Good morning, everyone. I'd like to welcome you back to the 51st Annual J.P. Morgan Global Technology Media and Communications Conference. I am Sebastiano Petti. I cover the media and communications sectors here at J.P. Morgan. I want to introduce Eric Levin, CFO of Warner Music Group. Eric, thanks for joining us.
Sebastiano, it is my pleasure. Is this working?
Yep.
Hit the mic. Okay, I got it.
Eric, I wanna start, after nearly a decade at WMG, you'll be stepping down as CFO at year-end.
I will? What? Oh, okay. Yes.
I saw the press release. What are you most proud of to have achieved during your tenure?
Wow, it's a lot. First of all, thank you for asking that. I've thought about that quite a bit as well as I look back on my, as you said, 9+ years. There's a few things I'll point to. The first one will be really when I started, this is 2014. The industry was still declining, was under great stress. Access had relatively recently bought the company. I'd say a small group of us, myself involved, but certainly our CEO, Steve Cooper, really kind of leaned in on building a really collaborative environment and focusing on growth even though the industry was still declining.
Investing in emerging markets, putting out more music across more markets around the world, investing in our distribution footprint. When the industry started to turn a year or two later, we were already positioned for growth. We really focused on making sure we were efficient in our cash flow management to make sure we had as many resources as possible to invest in that growth strategy. That's part one. Part two, come five years later, we have now built the growth profile and the infrastructure, and we're starting to think about IPO. That's obviously a major achievement in any company's life cycle. We, as unusual as this is, planned it, when we were ready to do it, COVID hit.
We were essentially the first company of scale to go public during the IPO, which was a unique experience. It required the team to really bond together, make sure we were taking care of each other as we were doing a remote roadshow in our sweatpants. It went very well, and it was a great experience. The last thing I'd point to is, I think we've built a great team. It goes beyond the finance team, but I'll include the finance team and our finance processes. Honestly, I think whoever replaces me, and I'm looking forward to helping them in the transition, will come in in a much kind of better, easier situation than I came into almost 10 years ago.
As you think about WMG from here, what are some of the most exciting opportunities in front of the company in the next 12-24 months, and how have you helped position WMG for success against the, you know, evolving backdrop?
The first thing I'll point to, and everything will kinda fit into this, is, you know, when we went public 3-ish years ago, our growth story really revolved around subscription streaming. Now our growth story really has multi facets to it. Still includes subscription streaming, but now includes ad-supported streaming, includes what we call the emerging bucket of streaming, social, fitness, gaming, et cetera. Our publishing division, Warner Chappell, has really accelerated in its growth profile. The facets of growth have really diversified. The macroeconomy has been a little uneven, as we all know. As the economy stabilizes, certain parts of the economy improve, we see ourself well positioned for growth across an array of growth drivers.
Great. Now shifting over to streaming. Now RM streaming growth has decelerated to low single digits over the last several quarters. You have several new albums dropping in the coming months, but recently said that the back half recovery would be gradual. Are recent share losses or the recent decline in recorded music streaming, is that structural? Is it transient?
It's all transient. I mean, if we just look back three quarters ago, you know, our fiscal Q4 of 2022, we grew in the teens. Same as Spotify, faster than virtually other, you know, the other players in the industry. We've had a lighter release schedule in the first two quarters of fiscal 2023. Some of that are releases that slipped into 2023. Some are the second half of 2023. Some of those scheduled for the second half of 2023. It just means our release schedule is stronger in the second half of the year than the first half. It's already started. We are already starting to see some very strong music come out. Ed Sheeran, Tiesto, Jack Harlow, with more to come.
It's just a back-end loaded year, and the gradual just has to do with the fact that the music is phasing in over the second half, and we expect to see improvement throughout that period.
Do you have an update on how the new releases are performing to, you know?
Sure.
Increase or decrease any confidence you might have—
Sure. Our confidence is very solid. What I would say is Ed Sheeran has a Number 1 album, and Tiesto has been number one across key markets in Europe. Jack Harlow, whose album just came out two or three weeks ago, has $100 million streams. We have young artists like Young Miko out of Mexico and FIFTY FIFTY out of Asia that combined have $1 billion streams between them. Both of them have a Spotify top five global hits. This is just the kind of relatively early days of the second half of the year. There's a lot more to come. We're really optimistic and see a really strong release schedule starting to perform.
Just in regards to just the gradual comment on the recovery, is it any different than what you had been anticipating going into, you know, maybe second quarter, or is it just more timing related perhaps?
It's completely time. You know, if we had all of our music ready to go the first day of Q3, April first, for us, fiscal Q3, you wouldn't put it out at the same time.
Right.
You phase it in over the next two quarters, each one, it's a marketing moment, each one. Some of them are tied to other events. For instance, we have the soundtrack to the Barbie movie, and Dua Lipa is gonna have music associated with that. That's a summer release of the movie. It'll be a summer release of the music. It just has to do with the more nuanced timing of releases throughout the next six months or the six months.
Right.
Where the music phases in, we expect the momentum to build throughout the two quarters.
As you think about, you know, the phasing in and then maybe a more steady release schedule, I mean, expectations to get back to market, you know, industry level, market level streaming growth?
Yeah, absolutely. Look, if we had our release schedule spread over the four quarters of 2023, more than the back half, we would expect to just have maintained momentum. We lost a little bit of momentum. We fully expect to gain it back, and we fully expect with our, you know, strong, sustained release schedule across, you know, 70-plus markets around the world, to perform like we always have, which is consistent with industry performance.
If you think about just, I mean, maybe you kinda just answered the question, but in light of the slowing growth in RM streaming over the last several quarters, has this at all changed how you're thinking about the long-term drivers of recorded music streaming in terms of, you know, P x Q equation?
It doesn't change it. I mean, we still have a lot of conviction that streaming has an extraordinary amount of growth, but now driven by a series of drivers, not just developed market subscription growth. It's developed market subscription growth. There's now pricing that we're starting to see with several big players taking pricing and others talking about price increases. We see that as something that is really picking up momentum. Ad-supported has been a challenge this year due to the macro factors. You know, ad-supported is quite cyclical.
Right.
It can grow over a long period of time in line with subscription, but it'll have periods where it's in decline with a tough economy, then in periods where it'll come back very, very quickly. We still see all the growth drivers in place, including emerging subscription, and we think it's kind of a solid period of growth in front of us.
Great. Thinking about emerging streaming platforms for a moment o n the call, the most recent call, you reiterated WMG's multi-year OCF conversion target range, but made it, you know, commented that maybe not necessarily in 2023. Not asking for guidance here today. We'll save that to the end i t sounded like you're intimating, however, that some emerging streaming platform deals renewals may have been delayed or may be slipping in terms of timing. Am I reading that correctly?
What I would say is, we have always said, we've certainly said for multiple years, that our multi-year target for operating cash conversion, is 50%-60%. We've always signaled multi-year 'cause there's always, every quarter is not the same in our business. There are deals that when they close, whether it's a distribution deal or A&R related deals or some M&A activity that affect within your cash flow, within quarter, within year. When you look at a multi-year period, we expect to hit our targets, and we manage to hit our targets. I'm not trying to call out any one specific deal, so much to say there's a lot of activity, and when things close can affect which quarters over-deliver and which quarters under-deliver. In aggregate, we expect to get to our sweet spot.
Not tying it to one deal, but certainly, there are a series of deal and transactions that can affect which quarters do extremely well and which quarters fall a little bit behind.
Yeah, I think we saw that in the fiscal fourth quarter of 2022, right? You had closing of a deal, kind of OCF conversion.
By the way, fiscal fourth quarter of 2022, we closed the deal, had a great fiscal Q1 of 2022 at another very strong cash quarter. Fiscal two, which structurally is one of our slower quarters, we pay bonuses and things like that, was a little behind. Q3 and Q4 have an opportunity to perform well, but we will see what deals close. We don't, you know, we try not to do is over-signal individual quarters because we wanna make sure that the deals we do are ready to do and we're not rushing to a timetable to do a deal where we leave value on the table.
Right. Great segue. That on the call, Robert said that if traffic moves from one platform to another, you wanna, you know, WMG wants to feel neutral about that. We—
Yeah.
We interpret that as Robert striving for equivalent economics based on level of consumption across platforms, it sounds like. Is this is referenced to one specific renewal, or just broadly, this has to more do with his comments of, you know, structuring deals smartly and, you know, comments he's made in the past?
It's really the latter. What I would say is that Robert's been on board for about four months, a little more than four months now. I think what he's trying to share is his philosophy, which would apply across deals and segments of the business. I think two of his key philosophies, one is negotiate collaboratively and broadly with our trading partners. Understand their plans to grow the music industry, make sure we're aligned in that, and if we're aligned, understand their different levers and values and see if we can put deals together where we're helping them as much as we can grow the industry so that there's as big a pie as possible to share, so that we're not just doing tactic, but we really have a broad strategic relationship with our trading partners.
The second one is this issue of fairness. The issue of fairness is one where we have now a very literally hundreds of broad array of digital distributors across many different product types. What we don't want to do is have certain distributors that get that weren't motivated to give favorable treatment or unfavorable treatment because they have a very different economic model than some of their competitors. We want to be, we want to support all of our distributors equally. We wanna be as aligned with them as we can, and that means to have economics that are as fair as we can across distribution types and distribution platforms.
He's really trying to create an environment of fairness, which also works to the benefit of our distributors, so they're on a level playing field, and they can compete for consumers on that level playing field. He's trying to explain the backdrop of his strategy and philosophy of negotiations. As individual negotiations happen, that will be the mindset which he brings to the discussions.
In light of that, have you seen, or is WMG pushing for more variable, you know, by the drink deals with emerging streaming platforms, given, you know, just the growth and engagement, y ou know, some of the monetization gaps that, you know, result?
We have pushed for variable deals, pretty rapidly out of the gate with these emerging streamers. It is a challenge to do in many cases. It is as simple as if they don't have the content tracking technology, then you can't track consumption, and then you can't really pay variably. If you can't report on it, you can't pay on it. Encouraging and working with our distributors to develop that technology is important. If they don't have that, then we have to do, obviously fixed-price deals, which is what most of our emerging streaming deals are. There are a few now that have moved to variable or have a composite of fixed and variable components. I think when we did our Meta deal last year, we announced that user-generated content had a variable component m oving towards, which is nice progress.
What we do have, even if we do fixed deals, is the ability to look at the high level data for how they've trended. When we did you know, generation deals two, three years ago, there was very little, if any, data to know what their trajectory was. Now we know a lot more about that, so we can figure out or estimate what, fair, using the prior question, fair economics are, and estimate what the right amount is. We can still try to get to fair economics, even if it's fixed, although it's obviously easier to do if it's variable.
Still evolving.
Still evolving and I'm sure will be for some time to come.
Recorded music growth, streaming growth continues to accelerate in emerging markets. On the 2Q call, you talked about some of WMG's initiatives.
Yeah.
in the Middle East and North Africa, as well as Sub-Saharan Africa. I mean, how has this strategy evolved over time, and which markets within the WMG portfolio are you most excited about?
Yeah. I think you hit the two keywords. I don't think our strategy has evolved. I think we created it about 8, 9, 10 years ago. I think the markets are evolving. In each market we assess in kind of in a bespoke or unique fashion to make sure we put the strategy—
Got it.
In place for that market. As far as strategy, what we have always prioritized is financial return. What we haven't done is invest in emerging markets that are still riddled with piracy and that streaming is not yet ramping up, 'cause you can invest a lot of money in creating music that's not gonna generate a return. We've been very hesitant to do that. When we see markets that are coming online with streaming and digital distribution, and we forecast we can generate a return, then we take very seriously entering that market in a very serious fashion. When I started the company in 2014, that market was China. Tencent was looking to really roll out their music platform. They were also very committed to working with the government to combat piracy.
We were the first major to license our content to Tencent, at roughly the same timeline, we acquired the Gold Typhoon catalog and built our market share very quickly, both by developing local music, but also by having a catalog. We've used that similar approach across the world in the in-between years, whether it's in Central Europe, Southeast Asia, we've built a series of emerging markets. You mentioned Middle East and Africa. Those are two markets we've investing aggressively over the past few years and continue to four, five years ago, we launched a label group in Lebanon as a headquarters, used that and that team to do deals in Rotana, the largest label group, which we invest in the Middle East and have global distribution rights to that.
We acquired Qanawat, the largest music distributor, and our market share went from single digits to roughly 20% in just a couple of years. Africa's earlier in the journey. A similar strategy where we have boots on the ground, but we've also invested in a label group in Nigeria, Chocolate City. We acquired Africori, a major music distributor, and we're building out our infrastructure there. There's other markets at early stages, whether it's India, Vietnam, Turkey, that we're looking at, that we've launched labels and we're looking at opportunities to expand our growth, and we'll continue to look for markets that are coming online. Emerging markets are very important to us, and we always have a series of next markets that we're looking at and tracking very carefully.
In light of what appears to be less catalogs coming to market versus, you know, the slew of deals maybe several years ago, you know, in lieu of that slowing pipeline, do you lean into emerging markets more? As you think about those, are they equivalent trade-offs from an ROI perspective?
We tend to look at them as coming from different buckets. We never saw the kind of acceleration of catalogs just coming onto the market as permanent. It was driven, you know, our analysis both by the lack of artists' ability to tour and looking for an additional revenue stream, very low cost of capital and a lot of money, willing to pay, you know, fairly, you know, significant multiples for catalogs, just created a moment. Now it's reached a more normalized environment where there's some catalogs that come up, but not a massive influx all at the same time. We look at catalogs all the time. We always view it as opportunistic.
If there are catalogs that are of size that we acquire, and we've acquired some, especially on the publishing side, most recently the David Bowie publishing catalog, we've generally financed them with debt. Part of the reason that we've done that is exactly your question, which is, we don't wanna divert internal operating cash flows that are slated to invest in A&R or emerging market expansion. We want that to be a continuous flow to drive growth.
Okay.
We view these catalog acquisitions as somewhat opportunistic, and therefore, we funded them with outside capital.
Makes sense.
Is generally what we've done.
Okay. Now just closing the loop on, recorded music streaming here. If you think about the moving parts we've just discussed.
Yeah.
You know, potential rebound in ad-supported streaming, you know, likely to come, whether it's back half this year, but maybe the next several quarters. What do you think the long-term composition of recorded music streaming will be on, going forward, right? I think we've talked about a, you know, maybe 70% subscription, you know—
Yeah.
Emerging streaming platform, you know, balance of the remainder.
What I'd say is, traditionally what we've seen is steady growth in subscription streaming, and I think that would be reasonable to expect. Certainly, when we look at third-party forecasts, that's what's forecasted, and with, I think, good logic. Ad-supported has generally grown in line with subscription streaming, except with a bit of a sine curve.
Right.
More cyclical based on how economic factors are doing, generally tracks that line with more cyclicality based on, you know, slowdowns when the economy is poor and then rapid accelerations when it recovers and when the economy is solid, grows stably. Emerging streaming is the interesting one because that's not really limited by a TAM. Subscription streaming, generally, people are gonna have one subscription to a streaming service, and that gives them the product that they need. With emerging streaming, you have potential for multiple products in a home, multiple products per person in a home.
Yep.
People use multiple social media products. They play games. You know, they have fitness products. All can be within the same home. You have the ability as products develop and products roll out for emerging streaming to become two, three, four use cases in a home, and therefore, has the potential to grow faster. I don't know for sure that it will, but certainly so far, we've seen it growing faster. As emerging streaming reaches scale, we hope it has the innovation of that side of the business continues, and it continues to accelerate that growth.
It increasingly sounds like Spotify will raise prices this year, but, you know, noted that this is part of the discussion with, you know, their partners, the labels. They've also said that they're looking to optimize growth. If we think about, you know, besides seeding perhaps some economics to Spotify to incentivize a price increase, what are the other areas or other levers at your disposal, you know, to help them optimize growth?
That's a tough one to answer. I mean, we're generally pretty careful not to try to negotiate in public, so I'm not gonna directly answer. I'll kind of more approach-wise say that several of the largest players in the industry, Apple, Amazon, Deezer, have taken upon themselves to raise rates. They've done it successfully. I think the market has beared, has proven it can bear rate increases. The price value of music is extraordinary when compared to other media products, especially other streaming media products, video, for example. There has not been rate increases historically over the past decade, so it's long overdue. Certainly, we encourage our partners to look very, very, very, very seriously at raising rates. I wouldn't wanna signal any private discussions in public.
Fair. Much to the chagrin of some in the room, perhaps. How do you think, you know, what, I guess, gives you confidence, or how do you think about the industry shifting to more recurring price increases? How does that factor into, you know,
Look, I grew up professionally at HBO, where price increases were something we did every single year, the cable industry did every single year while growing subscribers. I think, and I am hopeful, that now that the industry has done around, or at least much of the industry has done a round of rate increases successfully and continue to grow, that they start to understand that the industry can bear it. They start to have confidence in the ways to do it successfully, that they continue to look at the price value of music relative to what consumers pay for other products and understand that there's more room for increases and starts to build, if you will, a confidence and understanding that pricing can become and should become a normal part of the industry.
Certainly, in our conversations with our distributors, we are doing what we can to try to encourage not just a price increase, but a recurring set of price increases as part of the industry.
In regard, if you look at ecosystem-wide, you know, amongst the labels, not only is just RM streaming growth, you know, maybe slower below industry at WMG, you know, you're seeing a little bit of that at UMG as well as, you know, your peers as well. I mean, does this create more urgency to update, you know, the terms of trade or the monetization within the DSP model?
Updating the terms of trade is an issue that has been building for a while. I think what I would do is put it in the historical context. When the current deal structures were created, generally, it was when the industry was starting, call it 10-15 years ago, when the content being uploaded on services was generally the content from majors and indie labels. As the industry has evolved, and as there are now tens of thousands of tracks uploaded every day of different types, of different qualities, from different places, the compensation formulas just haven't evolved to keep up with the structure of the industry. Modernizing the payout structures is something important to look at and update to make sure it's consistent with the value that different content brings.
We believe very strongly that the content that we bring is a huge part of what brings acquisitions and retention to the platform, and it's important that be recognized. It's something we're leaning into pretty, you know, pretty meaningfully.
I think we were talking before, you know, before starting the session here, that, you know, near daily headlines about, you know, AI and, you know, Forbes article over the weekend as well, about, you know, the impact, you know, on the music industry. It seems to be a bit overblown at the moment, you know, with limited impact, you know, perceived limited impact on the WMG business or the overall labels. On the call, Robert, you know, suggested he was looking at AI in, you know, in terms of using it for offensive as well as defensive purposes. You know, are investors spending too much time thinking about the negative impacts on the industry while underestimating the potential benefits to the industry?
First of all, I'll start with, Robert comes from a tech media background. AI hasn't been an issue before, but there have been other issues in the past that have similar profiles. On the earnings call, he talked about UGC, where UGC was a threat. You know, call it 10 years ago, and UGC was a threat to monetization, a threat to diluting, you know, produced content, et cetera, et cetera. You know, those at YouTube, and with Robert being in a leadership role, turned that challenge into an opportunity. They turned it into a multi-billion dollar business. They developed the technology to track UGC so that what was legitimate and not legitimate could be taken down or compensated for as appropriate. That industry has evolved into a very successful framework for the music industry.
AI, although not the same, I think requires the same mindset of someone that understands tech and media. Robert, not just himself, but he's brought in a series of people, both from Google, YouTube, to run the technology and strategy teams and other tech companies, to work with the pre-existing management team on the issues of our business. AI is clearly one. We and they are taking this very, very seriously. Absolutely, the objective is not just to see this as a challenge, it's to make sure we understand the challenge and the risk, and that we manage it very thoughtfully, but also to see the tremendous opportunity and make sure we develop the strategies and potentially the technologies to help drive revenue and efficiency from them. So we see AI as another exciting development in the industry.
I don't think we think overreacting to some negative concern is fair or balanced. It's appropriate to realize there are risks, I think it's also really appropriate to recognize there's could be huge opportunities across the business. That we're prepared to really work that through and attempt to become, you know, someone that takes advantage of it.
Little over four minutes left here. Wanna make sure we hit a couple more items. I think one thing was, you know, jumping, you know, ahead here, but one of the things that I thought was interesting was Sony's announcement this week to make a majority investment within Proactiv Entertainment. I mean, as you think about WMG's capital allocation, does it make sense to perhaps widen the aperture of potential investment areas beyond DSPs and into some interesting opportunities or in, investment areas like, you know, Sony just delved into?
What I think we'd say is. Again, I'll bring it back to Robert. Robert, one of his first hires was to bring in a head of strategy and ops, and the team, the strategy team, Robert, and the business team are working together on a forward-leaning strategy. That is not something that is completed, certainly not in terms of its capital allocation. That's something that'll be developed going forward, including through the budget process. What I would say on that is, as we complete the strategy and financial allocation process from that easily could, not saying it will, but could impact how we deploy capital, including M&A. I think that's something that we need a minute to work through with Robert and the team, but it's something that is actively being developed.
What Robert has said, and what we've said is, you know, we are reallocating some resources towards technology. Certainly looking at technology as a driver of efficiency or scale in the business is a major kind of focus and lens and how specifically that plays out, we'll see over time.
Again, not asking for guidance here, but I think along those lines, in terms of the reallocation of resources, just thinking about, you know, you're still in budgeting or, you know, Robert and the team are still in budgeting planning mode. If we think about potential tech investments in products in terms of your CapEx profile.
Yep.
$100 million was kind of like the baseline many investors had assumed. Could we assume that, you know, there's perhaps some upside to that, you know, sizing, timing, you know, magnitude might, you know, TBD, but in terms of Robert leaning in on some of these opportunities, they're probably, as we look out into fiscal 2024, safe expectation.
I think that's a reasonable expectation. I think that what I had signaled prior to Robert coming is that our CapEx would remain elevated as we finalized our financial transformation, but once we started to wind that down, that our CapEx would come down to, you know, call it roughly $100 million a year ballpark. As Robert is reallocating resources towards technology, it's reasonable to assume a portion of that would flow into CapEx, and the CapEx would be higher. As you said, I think it's TBD as the strategy and allocation of capital are worked through in the coming, you know, next section of time. I think we need a little bit of time to get to that kind of more budget level, you know, direction. Yes, I think the direction of travel, I think your thesis is correct.
Yeah. Some of the cost initiatives, the RIF, right, that'll help perhaps pay for your sponsors.
The headcount reductions and restructuring is absolutely a portion of that being allocated to fund the increase in tech investments. Yes.
Last question here, lightning round. You guided to 50 to 100 basis points in margin expansion this year. You know, the first half is actually, you know, in within that range, towards the lower end, but within that range. What underscores your confidence in that 50 to 100 basis points of margin expansion, you know, maybe in light of the slower, quote-unquote, you know, RM streaming growth in the back half of the year?
Remember that our RM stream, streaming growth we expect to increase in the second half relative to the first half. We grew margins in the first half of the year in the range of 50 to 100 basis points. With accelerating streaming growth, we think that's attainable. In the second half of the year, we think that's attainable. The other thing I'd say is the first half, we had a tough comp. We had an extra week in the first quarter, first half of fiscal 2022, which is really an extra week of revenue without at high- margin.
Right.
We had a tough comp, and we delivered margin growth the first half of the year. We have a stronger release schedule, expect, improving streaming growth the second half of the year. That should be positive to margin enhancements. We feel good about margin for the year.
Well, Eric, thanks again for joining us here today. Again, congratulations on the retirement and.
Thank you.
Thank you all for joining us. Have a great day.
Thanks, Sebastiano. Thanks for joining us. Pleasure. Okay. Thank you.