Q2 2023 Warner Music Group Corp Earnings Call
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Welcome to Warner Music groups second quarter earnings call for the period ended March 31 2023.
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.
Yeah.
Good morning, everyone and welcome to Warner Music groups 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 , Robert Kintzel, and our CFO , Eric <unk>, who will take you through our results and then we'll answer your questions.
Before our prepared remarks I'd like to refer you to the second slide of the earnings snapshot.
Mind you that this 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 and 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.
So 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 or expectations beliefs and projections are expressed in good faith.
And we believe theres reasonable basis for them.
However, there can be no assurance that management's expectations beliefs, and projections will result will 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 Robert.
Thanks, Karen and good morning, everyone.
It's been four months since I joined Warner Music group from Google and I'd like to talk today about some changes we've made so far and shed some light on what's to come but first let me give you a summary of our Q2 results.
As expected on our last earnings call some of the macroeconomic currency and release slate headwinds from Q1 carried over into Q2.
As a result total revenue grew 5% and then.
Adjusted OIBDA increased 8%.
Recorded music revenue increased 3% and streaming grew 2%, reflecting ongoing weakness in the AD market and modest growth in the United States.
Music publishing had another impressive quarter with revenue growth of 15%.
Our strategy at Warner Chappell continues to deliver long lasting relationships with a wide array of global and local talent, while expanding our services to song writers and creating new opportunities for catalog.
This quarter highlights included our creative partnership with Belgium Superstars.
Max contributions as a co producer of bad bonding his latest album and 21 savages collaboration with Drake on the number one album her loss.
I promised I would be direct with you. So I'll simply say that while our results in music publishing we're best in class. We underperformed in recorded music there is plenty of room for improvement.
And we're addressing both company specific and industry wide issues.
As we signaled we have had two consecutive quarters, where our release schedule was less robust than normal.
That is now changing with the slate we have planned for the remainder of 2023.
The early results are promising with new releases from the likes of it Sharon Jack Harlow and TSM.
I will give some more details later on.
While we are optimistic that our second half release slate will drive better results in the second half this recovery may be gradual during the balance of the year.
Overall, we're confident in our ability to return to a better cadence of releases, which should lead to more consistent results.
At the same time, the music industry continues to morph, creating some risks and even more opportunities.
<unk> questions around the future of the streaming model and the rise of AI.
Only increases our conviction in the tech enabled strategy that will differentiate it Warner music group.
On our last earnings call I said that we will be reallocating resources to accelerate our use of technology to empower artists and songwriters as well as drive greater impact and efficiency in our business.
In March we made some tough but necessary decisions.
We announced.
Approximately 4% reduction in our workforce that will yield annual savings of $49 million, we will see approximately $20 million of savings in the remainder of this fiscal year.
To be clear that this was not straightforward cost cutting will be reinvesting a significant portion of these savings into new expertise and tech initiatives that will drive companywide benefits in the coming years.
I want to frame for you, how we're going to position Warner Music group for long term success in a highly proactive fiscally responsible way.
The demand for music is ubiquitous and.
And that's the use cases multiply the opportunities on the horizon are bigger and more wide ranging than ever.
Many of the key ingredients for our long term success already in place, we have incredible artists and songwriters and one of a kind Cadillac of iconic music.
We have the expertise resources and reach to both artist careers and brands.
But having said that I don't underestimate our challenges either.
Pace of changes faster the competition for talent is fierce where the world is growing noisier and attention spans are getting shorter.
If we are to maximize our opportunities and solve our challenges we need to add great technology into our mix and it can be tools, we borrow from someone else.
Got to be proprietary central part of our value proposition.
Technology can be a force multiplier a force multiplier for the skills and capabilities of our team and service of our artists songwriters and our catalog.
It's going to happen overnight, but long term, we're looking at music and technology of the twin engines of our success.
I'd like to tell you a bit more about our plan.
Starting as always with the music.
Today, the majority of the music industry as revenues come from a relatively small fraction of the world's population.
That makes growth potential in emerging markets enormous.
This March <unk> released a list of fastest growing recorded music markets. I was pleased to note that we've been expanding our presence in these regions for years by appointing new leadership opening additional offices and partnering with influential local players.
The recorded music industry's fastest growing region in 2022 with sub Saharan Africa jumping 35%.
It's an area that's full of incredibly diverse dynamic music cultures, and we've been steadily ramping up our anr activities.
There for the past five years.
Key moves have been concluded acquiring africa's leading independent distributor after Corey at the start of last year.
We know content for market leadership.
Even by the success of artists like CK Burnup Boy Mastic AG, and then <unk> as well.
The next three fastest growing regions for the recorded music industry in 2022, where China up 28% up 24% and Latin America up 26%.
In both China, and Mena, our revenue growth outperformed the market in Q2 and in Latin America, we're taking the necessary steps to catch up and gain share.
We have a great story to tell about how we're enhancing our profile in each of these key regions.
China One of music group has led the way as far back as 2014 by acquiring the gold typhoon catalog and by being the first major music company to partner with Tencent.
In Mena, we established a regional office over five years ago.
And we since leapfrogged, our competitors through deals with Rotana and kind of what.
In Latin America, we've rejuvenated, our Anr strategy, our breakout audits include Mexico's young Lucas.
Who is currently the number three on global Spotify chart.
We're also looking to expand our presence in fast growing genre. This April the annual report for the International music comment reveals that the dance music industry generated revenue of $11 3 billion in 2022, an increase of 34% from 2021.
We're fully primed to capitalize on this trend since 2017, we've acquired spinning records launch new labels, including major recordings and the U S and wed records in Asia and partnered with dance Music Legend, Patrick Moxie.
In 2021, we acquired the Cadillac of print Superstar DJ producer, David get up and sign a new deal with handful future recordings Amazingly David released its first album in 2002 was the most streamed dense artist in 2021 2022, and so far in 2023.
On technology, we're still evolving our plan, but let me share a glimpse into my vision.
As the music industry transition from physical to digital it continues to focus on high touch areas. It's always been good at and Underinvested and expect capabilities. These are the capabilities. We're forging here under the guidance of <unk>, our new president of technology.
We're building the leadership team and the culture that will bring an unprecedented level of expertise to the music business.
As we look ahead, here's what you should expect us to do.
Number one create efficiency by enhancing our systems and decision, making so we free up resources for higher ROI opportunities.
Number two.
Increase our effectiveness as brand managers for our artists and songwriters.
Number three grow scale through services for greater range and number of artists and songwriters all on one tech stack.
And number four.
Evolving our products to better monetize the artists and songwriters superfan relationship.
Switching to monetization.
As I've said before music is undervalued. This is something we intend to change in order to create a healthier ecosystem for artists songwriters the streaming services and us.
Recent price increases have been successful and our move in the right direction, but this should be just the first step.
Those subscription services, which have raised prices have done the fiscally prudent thing for themselves their shareholders and the creative community.
There is no sign that they're seeing elevated churn.
At the same time <unk> has started to experiment with different streaming models.
I cannot name all of these services at the deal terms are confidential.
But this is just the beginning and we will continue to collaborate with our partners on new paradigms.
When it comes to generate if AI it needs to be put into proper context framing it only as a threat is inaccurate.
Our first priority is to vigorously enforce our copyrights and our rights of name image likeness and voice to defend the originality of our artists and songwriters.
It is crucial that any AI generated platform discloses what their AI is trained on and this must happen all around the world.
Europe is leading by example, with the EU artificial Intelligence Act the European Parliament is considering amendments, which would codify the position that copyrighted content may not be used to train AI without prior authorization from rights holders and would require AI developers to disclose a summary of the materials that are used to train AI.
As in Europe , all around the world lawmakers are debating AI, but the primary focus has been on issues such as transparency safety algorithmic bias.
Obviously protection noticed the consumers and then the ability to opt out.
Last month Senator Chuck Schumer announces intension to draft a U S. AI Bill coming later this year.
I can promise you that whenever and wherever there is a legislative initiative on AI, we will be there in force to ensure the protection of intellectual property is high on the agenda.
However, we must also see and sees the massive opportunity that generate if AI will also be.
Consider this user generated content containing copyrighted material was originally viewed as a big threat by media companies.
From my personal experience at Youtube.
<unk> in 2010, we were fighting many lawsuits around the world and were generating low tens of millions of dollars from UGC.
We turned that liability into a $1 billion opportunity in just a handful of years.
On a multibillion dollar revenue stream over time.
2022, Youtube announced that it paid out over $2 billion from UGC to music rights holders alone and far more across all other content industries.
AI is just like any emerging technology, there will be challenges and opportunities and with the proper expertise it will be a powerful tool for the music industry and then tend to be there at the forefront on how to best deploy it.
Before I hand, it over to Eric I wanted to say that our strong second half slate has begun to take shape.
On Friday immediately following a victorious outcome in the face lips copyright infringement case lodged against them at Sharon dropped as a claim new album subtract.
The first single ice closed, which you may have heard on our pre call hold music became at 14 number one single in the UK.
The album has already hit number one in 41 countries and itunes while physical preorders have outstripped the numbers for last album in multiple territories.
We're seeing encouraging signs from other recent releases rap superstar check Harlow surprise dropped the new album on April 28, and it's already racked up over 70 million streams, while test release. This new album on the April 21, and quickly when double platinum in Brazil and Norway.
50, 50 is Cupid and young Lucas's Slava remix have been two of the hottest streaming singles.
Releases from across the globe occupy four of the top 10 spots on Spotify Top 50, USA chart with all four coming from outside the U S. Highlighting how we're bringing local artists to global stage.
Additionally, we have new music from duo Lipa, David Guetta level was the verb burn a boy Kelly Clarkson, Thiago PZ, Kay and Bailey Zimmerman and many more in the months to come.
I am very confident in the path forward as we combine creative and marketing excellence with innovation to propel our growth.
Finally in March Eric announced that he will retire by the end of the calendar year. We started the process of searching for a successor.
But we're fortunate that he'll be with us for a while longer I'll give you an update on the search in the coming months.
Now I'll turn it over to Eric to take you through our results and then we will answer your questions.
Thank you Robert and good morning, everyone. Despite the challenges Robert cited we delivered growth in revenue adjusted OIBDA and adjusted OIBDA margin.
Total revenue increased four 6% reflecting growth in both recorded music and music publishing.
Adjusted OIBDA increased seven 9%.
With margin of 24% compared to 19, 8% in the prior year quarter.
These increases were primarily due to higher revenue and lower variable marketing spend which is linked to the timing of releases.
Recorded music revenue grew two 5%.
Streaming revenue increased two 2% as subscriptions dreaming grew in the mid single digits and was partially offset by AD supported revenue declining in the mid teens.
Our streaming results reflect a lighter release schedule and market related slowdown in AD supported revenue.
Physical revenue increased 1% driven by solid performance in the U S.
Artist services and expanded rights revenue decreased by 4% due to lower merchandising and advertising revenue, partially offset by higher concert promotion revenue.
Licensing revenue increased 27%, including growth in brand income and the licensing settlement.
Recorded music adjusted OIBDA increased by 2% with a margin of 21, 8%, which was roughly flat compared to the prior year quarter.
Music publishing continues to deliver impressive results.
Posting 15% revenue growth driven by strength in digital performance and mechanical.
Digital revenue grew 18% the same for streaming revenue driven.
Driven by continued growth in streaming and the impact of digital deal renewals.
Performance revenue increased by 29%, primarily due to the timing of payments from collection societies and the remaining recovery from Covid disruption.
Performance revenue is now fully recovered from Covid, and we expect that growth to moderate meaningfully starting next quarter mechanical revenue increased 23%.
Primarily due to our strong share in physical sales and synced decreased by 4% due to lower commercial licensing activity in the U S, partially offset by copyright infringement settlements.
Music publishing adjusted OIBDA increased 25% to $76 million with margin, increasing 240 basis points to 29, 6% driven by strong operating performance.
In March we announced an approximately 4% reduction in head count that will generate annual savings of $49 million starting in fiscal 'twenty four.
We expect to realize $20 million of these savings in fiscal 'twenty three.
In connection with these head count reductions there were non recurring restructuring charges in the quarter of $41 million for severance costs the cash.
Cash outflows related to these costs will occur through the end of fiscal 2024.
In April we successfully launched certain components of our financial transformation program in select territories.
The program remains on track to meaningfully rollout in a wave based approach throughout the globe and with expanded functionalities during fiscal 'twenty three.
94 <unk>.
Yielding expected annualized run rate savings of $35 million to $40 million once fully implemented.
Q2, capex increased to $35 million as compared to $28 million in the prior year quarter, mainly due to investments in it capabilities.
Operating and free cash flow were both a use of cash in Q2.
Operating cash flow decreased to a use of $6 million from a source of $44 million in the prior year quarter because of higher income and withholding tax payments, primarily due to higher estimated U S taxable income.
The utilization of certain remaining tax credits in the prior year quarter and other movements in working capital.
Free cash flow decreased to a use of $41 million from $16 million in the prior year quarter.
As a reminder, our working capital will fluctuate from quarter to quarter, but our goal remains to deliver an operating cash flow conversion ratio of 50% to 60% over a multiyear period.
As of March 31, we.
We had a cash balance of $601 million.
Total debt of 4 billion and net debt of $3 4 billion, our weighted average cost of debt is 4% and our nearest maturity date is in 2028.
We expect growth to reaccelerate in the back half of the fiscal year driven by a robust release schedule in Q3, we've already had successful releases from Ed Sheeran, Jack Harlow MTS dough.
We look forward to more releases from some of our biggest stars in our next generation of talent from across the globe as we progress through the remainder of the fiscal year.
We continue to position ourselves for long term success, and we are reallocating resources to ensure we evolve our business and a fast smart and accretive way.
Thank you to everyone for joining us today, we will now open the call for questions.
Thank you.
To ask a question. Please press star one on your telephone and wafer name to be announced.
Draw. Your question. Please press star one again.
These standby, while we compile the Q&A roster.
Our first question comes from the line of Michael Morris with Guggenheim Securities. Your line is now open.
Thank you guys good morning.
Robert I would like to ask you.
I'd like to ask you a little bit more about the DSP.
Pricing progression that you touched on in your prepared remarks.
Specifically love to hear your thoughts about Spotify. So you mentioned a couple of your partners, who have already raised price and on their earnings call. Spotify management said that they would like to raise price in 'twenty three but its pending discussion with their music partners. Their label partners. So can you share any insights on your discussion with Spotify.
And if you see a path to collaborating on on the price increase there.
And then secondly, if I could Eric as we think about the stronger release slate in the second half of the fiscal year can you help us with how much you think the key categories of recorded music revenue.
Streaming revenue in particular will be impacted relative to the first half. Thank you.
Alright. Thanks.
Thanks, Michael.
So on the first part of your question.
There is no real update that I can provide you because those discussions are private obviously.
When there is some update I will make sure to share that.
But what I can tell you is this which is one of them.
Excited that they are sounding constructive publicly about the price increases on the earnings call.
But more importantly.
Actually I think it was you who published a report that the price increase would result in 1 billion Euro uplift in annual revenue for Spotify in 2024.
Which obviously.
As quite.
Positive and accretive.
So clearly that will be a win win not just for Spotify in us, but also for every DSP if price increases happen.
That's really.
I'll have to say about that at this point.
So thanks.
Thanks Robert.
Good to talk to you Michael So on the kind of relief plays in first half versus second half and the impact I think we feel as we've said and signaled before our release slate was a little lighter in the first two quarters of the year and we'll be quite.
Weighted towards Q3, and Q4 as we said on the call. We already have some releases out Q3 share in Jack Carlo <unk> that are already showing strong results with a lot more to come we have the Barbie soundtrack, featuring do or Lippe, which we're excited about BP Rexam music David.
Charlie Puth.
Young Lucas Mexico as the top three Spotify hit we can keep going and going the point is that the releases are there and.
In the second half is looking quite strong.
Absolutely expect this to improve our results in recorded music streaming in the second half of the year and this would likely create uplift in both streaming and physical those two categories. One that would be most positively affected Michael.
Thank you Bob.
Sure. Thank you.
Thank you.
Our next question comes from the line of Ben Swinburne with Morgan Stanley . Your line is now open.
Thanks, Good morning.
Robert with another quarter under your belt, there I'm wondering if you could update us a bit on some of the technology opportunities you see at the company and sort of where you think the biggest I don't know if it's efficiency or.
Our optimization potential is as you've brought on a new team and sort of worked for at least another quarter on on building out systems at Warner.
And then.
You guys I think made a comment in your prepared remarks, you expect a gradual recovery in the second half.
I mean do you think that that we should be assuming that the major labels are growing slower than the industry on a go forward basis because of just the grosses of independence, maybe throw in some AI generated music and there maybe the sort of regional skew towards.
Non western markets is that the right base case assumption, because obviously, we've sort of seen.
Results across the major labels kind of lag Spotify on a revenue growth basis and I'm curious do you think maybe that's the right assumption going forward.
Those are our two divisions. Thank you.
Thanks.
So on the <unk>.
Japan I think in my opening remarks, I highlighted the four areas that technology will impact Warner.
100% focused on efficiency.
There is a lot that we can achieve using technology on that front.
100% focus on effectiveness.
All of our activities scale.
Focus on monetization of Super fans. It is.
Every area of our business that I look at can use technology as a force multiplier. So what we're what we're doing is we've recruited the initial.
Our team of analysts technologists.
Which are unprecedented in this music industry.
And we're having an incredible momentum with hiring more and more people of that type that want to come here and be part of what we're doing.
And at the same time, we're looking at all of the activities inside the company all the projects and see how we how we apply them against the four areas that I was talking about.
I think this is incredibly exciting.
And I like to say is that we have to constantly parallel process and everything. This is the greatest example were parallel processing and for four different areas with technology.
What's even more encouraging is that.
The music part of company is.
Embracing it like.
Yes.
Most will coming sense, because everyone sees what a force multiplier. This can be on all of our activities that we do developing artists and marketing artists and songwriters. So.
It's an exciting journey to be part of it.
The.
And I can't underscore enough how unprecedented thesis.
But obviously time will we.
We'll have to prove it through our products that we ship in our actual delivery. So I prefer actions speaking louder than words, so I look forward to at some point in the future be actually prove that.
But I'm incredibly confident about this.
Sure.
Second question on major and sort of non western markets.
So.
I'm just about four months in on this.
So I'll reserve any sort of absolute statements on these things because there is.
There's still a lot to unpack.
What I can tell you is that.
Music is far more global than it's ever been and what I mean by that is that it comes from everywhere.
The rise of <unk>.
Local music in markets all around the world.
Is undeniable I've seen it from might see that Youtube.
For many years.
I'm glad that Warner has been investing.
Over the past many years.
Alongside this strategy I highlighted some of that in my opening remarks in middle East.
And other China and other markets.
<unk>.
And I think it is an incredibly exciting time for music because of that.
As it relates to Linda.
Leaned into it obviously.
I'm Barry.
Very focused on making sure that we succeed all around the world not just with distribution, but with sourcing a cough and discover new talent.
And helping them.
Become global.
Globalstar Global Superstars.
On majors versus Indies.
Think I touched on this on the last earnings call.
Obviously, as there's more and more music being uploaded that can put some pressure on us, but all the same tools that everyone that has at their disposal are the tools that we have at our disposal. So I would not go to any foregone conclusion on long term market share loss.
Yes.
Thank you very much.
Thank you.
Your next question comes from the line of Sebastiano Petti with Jpmorgan. Your line is now open.
Hi, Thanks for taking the questions I just wanted to see if you could touch on.
Some of your prepared remarks the investments in.
<unk> capabilities in the tech enabled strategies I mean, what is the glide path as we look at capital expenditures. After the implementation of the financial transformation program should we expect a step down in fiscal 2024, although there may be some of these initiatives with some of these programs and reinvestment of cost savings that will.
Still be felt inside of fiscal 'twenty four perhaps beyond.
And then.
My second question just on the Warner Chappell, obviously segmented.
Hey, OIBDA growth very strong in the quarter streaming you talked about in your prepared remarks, just the strong execution there.
Hey, OIBDA growth very strong in the quarter streaming you talked about in your prepared remarks, just the strong execution there.
Your impact perhaps.
Some of the underlying drivers of that growth how should we think about the <unk>.
Segment gross from here on a go forward basis, any underlying maybe one offs or comps that are impacting the recent kind of growth rates. Thank you.
Alright.
Eric I think he is better suited to answer Hey, Eric Thanks.
So.
<unk> great to talk to you again.
On Capex I would say a few things so.
We are absolutely.
Kind of with Robert and the Tech team developing we'll call. It the updated plan that shows increased investment in tech and tech capabilities to drive the business forward. So has our financial transformation starts to wind down and costs come down.
I read recently, we expect that our tech investment and Capex costs are higher than they were historically.
So whether that yields to something that stays relatively flat, but I would expect it to be a $100 million or more of the exact numbers over a long term plan will come out as we finalize our strategic plan and the financial plans that goes with it which are still in flight with Robert <unk> and the new teams still.
No.
Helping to plans forward, so I think more to come but certainly there'll be increased investment in technology that said.
Some of the cost measures that we've taken specifically the head count reductions, which is the new January .
$49 million of savings in fiscal 'twenty, four and annually thereafter.
<unk> is for the technology cost to basically be funded by other cost savings measures.
Incremental.
So the business. It is just a reallocation of resources to where it could have more impact.
And drive growth and efficiency in the business so.
Plan and details are in flight, but the strategy is clear and already taking place.
On OIBDA growth Best Jana I think it's fair as you look at the business to say that.
Our first half of the fiscal.
Fiscal year had a lighter release schedule, which meant that it was very imperative for us to be managing costs very tightly and prudently looking at every single line of the business, whether its overhead marketing to make sure the costs being spanking and what was deployed was having impact in the market and because of that.
We managed our margins and our OIBDA growth and EBIT growth quite carefully and we're able to deliver solid bottom line growth and obviously, we will continue to manage the business with financial discipline, but as we look at the second half of the year.
Appointment in the market of a significant amount of high end music you should expect us to support that with marketing appropriately to continue to make sure we're driving the impacting growth in the business, but we'll continue to look at all cost lines to make sure we're driving opt.
Opportunity for OIBDA growth and.
We continue to focus on driving the business for margin growth over a sustainable period of time that said, if we look at specific business lines on recorded music I would look at opportunities to improve streaming growth in the second half of the year.
Sync, which has been affected by the AD market downturn in the production of commercials will be looking carefully to see how the economy responds.
And how AD markets in commercial production response.
We'll be very close to that market and if there is an opportunity to reaccelerate that growth like we did in 'twenty, two we'll be pushing that pedal hard.
As we look at the publishing side of the business Warner Chappell has continued really solid teens growth and we expect <unk> to continue very strong growth I would say on Warner Chappell two things one is that the performance line, which has had outsized growth because its recovery.
Covid has taken multiple years.
At the end of its recovery line is about where it was pre COVID-19, we still expect that to be a growth area, but at a slower pace, but digital specifically driven by Vic screaming market growth, we continue to expect to see which and streaming is now our largest revenue line by far and Warner Chappell, we expect that to continue.
With strong growth trends going forward driving the market and the effective strategies of the chapel management team, which have been outpacing market growth in streaming. So we see a strong growth profile going forward for Warner Chappell and opportunity for acceleration of queue lines on record.
Thanks Best Channel.
Thanks, Eric.
Yes.
Thank you.
Our next question comes from the line of Benjamin Black with Deutsche Bank. Your line is now open.
Good morning, Thanks for the question.
Thank you.
Spoke a lot about technology, but UMC have been very vocal about the need to sort of need the funds.
The DSD model is the one that's not that's more artist centric. So I was curious what are your thoughts on the way the model currently constructed.
Do you think there is need for a change and if so.
How would you like to see the industry evolve and then one on <unk>.
Advertising it would be great.
On the advertising backdrop.
But you are seeing in early April are you seeing growing stabilization and the latest.
As the AD market dislocation impacted the pace of your emerging platform deals.
Many of these are tethered to the end market. Thank you.
So on the DSP model.
So I think I've said publicly.
A few times.
I am convinced.
Various numbers backup that music is significantly undervalued.
For instance relative to streaming video.
Roughly 50 cents on the dollar by multiple different analysis.
Or versus inflation et cetera.
So it is undervalued.
When I look at that I start thinking about like what are the underlying causes of that.
A great example of that is my own work at Youtube.
Sure.
Over the course of five years, we have increased the price of Youtube TV subscription by 100% and we have not increased the price of Youtube music by 80%.
People.
Two completely different decisions two completely different outcomes and by the way both businesses grew very successfully.
Sure.
And the cause of that is the structure of the agreements with DSP.
That structure was really really good for the industry.
It has taken it from.
Our low point to an incredible a recurring revenue stream all around the world with massive amounts of people and.
Payment instruments on file premium experience personalization all of that.
And then has rebuilt the business, but it does not mean that it is the right thing for the next 10 or 20 years. It has to change and it will change.
The one of the reasons for that is that there is not a real incentive for price increases.
That you see in every other industry.
But the other is that.
Every stream is valued at exactly the same way.
That doesn't seem like.
Something that's aligned with the way the World works for instance in sport Lebron James earns more money than some of his teammates not because he plays more hours per day place exactly the same number of hours.
Yet he earns more <unk>.
SPN comments more money per subscriber per month.
The TV channel.
Not because it is consumed more those propensity debate there as users users.
Willingness.
To remain with the over all services et cetera.
So it can't be that at Sharon stream is worth exactly the same thing that a stream of rain falling on the roof.
I think you are catching my address.
Where I'm going I think we Havent Misally model at this point now that the industry has.
Is healthy.
Has grown incredibly well I think it's time to.
Reevaluate, how we're licensing to dsp's do it together with them.
Because these are there ways to make all of this win win.
But.
It cannot be the only industry.
That doesn't assign value to high value artists and songwriters.
That it doesn't drive ARPA growth the way every other industry does.
So im not trying to limit the volume of content I understand thats important for personalization and choice on look at to change the value equation.
Way it works today, and putting new incentives, but it's too early to talk about any other specifics, but can imagine it is one of the top priorities for me personally.
Personally to change.
And I'm happy to take the advertising one.
So Ben on that one.
I guess I would say, we're seeing some positive signs, but I would continue to be cautious I think in calendar Q1.
We saw Youtube and meta have some improved results.
I think as we've talked about a stronger release schedule in the second half of the year.
Gives us optimism that advertising has the opportunity.
To do better in Q3, we will start to.
Have easier comps as in Q3 of 'twenty two is when the market started to soften and then in Q4 'twenty two is when it softened.
Significantly.
So.
We are optimistic more optimistic going forward, but I would also say that in prior quarters, we've seen stronger month or two and then a month that has been much weaker within a quarter. So I think we won't see a pattern of improvement before we really.
I believe that the market has stabilized, but there are some signs of improvement out there and with our stronger Ruby scheduling easier comps I think we feel.
Much better about the second half of the year than the results from the first half of the year on advertising.
Great. Thank you.
Okay.
Thank you.
Our next question comes from the line of Rich Greenfield with light shed partners. Your line is now open.
Rich Greenfield your line is open please check your mute button.
Hi can you hear me sorry about that yes.
Sorry about that Robert.
I just wanted to expand on your last answer Robert because I think it's so important thinking about sort of the future of this industry.
Part of the issue at Youtube TV as you had obviously a lot of legacy cable companies that we're charging 100, plus dollars a month versus a much lower price even a lot of dealing in order to grow price as a low cost new entrant with the music industry, you sort of have everybody sort of at the same price point within a dollar against everybody.
But you don't have anybody you don't have a lot of stealing sort of grow and so.
And we're even seeing people, who had sort of like new ideas you saw <unk> come in and they just got rid of their AD supported service and go sort of subscription only.
How do you think about the evolution like should this be a hybrid model of advertising and subscription should there be more of an advertising only model of subscription only.
What do you think of the future of the what's the business model of music look like in five or 10 years that you think we're moving towards.
So I think I think there are two different things one is sort of the user experience on the value proposition.
Which is I think more what you're attaching on and then there is the sort of wholesale relationship between us and the DSP.
So what I was talking about previously it was the change of the wholesale relationship.
<unk>.
As necessary.
Going forward.
But I do think that evolution of the <unk>.
I'd say the retailer relationship between the DSP and the users is always open.
I think dual revenue stream models are great.
I think you always need a premium version as well, obviously, we've experimented with all of that that Youtube.
I do think the experimentation with paid models adds and it is also important obviously, we've seen that with Hulu successfully as they are most adopted here despite having a completely AD free option. So I think I think.
Innovation around the use cases for users is important because it basically helps us optimize.
Audience segmentation right along different price points and different <unk>.
100% open to exploring all of these things with our partners, but what I'm trying to stress.
Is that the status quo of the way things work right now.
Is not something thats going to work going forward.
And I think.
Just to dig in on that is the issue that the way the wholesale relationship works makes an advertising business model or other hybrid business models not as appealing is that what youre, essentially saying needs to get fixed by changing wholesale you enable new retail models.
Uh huh.
Yes or no.
One even if nothing changed on.
On the user proposition.
The wholesale relationship has to change because today it does not increase.
It does not.
Incentivize price increases.
And as <unk> seen in every single subscription service, whether it's fitness services video services anything have increased prices over the last five years significantly other than music.
That's probably the only adjustment that hasnt other than the 10% price increases last year.
<unk>.
I know last few months.
That's one.
That is not actually incentivized in the current agreements it's actually the opposite.
And two it values every single piece of content exactly the same and that is not how the world works that is not how media works that is not how sports force how anything works so those things.
We'll change the.
What youre getting at is the user.
Proposition, which also requires.
Changes in our relationship with the DSP.
And open to that too open exploring that as well so that it can be yet additional model too.
<unk> segment and figure out a way to provide yet traditional option to users that is driving.
<unk> increased our pool versus another segment of our industry.
Our revenue streams.
Thanks very much.
Thanks, guys. Thank.
Thank you.
Next question comes from the line of Steven last check with Goldman Sachs. Your line is now open.
Hey, Thanks, good morning for Robert or maybe Eric It sounds like international is one of the more attractive areas for you to invest capital at the moment I'd be curious if you could update us on your view on the return profile of investments in international markets compared to some of the other areas, where you could perhaps invest capital today.
And then looking ahead, how much capital you think you can manageability invest in international markets over the next few years any thoughts there would be would be great.
Hi, Stephen So we continue to focus on multiple ways to invest in the globalization of our business, obviously, our anr marketing spend.
We continue to help drive local music and markets around the world.
We also have to look and selective.
M&A acquisitions and investments in key markets around the world, especially in emerging markets that help us build market share in markets that are fast growing and as I like to say kind of coming online and coming of age with streaming and so whether that's.
Investing in Rotana or.
Acquiring <unk>.
In the mid East, which has given us significant market share growth in the mid east the neighborhood of 20% or after Corey, which we acquired last year in fast growing African market, which is I think the fastest growing in the world. So we continue to look at.
The globalization and specifically emerging markets as a way to.
Supplement the development and growth and expansion of our market share in fast growing markets around the world that have the opportunity for strong IRR, so as far as our return on capital.
We look at them similar to how we look at any other deal. Obviously, we look at double digit returns as our threshold, we do look at the risk of deals.
And the likelihood of them paying off and making sure that we have a strong return profile overall of the company has a high teens consistent delivery of high teens return on invested capital. So we keep that in mind as well, but the investments that we make are supportive of our ROIC.
How much we invest I would say it's somewhat opportunistic.
We do not have a specific pool of capital to deploy in the globalization of our business specifically through M&A. We are looking at kind of markets, we see as high growth and we look at that.
Kind of build versus buy trade offs and in some markets, we build organically and <unk>.
Some markets.
See acquisition opportunities, which can accelerate the development of market share.
On capital, but the deal has to be right. The management team that we usually the vast majority of times wants to stay with the business and help build out our business has to be a good fit.
For our company and want to stay and be part of the Warner Music group. So it really is flexible.
Two what the structure is but we're very focused on developing emerging markets and have done so and will continue to do so going forward, which supplements our growth and help increase the reach and diversification of the business.
Thanks, Steve.
Great. Thanks for that and then maybe just a second one on free cash flow conversion, Eric It looked like it was pressured in the quarter by some one time items could you help perhaps unpack some of those and then as you look out over the next year or so I know on the call you mentioned, the 50%, 60% cash conversion has been the multiyear target is.
Is that within your scope this year should we be thinking about that as more of like a year two three.
Type target to achieve thank you.
So what I would say.
So those two pieces so.
Fiscal calendar Q2 has traditionally been a wider cash conversion quarter. There are several reasons for that one is the quarter that we pay bonuses.
Our DSP advances, which based on the timing of deals could happen at different times throughout the year, but have not.
Traditionally is certainly for quite some time have been focused on fiscal Q2, but generally we've been more focused towards fiscal Q4. So some of the things that drive working capital opportunities plus bonuses make fiscal Q2 generally a lighter quarter. So happens in this quarter, we had some additional.
Tax payments.
Largely timing.
But.
That did affect this quarter as well what I would say is that we're roughly in line with where our cash conversion was through the second quarter of 'twenty, two and last year.
For the full year had over 60% cash conversion rate I'm, not saying that's going to happen. This year I'm, saying there is a lot of things that are in flight timing of deals that are being negotiated which could have cash advances.
That may or may not close in 'twenty, three or might fall into 24, depending on the timing of those deals we could meet our cash conversion targets very strongly in fiscal 'twenty three because of some of those deals fall into 24, then the delivery of the 50% to 60% could be over multiple over $23, 24%.
So we continue to say over a multiyear timeframe because of the timing of some of the deals isn't fixed in stone and we need that flexibility, but on a sustainable basis that 50 to 60 is our.
On a running basis and we continue to focus on and are confident we can deliver it.
Okay. Thanks, Eric.
Thanks Steven.
Thank you. Our next question comes from the line of Matthew Thornton with <unk> Securities. Your line is now open.
Hey, good morning, Robert Good morning, Eric.
Maybe two if I could first one on emerging streaming Eric I apologize if I missed that but was there any change in that revenue.
Run rate and I guess, just higher level without getting into any specifics I guess do you feel like you.
You guys are making progress on the emerging side towards getting some more renewals.
Closed later later this year and any progress on that front would be helpful.
Second question is really around margins, Eric I think previously you talked about 50 to 100 basis points OIBDA margin expansion. This year I think the long term bogey over any multiyear period was roughly 100 basis points per year is that the right way to think about the business any color there would be helpful. As well thanks guys.
Okay I'll take the first one on the renewals.
So on the.
Sort of emerging.
Platforms renewals.
My my focus so no update.
Yes.
I have one rule that I focus on which is if traffic moves from one platform to another.
I want us to feel neutral about that.
I don't want to trade dollars for pennies going one way or another so that is really.
That is what im looking looking for.
And I think thats, the fiscally responsible thing to do for the long term health of the business. So that's that's.
That's all I can tell you as an update on that end.
And so that you understand.
Our bottom line is and I'll, let Eric answer the second question, Yes, So Matthew no change on our margin outlook.
We are continuing to focus on margin growth in each of the first two quarters of this year we've delivered.
Very strong margin growth and we'll continue to look at the full year and every year going forward for margin growth I will say that as.
Robert <unk>.
Technology team in the business overall.
Look at the technology initiatives and its ability to.
Drive efficiency and scale in our business and specific executions and operating plans to develop that we will fine tune our financial plan with that.
And we expect margin to continue to be a focus Mike that once we have that plan tweak some of our perspective on margin it might but I expect our margin focus to continue to be positive in our outlook and focus continue to focus on margin improvement going forward, but right now we continue to focus on the 100.
Basis points, a year and specifically this year.
50 to 100 basis points.
Given some of the dynamics might be more realistic given the first half of the year of margin improvement has been actually quite strong.
Thank you.
Our last question comes from the line of Ken Tim Nolan with Macquarie. Your line is now open.
Oh, great. Thanks for fitting me in I've got.
Couple of questions related to AI.
Interesting topic, both may be offensive and defensively for you Robert you mentioned.
Some of the copyright issues and it sounds like you're quite confident about your ability to defend against those is this going to be running topic for some time.
Or do you think the legislation that you referred to might begin to help.
And then secondly, more sort of often simply for you.
You mentioned using AI, both for creating efficiencies, but also I think implying that you could use AI more for your artist accretion of music are you looking to be building sort of proprietary AI artists can use as opposed to may be using other services or maybe anything else you can give us in terms of what you can be using AI for productively.
Thanks.
Sure. Thank you.
So one yes, this will likely be a topic that will be ongoing and we will probably be talking about it for the next five years.
All the time.
So until we all get tired of it.
But yes because of that.
Transformative technology.
Yes.
Look at both the threats as well as the opportunities and probably look at the opportunities even more so than the threats. However.
However.
As somebody who is working with thousands of order is.
Historic catalog.
<unk>, we have to look at protection of copyright name and likeness on voice et cetera.
So again this goes back to my parallel processing. This company is parallel processing and <unk>.
For us an AI it means both defensive and offensive at the same time.
And I think the.
There are a couple of things on this number one.
<unk>.
Regulation is important I think including people who are creating generally of AI. They agree on that lots of lots of good actors in that area that is important and copyright protection as part of that is very very important.
Second part next to it is the actual detection and enforcement, which is because you can have regulation, but if you don't have detection and enforcement of that then it's less useful to have the regulation.
No.
Sure.
In discussions with partners, who who who have.
Who are who operate generate of AI to figure that out who operate platforms to figure that out.
Obviously have lots of expertise on this front in house.
With Ral having.
Having overseen content on Youtube.
So that's an important part of it and then the sort of the use of AI for.
Sort of offensive.
Purposes, there is a very very wide spectrum of things that that it could be used for.
I don't really want to go into the specifics of that because it's early.
What I can tell you is that we're running fast exploring all of that.
And yes, we are in the business of <unk>.
Creating tools for artists to do there.
Mark.
Yes.
We have tools that basically supercharge their work right. So I'm not looking at technologies only.
Force multiplier for our teams and for Warner Music Group, but also for our roster.
So parallel processing on all these fronts and I think it's an exciting time for company like ours to be part of this and to be able to figure it all out and do it together with all of our technology and distribution partners.
Thank you I would now like to hand, the conference back over to Robert Hanson for closing remarks.
Alright. So thank you all so much for your interest and all your questions and I look forward to talking to you in 90 days. Thank you.
Have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Sure.
Sure.
Yes.
Okay.
Okay.
Okay.
<unk>.
Yes.
Good morning, John .
One of them.
Yes.
Okay.
Okay.
Okay.
We do in India.
[music] one over one.
Yeah.
Yes.
[music] Scott.