Q4 2023 Warner Music Group Corp Earnings Call
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Welcome to Warner Music Group fourth quarter earnings call for the period of fiscal year ended September 30th 2023 at.
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 group's fiscal fourth quarter and full year earnings conference call.
Please note that our earnings press release and earnings snapshot are available on our website and we plan to file our Form 10-K during the week of November 20th.
On today's call, we have our CEO, Robert Kintzel, and our CFO, Brian <unk>, who will take you through our results.
He will then be joined by Eric <unk> 11 for the Q&A portion of the call.
Before our prepared remarks, I would like to refer you to the second slide of the earnings snapshot to remind 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 earning 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 or expectations beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them How's.
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 that 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, Gary and good morning, everyone.
I'd like to warmly welcome, Brian Castellani, who joined us as CFO last month.
Brian it's been more than two decades of Disney most recently as CFO of Disney Entertainment and ESPN.
Excited he is part of our team now.
I'd like to say a heartfelt. Thank you Eric Levin, who has been our CFO for the past nine years.
He has broad smart that is.
Financial leadership to WMD during a transformational period for the industry and our company.
Given this quarter versus last the CFO will be available for Q&A.
I have no doubt you will join me in wishing him the very best as he moves into retirement in January.
I'm happy to say, our Q4 performance continues to deliver on the second half improvement that we promised on our Q1 earnings call.
Led by an acceleration in our streaming revenue Q4 revenue and adjusted OIBDA grew 5% and 18% respectively.
We also saw robust margin expansion of 230 basis points for.
For the full year, we reached a key milestone in eclipsing <unk> 6 billion.
Our revenue for the first time ever.
Our revenue and adjusted OIBDA grew 4% and 10%, respectively, and we delivered 120 basis points of margin expansion.
Importantly, operating cash flow conversion was 56% of adjusted OIBDA.
With industry tailwind at our back and a solid slate of new music to start the year, we have headed into fiscal 'twenty four with strong momentum.
As always everything we accomplished begins with our amazingly talented artists and songwriters.
In recorded music the diversity of our artist roster with showcased by a range of success stories.
From the global phenomenon of the BARDA contract.
The breakthrough country Superstars that Brian with whom we also signed for publishing this year.
Warner Records artist, Kenya, Grace scored a global hit with strangers, which rose to number one on Billboard stance on electronic chart.
In the U K, we celebrated a number one albums from it Sharon Barner Boy Blur and Liam Gallagher and.
And in Japan mid summer made up of members of the Super Group twice the number one with our first album.
We continue to bolster our local success in multiple territories across the globe.
We had number one hits by Golfs in Denmark.
And Laurence in Norway.
Anna and couple Plaza in Italy.
<unk> in China, and just lean Royale in India just to name a few.
At the same time, we brought bold innovative thinking to attracting new fans to our legendary artist and classic recordings <unk>.
Recent examples included a new deluxe edition of talking had stopped making sense.
15th anniversary of Slipknot, All hope is gone.
The 20th anniversary of Lincoln Park Meteoric.
With Madonna onshore, it's been a pleasure to find new ways to create cultural moments around her iconic carrier.
These include a series of remix albums, the special Pride additional patent box set containing 50 number one tracks and the celebratory viral campaign, we love Medina.
The music publishing our powerful momentum continues as Warner Chappell writers contributed to eight out of 14 Billboard number one spot in Q4, including Zach Bryans I remember everything.
Last night Bye Morgan wavelengths.
We're always expanding our publishing roster and have recently signed hotly contested deals with up and coming stars Cali, and lapping and Murray aperture.
We're always reinvigorating our incredible publishing catalog.
<unk> includes evergreen copyrights from composers such as George Michael It was just inducted into the rock and Roll Hall of Fame Gamba.
Gamble in house.
Morrison and Stephen Sondheim.
As we speak there are three sondheim musicals running in New York, including a revival Sweeney Todd starring one a record star Josh Groban, which was just nominated for a Grammy.
Looking forward to our new fiscal year I'm, even more optimistic than I was when I started.
We're excited about the trends, we're seeing in the industry and energized by our plans to capitalize on them, let's start with the industry.
It bears repeating music is the most popular form of entertainment and it's only getting bigger.
Our addressable market encompasses virtually everyone on the planet.
Growth in the music business is now well aligned with the opportunities constantly being created by the ongoing global penetration of smartphones and Internet service.
Ever since I arrived at <unk> I've been laser focused on how we can realize the true value of music.
Grateful to all of our partners, who are leaning in and.
And figuring out how we make positive changes together.
We're taking a two pronged approach.
First price optimization.
I see this as the most immediate and impactful growth lever for our industry.
A more sophisticated and dynamic approach to consumer pricing will benefit the streaming platforms music companies artists and songwriters.
The entire ecosystem.
Driving greater investment and innovation.
In the last year, we've seen the first round of subscription price increases across every major DSP.
And we strongly believe there is a greater pricing opportunity in the future.
Second.
Evolution of royalty models.
We've been consistently clear that streaming services should ascribe more value to their customers value most.
The creativity of popular artists and songwriters that deliver subscriber engagement and growth.
To state the obvious premium music should be better compensated then low quality filler or functional music.
We were delighted to work with visa to help shape their new approach to rewarding premium music Luke.
Look out for similar developments with other partners in the coming months.
While these proof points represent a good start there are just that.
We will continue to work collaboratively with our partners to align behind the long term growth of the industry.
Just told you why we're excited about the music industry.
Now let me explain why we're excited about Warner Music group specifically.
The future of music will be forced at the intersection of creativity and technology.
With that in mind, we're carving out a distinctive proposition through the combination of the following.
One the deep iconic catalog as well as up and coming talent and thriving superstars.
Two global scale with strong local capabilities in the discovery and promotion of talent.
Three the ability to use technology as a force multiplier on the previous two attributes.
Our commitment to each of these key areas is always underpinned by our focus on financial discipline, and we're constantly challenging ourselves to operate more efficiently and effectively.
As a rule of thumb a recorded music revenue is evenly split among three released vintages, new releases, which are less than three years old.
Shallow catalog, which is more than three but less than 10 years old and deep catalog, which has more than 10 years old.
We invest in Anr and marketing across each of these vintages to create a consistent flow of music from our artists and songwriters all around the world past present and future.
We pride ourselves on discovering original talents and unique voices with long term potential.
We provide them with tailored approaches to become standout global success stories.
I think one of a kind genre defining artists like Bruno Mars at Sharon car to be dwelt, Lipa, Zach Brian and many more.
The beauty of the streaming universe is that every time one of our superstars releases of new album.
Or it goes on the tour or scores of big zinc placement the fan engagement spikes across their entire body of work.
Equally in the world of platelets thing in social media and attract from our catalog can go viral at any moment.
We've seen hits from legend, like Fleetwood Mac, Bonita and Madonna explode on multiple platforms.
Introducing these audits to a new generation.
For instance, my 20 year old daughter discovered Fleetwood Mac. When there are $19 77 hit dreams when viral on ticked off two years ago.
Her favorite band of all time.
To fuel maximize and monetize this uplift in engagement requires real expertise in a wide network of relationships.
This is how we demonstrate our value and our relevance in the entertainment ecosystem.
Not just by discovering talent and promoting their latest works.
But by thinking holistically about their careers and growing their legacy.
Our entrepreneurial culture extends to how we select which companies to invest in or.
Or acquire.
A perfect example is our new venture with turnkey projects, which brings us a dynamic artist roster fresh catalog and a visionary team led by Eliot range.
Investing in our core business isn't just about the recordings and compositions that we own it.
It's also about leveling up our distribution business in ways that delivers profitable growth.
We created more capacity for Ada to focus on developing new distribution partnerships and for our technology team to build scalable solutions to enable these partnerships.
In the last year, we signed deals with a range of labels, including Australia last ride records. The Uk's Levy records in the U S Rostrum Records, which launched the careers of hip hop stars like Mac Miller and Whisker LIFO.
Let me turn now to our approach to global expansion in emerging markets.
For some time now our goal hasnt been just to market Anglo American repertoire in local markets.
That we sign and develop local talent that can have regional or global success.
As I've mentioned before we're making great inroads in fast growing territories, like China Middle East and Africa.
<unk> is a great example of this strategy in action.
With a vast population of one 4 billion people and its huge diversity of demographics.
<unk> has an endless evolving music scene.
According to Ipi, India has more than doubled its recorded music revenue over the last five years.
And it's also the highest growth of any top 20 country in 2022.
48%.
We've made huge strides since first launching our local office in Mumbai in 2020.
This year alone we've grown our presence, thereby acquiring E positive and Indian management that live events company.
Launching a new JV 91, North records.
And expanding our partnership with Sky digital an aggregator of Punjabi music.
Our team in India has attracted massive stars, including hip hop artist King who became the first Indian performer to hit Spotify Global top 30.
The music ecosystem is healthy and has a number of exciting growth drivers.
With price increase is happening across all major dsp's royalty models evolving to rewards quality in emerging market is gaining traction.
Very confident and positive about the path ahead.
We're excited about our new releases for fiscal 'twenty four including some that came out just last Friday from David Guetta, Jack Harlow Big fans risks and <unk>.
Of course developer who had her biggest global launch to date with her new single Houdini.
There are also eagerly anticipated projects from Green day, Kenya, Grace, Fred again, Gabby Barrett, Mario Becerra, and Mike powers, among many others.
We've been working hard to build a WMC that it will excel in the music industry of tomorrow.
Our work is already beginning to bear fruit and I assure you that there is much more excitement to come.
And now here's Brian to walk you through our financial results.
Thank you Robert and good morning, everyone.
I am extremely excited to be here and I'm looking forward to engaging closely with the investment community.
In my brief time Warner Music group I've been impressed with the work that we're doing.
We are investing in our already strong core and leveraging technology, which will continue to augment our growth through a rapidly changing music industry.
We have strong momentum ahead, and we'll share regular updates with you as our progress continues.
Now turning to our Q4 results as Robert highlighted our performance in the quarter was underpinned by a solid release slate.
And a recovery in AD supported streaming which drove sequential acceleration in our recorded music streaming growth.
This fueled our second half improvement, which combined with our disciplined cost management enabled us to deliver robust adjusted EBITDA growth and margin expansion for the full year.
There are a couple of items throughout the quarter on the year that affected comparability. These.
These include the impact from the CRB mechanical royalty rate increase our copyrights settlement and an extra reporting week.
The details on adjustments relating to these items can be found in our earnings press release.
I will provide growth rates in constant currency and normalized for these items.
In Q4 total revenue grew 5% and adjusted EBITDA increased 18%.
With a margin of 20% an increase of 230 basis points over the prior year quarter.
On a normalized basis.
Total revenue grew 6% and adjusted EBITDA increased 31% with a margin of 19, 9% an increase of 370 basis points over the prior year quarter.
Recorded music revenue grew 2% and 5% on a normalized basis.
Despite a challenging comparison to the prior year quarter, our streaming revenue grew 9% and.
An improvement from the 7% we reported in Q3.
Subscription streaming revenue grew by approximately 10% representing healthy growth over the 13% we delivered in the prior year quarter and was in line with Q3.
AD supported revenue increased by 7%.
Physical revenue increased 6% driven by strong performance in the U S, including from new releases like the Barbie soundtrack, 50, 50, G, Idaho and Mac Miller.
Artist services and expanded rights revenue decreased 11%.
Decrease was due to lower merchandising revenue in the U S tied to timing of touring cycles and economic headwinds in Europe that continue to impact our E&P business.
This was partially offset by higher concert promotion revenue.
Licensing revenue grew by 7% due to higher broadcast fees.
Recorded music adjusted our EBITDA grew by 23% with a margin of 21, 8% an increase of 370 basis points.
On a normalized basis.
Adjusted EBITDA increased by 32% with margin expansion of 450 basis points.
Music publishing continues to deliver impressive results.
With revenue growth of 15% driven by strength across all our revenue lines on a normalized basis revenue grew 13%.
Digital revenue increased 19% and streaming revenue increased 26%.
On a normalized basis digital revenue grew 15% and streaming revenue increased 17%.
Reflecting the continued growth in streaming and the impact of digital deal renewals.
Mechanical and performance revenue increased by 42% and 2% respectively.
<unk> revenue increased by 3%, primarily due to stronger performance in the U S.
Using publishing adjusted EBITDAR grew 19% with a margin of 24, 8% an increase of 90 basis points.
On a normalized basis music publishing adjusted EBITDA grew 17% with a margin of 24, 9% an increase of 80 basis points.
Moving to our full year results total revenue grew 4% and adjusted EBITDA grew 10% with a margin of 25% an increase of 120 basis points.
On a normalized basis total revenue grew 6% and adjusted EBITDA grew 17% with a margin of 24% an increase of 190 basis points.
We over delivered our margin expansion guidance, even as most of the cost savings from our March restructuring were reinvested to drive our business forward.
Recorded music revenue increased 2%.
Within recorded music streaming revenue increased 4% and adjusted our EBITDA grew 7% with margin expansion of 120 basis points.
On a normalized basis recorded music revenue increased 4% and streaming revenue grew 6%.
With adjusted EBITDA growth of 13% and margin expansion of 180 basis points.
Music publishing revenue increased 15% and adjusted EBITDA increased 28% with margin expansion of 270 basis points.
On a normalized basis music publishing revenue increased by 16%.
And adjusted EBITDA increased by 28% with margin expansion of 270 basis points.
We continue to successfully launch certain components of our financial transformation program in select territories.
The program remains on track to meaningfully rollout later this fiscal year and into FY 'twenty five.
Once fully implemented we expect the program to yield annualized run rate savings of $35 million to $40 million.
Q4, Capex of $38 million was the same as the prior year quarter.
Q4, operating cash flow decreased 17% to $338 million from $406 million in the prior year quarter.
The decrease was primarily driven by working capital items, which included higher royalty advances and the timing of digital deal renewables.
Free cash flow decreased 18% to $300 million from $368 million in the prior year quarter.
For the full year operating cash flow decreased 7% to $687 million and free cash flow decreased 8% to $560 million.
We delivered operating cash flow conversion of 56% for the full year in line with our target of 50% to 60% over a multi year period.
As of September 30, we had a cash balance of $641 million total debt of $4 billion and net debt of $3 3 billion.
Our weighted average cost of debt is four 1% and our nearest maturity date is in 2028.
While growth was muted in the first half as we had some release schedule softness.
We recovered to end the year on solid footing and already have momentum in 2024.
We are off to a strong start with new releases from dual liver David gas Jack Harlow.
The Panthers and many others.
As we look ahead to the fiscal Q1 I want to call out a couple items that will impact comparability.
First we announced that our digital distribution agreement with BRG will end.
To frame the impact the total revenue contribution from BMG in fiscal 2023 was approximately 4% of total recorded music digital revenue.
Negligible contribution to adjusted EBITDA.
BMG has already started to bring its digital distribution in house and it will be largely rolled off by the end of October 2024.
The impact to our Q1 'twenty for recorded music digital revenue will be approximately $15 million as both Spotify and Apple will transition desk tomorrow.
This impact will increase in Q2 and beyond as we will see the full quarter impact from the roll off of these DSP and.
And as BMG gradually brings other digital partners in house.
We will also discontinue bmg's physical distribution by the end of October 2024.
Dmg's physical distribution revenue represented less than 2% of our recorded music revenue in fiscal 2023.
We will provide details going forward and disclosed normalized growth adjusted for the impact of these items.
Second we are granted a licensing agreement extension for our catalog that will have a one time favorable impact on recorded music licensing revenue and adjusted EBITDA of approximately $70 million in fiscal Q1 2024.
While this is a multiyear licensing agreement extension the revenue and adjusted EBITDA will be fully recognized in Q1.
Our goal is to deliver healthy top line growth margin expansion and cash flow conversion on a consistent basis.
2024 has started with much stronger momentum than we had entering 2023, and we expect our slate to build throughout the year.
We will invest more heavily in the Anr and marketing in 2024 to ensure the success of our slate.
We still expect to deliver approximately 100 basis points of margin expansion for the full year, which will be back half weighted as well as 50% to 60% of operating cash flow conversion on a multiyear basis in line with our targets.
The momentum in our music Entertainment business is strong and we continue to position ourselves for long term success and growth.
Before I close I also want to take a moment to thank Eric.
His contributions to Warner Music group and leadership of the finance team have been immeasurable Im.
Grateful for his and the team support such a smooth transition.
Thank you to everyone for joining us today, we'll now open the call for questions.
Thank you.
As a reminder to ask a question. Please press star one wanting your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again, please stand by while we compile the Q&A roster.
Our first question comes from the line of Omar <unk>.
With Wells Fargo. Your line is now open.
Yes.
Good morning, guys and thank you for taking my questions.
Robert maybe first I wanted to ask as you continue to evaluate some of the necessary investments to better position. The company. How do you think about the balance between investing in Anr versus tech.
And second now that you've freed up some resources and 88, how should we think about your priorities to drive growth and maximize ROI in that business going forward. Thank you.
Alright. Thank you thanks for the question.
So.
Here's the way to think about it.
More music company, that's benefiting from the tailwind of the music industry that we just described.
The way, we invest and grow is first and foremost into IP.
And that has.
Multiple different ways multiple different forms.
One which is organic anr, which we do day in day out.
Investing into new artists or existing orders and there are new releases.
Two we acquire stakes and going concerns the acquisition of 10-K is a really good example from a couple of months ago.
Three we acquired catalogs, whether it's on the publishing side recorded sides, David Bowie catalog from a couple of years ago is a good example of that.
And then we look at all of these activities all around the World I just described in the earnings call our success in a minute.
High growth markets. So so we're replicating all of these activities.
Different geographies, so it's like a four pronged approach.
Then we layer on top of that investments into technology, which becomes a force multiplier on everything I. Just mentioned that is that is that is the main goal.
What do we do with the technology investments are 100% self funded.
Thats, what we committed to.
Earlier last year and Thats, what we are committing to going forward as well.
And when we do this we are creating a flywheel that is allowing us to continue our investments into growth continue our overall growth and continued to expand our margins at the same time.
That's that is the.
What's the strategy for our investment framework.
As it relates to AA and the freed up resources.
The the best way to think about it is.
We have an amazing team of executives.
That have <unk>.
Driven.
Business for quite a few years.
We are focusing on growing both our topline and our bottom line with a very strong global orientation, just again in line with what I just mentioned earlier.
A minute ago.
And.
We're focused on working with more and more labels and more and more audits all around the world and scaling that business.
And technology is a really big part of that.
Because it helps us do that more efficiently and faster and with less friction.
And a great example of that is the focus of our <unk> team, who runs our technology group to overhaul our supply chain and all of our partner facing tools that from a technology standpoint enables this.
For the business team to to drive acceleration in that business. So all in.
<unk>.
The strategy to grow Ada is there as it was before because the independent space is growing and we're leaning into that space and too.
We're just doing it differently, we're doing it in a way that is driving both topline and bottom line at the same time.
That's very helpful. 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.
And welcome Brian to.
To Warner music at least on the public earnings call.
Thank you.
Robert could you talk a little bit about streaming growth.
Our recorded music streaming growth as you head into fiscal 'twenty four it would seem between the Spotify price increases some of the activity an artist centric and your slate, we should see some acceleration from kind of the exit rate of high single digits that you guys just delivered.
That's my first question and I guess secondly.
I think you've called out $10 million of incremental investment in technology in the quarter.
<unk> will share everything, but can you talk a little bit on where that money is going and when that might translate into sort of business outcomes that you think we would we would see externally.
Okay sure. Thank you.
So first on sort of overall streaming growth obviously, we're pleased with the with the industry.
Returning to high too.
Two a very healthy double digit.
Growth.
The way I think about it is.
I'm not really looking at.
Our competitors.
I'm not looking at the world around us I'm, focusing on our own continual and sustained improvements in one hour company to just keep on improving on a steady basis and most importantly in a sustained basis.
That's very very important.
The obviously investments into Anr and all of that I, just mentioned a few minutes ago goes into that.
But at the same time.
Investing in the technology and the best way to think about that is.
There was a lot of foundational work that helps us actually deliver on that sustained growth promise from a technology technological standpoint.
Just mentioned overhauling our supply chain infrastructure, while that May sound very unsexy.
The.
The.
Benefits the business is very sexy.
Because it's removing lots of friction and increasing speed and the way we can process more music more partners more artists through our supply chain and so whether it's something that we wholly own or whether it's a partner of Ada.
With greatly externalized tools and improved tools.
All of that.
Contributes towards the growth of the company.
While.
Delivering on our margin expansion. So that's just one one example on the technology front.
Hey, Ben.
Dan It's Brian Nice to talk to you I just wanted to comment on that stream and growth and move back to my remarks, where.
<unk> Q4 over Q4, we had a really strong Q4 'twenty two.
And had subscription streaming growth there, 13% I think we were four or 500 basis points above some of our competitors.
So that comparison may be muted the quarter a little bit.
Setup as Robert said with the second half momentum that we continued in a stronger release slate in 'twenty four particularly in the second half.
So we feel good about that and just a reminder, on the price increases that theres a lot that goes into those and.
And those take time to roll through.
The industry there is.
From announcement to implementation geography product mix.
So theres a lot there as it works through our numbers, but we're set up well for 'twenty four thanks for the question.
Thank you.
Thank you.
Our next question comes from the line of Sebastiano Petti with Jpmorgan. Your line is now open.
Great. Thank you, Brian and welcome aboard Eric Congratulations again on your retirement.
Just wanted to ask on the Brian If you could just clarify the margin expansion target for the year is that 100 basis points on a reported basis or is that ex DMG and.
Additionally.
Just help us think about the phasing I think you said most of that is <unk>.
Back half weighted but you do also have pretty.
Pretty substantial licensing coming through in the first half so just trying to better understand that.
And then a question for Robert Robert can you tell us about the AICPA you announced this morning with Youtube and more generally how youre thinking about AI impacting the industry seems.
It seems to have been become less of a fear that perhaps a couple of quarters ago. Thanks again.
Sounds good Brian wanted to yeah Sebastian of banks on the margin expansion as I said in my remarks.
About 100 basis points of year target remains for us and we had a strong over delivery on an organic basis of a couple 100 plus basis points in 'twenty three.
And so that is an organic target ex BMG for us.
Net.
That will.
Typically as we work through the year it'll be gradual as we work through.
And get the benefit I think of many releases in the second half.
And that that margin would also be excluding the.
Catalog license sale in Q1, so we.
We continue to challenge ourselves in that regard.
Good about it as the team continues to be.
I think really.
Active and vigilant.
Cost managers and disciplined on the financial front. So we continue.
To keep focused on that target.
Let me, let me take the second.
Part of the question on the.
Data that was announced this morning with Youtube the AI beta.
So first.
I'd like to actually point onto the significance of this.
Which is.
Imagine an early two thousands if the file sharing companies came to the music industry and said would.
Would you like to experiment with this new tool that we've built.
And see how it impacts the industry and how we can work together it would've been incredible obviously that didn't happen. So this is the first time that a large platform at a massive scale.
That has new tools at its disposal.
<unk> proactively reaching out to its partners to test and learn.
And I just want to underscore the significance of this kind of engagement.
And.
The orderly fashion in which this is happening and I really applaud.
Youtube deep mine all of Google.
And our counterparts in the industry or participating in this because this is the right way to engage this whenever I say responsible engagement with our partners. This is precisely what I mean.
So we're excited about it we're excited to learn from it.
And together with them then develop great blueprint for how things should work, but development based on learnings.
More broadly the way I think about our engagement on AI and what do we practice is along the following lines we have three constituents.
One which is degenerative AI engines right, so whether it's deep mind anthropic Lambda et cetera.
And they're obviously, that's where it begins and there are efforts and the music industry are focused on making sure that that licensing content for training. They are keeping records of inputs. So that provenance can be tracked and then theres boarder marketing of the content.
The second group is the platforms, where most of the content irrespective of where it will be created that and buy which tools will end up because.
People, who are creating one views of streams or lots of user engagement and with the platform. So Youtube pick dock.
Instagram et cetera, obviously those are the platforms.
Spotify.
We're focused on.
Three things, which is control attribution and monetization.
And all of those wrapped in choice.
For artists.
Artists and songwriters, making sure that they have a choice and we have a blueprint from.
All of our work on user generated content over the past 15 years, or so which created a multibillion dollar industry on an annual basis for the music industry. So we just need to know right. The fine print for the AI H together with them and then the third set of constituents as governments.
And over there we are both through our trade organizations as well as ourselves working hard to make sure that <unk>.
Regulation around AI respects, the creative industries are music industry, specifically from our standpoint.
Licensing for training is required and also that name image likeness and voice is afforded the same protection as copyright and I myself personally.
Having spent time over the last month with.
Our leading politicians on these issues and regulators in London, Brussels, Tokyo, and a few others in D C and a few other cities around the world. So lots of effort underway, but I'm really excited and positive about the Youtube later.
Thank you.
Thank you.
Our next question comes from the line of Bob <unk> with UBS. Your line is now open.
Great. Thank you.
Can you provide a bit more color around the recent deals you've signed with the DSP.
Some of the benefits you expect to see beyond the price increases we've seen and the second question in terms of.
<unk> new catalogs can you talk what youre seeing in the market right now we've seen some activity among the smaller labels what do you think about valuations.
Availability of new IP. Thank you.
Sure. Thank you.
So.
So we obviously don't talk about the details of our DSP.
<unk> DSP agreements, but.
What I can say on the most recent one with these are we're really excited to work with them on what was the second.
Sure.
The second prong of our driving the value of music strategy right. The first prong is price optimization and second second one is new royalty models and Thats, where this one is.
Falling in.
And we we.
Again really like it when we're engaging with our partners.
And I've got I'm stressing that it's not just one company that you have multiple companies in the industry doing so that's really really important because again from my experience on the DSP side. If you just have one engaging with you.
Yes, it's helpful, but not that helpful. Because you need to scale things appropriately across the ecosystem in the industry. So I'm always focused on the fact that it shouldnt be just us or it shouldnt be just the other guys. It should be multiple large companies independence.
As many of US working together trying to develop better models and drive the value of music. So we're committed to doing that on multiple fronts.
And we want to make sure that.
The better value for music has reflected that.
<unk> reflected.
Better.
<unk>.
I forgot the second part of the question catalog got a lock acquisitions, yes.
I look at catalog as our natural resources in general.
It's incredible.
Sure.
The catalog that Warner Music group has is priceless it is.
It is.
It's a gift that keeps on giving.
And I use. The example of my 20 year old daughter, who two years ago discovered Fleetwood Mac and became their biggest fan.
That says everything.
That is.
That is what drives.
Driver of the value of our company and then all of our efforts to keep on creating new catalog through new releases and finding new stars et cetera that we mentioned is that Brian is an amazing example of that.
Obviously theres been a lot of catalog sales over the last few years.
That drove up valuations.
We're starting to see all council fluctuations in that space.
We are very active.
We're watching things.
In all geographies and it's a really big part of our focus to make sure that we're opportunistic and strategic at the same time about deploying our capital at the right price.
Where are we where we through our predictions see strong and growing performance of the underlying entities.
Yes, I would just add on that capital allocation that Robert mentioned.
And I think he had mentioned it before as well.
We're always looking to invest in Anr and new artists and licenses Theres also jv's like 10-K, we can do that through and then there is the purchase of catalog that is certainly a big.
A big part of our business that we continue to mine and their value continues to grow and then that supplemented by marketing and tech investments too.
Pour pour some.
Fuel to grow those returns, but overall, we look at this through the lens of how do we drive our return on invested capital and keeping that in growing in the high teens.
That's great just a quick follow up I think Robert last time, you had mentioned that you did not renew with Spotify yet.
We seem to think that you have since then.
Would you be willing to provide an update thank you.
Yes so.
So generally we do not provide updates on timing of our deals.
So I would say.
Speculating on those.
Probably not the best practice.
Yes.
There's really nothing too.
Nothing to announce.
And when we have something we will but there's nothing of note to speak of.
That's great. Thanks, so much.
Sure.
Thank you.
Our next question comes from the line of Benjamin Black with Deutsche Bank. Your line is now open.
Great. Good morning, Thank you for taking my question Robert.
Wanted to go back on your comments around sort of optimize retail pricing.
Beyond just broad price increases what would that entail.
I'm speaking about the introduction of new tier in segments in the market a little bit differently, how should we be interpreting your commentary just dig into that a little bit and then my second question is on <unk>.
Side of the business so.
What are we seeing in terms of recorded music at two <unk>.
<unk> revenue, we exclude the impact of some of these new platform deals and just looking forward can you sort of talk about the.
AD market environment, and how we should think about that reported revenue going forward. Thank you.
Sure so.
So when you I think it's four.
Price optimization, I think it's really important too.
To sort of broaden the scope of thinking.
And I don't mean, I mean, this both for our partners as well as for ourselves.
Suppliers.
Let me give you an example.
Aside from obviously.
Everything that I said before which is catch up to inflation go ahead of inflation compare yourself to other industries understand price elasticity all of those things those are sort of basics.
And so I am not going to go back into that but there are other things to look at for instance.
The relationship.
The ratio of family plan pricing relative to individual plant pricing is it at the right place. So even as price increases are happening is the ratio of these two correct you.
You can go further widen the aperture further by looking at China.
There are no family plans in China their own individual accounts. Another example from China is that while you have a subscription on Tencent.
Certain artists bands are selling their lp's on top of the subscription.
Yes.
So it is so useful to have a really broad aperture on all of these things and not just thing myopically through how things happen and only look at the dollars within that and I'll. Just give you only two examples there are others and there's just so many different ways.
I think through this so I think.
What's required for that is deep collaboration with our partners and making sure that.
The changes are win win for both sides and we drive the ecosystem up and to the right together at faster rate.
Yes, Ben it's Brian I'll take the AD supported.
What we're seeing.
<unk> improvement there.
I think everybody is familiar with the first half challenges in.
Advertising recession.
And so that rate of growth that rate of improvement continues.
Even without the addition of Tic Tac and the combined revenue report there we'd still be up we would still see a good improvement on the rate of change.
So we like the trends there and are encouraged.
Also encouraged I think by even with Spotify.
Remarks were.
And that I think as you look across I think performance in streaming probably being stronger performance and targeted advertising in the streaming space being stronger than the larger advertising space.
So it sets us up well for 24.
And we feel good about the outlook there.
Fantastic and Eric Congrats on a great run wish you all the best in your retirement. Thank you. Thanks, Ben I appreciate it.
Thank you.
Our last question comes from the line of Jason Bazinet with Citi. Your line is now open.
I really like the way you think about the business in terms of.
Getting the pricing right and finding win wins with your distribution partners, where do you think just conceptually where there where there's the most agreements.
For a win win where you sense that there is.
Where you are on the same page with your distribution partners.
I agree with you there is theres value there, but I think the industry has kind of struggled with whether or not you can sort of move the needle with new agreements for the DSP.
Sure.
I think.
Earlier during my opening monologue.
I said, there's been great progress.
But it's just a start.
And it really is just that and I feel like we're in the first inning of it and I'm not saying this because I'm on an earnings call with investors actually 100% mean this when I look at the full scope of.
All of the work that needs to be done and the opportunity that is ahead of us.
With some partners we're much further along with others less so but what you see is that generally when you make progress with one others tend to follow in different ways within 12 months.
So we are taking a prioritized approach to this.
I think the the.
The agreement is that the <unk> of the market is probably greater than what we have been thinking about.
In terms of revenue.
And.
And I think the agreement is that other industries have optimized their pricing better than we have that doesn't mean that we have done anything wrong. Because we also had to get huge amounts of people into the premium experience and.
<unk> revenue.
I think the.
<unk>.
What do we have to figure out is how they get wins.
Through this process.
In a way that it drives wins for us.
And that's that's where there are different ways and this goes to the aperture broadening a bit that we have to think through different ways not just.
The way that we've been used to thinking about and a lot of this work.
It takes a while these things don't happen overnight, but it's important that it begins and then it's done in a deeply analytical fashion because that is what the dsp's will do.
And that it's done in a collaborative fashion because they need to bring the industrial not just one or two partners. So that's that's what we're focused on.
Right.
Just wanted to close with one last thing.
At which is there.
This weekend I was just listening to some music.
On Spotify, and then I looked at their charts on my phone and right there on my screen.
Number two this was in the U S number two loving on me by Jack Harlow, Our oddest number three I remember everything by Zach Brian artist and number four my Love mine All mine by mid ski who is with US on publishing and this was I took a screenshot of that in this.
This.
Favorite screenshot over this year.
Three of four and Spotify in the U S. Without 10 is just a great Testament to our teams who.
In the beginning of the year when I was on my first earnings call.
My voice was really bad and we didn't have the best results and we said we know what we're doing we will deliver through the year and we have and the team has done it and it's just amazing to be able to.
To see the delivery so I just want to thank the entire company for hustling and doing that and.
And we commit to do that forward again, and I want to be the last month to say again. Thank you Eric for everything you've done for the company.
And we.
We may call on you here and there to take you out of your boredom.
Thank you.
It's been amazing to have you and thank you for your contribution.
Sure.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Scott.
Thank you.
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Charles.
Thank you.
Hi.
Thank you.
Yes.
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Yes.
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