Warner Music Group revealed its calendar Q1 (fiscal Q2) outcomes immediately (Could 8), with CEO Robert Kyncl acknowledging industry-wide challenges on the corporate’s earnings name.
“We acknowledge this can be a second of transition within the {industry} and for our firm,” Kyncl said on the decision, whereas sustaining his outlook for future development.
WMG reported company-wide income development of 1.2% YoY at fixed forex for calendar Q1, with recorded music revenues growing 0.7% YoY, and music publishing income rising 3% YoY. Subscription streaming grew 3.2% YoY, in comparison with double-digit development in the identical quarter final yr.
In his opening remarks, Kyncl recognized particular components behind these outcomes: “Our leads to [calendar Q1] replicate a lighter launch schedule, market share strain in China and a tricky year-over-year comparability in subscription streaming, the place we noticed sturdy double-digit development within the prior yr quarter.”
Regardless of these figures, Kyncl outlined three causes for optimism: “One, towards the backdrop of world uncertainty, music is essentially the most resilient artwork type and presently the least costly,” he mentioned.
“Two, the {industry} throughout music corporations and DSPs is aligned behind driving development via subscribers and value will increase. And three, WMG has the suitable artistic and business methods in place, and we’re sharpening our execution as we keep centered on our long-term development and profitability.”
The corporate continues to execute on its three-pronged technique, which Kyncl described as: “Develop market share, develop the worth of music and grow to be extra environment friendly, liberating up extra capital, each for reinvestment and to drive larger shareholder return.”
Listed here are 4 key takeaways from Warner Music Group’s calendar Q1 earnings name:
1. Warner’s M&A technique is accelerating as a part of its market share development plan
Warner Music Group is intensifying its merger and acquisition actions as a part of its broader technique to develop market share. Kyncl outlined this method in the course of the name: “We take a twin-engine method to rising our market share,” he mentioned.
“Alongside natural and our funding, we’re additionally growing our M&A exercise. We anticipate to have extra information about our M&A funding plans within the close to future.”
No phrase then on the much-rumoured $1 billion+ partnership with Bain Capital to purchase copyrights, however Kyncl has hinted on the forms of offers he’d need to make with a $1 billion warfare chest. Final quarter, he introduced the acquisition of the Tempo catalog and is clearly hungry for extra IP.
On immediately’s name, Kyncl described the Tempo deal as “a first-rate instance of [WMG’s] M&A technique in motion, reinvesting value financial savings into high-quality important music with excessive margins.”
He additionally famous that Tempo “will present us with an evergreen catalog” and brings “sturdy margins and money move technology”.
“As we replicate the technique throughout our different labels and geographies, we are going to increase our development with M&A. Briefly, we’re placing extra wooden behind fewer arrows to turbocharge our core enterprise.”
Robert Kyncl
A possible concentrate on music rights M&A was already turning into clear over the previous couple of years following Kyncl’s unwinding of sure investments made underneath WMG’s earlier management, for instance exiting ‘owned and operated’ media platforms like Uproxx, HipHopDX, and different media property.
Kyncl additionally recommended in March that WMG is unlikely to purchase a distribution firm, noting throughout a Morgan Stanley an interview that he has “checked out all distribution corporations over the past 18 months, simply being a accountable steward…and what I can let you know is that we’re not keen to develop [the market share of this area of the business] in any respect prices”.
The query then is, what may Kyncl be keen to splash money on? Famous person artist catalogs could possibly be one chance. Crimson Sizzling Chili Peppers are reported to be near putting a big-money cope with WMG.
Kyncl has additionally been bullish on rising markets, particularly these with excessive development potential like India, the place the corporate has made numerous investments in recent times.
“As we replicate the technique throughout our different labels and geographies, we are going to increase our development with M&A. Briefly, we’re placing extra wooden behind fewer arrows to turbocharge our core enterprise,” mentioned Kyncl.
However past India, a catalog deal in China might make numerous sense, given, by its personal admission, WMG’s lack of market share there. WMG hasn’t introduced a giant deal in China since 2014, when it purchased Gold Storm.
Addressing China on immediately’s name with analysts, Kyncl mentioned the market “is a giant alternative, clearly.”
He additionally revealed that Warner will “have a brand new Head of Asia beginning in two months, who will play a pivotal position in serving to us drive development across the largest markets in Asia”.
2. With a brand new CFO coming in, WMG is adjusting traders’ expectations for the rest of WMG’s fiscal yr
Calendar Q1 was Bryan Castellani’s final quarter as CFO at WMG, with Armin Zerza succeeding him this previous Monday (Could 5).
Zerza was beforehand CFO at Activision Blizzard and is extensively credited with taking part in a key position within the firm’s $69 billion acquisition by Microsoft.
Earlier this yr, WMG mentioned it was anticipating “excessive single-digit development” in subscription streaming for this yr and on a multi-year foundation.
That received’t occur this yr in any case, Kyncl conceded on the corporate’s earnings name immediately, and signaled that new CFO Armin Zerza is influencing how the corporate sees its monetary outlook: “As Armin settles into his new position, we’ll present updates on our enterprise and capital allocation priorities on the subsequent earnings name,” mentioned Kyncl.
Moreover, following calendar Q1’s outcomes, and seeking to the rest of the corporate’s fiscal yr, Kyncl closed his opening remarks with a candid commentary: “We anticipate the challenges we skilled this quarter to persist for the rest of the fiscal yr, leading to decrease subscription streaming development than beforehand anticipated.”
One factor appears clear from Kyncl’s statements on the decision, nonetheless: WMG will proceed to concentrate on liberating up more cash to reinvest.
Kyncl defined: “As we make organizational adjustments to optimize our efficiency, whereas yielding advantages from tech upgrades, we’re driving a virtuous cycle, so we are able to make investments extra for the good thing about artists, songwriters, and shareholders”.
He added: “Since 2023, we’ve introduced plans to realize a cumulative whole of greater than $300 million in annualized value financial savings, the vast majority of which is being reinvested in music and expertise.
“That is an ongoing course of that has grow to be a part of our DNA, and we are going to proceed to search for methods to drive much more efficiencies. By doing so, we are going to release further assets to pursue essentially the most enticing alternatives via a disciplined capital allocation plan.”
3. Double-digit will increase in A&R funding are paying off… with WMG’s “highest chart share in two years”
A main beneficiary of these reinvestments has been A&R spending.
Kyncl confirmed: “As I instructed you on our final earnings name, we noticed our A&R spend elevated double digits final yr, and it’ll enhance by much more this yr. We’re beginning to see indicators of our technique paying off.”
He added: “I’d like to focus on that our artistic engine is firing on all cylinders. Our share on the Spotify World charts has grown very persistently and by practically 50% since mid-2023…with Q3 on development to be our highest chart share in two years.
“As well as, proper now, WMG’s recording artists maintain 5 of the Prime Ten tracks on the Billboard World chart, together with the Prime 3, with Alex Warren, Bruno Mars, and Rosé.”
In keeping with Kyncl, “the artistic engine of the corporate is buzzing”.
“There are alternative ways to succeed out there. And I’m truly more than happy that we don’t have only a singular method to our enterprise.”
Robert Kyncl
Throughout the Q&A, Kyncl particularly highlighted WMG’s success within the US, the place Elliot Grainge took over as Atlantic Music Group CEO final yr, whereas Warner Information, underneath the management of Tom Corson [Co-Chairman and COO] and Aaron Bay-Schuck [Co-Chairman and CEO], has hit its stride.
Commenting on the 2 flagship WMG labels in the course of the Q&A with Kyncl, JP Morgan analyst Kiscada Hastings famous that “it looks as if [Warner] has two completely different philosophies at [its] flagship labels now”.
Hastings added: “With Aaron at Warner, who appears to have extra of a long-form and deliberate method to artist administration, and Elliot Grange at Atlantic, who appears to be fairly good at rapidly figuring out and blowing up artists.”
Responding to Hastings’ commentary, Kyncl mentioned: “As an organization, we’ve to stroll and chew gum on the similar time. There are alternative ways to succeed out there. And I’m truly more than happy that we don’t have only a singular method to our enterprise, that we’ve expertise that has completely different strengths.”
He added: “You’ve highlighted a few of these, nevertheless it doesn’t imply, as an example, in case of Elliot that’s all inclusively centered on fast hit. Elliot can also be very a lot centered on artist growth.
“And we’re working a lot, a lot nearer collectively as a management group throughout all of the operators so that individuals are also sharing insights, not simply competing with one another, however truly sharing insights collectively in order that as an entire, as an organization, we do higher. That is precisely the type of mixture of executives we’d like.”
4. AI laws is a precedence, with Warner supporting the No Fakes Act, which might result in new income streams
Kyncl additionally highlighted how Warner Music Group is taking an lively position in addressing synthetic intelligence regulation.
On immediately’s earnings name, he mentioned his current advocacy efforts: “I used to be in D.C. final month to help a revised No Fakes Act, the identical laws that I testified for at a Senate listening to final April.”
The invoice goals to supply “protections towards unauthorized deepfakes whereas organising a licensing framework paving the way in which for brand new income streams and extra reliable merchandise,” Kyncl defined.
“By supporting laws that creates clear licensing frameworks, Warner goals to each defend creators and allow new income alternatives within the quickly evolving AI panorama.”
Robert Kyncl
That is “not solely a bipartisan invoice that we’ve gathered help throughout music, leisure and tech industries, together with MPA, SAG-AFTRA, YouTube, OpenAI and others,” nevertheless it “additionally might function a blueprint for the therapy of identify, picture, likeness and voice rights around the globe.”
Kyncl emphasised that defending artists and songwriters is prime to rising the worth of music: “Rising the worth of music begins with defending our artists and songwriters. And immediately, nowhere is that extra essential than with AI.”
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