Warner Music Group Corp. Q1 FY2022 Earnings Call

Welcome to Warner Music Group's First Quarter Earnings Call for the period ended December 31st, 2021. At the request of Warner Music Group, today's call is being recorded for replay purposes. And if you object, you may disconnect anytime. Now, I would like to turn today's call over to your host, Mr. Kareem Chin, Head of Investor Relations. You may begin.

Good morning, everyone. Welcome to Warner Music Group’s fiscal first quarter earnings conference call. Please note that our earnings press release, earnings snapshot, and Form 10-Q we filed this morning will be available on our website. On today's call, we have our CEO, Steve Cooper, and Lou Dickler, our Acting CFO, who will take you through our results and then we will answer your questions. Before our prepared remarks, I'd like to refer you to the second slide of the earnings snapshot to remind you that this communication involves forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance. We plan to present certain non-GAAP results during this conference call and in our earnings snapshot slides, and have provided schedules reconciling these results to our GAAP results in our earnings press release. All of these materials are posted on our website. 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. Our expectations, beliefs, and projections are expressed in good faith, and we believe there is a reasonable basis for them. 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 to differ materially from our expectations. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our filings with the SEC. And with that, I'll turn it over to Steve.

Thanks, Kareem. Good morning, everyone and thanks for joining us. When we spoke last in mid-November, I indicated to you that we would have a productive end to 2021. The last few months have met those expectations. And as a result, we're off to a great start in fiscal '22. In Q1, our total revenue was $1.6 billion, an all-time high during our 18 years as a stand-alone company. We saw growth over the prior year quarter by 21% and 22% on an as-reported and constant-currency basis, respectively. Adjusted EBITDA was $389 million, an increase of 31% with margin improvement driven by strong revenue growth in both our recorded music and publishing businesses. In Recorded Music, our revenue was nearly $1.4 billion, another 18-year record, an increase of 21% from the prior year quarter. Streaming revenue grew 22%. Artist services and physical continued to show impressive recovery with revenue growth of 33% and 14%, respectively. Licensing revenue grew 13%. In Publishing, we delivered revenue of $229 million and a growth of 32% over the prior year quarter driven by double-digit increases across all revenue lines while the quarterly revenue and year-over-year growth also represent record highs. I've regularly highlighted our increasing focus on revenue from emerging streaming platforms in areas like social, fitness, and gaming. Until now, we've been reporting this revenue only for recorded music. Going forward, we will report this revenue for recorded music and for publishing on a combined basis. On an annualized basis, this revenue increased from $310 million in Q4 to $325 million in Q1 driven by growth in recorded music and publishing. Our approach to music is all about expanding our universe of opportunities. We are constantly seeking innovative openings to bring more music to more people in more ways and in more places. The agility and imagination with which we maximize the value of our music sets us apart from our competitors. Right now, a lot of money is being thrown at music as a so-called asset class. In this environment, artists, songwriters, and tech entrepreneurs have many different options for building their businesses and brands. We're being recognized for our unique position in this growing music ecosystem. Our creative expertise, our global infrastructure, and our willingness to experiment give us our strength and edge. While taking risk is part of our business, we pride ourselves on taking educated risks across a wide investment portfolio with a financially disciplined, ROI-focused perspective. Toward the end of the calendar year, we completed several strategic acquisitions that reflect our approach. We acquired 300 Entertainment, one of the most influential labels to emerge in the 21st century. It has developed a distinctive identity and a dynamic community of artists. We are honored to welcome to the Warner Music Group Megan Thee Stallion, Young Thug, Mary J. Blige, and many more. 300 shares the independent spirit that's always been part of the Warner story, our DNA, and our vision. With this deal, Kevin Lyles, who co-founded 300, became the Chairman and CEO of both 300 and our Elektra Music Group. We also acquired the rights to David Bowie's entire publishing catalog encompassing hundreds of songs over this revolutionary six-decade period. Three months earlier, we closed a new licensing deal for David Bowie's recorded music. We're now home to this incredible body of work as both a recording artist and songwriter. And in a deal that makes us one of the biggest music distributors in Africa, we acquired a majority stake in Africori, the continent's leading artist development, rights management, and digital distribution company. Last year, Africori reported strong revenue growth across all major revenue streams through the generation of hundreds of millions of audio streams and billions of YouTube views. These deals are already producing dividends. Gunna's new album on 300 Entertainment DS4Ever landed at number one on the Billboard 200, giving him his second chart topper. Just a month after our Bowie acquisition, Peloton introduced the David Bowie collection, which makes every release in his catalog available for Peloton users as the soundtrack to their workouts. 300, Bowie, and Africori bolster our already incredible roster of artists and songwriters. Our star power was on full display when the year's Grammy nominations were announced. Electric's Brandi Carlile and Atlantic's Silk Sonic both received multiple nominations. Also landing in the top categories were Atlantic's Ed Sheeran for song of the year and Warner Records' Sweetie for best new artist. In Publishing, we received numerous nominations, including song of the year and best rap and country songs among many others. We bring original artists and inspiring songwriters of every genre, geography, and generation to the world stage. We're a place where quality and diversity matter. That's the mindset behind our constant, ever-growing flow of great new music. In Q1, we saw the chart-topping return albums from Kodak Black and Roddy Ricch, as well as strong carryover performances from Ed Sheeran and Cold Blood. Latin American artists Tiago PZK and Petro have set social media on fire with hundreds of thousands of TikTok videos created from their hit songs. With over 800 million on-demand audio and video streams combined, Dua Lipa’s 'Levitating' was the most streamed song of 2021 in the U.S. and was the number one song of the year on Billboard's year-end singles chart. Atlantic's rising star, Gail, has racked up over 3 million TikTok video creations and half a billion streams from her debut single. South Africa’s CKay continues to hit new peaks with multiple versions of his global smash, 'Love Nwantiti', which has surpassed 600 million streams, more than triple what I've reported on our last call. Meanwhile, Warner Chappell continued its impressive run, signing key deals with Cardi B and R&B icon Jhené Aiko, and partnering on a new deal with Tim & Danny Music to sign Sam Smith. Warner Chappell was named BMI publisher of the year for the fourth consecutive year, and took home the CSX publisher of the year accolade, its second win in three years. Warner Chappell was also number one on Billboard's year-end Latin publisher chart for the fourth year in a row and ranked second on Billboard's year-end top 100 publishers list. Music is no longer linear, transactional or limited by format. It's complex, multifaceted, and interactive. The intersection of virtual social spaces, gaming, and music presents enormous opportunities to engage with massive and diverse audiences. We're leaning in and taking control of our future through a series of strategic partnerships, collaborations, and investments. We kicked off the year with collaborations with some of the biggest names in this space. Roblox featured David Guetta in the first-ever DJ set performed by an avatar. On Fortnite, Tones and I brought hits from her debut chart-topping album to the platform's Soundwave Series. Meanwhile, Silk Sonic joined the platform's Icon Series, allowing players to express themselves as the Grammy-nominated duo with '70s inspired outfits and accessories and to discover music through the new icon radio station. From collectibles to music royalties, Web3 represents an exciting future for the music industry that will help our artists reach millions upon millions of new fans in interesting and innovative ways. Since our investment in Dapper Labs in 2019, we've been consistently investing, building, and partnering in Web3 opportunities. We're continuing in this direction at an even faster pace in 2022. In January alone, we launched three important partnerships in the Web3 space. We partnered with one of the companies backed by music legend Quincy Jones. We'll be collaborating to create artist NFTs using their eco-friendly green Web3 platform. We announced the first major music partnership with the Digital Collectible Platform, Block party. Our initial collaboration is with the Venus superstars. We also became the first major music company to partner with the Sandbox. We'll be working with them to build out WMG land, a space where fans will be able to connect with their favorite artists through virtual experiences and NFTs. We've been discussing for several quarters now our differentiated dynamic range of artist and label services, covering everything from streaming to merchandise to branded content and IRR. The strategy was crystallized late last year when we unveiled WMX, giving this important segment of our business a fresh look and unified approach. WMX brings together a culturally curious audience of music lovers that currently totals more than a quarter of a billion monthly unique visitors. These connections are driven by our wholly-owned media brands, UPROXX, Songkick, and HipHopDX. WMX ranks by Comscore among the top five video media companies for 18 to 34-year-old audiences in the United States. It generates almost 50 billion monthly views on our premium YouTube channels as well as other streaming and social media platforms. WMX is helping to differentiate us in our mission to attract and amplify original artists by building broader and deeper fan bases. As you all know, there is a growing wave of interest in what companies are doing about important environmental, social, and governance issues. To us, continuing to become a more equitable and sustainable company is a moral, commercial, and creative imperative. This is something we've been passionate about for many years, and we've taken important steps since we hired Samantha Sims as our head of ESG back in August. Last week, we released our inaugural ESG report, which can be found on our website. The report outlines how we believe we can more effectively address the social and environmental challenges our global society is facing. Along with details about our north star DEI commitments, the report also highlights some of our initial accomplishments related to fighting climate change, producing more sustainable products, and other important initiatives. We recently announced the third round of grant recipients from the Warner Music Group, or Blavatnik Family Foundation Social Justice Fund. Since the fund was announced in June 2020, it has pledged $22.5 million to two dozen organizations. Its contributions continue to reflect the fund's strategic pillars: criminal justice reform, education, and arts and culture while also addressing the intersection of race, gender, and equity. We view all these initiatives as long-term commitments to action and accountability and we're excited about the path we're on. Before I pass the mic to Lou, I have some good news about the return of our CFO, Eric Levin. As you are all aware, Eric has been out on medical leave since November and we're happy and excited that he'll be rejoining us as CFO next week. Many thanks to Lou for the amazing job that he's been doing as acting CFO, in addition to his important responsibilities as our SVP and Corporate Controller. We couldn't be more enthusiastic about the amazing new music we have in store this year from our talented artists and songwriters. Even Cardi B, Jack Harlow, Bella Porch, and many others are going to be returning with really great new music. We're more convinced than ever that Web3 will be one of the next steps in the evolution of the music ecosystem as the global entertainment economy continues to change at light speed. Major music companies are the only ones with the skill sets, global footprint, and financial resources to fully support artists and songwriters. At the Warner Music Group, we're unrelenting champions of the incredible work of our artists and songwriters, and fierce advocates for their rights as creators. So, again, thank you to everyone in our company who makes this possible, and thank you to our shareholders for your continued support. With that, I'll hand it over to Lou.

Thank you, Steve. And good morning, everyone. Our Q1 results are highlighted by record high revenue across the board since we became a stand-alone company in 2004. These results were driven by growth in traditional and emerging streaming platforms, as well as continued recovery in physical and artist services, all of which underpin the continued momentum across our business. Before I get into our results, I'd like to highlight an item that affected comparability this quarter. Q1 includes the benefit of an additional week of operating performance versus the prior year quarter. Due to the timing of our 52/53 week financial calendar, the additional week fell in December 2021. As a result, this fiscal quarter is a 14-week quarter versus the standard 13-week quarter in the prior year. This additional week primarily benefited our recorded music streaming revenue and will only impact Q1, as all of the subsequent quarters in fiscal '22 are 13 weeks, consistent with the prior year. Moving now to our results, total revenue increased by over 22% on a constant currency basis, and 21% on an as-reported basis, reflecting strong performance in both recorded music and music publishing. Starting this quarter, we will break out streaming revenue for each of recorded music and music publishing and we will report revenue from emerging streaming platforms through Recorded Music and Music Publishing on a combined basis. Total streaming revenue increased 24%, driven by growth across both segments. This strong operating performance translated to impressive adjusted OIBDA growth of 26% with margins improving from 21.1% to 22%. Our margin growth is particularly notable given the continued strong recovery in lower-margin revenue lines, such as artist services. Adjusted EBITDA grew 31% with margins improving from 22.2% to 24.1%, also driven by strong operating performance and the pro forma impact of future cost savings from the transactions we closed in the quarter. You can find the calculations and reconciliations related to adjusted OIBDA and adjusted EBITDA in our press release. Recorded Music revenue grew 21%, underpinned by growth across all revenue lines. Streaming revenue increased by 22%, driven by growth in subscription, ad-supported, and emerging streaming platforms. As I noted earlier, these results also benefited from the additional week in December and were partially offset by the impact of a new deal with one of our DSP partners, which began at the start of fiscal 2022. Adjusting for the net impact of the additional week, which was $60 million, and the new DSP deal, which was $28 million, our recorded music streaming revenue would have grown by approximately 18% while this new DSP deal is now consistent with our other major DSP deals. We are seeing a variance relative to the prior deal, which will result in a similar impact on year-over-year comparisons that will extend throughout the remainder of fiscal '22. We fully expect to see a normalization of our recorded music streaming growth rate commencing in Q1 2023. Artist services and expanded rights revenue, which includes merchandising, grew by over 33%, reflecting an increase in merchandising and concert promotion revenue as touring has resumed. Physical revenue grew by 14%, primarily driven by strong new releases and worldwide demand for vinyl. Licensing revenue increased by 13% mainly due to higher synchronization and other licensing revenue as businesses continued to recover from COVID disruption. Adjusted OIBDA was $336 million, a 22% increase over the prior year quarter with margins improving to 24.2%. This growth was driven by strong operating performance across all revenue lines. Music Publishing had a record quarter as well, posting revenue of $229 million, a growth rate of 32% over the prior year quarter, reflecting double-digit growth across all revenue lines. Digital led the way with revenue growth of over 34% driven by streaming growth of 36% reflecting strength across traditional and emerging platforms. Sync revenue increased over 31% due to higher television, motion picture, and commercial income in the quarter compared to COVID disruptions in the prior year quarter. Growth performance in mechanical revenue increased by 27% as businesses continue to recover from COVID disruption with mechanical benefiting from strong physical sales. Music publishing adjusted OIBDA increased 38% to $55 million, while margins increased by 1.1 points to 24%. This increase in adjusted OIBDA margin was primarily due to strong operating performance. As mentioned on our last call, we still expect to see elevated full-year CapEx in the range of $130 million to $135 million. In Q1, CapEx increased to $34 million as compared to $18 million in the prior year quarter, mainly due to the investments in IT infrastructure and the expansion of our E and P facilities to address the strong demand in our e-commerce business. Our financial transformation program remains on track and is expected to deliver annualized run rate savings of about $35 million to $40 million once fully implemented starting in fiscal year 2023. Operating cash flow decreased 24% to $129 million from $169 million. The decline was largely driven by continued A&R investment and the timing of working capital. Free cash flow decreased 37% to $95 million from $151 million in the prior year quarter. As of December 31, we had a cash balance of $450 million, total debt of $3.85 billion and net debt of $3.4 billion. Since our IPO, we have continued to actively manage our capital structure, further reducing our weighted average cost of debt from 4% to 3.2% and extending maturities with our nearest maturity date now in 2028. And earlier this morning, we announced that we will be issuing our next quarterly dividend of $0.15 per share. As we look ahead, our business has more growth drivers than ever before, whether in recorded music where we continue to see growth in traditional and emerging streaming, acceleration in sales, and the return of artist services or in vital areas of Warner Chappell where performance is stabilizing and streaming and Sync are surging. This diversification gives us more confidence than ever that we're well-positioned for continued strong growth. We are truly excited about the steady flow of great new music we have in store and look forward to an amazing remainder of the year. Thank you for joining our call today, and we will now open the call for questions.

Thank you. Please stand by while we compile the Q&A roster. Our first question comes from Michael Morris with Guggenheim. Your line is open.

Hi. Thank you. Good morning. I wanted to ask you a couple of questions about your relationships with your largest streaming distribution partners. First, Lou, you referenced that $28 million headwind from the new deal with the streaming partner. Can you expand a bit on why this renewal had a negative impact, what it means for your growth for the balance of the year and beyond, and what it could mean for renewals with other partners? And then Steve, I'm hoping you can address this. There are public controversies that Spotify is having with the Joe Rogan podcast right now. What implications can that have for Warner Music? I know it's a pretty vast topic. There's a lot to cover, but maybe you could share your thoughts on how Spotify carrying something so controversial can impact your relationship with them and the broader concern that's now arising, which relates to how much Spotify is compensating music artists compared to the compensation provided to podcast contributors being so high. We'd appreciate your thoughts on that. Thanks, guys.

So Michael, on the first question, with regard to the DSP renewal, this is a short-term financial anomaly. It really understates the strength of streaming that we're seeing at Warner. All the deals we have with our global DSPs fall within a very narrow band, and the oddity of the comparison that we're seeing has created an exit that extends beyond fiscal 2022. We're incredibly confident that both traditional and emerging platforms will continue to experience strong growth. And as a result, our outlook for 2022 and beyond has changed.

Great. Let me see if I can address the Spotify issue or issues that you raised, Michael. First of all, just to be clear, Neil Young, Jimmie Nicol, Crosby, Stills & Nash are legendary artists. They continue to have an amazing impact on culture after more than 50 years of creating wonderful music. Our first inclination is to always support our artists, and it is good to see that Spotify is responding to these issues in an attempt to resolve them, but they should be the ones to speak about their own positions and call it signals. We want to be clear: we do business with hundreds of streaming operations around the world, not only traditional streamers but these new emerging business platforms. We and our artists broadly speaking feel very good about those revenue streams that are generated on a consumption basis. As I mentioned in my remarks, the Warner Music Group continues to fight day and night for our artists and songwriters to ensure that they are compensated for their work in as equitable a fashion as possible.

Thanks. Steve, if I could just really quickly clarify, it sounds like you're saying that although you're still very much trying to represent artists and ensure compensation broadly, you're not necessarily highlighting a disparity between different DSPs in terms of compensating better or worse, or fairly or unfairly compared to another? Is that what you mean?

No. As Lou mentioned, virtually all of our deals fall within a very tight band of economics. And when you look at Spotify, they are in the process of building, as Daniel Ek announced several years ago, a podcast business. The economics of that business are different than the economic relationship that we have with Spotify on the music side.

Great. Thank you. Appreciate it.

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

Hey, good morning. Thanks for the disclosure on the emerging streaming revenues. Looking at that on a total company basis, I'm wondering if you think that revenue base can grow again this fiscal year. I know the timing of those deals is lumpy, and you probably can't be super specific on when you have major renewals, but just if you expect that there is an opportunity to grow that in this fiscal year ahead still. And then for Steve, I think you mentioned Web3 twice in your prepared remarks. I certainly am not going to pretend to be a Web3 expert, but we're certainly getting questions from investors about how this could be a risk to any of the existing players in audio labels, DSPs, etc. The idea being that Web3 and blockchain allows artists and fans to be more directly connected and essentially reduce the intermediaries' profits, if you will. I’d love to hear your thoughts. I'm sure you have a view on this regarding the role of a label in Web3 music distribution, which is starting to become a focal point. Thank you.

Lou, why don't you take the first part, and then I'll take the second part.

Since our IPO, we have seen significant growth across emerging streaming platforms in social and fitness. As you mentioned, because of the nature of those deals, a lot of them are buyout deals, not consumption-based; therefore, the revenue patterns can be at times a bit steep as opposed to linear. Obviously, as those services mature and transition to a consumption model, we anticipate they will convert to a more linear pattern. We expect stable growth to continue within emerging streaming platforms through the balance of the year. As Steve mentioned and you alluded to, we see enormous long-term potential as Web3 scales, and we see opportunities in collectibles and NFTs, among other Web3 opportunities.

Great. Before I address Web3, let me just emphasize that we've been very consistent regarding traditional streaming, both in mature markets and in emerging markets. We still see tremendous potential for growth. When you consider the subscriptions relative to the smart device population, along with the nascent trend of raising prices that are sticking, all of these factors indicate that these areas will continue to enjoy significant growth for the foreseeable future. We see slim opportunities, albeit as new points out. Many of these emerging models, at least at the moment, lean more toward buyouts as opposed to consumption. But we continue to see new models coming to market every day, and those that have been in the market for a year or two continue to grow. So we are confident that on what we would now describe as the more traditional side of the business, long-term sustained growth is, in our view, quite profitable. With respect to Web3, which is a broad term encompassing blockchain, crypto, and NFTs, we observe not only the emergence of interactive models, but also endless opportunities as we navigate fandom around the world. I think the emergence of Web3 will further amplify the importance of music labels and publishers.

Thank you, guys.

Thank you.

Thank you. Our next question comes from Ben Maral with RBC Capital Markets. Your line is open.

Hi. Good morning. Thanks for taking my questions. One on capital allocation and one on margins if I could. First, you've clearly been very active in investing to sustain or accelerate growth through strategic acquisitions. Historically, you've been very consistent with your capital allocation philosophy, financial discipline, and ROI-focused initiatives, but I'm just trying to better understand if the new deals are indicative of a greater focus on M&A and possibly a willingness to deploy capital, particularly as we might be on the cusp of a significant increase in free cash flow over the next few years. And second, EBITDA margins continue to be a bright spot, up almost 200 basis points year-over-year to over 24% despite the meaningful recovery in lower-margin revenue streams. Can you just help us consider the factors you track towards a mid-20% range? It seems like you might get there ahead of expectations, but I’d appreciate your perspectives on whether recent M&A is accretive or dilutive to margins. Thanks.

Lou, why don't I take the capital allocation, and then you can take the margins. Thanks for your questions, by the way. Regarding capital allocation, our philosophy remains the same, albeit it gets refined at the edges from time to time. We still look first to reinvest in the business. That reinvestment in the business falls into several pockets. One is to invest in identifying new artists, new songwriters, their songs and their music, and we will continue to invest assertively in our core business to ensure a constant and ever-growing flow of new artists and music. We're also investing heavily in our internal infrastructures, as we are committed to and well on our way to being an immersive, tech-enabled 21st-century digital company. To achieve that goal, we have to provide our organization with the appropriate tools, whether it's self-serving, well-organized data oceans, robotics, or the digitization of processes. We have to have those tools to reach our objectives and enhance and support the decision-making of our people who already utilize good judgment, financial discipline, and accountability for these choices. Our internal capital allocation remains the same. Externally, we will continue to seek opportunities where we believe there is a sound alignment between the opportunity, what we have to pay, and our long-term ability to grow those acquisitions. We will continue to be assertive in investing in these technologies, some of which we discussed in our prepared remarks. We're committed to being at the leading edge of change within our segment of the music ecosystem. If you look at our investment strategy, we intend to be first at point A, first at point B, first at point C because we want to create our future. We don't want to follow someone else into it, and that philosophy will continue to guide us.

From a margin perspective, obviously we did see some margin expansion as we moved through COVID, and as I mentioned in the prepared remarks, lower-margin revenue returned. We did experience some margin compression in the period, although we're still able to deliver strong margin for the quarter, as well as an increase in margin year-over-year. Long-term, we expect the revenue mix and the continued growth in streaming, including emerging streaming platforms, to contribute positively to margin expansion. We have the cost-saving initiatives we've talked about, which will further drive margin improvement. We completed two material deals at the end of December with 300 Entertainment and the David Bowie Publishing Catalog. We believe there's a lot of growth potential within those assets as well as some operating efficiencies. Since these closed late in the quarter, we're not yet seeing the impact reflected in the December quarter, but starting in March, we expect to see that flow through. Because these are accretive deals, they will positively contribute to margin expansion.

That's great. Thank you, both.

Thank you.

Thank you. Our next question comes from Kannan Venkateshwar with Barclays. Your line is open.

Thank you. Lou, on the new revenue streams; thanks for the clarity on the publishing side of the business. But if you could just break them down a bit to help us understand if they grew sequentially on the same basis that they were measured last quarter; that would be helpful to understand the underlying trends.

The expansion - the growth in emerging streaming sequentially included both growth in Recorded Music and Music Publishing.

Got it. That's helpful. And then in terms of the impact, the $28 million impact on the DSP side, it sounded like it's because of restructuring these deals on account of podcasts on the role they're playing. I mean, correct me if I'm wrong, but does that also mean the contribution margin impact going forward may be different compared to the overall contribution margin of the business as a whole? So if you can just help us understand the EBITDA impact of that revenue stream, that would be useful as well. And I have one follow-up for Steve.

On the DSP item, the $28 million that you referenced was unrelated to the impact of podcasting. It was tied to the deal that we had with that specific DSP. We obviously can't discuss specific terms of deals, but we'll reiterate that it was a unique situation. Just as a reminder, we will lapse this when we reach Q1 in 2023 on a comparable basis, so we'll see the growth rate return to a more normalized level reflecting the underlying resumption of business.

Got it. And I guess more broadly, when you consider these new revenue streams, you mentioned these are buyout deals currently that might move to consumption-based models over time, driving growth, of course. But as of now, when some of these platforms like Peloton or Facebook experience growth impacts on these assets, does that correlate to the revenues we see from these assets, or because they are buyouts, are they largely isolated from these impacts? Thanks.

Yes. The buyout deals that we do—the economics of these deals should approximate usage on the services. To the extent we shift to a consumption-based model, revenue recognition would be linear, but we should still see an improvement in economics regardless of the payment method and how they report to us.

Got it. Thank you.

Thank you. Our next question comes from Vijay Jayant with Evercore ISI. Your line is open.

Hi, this is Vijay. I just had two questions. Can you share any insight into what you're observing in terms of paid music subscription growth across the industry based on the internal data you see and maybe how its growth currently compares to pre-COVID levels? My second question was, over the past few quarters, a lot of music assets between catalogs and new labels have come to market. How do you evaluate potential assets you may want to buy, and what made the two assets you purchased compelling in comparison to other assets that came to market during that timeframe?

Lou, why don't I take the second question and then you can address the first one? We evaluate deals on an ongoing basis. We have a steady flow of opportunities. When we assess deals, we look at the asking price and determine how much we believe we can enhance the performance of those assets once we acquire them. We are not financial buyers; we buy because we are operators who know how to activate these organizations or assets differently than they are currently managed. When we look at any specific asset, we can determine, for lack of a better term, how much headroom exists to enhance those assets' performance. If we see assets managed poorly that have significant asking prices, we pass. Conversely, assets that have substantial headroom and can align with our investment return metrics, we pursue. We consistently pass on more deals than we choose to close because we don’t aim to have the biggest checkbook; instead, we focus on the right price and the right reasons to supercharge the assets we acquire. This has been our operating approach for the past decade, and it will continue going forward: we invest, we don't speculate.

Regarding streaming subscriber growth, we have confidence in the fundamentals of streaming; we believe they are strong. The long-term growth prospects for streaming platforms and subscriptions are solid. When you consider penetration across both emerging and developed markets, there is tremendous opportunity for further penetration, which will drive growth. Therefore, we view the long-term growth of the business positively. Additionally, as indicated by Spotify, there has been some discussion regarding their average revenue per user (ARPU). We also have internal metrics on ARPU, and we've seen some increases therein. Price hikes would further benefit us.

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

Thanks. I think it's been about two years since you guys discussed your view on monetization on ad-supported streaming services. At that time, you felt like you weren't receiving fair compensation. Over the past two years, do you feel like these ad-supported services have harmonized, or do you still think there’s room for improvement in terms of your compensation at these rates?

Well, we’re pursuing several strategies. Firstly, where we believe the rates are inadequate, we continue to negotiate what we deem to be appropriate splits. More importantly, with WMX, we've unified our approach to ads, allowing for a consolidated strategy across our businesses. This reorganization enables us to align our portfolio of artists and music with potential advertisers more effectively. I expect that both by negotiating specific deals and through the reorganization of WEA into WMX, we'll see positive returns from this initiative.

Just to follow up, the reorganization of WMX essentially consolidates more of your talent under one umbrella and enhances holistic sales efforts. Is that the essence of what you're getting at?

Exactly. We're creating a centralized service as an interface catering to ad buyers' needs and how we can meet those needs. This service is coordinated on a global scale through a highly motivated and skilled centralized organization.

Thank you. Our last question comes from Matthew Thornton with Truist Securities. Your line is open.

Hey, good morning, Steve. Good morning, Lou. I have two questions, if I may. Coming back to the renewed deal with the digital partner, the $28 million without getting into specifics, are there any benefits derived from the renewed deal? Perhaps related to promotion or something similar, or was this particular DSP just previously outside the band and is now being brought inside? What’s the answer there? Secondly, concerning linearity for the year, it seems the first quarter is off to a good start, but as you think about the content slate for the year or the investments you're making, is there anything you'd call out regarding linearity moving forward? Lou, regarding this, do you have any thoughts or estimates on expected currency headwinds versus organic revenue growth for the year?

Lou, go ahead.

I would answer the first question regarding the deal: it was outside the band, and now it’s inside the band. That’s the answer to that one, and we, of course, don’t discuss specifics. Over to you, Steve.

When we consider the rest of the year, we feel we've built nice momentum. We believe that, as mentioned earlier, we'll have a robust slate of great music coming. While I can't provide a line or curve for exactly how that will translate, I am quite confident that we will deliver on what we've historically committed to deliver this year.

Thank you. I would now like to turn the call back over to Steve Cooper for closing remarks.

Thanks again, everyone, for your time. We appreciate you joining us on these calls, and we value your ongoing support. We will talk in a few months, and hopefully my confidence in our momentum will be realized. Anyway, I hope everyone enjoys the balance of the Lunar New Year. Have a wonderful Valentine’s Day, have a wonderful rest of the winter, and stay safe. Thanks, everybody. Bye-bye.

This concludes today's conference call. Thank you for participating. You may now disconnect.