Warner Music Group Corp. Q2 FY2022 Earnings Call

Welcome to Warner Music Group's Second Quarter Earnings Call for the period ended March 31, 2022. At the request of Warner Music Group, today's call is being recorded for replay purposes, and if you object, you may disconnect at any time. Now I would like to turn today's call over to your host, Mr. Kareem Chin, Head of Investor Relations. You may begin.

Good morning, everyone. Welcome to Warner Music Group's fiscal second quarter earnings conference call. Please note that our earnings press release, earnings snapshot and the Form 10-Q we filed this morning will be available on our website. On today's call, we have our CEO, Steve Cooper; and our Executive Vice President and CFO, Eric Levin, 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 includes forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance. We plan to present certain non-GAAP results during this conference call 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. As we approach the two-year anniversary of our IPO, I'd like to reflect for a moment on the key pillars of our success. These are the fundamentals of our strategy, the principles we bear in mind when charting our course into the future. First, of course, is the music. It's at the heart of everything we do. While taste, trends and technology are ever-changing, our artists and songwriters will always be our driving force. Second is our global growth. About a decade ago, we set a goal to become a global music entertainment company through the expansion of our local expertise. Today, I'll share the progress we're making in growing our presence around the world. Third, we're a company that thrives at the intersection of art and technology. Innovation and data-driven insights are helping us actively create our future. And fourth, our people and our commitment to making our company a place where the best individual talents can be long and build a career. But first, let's get into our Q2 results. I'm pleased to say that they reflect the strong health of our streaming revenue, continued growth in publishing, and recovery from COVID in artist services and performance. Total revenue in the quarter was almost $1.4 billion. This represents year-over-year growth of 10% and 13% on an as-reported and constant currency basis. Adjusted EBITDA was $282 million with a margin of 20.5%, compared to 21.4% in the prior year quarter. This decline was driven by our revenue mix. As our lower-margin revenue streams recovered from COVID, they became bigger contributors to overall revenue. We continue to expect that we'll achieve our long-term margin targets in the next several years as mix and growth rates normalize. In recorded music, our revenue was approximately $1.15 billion, an increase of 11.4% from the prior year quarter, with streaming revenue growing 10%. Normalizing for the impact of the new digital deal that we discussed on our Q1 earnings call, recorded music total revenue and streaming revenue both grew by 15%. Artist services and physical continue to show impressive recovery with revenue growth of 25% and 8%, respectively. Licensing revenue powered by sync grew 23%. In publishing, we delivered revenue of $230 million, 23% more than the prior year quarter, driven by growth across all revenue lines. Company-wide streaming revenue from emerging platforms grew to $345 million on an annualized basis, up from $325 million in Q1. And now on to the music. An important differentiator for the Warner Music Group is our focus on long-term artist development. These days, there's a misconception that all music majors are just following the same data and chasing artists who already have a significant presence in the market. That's not quite true for us. First and foremost, we seek out originality. When we identify really great artists and songwriters, we collaborate with them to ensure that they have the opportunity to realize their full potential. Most of our biggest superstars were signed to one of our labels at the very beginning of their careers. This commitment to extraordinary talent is something that has distinguished us for decades. Legendary voices like Aretha Franklin and Fleetwood Mac have now been joined by visionary performers like Lizzo and Ed Sheeran. The impact of our unique irreplaceable catalog in music will reverberate for generations. At this year's Grammys, Silk Sonic, the R&B super-duo of Bruno Mars and Anderson .Paak took home the highly coveted Record of the Year and Song of the Year awards, plus two more. Bruno has now won Record of the Year 3 times, a feat previously accomplished only by Paul Simon. Without question, he now ranks as one of the world's greatest entertainers. We're always developing the next wave of culture-shaping music that will create the soundtrack of tomorrow. For example, Gayle kicked off the year with number one worldwide smash ABCDEFU and Jack Harlow's new single First Class debuted at number one on the Billboard Hot 100 last month. Dua Lipa and Megan Thee Stallion racked up over 40 million streams in just one week with their hit collaboration Sweetest Pie. Our publishing team also continues to excel with an impressive 90 songs charting on the Billboard Hot 100 over the course of Q2. Some of the biggest hits that our songwriters contributed to this quarter were Silk Sonic's Smoking Out the Window, Rauw Alejandro's Desperados, and Dave's Starlight. Warner Chappell had a superb showing at this year's Grammys. In addition to Bruno and Anderson, who are also Warner Chappell's songwriters, we saw big wins for Chris Stapleton for Best Country Song and Ojivolta for Best Rap Song. Warner Chappell is winning highly competitive deals for talent around the world and across the music spectrum. From Nigeria's Tay Iwar to Italy's Sick Luke to the U.S.'s Nicolle Galyon. In March, we signed two important deals with Patrick Moxey, the Founder of Dance Label Ultra. Warner Chappell now administers Ultra’s 6,000 copyrights throughout Europe, including songs from Drake, Rihanna, and The Weeknd, among many others. And Warner recorded music also entered into a strategic alliance with Patrick's legendary Payday Records as well as his new label, Helix. At a time when domestic music is on the rise in most countries, we're also one of the few companies with the resources and expertise to take a truly global approach to artist development. This strategy requires a mix of organic A&R investment, partnerships with the most credible local players, and financially disciplined acquisitions of catalogs and labels. Across established and emerging markets, we create the conditions for success to travel at the speed of sound. We saw a perfect example of our long-term strategy in action when Anitta and Paulo Londra, both signed to Warner Music Latin America, took number one and number two on Spotify's global chart. With her monster hit, Envolver, Anitta made history as the first Brazilian to hit the top spot, while Paulo has spent five consecutive weeks at the top of Billboard's Argentina 100. According to IFPI's 2022 Global Music Report, MENA was the fastest-growing market in 2021, up 35% year-over-year. This quarter, we announced that we would be acquiring Qanawat Music, the region's largest independent distributor, which will expand our presence in this important territory. Qanawat is on the ground in Dubai, Cairo, and Casablanca and offers services in more than 20 countries. Having only launched Warner Music Middle East in 2018, we moved quickly to become a leading player in this region. India is another rapidly growing market where we focused our attention and have increased our market share meaningfully in the last 24 months. We've recently partnered with some of Bollywood's biggest talents. And last month, Warner Music India entered into a strategic partnership with Jjust Music, founded by renowned actor and producer, Jackky Bhagnani. This will give us access to marquee Bollywood releases while Jjust Music artists will benefit from our worldwide network. In March, we partnered with Diljit Dosanjh, one of India's biggest film and music superstars. We're already working together to amplify his global career, including collaborations with Canadian rapper Tory Lanez and Tanzanian star Diamond Platnumz. Across the globe, blockbuster albums from the likes of Red Hot Chili Peppers, Ed Sheeran, and Kodak Black are showing incredible staying power. And we're excited about what's on the horizon with new music coming from stars like Lizzo, Ava Max, and Cardi B, as well as our next generation of hit makers such as PinkPantheress, Bella Poarch, and Tiago PZK. As the world grapples with war, inflation, and other macroeconomic concerns, one thing is certain: music's ubiquity and value have already proven to be resilient through any kind of disruption. Unlike the video streaming market, which churns as subscribers constantly search for new and different exclusive content, the music streaming market is sticky. Subscribers have access to all the music they could ever want on a single platform, and they become attached to the collections and playlists they have curated over time. And while films and TV series may come and go, devotion to one's favorite music and artist is more deep-seated and longer lasting. As new platforms emerge, it becomes increasingly clear that whatever the mode of consumption, music is the common thread that runs throughout the entire entertainment economy. We're one of the few companies with the reach, skills, and capabilities to connect the dots for artists and songwriters on a global basis. We protect and promote the value of music. We help creators navigate an incredibly complex landscape, and we deepen the connection between artists and fans. As streaming continues to scale and social media provides increasingly meaningful revenue, there is now a lot of buzz about Web3. Since 2019, we've been strategically investing in tech companies that feature music prominently in their offerings. This has built our reputation as the planet's most innovative future-focused music company. These investments have fostered partnerships at the intersection of gaming, social, and entertainment with brands such as Roblox, Fortnite, and The Sandbox. And we formed groundbreaking relationships with innovation leaders such as Genies, Blockparty, OneOf, and Dapper Labs. As a recent example, we've also partnered with blockchain gaming developers Splinterlands to give Warner Music artists the tools to develop arcade-style games such as the extremely popular DAP. The latest deal we signed was with proof of attendance protocol, POAP for short. This will enable us to mint shared memories as NFTs, giving collectors authenticated digital proof they were part of a specific experience or event. Atlantic Records' rapper, Kevin Gates, recently tapped into the technology offering fans who attended his sold-out Red Rocks concert a POAP to commemorate the show. As I mentioned earlier, we thrive at the intersection of art and technology. We were very excited to announce that Mike Shinoda, Co-Founder of the Warner Records band Linkin' Park, has been enlisted as our first-ever community innovation adviser. Mike is a music tech visionary who will be a great source of wisdom and insight as our artists bring their creative visions to life on multiple new platforms. I've talked before about our network of direct-to-consumer destinations, including UPROXX, HipHopDX, Songkick, and EMP. These companies all fall under the umbrella of our newly rebranded media and content arm WMX. Last week, at our first-ever New Fronts event for brands and advertisers, WMX unveiled new culture-driving original programming that will roll out across these outlets later this year. These programs include: Fresh Pair with Katty Customs, a sneaker culture show co-hosted and executive produced by Just Blaze; Iconic Records, a visual podcast that will explore the legacy of Notorious B.I.G.; and Limited, a merch design competition featuring hot artists and emerging creators. WMX already ranks as a top five video company in the U.S., and this exciting roster of programming will bring advertisers new opportunities to reach young, engaged, and influential audiences. The other two areas of incremental revenue I'd like to highlight today are, first, digital fitness. WMG was the music launch partner for Peloton's gaming-inspired fitness experience, Lanebreak. The first artists featured on Lanebreak were two Warner Legends, David Bowie and David Guetta. Second, podcasting. Following the success of shows like People's Party with Talib Kweli, we're continuing to build our presence in this space. Last month, we announced the launch of Interval Presents, our in-house podcast network sitting at the crossroads of music, pop culture, and social impact. We already have shows in the works from Oscar-winning actress Lupita Nyong'o, and Grammy-nominated singer Jason Derulo, among other major talents. When we took the company public less than two years ago, many of these business models were only nascent. While we still have plenty of work to do, we've made great progress in a very short period. Our strategies are proving to be sound. The universe of possibilities continues to expand in every direction and will enhance the growth of an already robust music entertainment industry. IFPI reported that the global recorded music industry grew by an impressive 18.5% in 2021. We're proud to say that we outperformed this benchmark by almost 2.5 percentage points, a testament to our impact on global culture and our ability to create communities of fans across every medium. During our last call, we talked about our DEI commitments, which we unveiled as part of our first ESG report. This quarter, we announced a new initiative designed to help us achieve those objectives, our DEI Institute, the first of its kind within the music industry. It will help us tap into a wide array of external expertise as we educate our employees and implement action plans across our company. Before I hand it over to Eric, I would be remiss if I didn't talk about the situation in Ukraine. We pray that this conflict ends soon and that the people of Ukraine can live in peace. As it's done throughout history, music is playing an indispensable role in lifting spirits and giving hope during this terrible hardship. We're committed to supporting relief efforts, both for the people in Ukraine and the refugee population. This includes contributions to the Red Cross, Polish Humanitarian Action, and Project Hope. As we announced in early March, we suspended operations in Russia. We're very excited about all the great new music and fresh initiatives that will be introduced through the balance of the year. We look forward to keeping you updated as we continue to build our momentum. And with that, I'll turn it over to Eric.

Thank you, Steve, and good morning, everyone. There is a lot to go through regarding our Q2 results, so I'll begin with some key points. Core streaming is thriving, supported by strong subscription streaming. Our non-digital revenue lines are also continuing to increase. Publishing is performing exceptionally well, achieving impressive results once again. In recent quarters, we've seen significant investments in A&R and M&A, which have clear effects on our cash flow. As anticipated, this has attracted the interest of analysts and shareholders who want to understand how we assess these investments, the expected returns, and how they will contribute to future growth. I will delve into that more shortly. Now, onto our results. Total revenue rose by over 13% on a constant currency basis, showing double-digit growth in both recorded music and music publishing. Reported total revenue increased by 10%. Total streaming revenue grew by 12%, fueled by growth in both segments, including revenue from emerging streaming platforms. This strong operating performance resulted in a 7% increase in adjusted OIBDA, with margins at 19.9%, compared to 20.4% in the same quarter last year. The margin decline is due to the ongoing recovery in lower-margin artist services revenue, as well as a decrease in high-margin streaming revenue following the new deal with one of our digital partners, which we discussed on our last earnings call. Adjusted EBITDA rose by 5%, with margins falling from 21.4% to 20.5%, for similar reasons that affected adjusted OIBDA. It's important to note that adjusted EBITDA accounts for the anticipated impact of future cost savings and certain specific transactions. You can find the relevant calculations and reconciliations regarding adjusted OIBDA and adjusted EBITDA in our press release. Recorded music revenue increased by 11% across all revenue lines. Streaming revenue grew by 10%, driven by both traditional and emerging platforms. Our results reflect the influence of the new deal with our digital partner that started at the beginning of fiscal 2022. When adjusting for the impact of this new deal, which amounted to $31 million for the quarter, our recorded music streaming revenue would have risen by 15%. I want to provide further detail to clarify the underlying trends in recorded music streaming. After normalizing for the new deal's effects, subscription streaming revenue showed strong growth in the high teens. Comparability in our ad-supported streaming growth was distorted due to a true-up payment that positively impacted the prior year quarter. Consequently, ad-supported streaming, which typically grows in alignment with subscription streaming, saw growth in the high single digits. We anticipate a normalization in our recorded music streaming growth rate beginning in Q1 2023, once we surpass the anniversary of the new digital deal. Revenue from artist services and expanded rights rose by 25%, thanks to higher merchandising revenue and increased touring activity. Physical revenue grew by 8%, mainly due to rising global demand for vinyl. Licensing revenue increased by 23%, primarily driven by more synchronization revenue. Adjusted OIBDA reached $253 million, an increase of 5% compared to the prior year quarter. The margin fell from 22.9% in the prior year quarter to 22.1% due to revenue mix changes. Music publishing also had a strong quarter, posting revenue of $230 million and achieving a growth rate of 23%, with increases across all revenue lines. Digital revenue grew by 26%, with streaming growth at 23%, benefiting from traditional and emerging platforms, and digital also gained from the timing of new digital deals. Sync revenue increased over 28% due to heightened commercial licensing activity during the quarter. Performance revenue rose by 9% as bars, restaurants, concerts, and live events continue to recover from COVID disruptions. Mechanical revenue went up by 8%, benefiting from solid physical sales. Music publishing's adjusted OIBDA rose by 33% to $61 million, with margins increasing by 2.5 percentage points to 26.5% from 24%. As I mentioned during our last call, we expect elevated full-year CapEx to be between $130 million and $135 million. In Q2, CapEx increased to $28 million from $20 million in the prior year quarter, largely due to investments in IT infrastructure and the expansion of our E&P facilities. Our financial transformation program is progressing well and is expected to yield annualized savings of $35 million to $40 million once fully implemented, starting in fiscal year 2023. Operating cash flow declined by 71% to $44 million from $150 million, primarily due to the timing of royalty payments and fluctuations in working capital. Free cash flow decreased by 88% to $16 million, down from $130 million in the same quarter last year. As of December 31, we held a cash balance of $385 million, total debt of $3.8 billion, and net debt of $3.4 billion. Since our IPO, we have actively managed our capital structure, reducing our weighted average cost of debt from 4% to 3.3% and extending maturities, with our nearest maturity now in 2028. It is clear that the best use of our capital is to invest alongside the growth trends in the music industry. I want to clarify a few aspects regarding the financial characteristics of our A&R and M&A investments. Most of our A&R advances to artists and songwriters are recoupable against royalties, and we successfully recoup the majority, though timing can vary. Artist deals have become more costly because music holds greater value in the streaming era. We can afford to pay more because we earn more. The majority of our new artist deals involve substantial recording commitments and long-term rights. Our M&A investments are typically accretive from day one, contributing to growth and financed through debt. These investments, sometimes involving unique rights and catalogs, allow us to act as strategic buyers who can maximize the value of acquired rights using our global infrastructure. Whether in A&R or M&A, we thoroughly evaluate every transaction and are confident that our diverse portfolio of investments will drive profitable growth and enhance shareholder value for years to come. Looking ahead, we are optimistic about the health of our business and our ability to capitalize on the significant opportunities for growth that lie ahead.

Our first question comes from Benjamin Black with Deutsche. Your line is open.

The first one is for Steve. As you mentioned, a lot has happened into your IPO between COVID, inflation, interest rates and obviously the war. So has your long-term outlook changed at all? I know the entire market has come under pressure, but your stock has actually been hit a lot harder. So what do you think the market is missing? And then perhaps one for Eric on margins. How should we be thinking about the cadence of your margin expansion over the next couple of years? I understood that some of the lower-margin revenue streams are coming back this year, and you have the drag from a new DSP deal. So should we anticipate sort of more modest margin trends this year before we see a more meaningful step-up in '23?

Thank you for your questions, Ben. I'll address the first one regarding the changes in the world since our IPO. It's evident that many are concerned about issues such as war, inflation, and rising interest rates. Nevertheless, I believe music has shown and will continue to show its resilience, as it is essential to human nature in all circumstances. For instance, during the height of the pandemic, music consumption not only persisted but grew, with new use cases appearing regularly. Therefore, our long-term outlook remains steady, and if anything, our optimism has increased. As Eric mentioned, streaming is performing well in both established and emerging markets, with new opportunities consistently arising. Many of the emerging business models we discussed during our IPO are now yielding significant revenue and are expanding more rapidly than traditional revenue sources. Additionally, I believe we are well-positioned to take advantage of these opportunities due to our size and innovative approach. We are dedicated to long-term artist development, having identified opportunities in emerging markets early on, and we are committed to exploring and pursuing those prospects. We clearly lead the market in innovation, as demonstrated by our advancements in streaming and our agile approach in the Web3 space, moving faster than our competitors. We have been pioneers in establishing landmark deals and will continue to be. I am confident that despite the current chaos in the world, music will remain a vital force in our lives and business indefinitely. I hope that addresses your first question, Ben.

Ben, let me tackle your second question. I'll hit a few key points, and thank you for the question on margins. So first, what we're seeing is something that we fully expected. Two is our recorded music margins actually increased once you adjust for the DSP renewal. So on a fundamental operating basis, we’re still seeing margin growth, but yes, your question in these results, as artist services recovers it, is a lower margin business. It will cause a slowing or a flattening in margin in the short term. Once artist services recover, we fully expect to resume our margin expansion trajectory consistent with our plans at the time of the IPO and heading towards mid-20s margin. So everything we're seeing is what we expected and, on an operating basis, we're still very comfortable with our commitment towards margin expansion.

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

I was hoping that Steve or Eric could provide more insight into the emerging streaming business you mentioned that grew on a run rate basis this quarter. What is the overall situation with those deals regarding fixed versus variable? Are there one or two areas, Steve, that you are particularly excited about for the next 12 to 24 months? And for Eric, given the concerns in the market about the economy and macro challenges, could you remind us how you view your revenue base in terms of exposure to the economic cycle versus growth linked to subscriptions?

I will begin with the question about emerging streaming models versus variable agreements. This is something we've been actively addressing with our emerging streaming partners. It's important to understand that we have numerous licenses across various product categories, so it's an ongoing process rather than a one-time task. Emerging streaming platforms typically offer multimedia services or products where music plays a critical role. This can involve music combined with video, games, graphics, or other multimedia experiences related to social or fitness activities. We are encouraging these partners to establish systems to report music consumption on a detailed, stream-by-stream basis, enabling us to pursue truly variable deals. As they advance these capabilities, our goal is to negotiate deals based on revenue or consumption metrics, moving toward that direction. This quarter did not see any major renewals, only some smaller ones. We are continuously working towards this objective, but it's important to note that progress varies among different companies, and developing the necessary tracking systems is a process that will take time. On a positive note, we are thrilled about our partnerships focused on Web3 capabilities such as NFTs, avatars, and games within metaverses, as we see significant potential for development here. We aim to create sustainable long-term business models rather than transient initiatives. We are engaged in various projects and experiments with our partners, and many artists are keen to explore these opportunities. As mentioned by Steve, artists like Kevin Gates are part of this exciting future that presents new growth avenues, and we are dedicated to being innovators in this space. Regarding the macroeconomic landscape, we believe music is a vital part of people's lives and will remain resilient, despite potential economic challenges. Music streaming differs from other forms of streaming; while many people subscribe to multiple video services, most audio subscribers tend to choose a single service that aggregates all music in one place. We consider this service to be fairly priced or even low-cost while providing high value, making it central to daily life. We anticipate that music and the development of new digital services will continue to be a growth market, even in the face of economic setbacks, and we have observed this trend so far. We are vigilant about global and economic developments, continually assessing how to enhance efficiency and strategically allocate resources to drive revenue growth and create value. We remain optimistic about the future growth potential of music.

Our next question comes from Kutgun Maral with RBC Capital Markets. Your line is open.

I was hoping to dig into streaming revenue trends and your expectations for the back half of the year. Underlying growth at recorded music of 15% in Q2 was fairly healthy. I guess looking ahead, do you view the mid-teens growth rate as being sustainable? And is there a scope for a potential acceleration off of the 15%? Just for my end, looking at the different components it seems like subscription streaming revenue growth will presumably stay in the high teens range and that you just reported in Q2. Ad-supported streaming growth should maybe normalize closer to that high teens increase at subscription as well as you shift away from that true-up payment comp from last year. And perhaps there are new deals with emerging streaming platforms as well after a relatively quiet few quarters, and maybe that could help bolster overall streaming growth. So I know that you don't provide guidance, but is this the right way to think about the trajectory for the back half of the year? Or are there any other puts and takes that we should be mindful of?

Thanks, Kutgun. I think that was a quite thoughtful kind of statement. Certainly, we don't give guidance. So what I would say is, this quarter, our fiscal Q2 subscription streaming continued to grow in the high teens, the fundamentals of that business we see are incredibly healthy. We see penetration growth opportunities in both developed and emerging markets around the world. Spotify has had success with their price increases. Their constant currency ARPU went up 3%, I believe, in this quarter. We continue to be encouraging of others to look at pricing as an opportunity to improve the economic performance of streaming. So we see streaming as being very strong, the emerging forms of streaming and what we're starting to see in Web 3.0 gives us a lot of enthusiasm as well going forward. On the ad-supported side, you're right, there was that true-up in the accounting of that this quarter that has caused it to have lower growth for this individual quarter, but the fundamentals of ad-supported streaming growth remain very healthy and we have seen and fully expect to continue to see ad-supported streaming growing in line with subscription streaming on a fundamental basis. So we feel very good about the streaming platforms, their growth, and the opportunities going forward, absolutely.

Our next question comes from Andrew Uerkwitz with Jefferies. Your line is open.

Could you discuss the catalog environment and how rising interest rates may affect it? Are there many catalogs, sellers, and buyers in the market? Can you share insights about the competition and the potential impact of increasing interest rates on sales and pricing for those catalogs?

Thank you for the question, Andrew. COVID has certainly affected artists' ability to tour, and low interest rates have led many artists to consider selling their catalogs. As touring resumes and more revenue streams return for artists, coupled with rising interest rates, potential buyers may rethink their offers based on different discount rates, which could affect valuation over time. We anticipate that interest rates will continue to climb. However, we don't expect any significant short-term shifts in catalog values or in artists' willingness to sell. Over time, these changing circumstances could alter the landscape for both buyers and sellers. In the near future, we do foresee an increase in catalogs being put on the market. We will continue our opportunistic analysis as we have in the past. If a catalog aligns strategically and is priced well, we will consider pursuing the deal, but we are under no pressure to make acquisitions. We have various methods for using our capital to foster growth, including organic growth, mergers and acquisitions, entering new markets, and acquiring labels and catalogs. We will keep assessing the market and proceed with deals when it makes sense, ensuring that we invest our capital with careful financial discipline to achieve the best returns and growth potential moving forward.

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

A couple of questions. One, Eric, you just touched on this, but I'm curious if you could expand on thoughts on the return of touring and the impact or impacts that could have on the business. We know about the margin dynamic, but I'm thinking more like top-line impact. First of all, do you think it's just kind of a return to sort of the prior environment? Or are there any reasons to think that sort of touring and in-person interactivity could be something bigger in sort of a post-COVID world? I'm also curious whether you think that the ability to have live performances can impact streaming and just kind of appetite for music, enthusiasm, etc.

Sure. Just writing down, there's a lot of question, Michael. So the return of touring, certainly it will be interesting. There'll certainly be some dynamics that change around the tour. So I would expect social to be a great promoter of tours around the world, artists and labels and partners using social applications to build buzz and momentum. I would expect labels and artists to be working together to create surrounding opportunities around tours, where in the past, it be tours with merch, now it will be tours with merch, and there may be Web3 applications to create micro-communities that are giving NFTs and special opportunities. And those kinds of things, I think, are going to become one experimented with in the short term, what works, what the fans really love, what do they respond to, obviously, at some level, what monetizes. So I think we'll start to see experimentation in those areas, both around the release of new music but also around tours. So I think there'll be new kind of dynamics that are explored and new norms that develop over time. For the Warner Music Group, obviously, our artist services business has a significant portion that's tied to touring. We have several concert promotion businesses in Europe, in France and Spain, for example. We have a tour merch business in the U.S. And as touring comes back as we're seeing this quarter, those revenue streams start to come back, and that's a very healthy thing. Again, they are lower margin businesses, but they are positive to overall margin. Meaning not the margin percentage but it's incremental dollars on revenue and OIBDA. So we're thrilled they're coming back. It's an important part of the music equation, and it's healthy that artist services is recovering and shows signs that obviously the economy is starting to get back to something more normal post-COVID. On the M&A side, certainly, what we focus on when it comes to geographic expansion are the emerging markets. We have always been a company that focuses on return on investment. We have been cautious not to overinvest in emerging markets before streaming and legitimate revenue streams are able to really drive growth. When those fundamentals are in place, or are just starting to come into place, we start to focus on developing our capabilities in those markets. And we've done it time and time again in the past few years, in Turkey, in the Middle East, in Vietnam, before that in China, and Indonesia and Brazil and Mexico. We're now looking at a series of areas that we're really excited about. Steve mentioned MENA, Middle East, North Africa, which is the fastest-growing region in the world. I think it grew 35% or so last year. We recently acquired Qanawat, the largest music distributor throughout the Middle East. We launched an organic label, an owned and operated label in the Mid-East roughly three years ago to get the start and build relationships. We developed a partnership with Rotana, one of the largest labels throughout the Middle East. So our capabilities, our infrastructure, our music that we're putting out and how we're monetizing in the Middle East is changing really rapidly. We're a significant player there. And we've got a similar mindset in Africa where we acquired Africori, where we developed a partnership with Chocolate City, one of the most significant labels in Nigeria and have been releasing great music. And CK that came out of Africa had just had a global hit earlier this year. So those are two areas in the world that we're starting to see monetize, and we're leaning into heavily. But obviously, there's other markets in Asia and Latin America that we're continuing to lean into as well. And we're very excited about the continued globalization of music. We see it as one of the really meaningful growth vectors.

Our next question comes from Matthew Thornton with Truist. Your line is open.

Steve and Eric, maybe two quick ones, if I could. You touched on touring, but I was wondering maybe if you could touch a little bit on the E&P business. Obviously, I would assume that it had some benefits during the lockdowns and pandemic. I'm curious how that's performing as we kind of have opened up and continue to open up. Any color there would be helpful. And then just secondly, Eric, you talked about cash conversion effectively a little bit early. I'm just kind of wondering if there's a number we should think about as you think about conversion from adjusted OIBDA to free cash flow, again, barring any deals. Is there a way to think about what a normalized number looks like there? Any color would be great.

Certainly. E&P experienced significant growth during COVID, driven by increased e-commerce as people preferred staying home rather than shopping in public. While we saw substantial growth rates exceeding 30% in some quarters, this year E&P's growth has stabilized. This isn’t due to a lack of confidence in E&P's potential; we strongly believe in its long-term growth prospects. However, challenges have arisen from the previous year’s accelerated demand and global supply chain issues affecting product availability. E&P has done an excellent job addressing these challenges, but they are not alone in facing such hurdles. The ongoing war in Ukraine has also impacted consumer behavior in Europe, leading to more cautious spending on lifestyle goods. Overall, while E&P is performing adequately, its growth momentum has slowed in the short term. We remain optimistic about its future and are confident we will overcome these current obstacles. On the cash management side, our primary focus is on business growth. We expect our operating cash flow to rise in tandem with revenue and OIBDA. We have a structured approach to capital deployment. Our first priority is reinvesting in music to fuel future growth opportunities that meet our return criteria. If suitable opportunities arise, our operating cash flow will be deployed for future growth. The second priority is returning cash to shareholders, followed by paying down debt, which we haven't prioritized recently due to our focus on music investments. Our investments typically take the form of advances, which are recoupable. Thus, a temporary decline in cash flow from these advances is just a timing issue, as we recover these amounts as music performs. We are strategic about capital deployment based on available deals that drive growth and meet our return benchmarks. This approach allows us to accelerate growth while ensuring we recover our advances over time.

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

Over the past few months, the market seems to have shifted focus from revenue, gross profit, and EBITDA multiples to earnings and free cash flow. With that in mind, I wanted to ask about cash from operations. It appears that your cash generation has been somewhat subdued during the first half of the year. It’s often the case that working capital acts as a drag in the first half but tends to improve in the second half, although not always. Could you provide some insight into this? Do you expect anything to be different in this fiscal year compared to the previous few years when we typically see a reversal in the second half?

No, there's no opportunity for capital deployment for advances. It's really about the timing of deals, which doesn't follow a seasonal pattern. While some aspects of working capital are seasonal, such as bonuses that are paid in the first half of the year causing a drag, the recovery tends to happen in the second half. The renewal timing of DSP deals isn't seasonal; it simply depends on when the deals are due and renewed. Thus, much of this is about the unpredictability of deal timing, though bonuses do create more of a drag early in the year compared to later.

This concludes the question-and-answer session. I would now like to turn the call back over to Steve Cooper for closing remarks.

Thanks again, everyone, for joining us today. We appreciate all of you taking the time. We hope you have a wonderful spring and summer, and we will talk again in a few months. Everybody stay well and stay safe. Thank you again.

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