Warner Music Group Corp. (WMG) Q1 2021 Earnings Call Transcript

Welcome to Warner Music Group’s First Quarter Earnings Call for the Period Ended December 31, 2020. 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’d like to turn today’s call over to your host, Mr. Kareem Chin, Head of Investor Relations. You may begin.

Good afternoon, everyone. Welcome to Warner Music Group’s fiscal first quarter earnings conference call. Our earnings press release, earnings snapshot, and the Form 10-Q we filed this afternoon are available on our website. On the call today, we have our CEO, Steve Cooper, and our Executive Vice President and CFO, Eric Levin, who will guide you through our results before we open the floor for your questions. Before Steve begins, I would like to draw your attention to the second slide of the earnings presentation, which reminds you that this communication includes forward-looking statements reflecting Warner Music Group’s current views on future events and financial performance. We will present certain non-GAAP results during this call and in the new earnings snapshot slides available on our website. Reconciliation schedules for these results to our GAAP results are included in our earnings press release on the website. Additionally, all revenue figures and comparisons discussed today will be presented in constant currency unless stated otherwise. All forward-looking statements are made as of today, and we do not assume any obligation to update them. Our expectations, beliefs, and projections are presented in good faith, and we believe there is a reasonable basis for them. However, there is no guarantee that management’s expectations, beliefs, and projections will be realized. Investors should not place reliance on forward-looking statements, as they are influenced by various risks, uncertainties, and other factors that could result in actual outcomes differing significantly from our expectations. Further information on the factors that might cause actual results to differ materially from those in the forward-looking statements can be found in our earnings press release, our Form 10-Qs, Form 10-K, and other SEC filings. Now, I will hand it over to Steve.

Thanks, Kareem. Good afternoon, everyone, and thanks for joining us, and welcome to our first quarter earnings call. We are happy to usher in the New Year and we are excited about all that 2021 has to offer. With a broad vaccine rollout on the horizon, we are hopeful that the world can safely begin to reopen and that we will start to see some return to normalcy. In the meantime, we are very fortunate that our core streaming business remains as strong as ever and that music has a rapidly growing presence in new and diverse applications. In fact, Q1 was the highest revenue quarter in our 17-year history as a standalone company. Our revenue grew 4% year-over-year from our previous record high in Q1 of 2020, an achievement that we are especially proud of given that we accomplished this during the pandemic. The strong, double-digit revenue growth in digital more than offset the continued disruption in Recorded Music’s artist services and expanded rights revenue and Music Publishing’s performance revenue. Excluding revenue from those areas, our year-over-year revenue growth in Q1 would be approximately 8%. Adjusted EBITDA was up by approximately 20% year-over-year with margins improving to over 22%. Even with the decline in lower-margin revenue streams such as artist services, this growth highlights the operating leverage driven by digital’s increasing contribution to our overall revenue as well as our focus on operating cost management. Our Recorded Music revenue returned to year-over-year growth and was up approximately 5%. Double-digit growth in digital revenue more than offset declines in physical and artist services. Our primary goal will always be to create and deliver a constant, ever-growing flow of dynamic and diverse new music. Our success was on full display when the Grammy nominations were announced in late November. Artists from every one of our U.S. label groups were recognized, as well as talent from the U.K., Nigeria, Jamaica, and Germany. We had two of the most nominated artists of the year with previous Grammy winners, Dua Lipa and Roddy Rich, each getting six nods. We also did exceptionally well in the big four categories with two nominations in each, Coldplay and Dua in Album of the Year; Roddy and Dua in Record of the Year and Song of the Year; and Chika and triple-nominee, Ingrid Andress, in Best New Artist. 2020 was a landmark year for our labels, with Atlantic taking the number one spot for the fourth consecutive year in on-demand audio streams in the U.S. as reported by Nielsen. Looking ahead, we expect this winning streak to continue with some amazing music from both our emerging talent and global superstars. In Music Publishing, revenue was essentially flat in the quarter, with digital revenue growing almost 36% year-over-year. This impressive jump was offset by the dislocation and performance where revenue was lost from the ongoing closure of bars, restaurants, clubs, and concerts. Mechanical revenue was down given the continued contraction in physical sales. Sync revenue was also down, but we expect an upward trajectory as COVID subsides and television and film production resume. Warner Chappell continued its creative revitalization in Q1 as its writers contributed to 10 No. 1 charting singles in the U.S., including hits from Pop Smoke and Ava Max. Warner Chappell Nashville continued its impressive run being named Country Music Publisher of the Year by ASCAP for the eighth consecutive year and by BMI for the third consecutive year while winning Song of the Year from both. And on the international front, Warner Chappell topped charts across the globe with releases from MNEK, Master KG and Nomcebo, Rauw Alejandro and Jhay Cortez among others. There has been a lot of coverage about new players doing big-money deals for Music Publishing assets. This is powerful recognition of the value of music, and we are willing and able to pursue those deals when we believe they make sense. However, given our rigorous financial discipline, we never buy market share at a loss. Instead, we are in the business of developing songwriters’ global careers and catalogs. We build value over the long term through our extensive expertise in global infrastructure. With this in mind, Warner Chappell is unique among the majors for having established a dedicated creative services team that mines our catalog for incremental revenue. As one example announced just last week, our creative services team helped launch the 50th anniversary celebration of the Sound of Philadelphia. This launch includes a partnership with smart speaker manufacturer, Sonos, for a new radio program, which we are honored to have hosted by a long-time Warner Chappell icon, Kenny Gamble. We also have a suite of proprietary tools that helps us create new licensing opportunities all around the world for our deep catalog and hidden gems. These tools include our song demo database Ero, and our beat broker service offering easy-to-clear curated songs for sampling. As we have said before, we have a one-company philosophy and Warner Chappell and Recorded Music work closely together to maximize the value of all rights. Our sound recordings and our musical compositions are critical to any comprehensive music service offering, and Warner Chappell’s fractional or full ownership of well over 1 million songs gives us an expanded reach in all of our digital negotiations. As we look ahead, our revenue opportunities are vast and diverse. We continue to see robust growth in both subscription and ad-supported streaming with plenty of runway around the globe. At the same time, the pandemic has accelerated consumer adoption in areas like in-home digital fitness, video gaming, live streaming, and social media. These platforms rely heavily on music, and we are at the forefront of helping them invent and evolve new commercial opportunities. Here are just a few examples from this quarter. With the rapidly growing gaming market, two clear trends have emerged: games as virtual shared social spaces and a shift towards user-generated content. Our recently announced stake in Roblox aligns WMG with a leading platform at the intersection of both of these trends. Roblox is a metaverse of social experiences with an in-game currency, Robux and 40 million daily active users, each spending an average of more than 2.5 hours per day on the platform. That level of engagement is unmatched by social networks. As the only music company to have invested in Roblox’s last round, we are in a strong position to create next-generation, music-based fan experiences and products. We have a number of upcoming events that we are excited to announce in the near future. Secondly, our ever-expanding relationship with TikTok, since being launched outside of China a little over three years ago, this social media app has reportedly attracted more than 1 billion monthly users. TikTok’s creator community now has broad access to the latest hits and classic tracks from our artists and songwriters. Our deal with TikTok will also see us collaborating on imaginative marketing campaigns and offering new ways for fans to express their creativity. There is exciting competition in this space with other companies like Instagram, YouTube, Snap, and Tencent also exploring how to integrate more music into everyone’s social media feeds. Third, we revealed last week that we will be a launch partner for Adaptr. This is a first-of-its-kind service that enables developers to quickly and easily license music. Adaptr is designed to accelerate innovation, reduce infringement and generate incremental value for our artists and songwriters. With so many startups experimenting with music, Adaptr allows them to go straight to market and forge a whole new frontier of commercial possibilities. Fourth, we are differentiating WMG in the marketplace through our collection of owned and operated direct-to-consumer destinations. This global network brings us closer to millions of music fans while helping us better understand their behavior and emerging cultural trends. Our consumer brands, EMP and UPROXX, as well as our social content publisher, IMGN, all showed double-digit revenue growth in Q1. As our business continues to be pressure tested by COVID, these destinations have been a stabilizing force adding to this quarter’s strong results. The biggest contributor was EMP, our European merchandising e-tailer. With many brick-and-mortar operations remaining under COVID restrictions, EMP seized the opportunity and drove its first quarter revenue up by over 30%. A clever marketing plan generated healthy sales from Black Friday through Cyber Monday, with average order values over those four days increasing by 36% year-over-year. We recently brought in Maria Weaver as President of our Global Artists and Label Services Network, WEA, to oversee all of our D2C efforts. Previously, she was Chief Marketing Officer for Comcast Advertising and she brings a wealth of new ideas and expertise to help monetize our ever-widening range of music products and experiences. As COVID continues to test our results, we have adapted and become even more resourceful in finding ways to enhance our company’s outcomes. Under difficult circumstances, we have achieved record-breaking results, all the while maintaining our track record of financial discipline. We have some fantastic new music from amazing artists and songwriters on the way, and we continue to grow our investment in a new generation of talent while inventing bold and memorable ways to impact global culture. And with that, I will turn it over to Eric.

Thank you, Steve, and good afternoon, everyone. We are very pleased with our financial performance in the first quarter. Last year's Q1 was a record-breaking revenue quarter for us and was also the last reporting period unaffected by COVID. In light of that challenging comparison, and while still dealing with the pandemic's challenges, we managed to return the company to growth and achieve a new all-time high quarterly revenue as a standalone company. Our business model has demonstrated its robustness and flexibility, supported by ongoing strong growth in our digital and direct-to-consumer businesses, along with our financial discipline. While COVID still poses challenges in some areas, we have proactively pursued other opportunities whose growth was accelerated by the pandemic, positioning us favorably as things return to normal. In terms of our performance this quarter, total revenue increased approximately 4% on a constant currency basis and 6% on an as-reported basis compared to the previous quarter. Artist services and Recorded Music in Music Publishing were most significantly impacted by COVID due to tour cancellations and postponements. Excluding those areas, our revenue grew 8% on a constant currency basis and 10% on an as-reported basis compared to the same quarter last year. Both adjusted OIBDA and adjusted EBITDA saw substantial year-over-year increases, reflecting the ongoing shift in our revenue mix from physical to digital. Adjusted OIBDA rose about 18% to $282 million, with the margin improving from 19% to over 21%. This improvement was driven by a greater contribution from higher-margin streaming revenue, effective cost management, and the impact of previously announced transactions that closed during the quarter. Adjusted EBITDA increased 19% to $297 million, with the margin rising from 20% to over 22%. This growth was primarily attributed to the same factors influencing our adjusted OIBDA performance, in addition to higher pro forma savings expected from our transformation initiatives and the pro forma impact of those previously announced transactions. These transactions added $5 million to adjusted OIBDA and $9 million to adjusted EBITDA in the quarter. Excluding this contribution, our adjusted OIBDA and adjusted EBITDA grew 13% and 16%, respectively. Adjusted OIBDA excludes one-time costs related to restructuring, other transmission initiatives, COVID-related expenses, and non-cash stock-based compensation expenses in both the current and prior quarters. Adjusted EBITDA excludes these items and includes expected pro forma savings from our transformation initiatives and the pro forma impact of previously announced transactions. Please refer to our press release for calculations and reconciliations. In Recorded Music, Q1 revenue rose approximately 5% over the prior year quarter. Digital revenue grew 13%, driven by a 16% increase in streaming revenue. The streaming category saw growth across all key components, with both subscription and ad-supported streaming growing in double digits, and growth from emerging streaming platforms significantly outpacing the broader category. Physical revenue decreased 9% as the ongoing transition to streaming and COVID impacted sales, although it was partially offset by strong physical releases during the quarter. Licensing revenue declined 1% due to reduced deal activity and advertising in television and film related to COVID, though this was offset by certain one-time settlements. Artist services revenue, encompassing tour-related merchandising and our direct-to-consumer merchandising through EMP, decreased 9%, and revenue related to concert promotion and tour-related merchandising saw a significant year-over-year decline. EMP experienced robust growth of over 30%, bolstered by a strong holiday season as COVID restrictions limited brick-and-mortar shopping in Europe. For Q1, Recorded Music adjusted OIBDA increased 16% over the prior year quarter to $275 million, driven by a shift towards digital revenue and overall cost savings. Adjusted OIBDA margin increased 2 percentage points to 24%. Music Publishing revenue declined 1% in Q1, although digital revenue grew by 36%, propelled by an increase in streaming revenue, which offset declines in performance and sync, as well as a decrease in mechanical revenue. Music Publishing adjusted OIBDA rose 18% from $34 million to $40 million, with margins improving from 20% to nearly 23% due to changes in revenue mix. In the first quarter, operating cash flow improved to $169 million from $78 million in the previous year, thanks to strong operating performance and timing of working capital, including payments from certain digital services. Free cash flow decreased from $46 million in the prior year to negative $174 million, impacted by increased investment activity linked to previously announced transactions, although this was partially offset by an increase in operating cash flow. Capital expenditures in the first quarter totaled $18 million, up from $15 million in the prior year, reflecting our plans to upgrade IT and finance infrastructure. The total investment for this program is expected to be around $20 million in fiscal 2021, with anticipated annualized savings of approximately $35 million to $40 million once fully implemented. For fiscal 2021, we project total capital expenditures to be between $90 million and $100 million. Cash taxes amounted to $17 million in the quarter. On December 1st, we paid our regular quarterly dividend of $0.12 per share, totaling $62 million for the quarter. By December 31, we held a cash balance of $566 million and net debt of about $2.8 billion. On November 2nd, we completed a $250 million addition to our three 3% Senior Secured Notes due 2031. The proceeds of this financing, along with approximately $90 million in cash on hand, were used to fund previously announced transactions totaling $338 million. Additionally, on January 20th, we amended our term loan credit agreement, extending the maturity from November 1, 2023, to January 20, 2028, and eliminating several negative covenants. In conclusion, we are encouraged by our first-quarter performance, which gives us a strong start to the year. Despite ongoing challenges related to COVID, our solid streaming growth, outperformance in our direct-to-consumer business, and strong physical releases during the quarter have reinforced our confidence in achieving significant growth in fiscal 2021. We appreciate your participation in our call today, and we will now open the floor for questions.

Our first question comes from Michael Morris with Guggenheim. Your line is open.

Thank you. Good afternoon, guys. A couple of questions for me, the first one is on streaming and those streaming revenue sources that were strong in the quarter. Eric, I am hoping to maybe push you a little bit on some more detail of the contribution from the new partnerships and the relative performance of the subscription side versus the ad side, it sounds like all were strong. But any additional detail you could give us on maybe relative performance and also how those are pacing in the fiscal second quarter? And my second question, there are a couple of things specifically that you have cited as benefiting during COVID. You have had your virtual concerts, Steve, you spent some time talking about EMP. My question is, as we look forward and hopefully see things starting to open up, do you expect some regression in those areas or do you think you can continue to have a strong base and see perhaps a live event recovery? Thanks, guys.

Okay, great. Let me address your first question. We can categorize streaming into three main areas: subscription, ad-supported, and emerging digital revenue. Both subscription and ad-supported streaming are now performing similarly, with growth in the double digits, which is encouraging. Subscription has consistently grown in double digits since the onset of COVID, while advertising experienced an initial decline but has shown quarter-over-quarter improvements. This is the first quarter where advertising growth has also reached double digits, indicating a strong recovery for ad-supported streaming. Emerging forms of streaming are continuing to grow at a much faster rate than subscription and ad-supported, as categories like social, gaming, fitness, and live streaming are expanding rapidly. Additionally, we're partnering with new platforms, which broadens our network of collaborators. We believe these positive trends across all three categories will persist as we maintain robust performance and a strong release schedule for the future. Regarding the categories, we anticipate continued growth in these areas beyond COVID. Particularly in emerging categories, we expect ongoing expansion due to consumer behavior surrounding social, gaming, and the rapid development of metaverses, which will drive our growth moving forward. We foresee innovation and new platforms emerging, leading to sustained growth during and after the COVID-affected period.

Thank you for that. And just to clarify on that second part, on EMP, that physical direct-to-consumer in particular as well. You feel that this is a base that’s growing and will be strong, sort of even post the reopening or do you think there is perhaps a little bit of a trade-off there with perhaps live events, merchandising or anything like that?

Thank you. That’s a great question. EMP is a business we acquired about three years ago, and we truly believed in their potential for long-term growth. Our experiences have only strengthened our confidence in the business and the management team at EMP. It's evident that the closure of brick-and-mortar stores has shifted consumers towards e-commerce platforms, which has benefited EMP. However, EMP has actively adapted by expanding their product offerings, innovating their marketing strategies, and enhancing their ability to reach customers while also growing their customer base across Europe. While a 30% growth rate may not be typical moving forward, we anticipate consistent and solid growth for that platform both during the COVID-affected period and beyond.

Okay. Thank you.

Thank you.

Our next question comes from Alexia Quadrani with JP Morgan. Your line is open.

Thank you very much. Can you talk about the impact from acquisitions you highlighted on your last call, I believe it was $338 million, and how did that impact your results this quarter and what do you expect the impact to be going forward? And then my sort of follow-up question is sort of a follow-up on your commentary and your answer to Michael’s question. I think he asked about the emerging growth platforms for gaming and fitness and stuff and how you will do there when the economies reopen. I guess my follow-up on that is a little bit different in the sense is, if we do see a pullback in gaming and we do see a pullback in fitness in terms of engagement, is your penetration level so early days that regardless of maybe a pullback in engagement in the broader population, you still can see kind of robust growth on those platforms because you have so much more to kind of grow within the existing platform?

Regarding the M&A, we acquired a company for $338 million. In the first quarter, it had a $5 million incremental OIBDA impact and a $9 million incremental impact on adjusted EBITDA. When we evaluate it on an annualized basis, these figures align with our expectations, indicating an annualized run rate OIBDA of approximately $37 million, which is consistent with our forecasts and the performance of these businesses. Concerning emerging platforms, we observe that music is becoming increasingly integrated into social gaming, metaverses, and various live streaming applications. We believe this is just the beginning, as music is present in many existing and new forms, and we anticipate that we will manage this line for growth throughout and beyond the COVID period.

Thank you.

Thanks, Alexia.

Our next question comes from Ben Swinburne with Morgan Stanley. Your line is open.

Thanks. Good afternoon. I want to hear from Steve on the strategy for these emerging digital platforms and what I mean by that is the press reported you guys signed, I think, a second TikTok deal in a relatively short period of time, I think the first one was in April and then this most recent one just in January. I know you can’t talk about specifics. But as these agreements evolve and you renew them, what other than trying to maximize your revenues are you trying to accomplish? How do these agreements and the business models behind them in your eyes evolve over time? Do they eventually look and feel like kind of streaming, so it’s a revenue share and relatively predictable or do you think these are going to be quite different? Also, specific to TikTok, hopefully, you can comment, they reported that there were over 70 artists that broke on TikTok and were signed by majors last year. I am just wondering how you guys are ensuring that you are able to find and sign the artists you want ahead of your competition? I’d love to hear your thoughts on those things.

Thanks, Ben. So let me start first with kind of how we see the shape of the world. Our revenue falls into, what I would call, four buckets. First, I am going to put aside physical and touring-related revenue and talk about really digital. So, in the four buckets, we have the traditional streaming. We see, as Eric has said, a lot of runway both with the established services in the more mature markets, as well as emerging markets. The second bucket is really the social platforms, and Facebook, Instagram, and Twitter are using more and more music, not because they are pushing it, but because their users are pulling it. With respect to the social platforms, we continue to shape and/or reshape our deals based upon how mature they are relative to their growth curve and what support we believe they need from us to blossom into very substantial sources of revenue. I think, as we mentioned to people during our IPO, the average startups we typically give breaks in exchange for futures and so far that approach has worked very well for us. The third bucket contains interactive business models. You have got Fortnite, you have got Roblox, you have got, in certain respects, some of the fitness models. We see ourselves as being part of those universes or metaverses, where we establish ourselves and our business as an integral part of those universes. Roblox, in particular, has a very interesting model where you can create your own business, your own world, in our case, our own music entertainment world inside of their metaverse. Our intent is to continue to work within these interactive digital worlds to create a strong presence for the Warner Music Group, where we are able, whether it be on a transaction or a sharing basis, to work with them to optimize our revenue and help them build their models. The fourth bucket is frankly all other and those are new models and new opportunities that are literally emerging day-in and day-out. I can’t tell you yet exactly how we are going to handle them, but we do know that we see a constant stream of opportunities to both partner and to invest in for the foreseeable future, and we plan on continuing to do that. With TikTok, specifically, we have a very close relationship. One of our recent acquisitions, IMGN, was recently named one of their top-five creators and we have very good relationships with the collective known as influencers on TikTok and with people that utilize our music. In fact, you may have seen, I don’t know, a month or two ago, that 'Dreams,' a 40-year-old song, was used on TikTok and came back into the top 10 on radio and the top 10 on streaming services. We work through our labels and through our affiliates around the globe to ensure that we have a strong relationship not only with the service itself but with the creators and developers on those services that wish to utilize our music and we wish to utilize their talent. Hopefully, that answers your question.

Yeah. Thanks. Even I heard of the Dreams thing on TikTok. That’s how big it was. Thank you for the color.

Yeah. Yeah.

Thank you. Our next question comes from Heath Terry with Goldman Sachs. Your line is open.

Thank you very much. Steve, I am curious about how you are preparing for Warner’s role in live music as we hopefully approach a return to normalcy. Is there current work being done to position your artists effectively for the revival of live events? How do you envision this opportunity unfolding for Warner to gain an advantage in the latter half of 2021?

Well, I actually see several things. First of all, I hope that the second half of calendar 2021, I hope that the vaccine is being broadly distributed. I hope that we get clarification on its efficacy rates relative to the new strains and that businesses can open and we can begin the, what I think is going to be a longer path to get back to some semblance of normalcy. What we are doing in the interim is a couple of things. Number one, we are taking advantage of live streaming to continue to promote our established and emerging artists and we are doing that with any number of digital streaming partners that are operating successfully in the live streaming world and in the virtual reality worlds. We are continuing to work in a variety of ways to grow the fan bases for established and emerging artists. We obviously continue to roll forward plans for our live activities, our promotional touring. But as you know, for our emerging talent, much of that relies on the opening of smaller venues and while we are hopeful that that’s going to happen sooner as opposed to later, we also know that the way we schedule this and the way we return to live has to be carefully crafted so that our artists don’t get lost in a traffic jam. Our label operators are looking at this on a regular basis because they know that when the gates do open, we have to be in the right lane so to speak. What we also believe, and I think that Eric touched on this as well, is peoples habits are changing and we are looking to, frankly, capitalize on that by establishing a sound foundation in live streaming and working on establishing live foundations in these interactive worlds, Heath. So we are aware of it. We continue to roll-forward our plans but we are looking at other ways, frankly, to capitalize on what’s been a for the planet, broadly speaking, a horrendous situation.

Great. Thanks. Thank you, Steve. I appreciate that.

Thank you. Our next question comes from Jason Bazinet with Citi. Your line is open.

Hi. This is maybe a dumb question but I am going to ask it anyway. When you guys talked about EMP, I sort of thought about it as a bit of a side show and with this IMGN media asset that you bought and your stake in, I think you have a stake in Roblox. I am starting to think we sort of are seeing the early outlines of a strategy to almost vertically integrate in a new way, not by buying a traditional streamer or anything like that. But is that the right way to think about how you are thinking about using your excess cash flow?

Well, I think that you should look at it in a couple ways, Jason. I got the name right, I hope it. I am doing this on an iPhone, so sometimes it’s a little scratchy. We are doing, I guess, you could look at our strategies, our growth strategies in a couple ways. The first is, we are going to ensure that our core businesses, Recorded Music and Music Publishing, that we continue to build thoughtfully with the right financial discipline those businesses. So we intend on over time continuing to increase our A&R budgets and the related budgets of marketing and promotion. We also plan on enhancing the footprint of those businesses on the Music Publishing side, primarily through catalog acquisitions, on the Recorded Music side, primarily through the acquisition of going concerns or opening new offices. What streaming has shown us is that it is more important than ever in our core businesses to be global and not Anglo-centric and that’s been one of our goals over the last eight years or nine years and we are going to continue to pursue that.

Yeah.

So that’s number one. Number two, some of the moves that we have made have to do with not only revenue diversification, where we see the world of musical entertainment in the next five years or 10 years, Jason. And where we see the intersection of social, gaming, and everything else are in these metaverses, where people come to them for any number of reasons and we want to make music a far more compelling reason to come to these alternative worlds.

Yeah.

So that is where we see much of the future and we intend on investing in a future that we believe is figuratively and almost literally around the corner. So your observation is accurate.

Okay. Thank you very much.

Our next question comes from Brian Russo with Credit Suisse. Your line is open.

Hi. Thanks for taking the question. This is a follow-up to a couple of the earlier questions either for Steve or Eric. When you look at the impact the shutdown had on the subscription streaming in calendar ‘20, it didn’t look like the subscription piece was really negatively impacted. When the world sort of returns to concerts and live events, hopefully, later this year, do you think we should expect to see the subscription streaming benefit at all, maybe with the notion that you have a lot more new music coming and new concerts might encourage consumers to subscribe? Thank you.

Well, I am happy to help answer that. So the return post-COVID for subscription streaming, we think the environment is growing solidly now. There are opportunities for that to grow potentially. We could break it into developed markets and emerging markets. In developed markets, we continue to see subscriber growth. We think we are still in relatively early innings and there’s ample room for subscriber growth. What we are starting to see with the DSP is there’s some experimentation with price increases and we think as that we hope and think there’s a strong opportunity for that to gain traction. So whether it’s Spotify, which has in selected markets increased the price of family plan, or Amazon, and we hope other platforms looking at high resolution as a tier that can support increased pricing. So we think that has the potential to be a positive impact on developed markets as their ARPU has the opportunity, which really hasn’t increased in the past 10 years, to go up. Emerging markets are really just starting to find their stride. It is really very, very early days, and we think that the growth there has the potential to really accelerate brands that they will be lower ARPU. However, those markets in the past were relatively light revenue contributors overall and as subscription streaming and ad streaming find their way into emerging markets, really has an opportunity to be incremental growth at very high rates. We do think that subscription streaming and ad-supported streaming have an opportunity to really continue to grow strongly going forward using those combination of factors. Hopefully, that answers your question, Brian.

Well, Eric, just a follow-up.

Yeah.

I think in a prior call, you were talking about back half weighted this year in terms of your release schedule; a lot more artists are releasing and that’s kind of what I was asking about, if you have a sort of like a push for lots of new releases and the artists will support this by touring, fingers crossed. Is that something that sort of moves the needle for the subscription streaming or is it all just sort of more based on the overall number of subscribers and some of the other ARPU opportunities you talked about?

No. It’s a combination, Brian. I mean, certainly, subscribers and ARPU are a huge part of the equation, but also market share is and market share can be driven through a combination of things. Obviously, new releases and having a strong release schedule is part of the formula continuing to mine our catalog and ensuring that new audiences are discovering our catalog. We are continuing to keep that robust. As such, yes, as releases continue to come out, and hopefully, we expect to have a strong release schedule, which we continue to work towards in the second half the year, we would obviously expect that and hope that drives streaming opportunities. So, yeah, we do think that is certainly something we are striving for.

Terrific. Thank you.

Thanks, Brian.

Our next question comes from Rich Greenfield with LightShed. Your line is open.

Hi. Thanks for taking my questions. First, you've been discussing gaming quite a bit, particularly the concept of the metaverse. I’m curious about the role of Twitch in this space. I understand that the industry is becoming stricter about copyright enforcement. How is Twitch positioned regarding their licensing of music from Warner Music? Is there a goal for 2021 to expand this partnership? Secondly, on a broader note, we've noticed that major subscription and even ad-supported streaming platforms are increasingly focused on podcasting. I've seen that podcasters are incorporating more premium audio content, including music. Is that where the opportunity lies, or could this trend risk taking away from time spent on music? How do you view the overall podcast landscape?

Let me start with Twitch. The industry is currently engaged in discussions with Twitch about licensing, and while there has been some contention, I am fairly optimistic that this will be resolved in 2021. This situation highlights the importance of music in the gaming industry, as it plays a significant role in enhancing the gaming experience. I believe a satisfactory resolution is attainable for all parties involved. Regarding podcasting, I have mixed feelings. We produce a multitude of podcasts that are available on platforms like Apple and radio, and we have a deal with Spotify, among others. While I think users primarily come to streaming services for music and podcasts, those who seek podcasts often end up listening to music as well, which benefits both mediums. However, I've noticed that podcasts tend to attract smaller audiences, with many niche topics. Unlike music, which people often replay multiple times, podcast listeners typically don’t revisit the same episode repeatedly. I believe the key to podcasting is providing continuous content for smaller audiences, and as we cater to these specific niches, I see them as a gateway that can lead to increased music listening on streaming platforms.

So you think that ultimately podcasting can actually help be a way to introduce music to different audiences than just traditionally just listening to music as a starting point?

Absolutely. When you consider all the traditional TV programs that used to introduce new music, like American Idol, The Voice, or Glee, podcasts can serve as a discovery platform for some people. If they enjoy what they hear, it can lead them to explore music that they’ve discovered, including broader podcasts and similar music since these are curated on various services. In my opinion, podcasting will indeed benefit the music industry.

Thanks for the thoughtful answers. I really appreciate it.

Thank you. Our last question comes from Jessica Reif Ehrlich with Bank of America. Your line is open.

Thank you. I have two topics to discuss: streaming and artists or talent. Regarding streaming, you mentioned this earlier, but Spotify is testing price increases in seven markets, and this has been ongoing for several months. Have you noticed any changes in dynamics due to these price changes, and if successful, is there a way for you to encourage other DSPs to follow suit? Amazon has a different offer. Also, within streaming, where do you anticipate seeing significant growth moving forward in new markets? Spotify recently launched in South Korea, and Russia was one of their largest launches. There's also discussion about DSPs entering Africa, which I imagine you have monetized well in the past. Switching topics, you mentioned in the press release and during the call several times about your upcoming release schedule for new and established artists. Can you provide any details about what we can expect? Thank you.

Well, Eric, let me make a couple of comments, and you may want to chime in. So just about streaming broadly and the monetization, Jessica, our view is that there’s still an enormous gap between the monetization of eyeballs and the monetization of ears. Ultimately, we think that all of the streamers, as they add new features and new functionality, by way of example, you cited Amazon with their high-res. You are right Spotify is experimenting with price increases. Ultimately, we think that all of the services over time will increase prices. We encourage them to do this and when we think about the tens of millions of tracks that people get for a few dollars a month, our expectations every day grow that the services will begin to raise prices for functionality and features, and Spotify is experimenting. We hope they broaden that experiment relative to pricing. As we have said, we think there’s a lot of runway still, not only in the more mature markets but in emerging markets. As they launch in new markets, even when they begin with free offerings, it exposes people to more and more music. You mentioned Russia. Well, in Russia, even before the advent of Spotify, there are a number of streamers that we and others have partnered with, and Russia is a nicely growing market. The same is true in South Korea. You mentioned Africa, where we have partnered with Africori, which is one of the largest music streamers and distributors in Africa. While these markets, by way of economics don’t look overly meaningful at the moment when you compare them to the U.S. or Japan or the U.K., they are growing. People are being exposed to curated music. People are being exposed to some of the world’s greatest artists, both global artists as well as local artists. Our view is that while the circumference of the globe is only 25,000 miles, with respect to the circumference of music, it’s a lot more. That was streaming in new markets. What was your third question?

Sorry, I was on mute. First of all, regarding Spotify, have you noticed any changes in consumer behavior due to the price increases? My second and final question pertains to your talent, which is crucial for you. You mentioned in the press release and a few times during the call about your upcoming release schedule for new and established artists. Can you provide any insights or visibility for the remainder of the year concerning these artists? Additionally, I found something you said earlier to be very interesting. While it's true that local artists will contribute to the market alongside international artists, how do you plan to introduce those local artists to Anglo markets as you aim to become more global and less Anglo-centric?

Well, all right, so I will do that. And then, Eric, can talk about any change in behavior. So we do cross our artists wherever we can and where we see potential in both directions. By way of example, one of the most prominent Chinese artists, JJ Lin, in one of his latest albums in China, we featured our artists from the west and vice versa. We look for crossover opportunities whenever we can and we do it because one of the things we have observed, and I think we have mentioned this before, is global hits can come from anywhere and resonate everywhere, and we are seeing more and more examples of that every day and we run our Recorded Music business in a way that not only are we global but we are also very local. You will see in the Grammy nominations, Burna Boy, who has put out perhaps three or four albums now with Atlantic. He’s the first Nigerian homegrown artist to be nominated for a Grammy, and we have successfully worked with him, because he’s such a talented kid, to take him global, so to speak. We do see that and actively work on it. We have taken Anitta from Brazil and expanded her influence across South America, Central America, Mexico, the Iberian Peninsula, and other regions. Regarding our release schedule, we usually don’t provide a forward look on that. I will say that when Eric described it as a very strong release schedule from both our top artists and emerging talents, he was absolutely correct. Eric, would you like to comment on any changes related to behavioral shifts?

I would be cautious in characterizing how Spotify’s consumers responded to their family plan rate increases. However, we believe this is a natural progression involving experimentation and gathering data on customer responses to determine if, when, and how to implement further rate increases. There have been reports indicating that Spotify has raised family plan prices in Canada and France, among other markets. We find this encouraging and indicative of ongoing momentum in expanding family plan price increases into additional markets. We see momentum building regarding price increases, and our deals incentivize both sides to support these raises. They are beneficial for both parties. We engage in ongoing discussions with the digital service providers about opportunities and price increases, and we are noticing positive movement from them in this area. While we don’t control these developments, we are certainly supportive and are observing early signs that suggest this movement is underway. Thank you.

Great. Thank you both.

Thanks, Jessica.

I’d now like to turn the call back over to Steve Cooper for closing remarks.

Well, I want to thank everybody again for taking the time to join us today, and I just hope you all stay safe and stay sane. Thanks again and we will talk to you in a few months. Bye now.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.