music publishers and other labels.
<unk> and.
And in many ways beneficiaries of that additional spend maybe.
Okay, and congrats guys on negatively Sally and the other mega and getting the sports illustrated cover that was pretty cool.
Yeah.
Thank you Megan.
Our next question comes from Vandenberg with Morgan Stanley. Your line is open.
Thanks, Good morning.
Eric if I look at the first 9 months of the year at least on and <unk> basis margins are up I think a couple of hundred basis points year on year and you guys are tracking to this nicely to this 20% plus number just can you talk about your confidence and margin expansion looking out over the next several years you can see anything that derails at least at the trend line.
And and if you want to if you want to talk numbers feel free but I figure you probably wont.
And then Steve just on the M&A front, you guys continue to sort of.
Acquire not just label it but also technology assets and other things can you remind us of sort of how you're thinking about deploying cash flow as we move into 'twenty, 2 and 'twenty 3 because your leverage is coming down and I don't think the company is looking to Delever. So just sort of remind us where you are what your M&A strategy and where you're focused this thank you.
Okay.
Sure I'll take the first 1 first so on margins and good to hear from you Ben.
So yes look when we went public which is just 13 months ago. We said you know 3.4 years out.
$2023.2020 for 2025 timeframe, we expected low to mid <unk>.
It's really we set low twenties.
And as we're now a year out we're already low twenties margin and there are a couple of factors..1 is executing on the plans that we had laid out.
Continuing to work on cost containment, whether it's through our technology innovation and <unk>.
<unk> and efficiency programs.
We also have our financial transformation, which will be going live and the next year with the bulk of the savings commencing in fiscal 'twenty 3.
Continuing to gain leverage on scale as we continue to grow our rep.
Revenue and gross margin faster than we're growing our underlying cost base.
Over time, we would say the shift from physical to streaming although this quarter. The physical result was obviously up substantially so for this quarter that doesn't quite hold.
So we continue to believe that on a long term basis, continuing to improve our margins above where they are now into the mid twenties is reasonable and.
And where we're heading.
However, we will say and the short term as we recover from Covid and specifically when concert.
Touring and that comes back our concert promotion businesses and our tour merch businesses, which are the 2 businesses that haven't recovered yet or some of our lower margin businesses. So as those recover we could expect to see some moderation and the growth and margins in the short term, but long term.
And all the fundamentals are in place for continued growth of margin from here forward.
And we continue to focus on that.
Key business driver, both in terms of efficiency and our business and scale.
Steve for you on that.
For your question.
Thanks, Eric.
So Ben first of all on <unk>.
M&A strategy and.
Our free cash flow deployment.
First of all as as abroad.
Envelope.
We are very very disciplined with respect to.
Our investment strategy, which includes M&A.
<unk>.
But whenever we do and when we looked at Anr when we do M&A.
Our financial discipline and thoughtful financial metrics.
Always guide our decisions and you can see this frankly.
Materialize when you look at our our conversion from.
OIBDA.
EBITDA to cash flow.
And with becomes evident that.
We remain very disciplined.
Relative to our specific strategies.
And we plan on continuing to invest.
<unk> organically and through M&A.
And and our core business and.
And expanding our global footprint.
We continue to invest.
And both our own technological capabilities as.
As well as in a true third party.
Our technological capabilities.
And and.
And in those third party investments.
We not only true.
Commercial relationships, but these investments.
Our work with them to define how we how we move our music.
And 2 broadly diverse supplied revenue streams and that will continue to also be a priority for us so core music business.
Diversified revenue streams.
And future Proofing us.
By both internally and externally.
Investments in new technology.
When it comes to our free cash flow.
You are right, we have no intention at the moment to pay down debt.
With the full support of our board.
When you look at reinvesting in our business.
Both with respect to organic as well as M&A opportunities.
And secondly to.
To repatriate to our shareholders.
Excess cash through dividends and presumably over time.
True modest dividend growth.
And if and when.
We run out of opportunities to.
To invest.
Or to repatriate to shareholders, we'll then look to debt.
Debt reduction, but I don't see that and the near future.
Thank you both.
Thanks Pam.
Our next question comes from Tim now with Macquarie. Your line is open.
Oh, thanks, very much I'd like to pick up on this discussion about the new technologies and opportunities.
<unk> earnings call, we spoke for the first time about wave and about <unk> and about.
Dapper labs and now.
You are introducing this concept to this virtual idol and I'm just curious.
No pun intended but how real is that how much of like Chinese specific opportunity is it how well positioned are you to benefit from any growth there and could that be something that.
And that takes hold outside of outside of China, Our Asia. Thanks.
Well.
And.
Tim I think that debt.
It's already taken hold.
Or it is certainly it's certainly approaching taken a hold not only in China.
Japan, other Asian countries, but globally.
When when you look at when you look at social gaming and these meta versus.
We are already talking about.
Dealing in the virtual world.
Where people have their own avatars.
They they have their own communities and these virtual worlds and.
And and these virtual worlds reflect.
And people need there or are they want to be between the real world.
Creating.
Virtual only beans.
Is is not and logical next step.
And while this has been predominantly the domain.
Certain Asian countries.
The.
The wonderful thing about it and you can create these characters.
And you can create.
A tremendous fan base.
Relative to these characters I'll give you something that's a bit analogous.
Even though it's not quite all the and the digital format.
When you watch a Marvel movie.
Youre talking about characters.
That don't exist in real life.
And you're talking about computer generated imaging.
That doesn't exist in real life.
But yet when you look at for success for these care of these characters.
Look at the success of Marvel U.
You look at the success of many of the soundtracks.
Which in many cases, we provide.
And you look at the fan base for these characters.
Being able to do this and a virtual world is really not a massive step Tim.
And it's a step where we're determined.
And to lead the crossovers.
These virtual beings into the world and music.
So I don't think it's a flash and the pan.
I think it's here to stay and.
And not only do I think its share to stay I think could share to growth.
Hopefully that answers your questions.
That's great thanks very much.
Yeah.
Thank you. Our next question comes Kenneth Zhang catastrophe for with Barclays. Your line is open.
Thank you.
I apologize if this has been asked already agenda and little bit late but.
On the M&A side, I guess, a slightly different aspect of what's going on and the investment is the catalog.
Acquisitions.
And part of it seems to be a bunch and I'll say it 8 sorry, but.
It's been an opportunity for these days.
Potentially and look at monetizing that playbook higher multiple because the day and you don't seem to get the credit but that side of the business compared to what some of these transactions are doing.
And the marketplace.
So it.
And did an opportunity for you guys to think about that business slightly differently.
So Eric let me take the first part and you can pay a fee.
Second part.
And I'm, sorry, I didn't catch your name.
This is connect and from Barclays.
Okay, and I'm on it stockpile and so it's still difficult anyway.
So so let me give you kind of a top U and then Eric will give you a.
From a financial perspective.
From kind of an overview when you when you look at some of these multiples.
To us it looks like a movement and capital.
Fixed income.
To what people believe is the sexier form of fixed income.
And many of these financial players.
Our buying assets with no organization or no capability to activate those assets.
We also agree with your observation it may be a function of rates.
But.
Yeah.
What we don't see.
Is.
US turning into.
Asset managers.
And moving away from being a proactive music and entertainment company.
And we're looking for the long term and our long term growth.
And while it's always possible.
You know if our shareholders and board.
Desired.
To pack and certain assets and continue to manage them.
But.
Frankly.
We do that already.
And you're right, while we don't trade at a 30 or 35 time multiple.
When you think about buying assets.
At that multiple.
And not having.
And organization to not only activates.
Spot turbocharge, the cash flow attributable to those assets.
From our perspective.
That just seems not like a business that we're inclined to be and at the moment.
Eric do you want to add to that.
Yes.
<unk>.
Supplement that with a few quick things 1 is.
We have been active this year and acquiring music growth both in the recorded and the publishing side.
We announced earlier this year that we acquired for $338 million assets with a run rate EBITDA of $37 million.
And we've done other deals throughout the year as well.
But we are always financially disciplined we are not looking to compete at the highest price for the sake of competing we look at assets that are accretive to our business and as Steve said, we are always looking for assets, where we can drive incremental value whether the opportunities are and re energizing and re releasing masters catalog looking to improve.
<unk> zinc opportunities so and we've put it all together, we think we've found and effective array of assets to acquire this year.
And that we've been able to put to work as Steve said and generate even higher revenue and returns and we'll continue to look for opportunities and the market that meet our criteria, but we will always apply our same financial discipline to it cannot.
Thank you Bob.
Thank you.
Thank you and this concludes the question and answer session I would now like to turn the call back over to Steve Cooper for closing remarks.
Again, I want to thank everybody for taking the time to join us today.
Please look for our future announcements as as I mentioned during the <unk>.
During the presentation part of the call.
And please everyone continue to enjoy the summer, but stay safe because it.
Really remains crazy Crazy World. So thanks again speak to you soon bye bye.
Yeah.
This concludes today's conference call. Thank you for participating you may now disconnect.
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