Q2 2022 Warner Music Group Corp Earnings Call
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Welcome to Warner Music groups second quarter earnings call for the period ended March 31st 2022.
Quest of Warner Music for today's call is being recorded for replay purposes, and if you object you may disconnect at this 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.
Welcome to Warner Music group's fiscal second quarter earnings Conference call.
Please note that our earnings press release earnings snapshot in 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 executive Vice President and CFO , Eric <unk>, 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 for mind you. Just communication includes forward looking statements that reflect the current views of Warner music group about future events and financial performance.
We plan to present certain non-GAAP results. During this conference call in our earnings snapshot slides and have provided schedules reconciling these results to our GAAP results in 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 in 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 there is a reasonable basis for them.
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 to differ materially from our expectations.
Information concerning factors that could cause actual results to differ materially from those in the forward looking statements is contained in our filings with the SEC and with that I'll turn it over to Steve.
Yes.
Thanks, Karim good morning, everyone and thanks for joining us.
As we approach the two year anniversary of our IPO I'd like to reflect for a moment on the key pillars of our success.
These are the fundamentals of our strategy.
Principles, we bear in mind, when charting our course into the future.
First of course is the music.
So to the heart of everything we do.
While tastes trends in tech are ever changing our artists and songwriters will always be our driving force.
Second is our global growth.
About a decade ago, we set a goal to become a global music Entertainment company through the expansion of our local expertise.
Today I'll share the progress, we're making in growing our presence around the world.
Third we're a company that tribes at the intersection of Art and technology.
Innovation and data driven insights are helping us actively create our future.
And fourth our people and our commitment to making our company a place where the best individual talents can be long and build a career.
But first let's get into our Q2 results.
I am pleased to say that they reflect the strong health of our streaming revenue continued growth in publishing and recovery from Covid and artist services and performance.
Total revenue in the quarter was almost one $4 billion.
This represents year over year growth of 10% and 13% on an as reported and constant currency basis.
Adjusted EBITDA was 282 million with a margin of 25%.
Compared to 21, 4% in the prior year quarter.
This decline was driven by our revenue mix.
As our lower margin revenue streams recovered from Covid, they became bigger contributors to overall revenue. We continue to expect that we'll achieve our long term margin targets in the next several years as mix and growth rates normalize.
In recorded music, our revenue was approximately $1.15 billion.
An increase of 11, 4% from the prior year quarter with streaming revenue growing 10%.
Normalizing for the impact of the new digital deal that we discussed on our Q1 earnings call.
Accordingly music total revenue and streaming revenue both grew by 15%.
Our dis services and physical continued to show impressive recovery with revenue growth of 25% and 8% respectively.
Licensing revenue powered by sink grew 23%.
In publishing we delivered revenue of 230 million, 23% more than the prior year quarter driven by growth across all revenue lines.
Company wide streaming revenue from emerging platforms grew to $345 million on an annualized basis.
Up from $325 million in Q1.
And now onto the music.
An important differentiator for the Warner Music Group is our focus on long term artist development.
These days there are some misconception that all music natures are just following the same data.
And chasing artists, who already have a significant presence in the market.
That's not quite true for us.
First and foremost we seek out originality when.
When we identify really great artists and songwriters, we collaborate with them to ensure that they have the opportunity to realize their full potential.
Most of our biggest superstars were assigned to one of our labels at the very beginning of their careers.
This commitment to extraordinary talent is something that has distinguished us for decades.
Legendary voices like a REIT to Franklin and Fleetwood Mac have now been joined by visionary performers like <unk> Sharon.
The impact of our unique irreplaceable catalog of music will reverberate for generations.
At this year's Grammys silk Sonic the RMB Super duo Bruno Mars, and Anderson pack took home the highly coveted record of the year and song of the year Awards plus two more.
Bruno has now won record into year three times a feet previously accomplished only by Paul Simon.
Without question he now ranks as one of the world's greatest entertainers.
We're always developing the next wave of culture shaping music that will create the soundtrack of tomorrow.
For example, Gail.
Kicked off the year with number one worldwide Smash a b C. D E F you and Jack Carlos New single first class debuted at number one on the Billboard Hot 100 last month.
Ah Lippe and Megan the stallion racked up over 40 million streams in just one week with their hit collaboration Swedish Pi.
Our publishing team also continues to excel with an impressive 90 songs charting on the Billboard Hot 100 over the course of Q2.
Some of the biggest hits that are songwriters contributed to this quarter, where silk sonics smoking out the window rau, although honchos desperadoes and Dave Starlight.
Warner Chappell had a superb showing at this year's Grammys. In addition to Bruno and Anderson, who are also Warner Chappell song writers, we saw big wins for Chris Stapleton for best Country song and Oji Volta for best Rap song.
Warner Chappell is winning highly competitive deals for talent around the world and across the music spectrum.
From Nigeria's, Taiwan to Italy sick look to do.
The U S is Nicole gallium.
In March we signed two important deals with Patrick Moxie, the founder of dance Slaybaugh Ultra.
Warner Chappell now administers ultra is 6000 copyrights throughout Europe , including songs from Drake, Rihanna and the weekend among many others.
Warner recorded music also entered into a strategic alliance with Patrick's legendary pay day records as well as new label Helix.
Yes.
At a time when domestic music is on the rise in most countries. We're also one of the few companies with the resources and expertise to take a truly global approach to artist development.
This strategy requires a mix of organic Anr investment.
Partnerships with the most credible local players and financially disciplined acquisitions of catalogs and labels.
Across established and emerging markets, we create the conditions for success to travel at the speed of sound.
We saw a perfect example of our long term strategy in action.
When Anita and Paulo laundry, both signed to Warner Music Latin America.
Took number one and number two on Spotify Global chart.
With her monster hit and fall there Anita made history as the first Brazil, you're going to hit the top spot.
While Paolo has spent five consecutive weeks at the top of Billboards Argentina 100.
According to <unk> 2022 Global music report.
<unk> was the fastest growing market in 2021 up 35% year over year.
This quarter, we announced that we would be acquiring kind of what music the region's largest independent distributor, which will expand our presence in this important territory.
Kind of what is on the ground in Dubai, Cairo, and Casa Blanca and offer services in more than 20 countries.
Having only launched Warner music Middle East in 2018, we've moved quickly to become a leading player in this region.
India is another rapidly growing market, where we focused our attention and have increased our market share meaningfully in the last 24 months.
We've recently partnered with some of Bollywood biggest talents.
And last month Warner Music, India entered into a strategic partnership with just music.
Founded by renowned actor and producer Jackie Bargnani.
This will give us access to marquee Bollywood releases, while just music artists will benefit from our world wide networks in March we partnered with <unk> dose, saying one of India's biggest film and music superstars.
We're already working together to amplify his global career.
<unk> collaborations with Canadian rapid Tory lanes, and Tanzanian Star Diamond Platinum's.
Across the globe.
Buster albums from the likes of Red Hot Chili Peppers, Ed Sheeran, and Kodak Black are showing incredible staying power.
And we're excited about what's on the horizon with new music coming from stars like Litho, Ava Max and Cardi B.
As well as our next generation of Hitmakers, such as Pink Panther risks Bella porch and Tiago PC today.
As the World Grapples with war inflation and other macroeconomic concerns one thing is certain musics ubiquity and the value have already proven to be resilient through any kind of disruption.
Unlike the video streaming market, which turns as subscribers constantly search for new and different exclusive content to them.
Music streaming market is sticky.
Subscribers have access to all the music they could ever want on a single platform.
And they become attached to the collections and playlists they have curated over time.
And while films and TV series May come and go.
Devotion to one's favorite music artist is more deep seated and longer lasting.
As new platforms emerge it becomes increasingly clear that whatever the motive consumption.
<unk> is the common thread that runs throughout the entire entertainment economy.
We're one of the few companies with the reach skills and capabilities to connect the dots for artist and song writers on a global basis.
We protect and promote the value of music.
We help creators navigate an incredibly complex landscape and we deepen the connection between artists and fans.
As streaming continues to scale.
And social media provides increasingly meaningful revenue.
There is now a lot of buzz about web three.
Since 2019, we've been strategically investing in tech companies that featured music prominently in their offerings.
<unk> built our reputation.
As the planet's most innovative future focused music company.
These investments have fostered partnerships at the intersection of gaming, social and entertainment with brands, such as roadblocks Fortnite and the sandbox.
And we formed groundbreaking relationships with innovation leaders, such as <unk> Block Party, one of and Dapper labs.
As a recent example.
We've also partnered with blockchain gaming developers splinter lands to give Warner music artist tools to develop arcade style games, such as the extremely popular DAP.
The latest deal we signed was with proof of attendance protocol.
Pro App for short.
This will enable us to mint shared memories as ftes, giving collectors a dedicated digital proof.
They were part of a specific experience or event.
Atlantic Records wrapper, Kevin Gates recently tapped into that technology.
Offering fans, who attended his sold out Red rocks concert.
Poe App to commemorate the show.
Excuse me.
As I mentioned earlier, we thrive at the intersection of Art and technology.
We were very excited to announce that Mike Shinoda co.
Cofounder of the Warner Records band Lincoln Park has been enlisted as our first ever community innovation advisor.
Mike is a music tech visionary, who will be a great source of wisdom and insight as our artist bring their creative visions to life on multiple new platforms.
I've talked before about our network of direct to consumer destinations, including up prop hip.
Hip hop Dx song kick in E&P.
These companies all fall under the umbrella of our newly rebranded media and content are W. Amex.
Last week at our first ever new fronts event for brands and advertisers.
<unk> unveiled new culture, driving original programming that will rollout across these outlets later this year.
These programs include.
Fresh pair with caddy customs, a sneaker culture show co hosted and executive produced by just plays.
Iconic records, a visual podcasts that will explore the legacy of notorious B I G and limited.
Merch design competition featuring hot.
Hot artist and emerging creators.
W. Amex already ranks as a top five video company in the U S.
And this exciting roster of programming will bring advertisers new opportunities to reach young engaged and influential audiences.
Yes.
The other two areas of incremental revenue I'd like to highlight today are first digi.
Digital fitness Wm Chee was the music launch partner for pellet tons gaming inspired fitness experience Lane breaks.
The first start is featured on lane break where to Warner Legends, David Bowie and David get it.
Second podcasts.
Following the success of shows like peoples party with tallied qual leaf.
We're continuing to build our presence in this space.
Last month, we announced the launch of interval presents.
Our in House podcast network sitting at the Crossroads of music pop culture and social impact.
We already have chosen to works from Oscar winning actress Lupita Nyongo.
And Grammy non native singer, Jason Derulo among other major talents.
When we took the company public.
Less than two years ago. Many of these business models, we're only Nathan.
While we still have plenty of work to do we've made great progress in a very short period.
Our strategies are proving to be sound.
The universe of possibilities continues to expand in every direction and will enhance the growth of an already robust music entertainment industry.
FP reported that the global recorded music industry grew by an impressive 18, 5%.
In 2021.
We're proud to say that we outperformed its benchmark by almost two five percentage points.
A testament to our impact on global culture, and our ability to create communities.
Fans across every medium.
During our last call.
We talked about our <unk> commitments, which we unveiled as part of our first <unk> <unk> report.
This quarter, we announced a new initiative designed to help us achieve those objectives.
Our dei Institute that.
The first of its kind within the music industry.
It will help us tap into a wide array of external expertise.
As we educate our employees and implement action plans across our company.
Before I hand, it over to Eric.
I would be remiss, if I didn't talk about the situation in Ukraine.
We pray that this conflict and soon and that the people of Ukraine can live in peace.
As its done throughout history.
<unk> is playing an indispensable role in lifting spirits and giving hope during this terrible hardship.
We're committed to supporting relief efforts, both for the people in Ukraine, and the refugee population.
This includes contributions to the Red Cross Polish humanitarian action and project hope.
As we announced in early March we suspended operations in Russia.
We're very excited about all the great new music in fresh initiatives that will be introduced through the balance of the year.
We look forward to keeping you updated as we continue to build our momentum.
And with that I'll turn it over to Eric.
Thank you, Steve and good morning, everyone.
There is a lot to unpack within our Q2 results, but I will start with some high level takeaways.
Core streaming.
Health remains incredibly healthy underpinned by strength in subscription streaming.
All of our non digital revenue lines continue to grow as well.
While publishing is firing on all cylinders posting impressive results yet again.
Over the last several quarters, we've seen elevated levels of investments in our in M&A.
Obvious impacts on our cash flow.
As expected this has drawn attention from analysts and shareholders, who want a better understand how we view these investments what our return thresholds are and how these investments will drive future growth I'll get into that in more detail shortly.
Moving onto our results total revenue increased by over 13% on a constant currency basis, reflecting double digit growth in both recorded music and music publishing.
On an as reported basis total revenue grew 10%.
Total streaming revenue increased 12% driven by growth across across both businesses, including revenue from emerging streaming platform.
<unk>.
This strong operating performance translated to adjusted OIBDA growth of 7% with margins of 19, 9% compared to 24% in the prior year quarter.
The decline in margin reflects a continued recovery in lower margin artist services revenue.
As well as the reduction in high margin streaming revenue, resulting from the impact of the new deal with one of our digital partners. We discussed on our last earnings call.
Adjusted EBITDA grew 5% with margins declining from 21, 4% to 25% due to the same factors that impacted adjusted OIBDA.
As a reminder, adjusted EBITDA includes the pro forma impact of future cost savings and certain specified transactions you can find the calculations and reconciliations related to adjusted OIBDA and adjusted EBITDA in our press release.
Recorded music revenue grew 11% driven by growth across all revenue lines streaming revenue increased 10% due to growth in traditional and emerging streaming platforms.
As mentioned our results reflect the impact of the new deal with one of our digital partners, which began at the start of fiscal 2022 adjusting for the impact of the new deal, which was $31 million in the quarter are recorded music streaming revenue would have grown 15%.
I wanted to provide a bit more granularity so that everyone understands the underlying trends within recorded music streaming.
Normalizing for the impact of the new deal subscription streaming revenue was robust in the high teens comparability in our AD supported streaming growth was impacted by a true up payment that benefited the prior year quarter as a result AD supported streaming which generally grows in line with subscription streaming.
Grew in the high single digits we.
We fully expect to see a normalization in our recorded music streaming growth rate commencing in Q1 2023, once we lap the anniversary of the new digital deal.
Harvest services and expanded rights revenue grew by 25%, reflecting an increase in merchandising revenue and touring activity.
<unk> revenue grew by 8%, primarily driven by an increased worldwide demand for vinyl.
Licensing revenue increased by 23%, mainly due to higher synchronization revenue.
Adjusted OIBDA was $253 million a.
A 5% increase over prior year quarter.
Margin declined from 22, 9%.
In the prior year quarter to 22, 1% due to revenue mix music publishing had another strong quarter as well posting revenue of $230 million and a growth rate of 23% reflecting increases across all revenue lines.
Digital delivered strong revenue growth of 26% driven by streaming growth of 23% with strength across traditional and emerging platforms digital benefit from the timing of new digital deals synced.
Zinc revenue increased over 28% due to higher commercial licensing activity in the quarter.
Performance revenue increased by 9% as bars restaurants concerts and life events continued to recover from Covid disruption and mechanical revenue increased 8% benefiting from strong physical sales music.
Music publishing adjusted OIBDA increased 33% to $61 million, while margin increased two five percentage points to 26, 5% from 24%.
As I mentioned on our last call.
We still expect to see elevated full year capex in the range of $130 million to $135 million in Q2, capex increased to $28 million as compared to $20 million in the prior year quarter, mainly due to investments in our it infrastructure and expansion of our E&P.
Facilities.
Our financial transformation program remains on track and is expected to deliver annualized run rate savings of $35 million to $40 million once fully implemented starting in fiscal year 2023.
Operating cash flow decreased 71% to $44 million from $150 million. The decline was largely driven by the timing of royalty payments and other movements within working capital.
Cash flow decreased 88% to $16 million from $130 million in the prior year quarter.
As of December 31, we had a cash balance of $385 million total debt of $3 8 billion and net debt of $3 $4 billion since.
Since our IPO.
We have continued to actively manage our capital structure further reducing our weighted average cost of debt from 4% to three 3%.
And extending maturities with our nearest maturity date now in 2028.
There is no question that the optimal use of our capital is to invest alongside the music industry is tail winds.
I'd like to clarify a few points around the financial characteristics of our Anr and M&A investments.
The vast majority of our Anr advances to artists and songwriters are recoupable with royalties from royalties and we recoup the overwhelming majority of them.
Just a matter of timing.
Artist deals have become more expensive because music is worth more in the streaming era, we can pay more because we earn more.
Overwhelming majority.
Of our new artist deals provide us with substantial recording commitments and long term rates.
When we make M&A investments they are typically accretive on day one.
Incremental to growth and financed with debt.
With our M&A investments, which are sometimes for once in a lifetime rights and catalogs, we have the luxury of being an opportunistic strategic buyer that can maximize the value of acquired rights through our global infrastructure.
Whether investing in Anr or M&A, we rigorously analyzed every transaction and have a high degree of conviction that our broad portfolio of investments will drive profitable growth and shareholder value for years to come.
As we look ahead, we feel great about about the health of our business and how we are positioning ourselves to take advantage of the vast opportunities for growth that lie ahead. Thank.
Thank you for joining our call today, and we will now open the call for questions.
Thank you to ask a question.
One of your telephone.
Sorry, your question press the pound key.
Standby, while we compile the Q&A roster.
Okay.
Our first question comes from Benjamin Black with Deutsche Bank. Your line is open.
Great. Thanks for the question I have two the first one for Steve.
As you mentioned a lot has happened since our IPO between Covid inflation interest rates. Obviously the war. So has your long term outlook changed at all.
I know the entire market has come under pressure, but your stock has actually been hit a lot.
Harder so what do you think the market is missing and then perhaps one for Eric on margins.
How should we be thinking about the cadence of your margin expansion over the next couple of years.
But some of the lower margin revenue streams are coming back this year and you have the drag from the new DSP deal. So should we anticipate a more modest margin margin trends. This year before we see a more meaningful step up in 'twenty three thank you.
Alright, Thanks for your questions Ben I'll take the first one which is.
Really about the.
Changes in the world since our IPO.
I think everybody is seeing.
And as concerned about about some of these.
<unk>.
Situations that are involved in the world Today War inflation rising interest rates.
That being said music has and I believe we will continue to prove its resilience because it is fundamental.
To human nature, whether it'd be in good times or bad times.
I would I would remind everyone that at the height of the pandemic.
Music consumption continued to increase and new use cases emerge.
No.
Virtually every day.
So our long term outlook.
Remains unchanged and if anything we're even more optimistic.
As Eric mentioned streaming continues to be strong both in established and emerging markets.
And new opportunities are coming online all the time.
Many of the emerging business models that we had talked about at the time of our IPO.
Okay.
Excuse me are now generating meaningful revenue and are growing faster than traditional revenue streams.
I also believe.
That we are better positioned to capitalize on these opportunities.
Because of our our size and our innovative mindset.
We remain committed to long term artist development.
We were early to see opportunities in emerging markets and we continue to seek out find and seize those opportunities.
We are clearly the market leader by way of innovation, we saw it with streaming and now as we see the web three space. We've moved we moved faster and more agile ways that our competitors. We've been the first to set precedent setting deals and we will.
Continue to do so.
So I'm very confident despite all of the craziness in chaos in the world.
That music will continue to be a driving force in our lives and in business till the end of time.
Hopefully that answers your question number one.
Great.
Let me tackle your second question I'll hit a few key points and thank you question on margins. So.
First what we're seeing is something that we fully expected.
Two is recorded music margins actually increased once you adjust for the DSP renewal so on our fundamental operating basis, we're still seeing margin growth, but yes, which is implicit in your question in these results as artist services recovers it.
There is a lower margin business it will cause a slowing or flattening in margin in the short term.
Artist services recovers.
We fully expect to resume our margin expansion trajectory consistent with our plans at the time of the IPO and heading towards mid Twenty's margins. So.
Everything we're seeing is what we expected and you know operating basis, we're still very comfortable with our commitment towards margin expansion.
Great. Thank you for that.
Thank you.
Our next question comes from Ben Swinburne with Morgan Stanley . Your line is open.
Thank you and good morning.
I guess I was hoping Steve or Eric or both could give us some more color on the emerging streaming business that you mentioned grew on a run rate basis this quarter.
Whats happening at a high level with those deals in terms of fixed versus variable and is there one or are there one or two areas. Steve you would really highlight that youre, particularly excited about as you look out over the next 12 24 months.
And then maybe for Eric obviously, Theres a lot of concern in the market about the economy than just sort of macro headwinds could you just remind us again at a high level. How you think about your revenue base in terms of what might be exposed to the economic cycle versus just sort of underlying growth tied to subscriptions et cetera. Thank you both.
Sure.
I'll start on the emerging streaming fixed versus variable question.
So.
It is absolutely something that we've been working with our emerging streaming partners note that we literally have hundreds of licenses with many different categories of products and services. So it's not a one time thing, but we are.
One thing just to set the table emerging streaming platforms are generally services or products that are multi media music is incorporated into the product critically central to their products, but it can be music paired with video music paired with a game music paired with graphics or some other social or.
Fitness multimedia product.
Working we have been encouraging and working with these.
Partners with them to develop the systems and capabilities to report on music on a screen by screen consumption detailed basis that allows us to have truly variable deals.
As they develop those capabilities. It is our intent to negotiate variable deals tied to revenue are consumption whatever the right variable is and we're moving towards that.
In this quarter there were no major renewals smaller renewals, but not major renewals. So we continue to work towards that and what I will say is it will take some time different companies are making different degrees of progress on developing the systems capabilities to track music on a stream.
Stream consumption basis, so it's not going to be a moment, but a process that we're working with over time.
Hopefully that answers. Your first question what I will say is that we are incredibly excited about what we're seeing.
Do you see this.
Focus of our partnerships on web three type capabilities, whether it's in Ftes.
You know avatars.
Games that can be you know installed within a matter versus.
We think there's an extraordinary amount of opportunity to be developed there we want to develop a long term business models.
Not one offs that come and go and can't be sustained so we're working on a series of.
Projects and experiments with various partners that we've talked about.
And so a lot of our artists are interested in exploring this field Steve mentioned several in his talking points by Kevin Gates. So we're very.
Excited about this as a future a new avenue of growth and we're really working very hard to be innovators in this space.
On the macro economy side, what I would say is that.
Music is a cornerstone of People's lives. We think music is has the expectation we have the expectation that will be incredibly resilient even as.
As macro economic challenges emerge, we think it's different than other forms of streaming focusing on that for a second and other forms of streaming people generally have.
Video multiple streaming services each of which have different <unk>.
Content and people can.
Decide which one they value more than another streaming service and audio people generally have one streaming service they subscribe to which is all the music.
Aggregated into one place we think it's a very.
If you will fairly priced if not even low price high value service, that's central to People's lives and so we think what we've been seeing and what we.
I expect that'll be incredibly resilient.
There and so we think music and the innovation of New digital services represents our continued growth market for music as we look forward despite macroeconomic challenges and.
We've been seeing that so far that said.
We continue to monitor everything that's happening.
In the world and in the economy to look at areas. We can continue to get more efficient areas, where we should be focusing resources to drive the best.
Revenue growth and value creation, and so we continue to be mindful and focused on a changing and complex world.
Still extremely optimistic about the growth vectors of music growing forward.
Thank you.
Thanks Ben.
Our next question comes from kind of morale with RBC capital markets. Your line is open.
Good morning, and thanks for taking the question I was hoping to dig into streaming revenue trends and your expectations for the back half of the year.
Underlying growth that recorded music at 15% in Q2 was fairly healthy.
Looking ahead do you view, the mid teens growth rate as being sustainable and is there scope for a potential acceleration off of the 15%.
For my end looking at the different components. It seems like subscription streaming revenue growth will presumably stake in the high teens range and then you just reported in Q2 AD supported streaming growth should maybe normalized closer to that high teens increase at subscription as well as you shift away from that true up payment comp from last year.
And perhaps there are new deals with emerging streaming platforms as well after a relatively quiet quarters.
And maybe that could help bolster overall screening breadth. So I know that you don't provide guidance, but is this the right way to think about the trajectory for the back half of the year or are there any other puts and takes that puts and takes that we should be mindful of.
Thanks cooking.
I think that was a.
Quite thoughtful kind of statement certainly we don't give guidance. So what I would say is this quarter.
Our fiscal Q2 subscription screaming continued to grow high teens fundamentals of that business.
We see are incredibly healthy we see penetration growth.
Opportunities in both developed and emerging markets around the world.
Spotify has had success with their price increases their constant currency. Our crew went up 3% I believe in this quarter.
Continue to be encouraging of others to look at pricing as an opportunity to.
Improved economic performance of streaming so we see streaming as being very strong the emerging.
<unk> of streaming and what we're starting to see and web three point, though it gives us a lot of enthusiasm as well going forward.
On the AD supported side Youre right there was that.
True up in the accounting of that this quarter that caused it to have.
Lower growth that this individual quarter, but the fundamentals of AD supported streaming growth remained very healthy and we had seen in and fully expect to continue to see AD supported streaming growing in line with subscription streaming on a fundamental basis. So we feel very good about the streaming platforms.
Our growth and the opportunities going forward absolutely.
That's great. Thank you so much thank you.
Our next question comes from Andrew <unk> with Jefferies. Your line is open.
Yes, hi.
Could you talk a little bit more about the catalog environment.
And the impact interest rates can have there are there are a lot of catalogs out. There are there are a lot of sellers are there a lot of buyers can you just talk about the competition there and the impact of interest rates are rising interest rates could have on.
Today, I'll, let price so those catalogs.
Yeah.
Sure.
Hi, Andrew I appreciate the question so.
Look there have been and I think COVID-19.
Impact on artists ability to tour, certainly and lower interest rates created an environment, where a lot of artists were interested in exploring the sale of their catalogs.
As artists are able to tour again, and additional revenue streams come back to artists.
And as interest rates rise, which could.
Cause potential buyers to just annualize the math with different discount rates and come up with lower values could cause things to change over time.
Obviously interest rates are projected to go up over time. So we don't think there is a moment, where either catalog values will change dramatically or artist interest in selling will change dramatically, but over time.
Those changing dynamics could it change the equation both for buyers and sellers in the short term, we do expect more catalogs to come up for sale.
We will do what we have always done which is we analyze them on an opportunistic basis.
It's a strategic fit and well priced we will consider doing deals.
But we don't feel any pressure to do deals we have many ways to invest capital to drive growth both organically through M&A launching in new markets.
Acquiring labels.
And acquiring catalogs theres many different tools that we have and we will continue to evaluate the market and do deals where appropriate.
And and work to make sure we're investing our capital with financial discipline to find the best.
Returns for our investment and to drive the best growth profile going forward.
Got it. Thank you guys. That's all I have.
Thanks, Andrew.
Our next question comes Michael Morris with Guggenheim. Your line is open.
Thanks, guys.
Good morning couple of questions one.
Eric you just touched on this but I'm curious if you could expand on thoughts on the return of Turing and the impact.
Impacts that could have on the business.
We know about the margin dynamic, but I'm thinking more like topline impact.
First of all do you think it's just kind of a return to sort of the prior environment or are there any reasons to think that sort of touring and an in person in our activity can be something bigger.
And then sort of a post COVID-19 world I'm also curious whether you think that the ability to have live performances can impact streaming or just kind of appetite for music enthusiasm etcetera.
So that's the first question and then the second question along the lines of the acquisitions.
As you think about the geographic expansion that you've also been embarking on and.
Supplementing with acquisitions what are your thoughts on.
Expanding the footprint further from here versus where you currently stand thanks guys.
Sure.
Just writing down that was there's a lot of question Michael.
No problem that's great.
The return of Turing It certainly will be interesting there'll certainly be some dynamics that change around the tour. So I would expect social to be a great promoter of tours around the world artists and labels.
Partnerships, using social applications to build buzz and momentum.
We would expect of labels and artists to be working together to create surrounding.
Surrounding opportunities around tours, where in the past the tours with merch now it'll be tours merch and there may be web three applications to create micro communities.
That are giving in ftes and special opportunities.
And those kinds of things I think are going to become one experimented with in the short term what works what the fans really love what did they respond to obviously at some level. What monetize is so I think we'll start to see experimentation and those areas. Both the brown the release of new music, but also.
Round tours, so I think there'll be new kind of dynamics that are exploring new norms that develop over time.
For the Warner Music Group, obviously are the services business has a significant portion that's tied to touring we have several concert promotion business in Europe in France, and Spain. For example, we have a tour merch business in the U S and as Turing comes back as we're seeing this quarter those revenue streams start to come back in.
And that's a very healthy thing again, they're lower margin businesses, but there are positive to overall margin, meaning not the margin percentage, but it's incremental dollars on revenue and OIBDA. So we're thrilled theyre coming back it's an important part of the music equation and it's healthy that artist services recovering and show signs that obviously that the economy.
Is it starting to get back to something more normal post COVID-19.
On the M&A side.
Certainly what we focus on when it comes through geographic expansion.
The emerging markets, we have always been a company that focuses on return on investment we have been cautious not to overinvest in emerging markets.
<unk> streaming and legitimate revenue streams are able to really drive growth.
Those.
Fundamentals are in place we.
Or are starting to come into place we start to focus on developing our capabilities in those markets and we've done it time and time again over and over again in the past few years in Turkey, and the middle East in Vietnam before that in China.
Indonesia, and Brazil and Mexico.
We're now looking at a series of areas that we're really excited about Steve mentioned Mena Middle East North Africa, which is the fastest growing region in the world I think it grew 35% or so last year we.
Recently acquired kind of what's the largest music distributor throughout the middle East we launched.
Organic label and owned and operated label and the mid East roughly.
Roughly three years ago to get started and build relationships. We develop the partnership with Rotana one of the largest labels throughout the middle East So our capabilities our infrastructure our music that we're putting out and how we're monetizing in the middle East is changing really rapidly we're a significant player.
There and we've got a similar mindset in Africa, where we acquired after Corey where we did.
<unk> developed a partnership with chocolate city, one of the most significant labels in Nigeria and have been released and great music and <unk> that came out of Africa.
Had a global hit earlier this year so.
Those are two areas in the world that we're starting to see monetize and we're leaning into heavily but obviously, there's other markets in Asia Latin America that we're continuing to lean into as well.
And we're very excited about the continued globalization of music, we see it as one of the really meaningful growth vectors.
Sure.
Great. Thank you Eric.
Thank you.
Our next question comes from Matthew Thornton with choice. Your line is open.
Okay.
Hey, good morning, Steve and Eric maybe two quick ones. If I could you touched on Turing, but I was wondering maybe if you could touch a little bit on the E&P business, obviously I would assume that it had some benefits.
During the Lockdowns and pandemic I'm curious how that's.
For me as we kind of have opened up and continue to open up any color there would be helpful.
And then just secondly, Eric you talked about you know cash conversion effectively a little bit early I'm, just kind of wondering if there's a.
A number we should think about as we think about conversion from adjusted OIBDA to free cash flow again barring any.
<unk> is there a way to think about what a.
Normalized number it looks like there are any color would be great. Thanks, guys.
Sure So EMP.
You're absolutely right. So E&P was a major fitness I hate to say beneficiary during COVID-19 that doesn't sound like a phrase that should come out of someone's mouth easily, but but e&ps business grew maybe I'll say it that way.
On accelerated basis during Covid, there were quarters, we were discussing 30% plus growth.
It just had a significant pull forward of e-commerce businesses benefited.
From peoples you know.
Desire to stay home and not go in public spaces to shop or other activities.
This year, we're seeing E&P much more of a level off if you will and that's not because we don't think this is a long term growth business. We do we believe very strongly in E&P, but some of the dynamics won the pull forward of the prior year, but to some of the supply.
Chain disruptions in the World have created a challenge for E&P getting the products they've ordered on time.
They need and that has caused the challenge they have been incredible leaders in working through those challenges in getting those resolved, but that has been a challenge with many companies around the world M. P is not.
Divorced from that and quite frankly, the b or in Ukraine has been.
A challenge as well I think the climate in parts of Europe .
Have been much more cautious and there's just less of a <unk>.
Environment for people to be shopping for kind of lifestyle goods. So.
E&P continues to do fine, but its growth trajectory is definitely in the short term leveled off.
But we're very excited about E&P in the longer term, we just have to get past this moment.
Which we will.
And then on the cash side, what I would say is kind of.
Kind of two pieces first and foremost, we're very focused on growing our business and as our revenue and OIBDA grow our fundamental operating cash flow, but we fully expect to grow with that however, we have a waterfall of how we deploy our capital in the <unk>.
Part of our waterfall is evaluating ways to reinvest in music to continue to drive future growth. If we find opportunities that meet our return thresholds. Our first priority is to deploy our operating capital our operating cash flow into driving future growth if it.
It's the high return threshold that we have second our second step in the waterfall is to return cash to shareholders.
Third would be to pay down debt, we haven't done that in quite some time, because we have found ample opportunity to invest in music to drive future growth.
When we invest in driving in music to drive growth is generally in the form of advances advances are recoupable. So even if our cash flow in an individual quarter.
<unk> is down because we are laying out advances. Please remember that's just timing as our music performs we recoup those advances and so it really comes full circle. So we are opportunistic quarter by quarter based on the deals we see in the market. If there are deals that are accretive.
Two growth and meet our return thresholds.
We are.
More than happy to deploy our capital to accelerate future growth, especially because our advances are recouped in time as the music performance hopefully that helps method.
Thank you our next question from Jason Bazinet with Citi. Your line is open.
I guess over the last couple of months the market seems to have moved from Rav multiples and gross profit multiples.
Our multiples down to earnings and free cash and through that lens I just wanted to ask a quick question about cash from operations.
It seemed like it was.
Your cash generation is pretty muted I guess through the first half of the year, but.
It seems that working capital is almost always a drag in the first half and tends to reverse in the second half not always.
But can you just maybe it's related to the topic, you've just talked about advances, but can you just elaborate on that a bit and is there anything different.
But you can anticipate.
This fiscal year versus the last few fiscal years, we've seen reversal.
In the second half.
No Theres no again, the deployment of capital for advances is really opportunistic doesn't necessarily have its the timing of deals theres not really a seasonality to that there are parts of working capital that are seasonal bonuses are paid in the first half of the year. For example, so you see.
See that as a drag in the first half of each year and then the benefit of a recovery in the second half of the year.
The timing of when DSP deal to renewals is not.
Seasonal is just based on the timing of deals and when they renewed so a lot of it is just based on the timing of deals which is hard to predict but there are a few things like bonuses.
That are more of a drag in the first half of the year than the second half Jess.
Thank you.
Thank you.
Thank you. This concludes the question answer session I would now like to turn the call back over to Steve Cooper for closing remarks.
Thanks again, everyone for joining us today, we appreciate.
All of you taking the time.
We hope you have a.
A wonderful spring and summer and we will talk again in a few months.
Stay well and stay safe. Thank you again.
This concludes today's conference call. Thank you for participating you may now disconnect.
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