Welcome to Warner Music Group's Fourth Quarter Earnings Call for the period and fiscal year ended September 30, 2023. 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, and welcome to Warner Music Group's fiscal fourth quarter and full year earnings conference call. Please note that our earnings press release and earnings snapshot are available on our website and we plan to file our Form 10-K during the week of November 20. On today's call, we have our CEO, Robert Kyncl; and our CFO, Bryan Castellani, who will take you through our results. They will then be joined by Eric Levin for the Q&A portion of the call. Before our prepared remarks, I would 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 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 that 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 Robert.

Thanks, Kareem, and good morning, everyone. I'd like to warmly welcome Bryan Castellani, who joined us as CFO last month. Bryan spent more than two decades at Disney, most recently as CFO of Disney Entertainment and ESPN. We're excited he's part of our team now. I'd like to say a heartfelt thank you to Eric Levin, who's been our CFO for the past nine years. Eric has brought smart, steady financial leadership to WMG during a transformational period for the industry and our company. Given this quarter was his last as CFO, he will be available for Q&A. I have no doubt you'll join me in wishing him the very best as he moves into retirement in January. I'm happy to say our Q4 performance continued to deliver on the second half improvement that we promised on our Q1 earnings call. Led by an acceleration in our streaming revenue, Q4 revenue and adjusted OIBDA grew 5% and 18%, respectively. We also saw robust margin expansion of 230 basis points. For the full year, we reached a key milestone in eclipsing $6 billion of revenue for the first time ever. Our revenue and adjusted OIBDA grew 4% and 10%, respectively, and we delivered 120 basis points of margin expansion. Importantly, operating cash flow conversion was 56% of adjusted OIBDA. With industry tailwinds at our back and a solid slate of new music to start the year, we've headed into fiscal '24 with strong momentum. As always, everything we accomplished begins with our amazingly talented artists and songwriters. In recorded music, the diversity of our artist roster was showcased by a range of success stories from the global phenomenon of the Barbie soundtrack to the breakthrough country superstar, Zach Bryan, with whom we also signed for publishing this year. Warner Records artist, Kenya Grace, scored a global hit with 'Strangers', which rose to number one on Billboard’s Dance and Electronic chart. In the U.K., we celebrated the number one albums from Ed Sheeran, Burna Boy, Laar, and Liam Gallagher. And in Japan, MiSaMo, made up of members of the supergroup Twice, hit number one with their first album. We continue to bolster our local success in multiple territories across the globe. We had number one hits from Gabz in Denmark, Kjartan Lauritzen in Norway, AIVA, ANA, and CapoPlaza in Italy; Elva Hsiao in China; and Jasleen Royal in India, just to name a few. At the same time, we brought bold, inventive thinking to attracting new fans to our legendary artists and classic recordings. Recent examples included a new deluxe edition of Talking Heads' 'Stop Making Sense', the 15th anniversary of Slipknot’s 'All Hope is Gone', and the 20th anniversary of Linkin Park's 'Meteora'. With Madonna on tour, it's been a pleasure to find new ways to create cultural moments around her iconic career. These include a series of remix albums, the special pride edition of her box set containing 15 number one tracks, and the celebratory viral campaign, 'We Love Madonna'. In Music Publishing, our powerful momentum continues as Warner Chappell writers contributed to 8 out of 14 Billboard number one spots in Q4, including Zach Bryan, 'I Remember Everything', and 'Last Night' by Morgan Wallen. We're always expanding our publishing roster and have recently signed hotly contested deals with up-and-coming stars Kaliii, Laufey, and Maria Becerra. We're always reinvigorating our incredible publishing catalog, which includes evergreen copyrights from composers such as George Michael, who was just inducted into the Rock & Roll Hall of Fame, Gamble and Huff, Van Morrison, and Stephen Sondheim. As we speak, there are three Sondheim musicals running in New York, including a revival of 'Sweeney Todd', starring Warner Records star Josh Groban, which was just nominated for a Grammy. Looking forward to a new fiscal year, I'm even more optimistic than I was when I started. We're excited about the trends we're seeing in the industry and energized by our plans to capitalize on them. Let's start with the industry. Advanced reporting shows music is the most popular form of entertainment and it's only getting bigger. Our addressable market encompasses virtually everyone on the planet. Growth in the music business is now well aligned with the opportunities constantly being created by the ongoing global penetration of smartphones and Internet service. Ever since I arrived at WMG, I've been laser-focused on how we can realize the true value of music. I'm grateful to all of our partners who are leaning in and figuring out how we make positive changes together. We're taking a two-pronged approach. First, price optimization: I see this as the most immediate and impactful growth lever for our industry. A more sophisticated and dynamic approach to consumer pricing will benefit the streaming platforms, music companies, artists, and songwriters, the entire ecosystem, driving greater investment and innovation. In the last year, we've seen the first round of subscription price increases across every major DSP and we strongly believe there is a greater pricing opportunity in the future. Second, the evolution of royalty models: we've been consistently clear that streaming services should ascribe more value to what their customers value most. It's the creativity of popular artists and songwriters that deliver subscriber engagement and growth. To state the obvious, premium music should be better compensated than low-quality filler or functional music. We were delighted to work with Deezer to help shape their new approach to rewarding premium music. Look out for similar developments with other partners in the coming months. While these proof points represent a good start, they are just that. We will continue to work collaboratively with our partners to align behind the long-term growth of the industry. I just told you why we're excited about the music industry. Now let me explain why we're excited about Warner Music Group specifically. The future of music will be forged at the intersection of creativity and technology. With that in mind, we're carving out a distinctive proposition through the combination of the following. One, a deep iconic catalog as well as up-and-coming talent and thriving superstars; two, global scale with strong local capabilities in the discovery and promotion of talent; three, the ability to use technology as a force multiplier on the previous two attributes. Our commitment to each of these key areas is always underpinned by our focus on financial discipline, and we're constantly challenging ourselves to operate more efficiently and effectively. As a rule of thumb, our recorded music revenue is evenly split among three release vintages: new releases, which are less than three years old; shallow catalog, which is more than three, but less than 10 years old; and deep catalog, which is more than 10 years old. We invest in A&R and marketing across each of these vintages to create a consistent flow of music from our artists and songwriters all around the world, past, present, and future. We pride ourselves on discovering original talent and unique voices with long-term potential. We provide them with tailored approaches to become standout global success stories. Think of one-of-a-kind genre-defying artists like Bruno Mars, Ed Sheeran, Cardi B, Dua Lipa, Zach Bryan, and many more. The beauty of the streaming universe is that every time one of our superstars releases a new album, goes on tour, or scores a big sync placement, fan engagement spikes across their entire body of work. Equally, in the world of playlisting and social media, a track from our catalog can go viral at any moment. These big hits from legends like Fleetwood Mac, Boney M, and Madonna explode on multiple platforms, introducing these artists to a new generation. For instance, my 20-year-old daughter discovered Fleetwood Mac when their 1977 hit 'Dreams' went viral on TikTok two years ago. They are now her favorite band of all time. To fuel, maximize, and monetize this uplift in engagement requires real expertise and a wide network of relationships. This is how we demonstrate our value and relevance in the entertainment ecosystem, not just by discovering talent and promoting their latest works, but by thinking holistically about their careers and growing their legacies. Our entrepreneurial culture extends to how we select which companies to invest in or acquire. A perfect example is our new venture with 10K Projects, which brings us a dynamic artist roster, fresh catalog, and a visionary team led by Elliott Branch. Investing in our core business is not just about the recordings and compositions that we own, but also about leveling up our distribution business in ways that deliver profitable growth. We created more capacity for ADA to focus on developing new distribution partnerships and for our technology team to build scalable solutions to enable these partnerships. In the last year, we signed deals with a range of labels, including Australia's Last Ride Records, the U.K.'s LAB Records, and the U.S. Rostrum Records, which launched the careers of hip-hop stars like Mac Miller and Wiz Khalifa. Let me turn now to our approach to global expansion and emerging markets. For some time now, our goal hasn't been just to market Anglo-American repertoire in local markets. Instead, we signed and develop local talent that can have regional or global success. As I've mentioned before, we're making great inroads in fast-growing territories like China, the Middle East, and Africa. India is a great example of this strategy in action. With a vast population of 1.4 billion people and its huge diversity of demographics, India has an endlessly evolving music scene. According to IFDI, India has more than doubled its recorded music revenue over the last five years and it also has the highest growth of any top 20 country in 2022 at 48%. We've made huge strides since first launching our local office in Mumbai in 2020. This year alone, we've grown our presence by acquiring e-positive and Indian management and live events company, launching a new joint venture, 91 North Records, and expanding our partnership with Sky Digital, an aggregator of Punjabi music. Our team in India is attracting massive stars, including hip-hop artist King, who became the first Indian performer to hit Spotify's global top 30. The music ecosystem is healthy and has a number of exciting growth drivers, with price increases happening across all major DSPs, royalty models evolving to reward quality, and emerging markets gaining traction. We're very confident and positive about the path ahead. We're excited about our new releases for fiscal '24, including some that came out just last Friday from David Guetta, Jack Harlow, PinkPantheress, and of course, Dua Lipa, who had her biggest global launch to date with her new single 'Houdini'. There are also eagerly anticipated projects from Green Day, Kenya Grace, Cardigans, Gabby Barrett, Maria Becerra, and Myke Towers, among many others. We've been working hard to build a WMG that will excel in the music industry of tomorrow. Our work is already beginning to bear fruit, and I assure you that there is much more excitement to come. And now, here's Bryan to walk you through our financial results.

Thank you, Robert, and good morning, everyone. I am extremely excited to be here, and I'm looking forward to engaging closely with the investment community. In my brief time at Warner Music Group, I've been impressed with the work that we are doing. We are investing in our already strong core and leveraging technology, which will continue to augment our growth through a rapidly changing music industry. We have strong momentum ahead and we'll share regular updates with you as our progress continues. Now turning to our Q4 results, as Robert highlighted, our performance in the quarter was underpinned by a solid release slate and a recovery in ad-supported streaming, which drove sequential acceleration in our recorded music streaming growth. This fuels our second half improvement which combined with our disciplined cost management enabled us to deliver robust adjusted EBITDA growth and margin expansion for the full year. There are a couple of items throughout the quarter and the year that affected comparability. These include the impacts from the CRB mechanical royalty rate increase, a copyright settlement, and an extra reporting week. The details and adjustments relating to these items can be found in our earnings press release. I will provide growth rates in constant currency and normalized for these items. In Q4, total revenue grew 5% and adjusted OIBDA increased 18%, with a margin of 20%, an increase of 230 basis points over the prior year quarter. On a normalized basis, total revenue grew 6% and adjusted OIBDA increased 31%, with a margin of 19.9%, an increase of 370 basis points over the prior year quarter. Recorded Music revenue grew 2% and 5% on a normalized basis. Despite a challenging comparison to the prior year quarter, our streaming revenue grew 9% and an improvement from the 7% we reported in Q3. Subscription streaming revenue grew by approximately 10%, representing healthy growth over the 13% we delivered in the prior year quarter and was in line with Q3. Ad-supported revenue increased by 7%. Physical revenue increased 6%, driven by strong performance in the U.S., including from new releases like the Barbie Soundtrack, 50-50, G-IDLE, and Mac Miller. Artist services and expanded rights revenue decreased 11%, with the decrease due to lower merchandising revenue in the U.S. tied to timing of touring cycles and economic headwinds in Europe that continue to impact our E&P business. This was partially offset by higher concert promotion revenue. Licensing revenue grew by 7% due to higher broadcast fees. Recorded music adjusted OIBDA grew by 23%, with a margin of 21.8%, an increase of 370 basis points. On a normalized basis, adjusted OIBDA increased by 32% with margin expansion of 450 basis points. Music Publishing continues to deliver impressive results with revenue growth of 15%, driven by strength across all revenue lines. On a normalized basis, revenue grew 13%. Digital revenue increased 19%, and streaming revenue increased 26%. On a normalized basis, digital revenue grew 15% and streaming revenue increased 17%, reflecting the continued growth in streaming and the impact of digital deal renewals. Mechanical and performance revenue increased by 42% and 2%, respectively, while sync revenue increased by 3%, primarily due to stronger performance in the U.S. Music Publishing adjusted EBITDA grew 19%, with a margin of 24.8%, an increase of 90 basis points. On a normalized basis, Music Publishing adjusted OIBDA grew 17%, with a margin of 24.9%, an increase of 80 basis points. Moving to our full year results. Total revenue grew 4% and adjusted OIBDA grew 10%, with a margin of 20.5%, an increase of 120 basis points. On a normalized basis, total revenue grew 6% and adjusted OIBDA grew 17%, with a margin of 20.4%, an increase of 190 basis points. We over-delivered our margin expansion guidance even as most of the cost savings from our March restructuring were reinvested to drive our business forward. Recorded music revenue increased 2%. Within Recorded Music, streaming revenue increased 4% and adjusted OIBDA grew 7%, with margin expansion of 120 basis points. On a normalized basis, recorded music revenue increased 4% and streaming revenue grew 6%, with adjusted OIBDA growth of 13% and margin expansion of 180 basis points. Music Publishing revenue increased 15%, and adjusted OIBDA increased 28%, with margin expansion of 270 basis points. On a normalized basis, music publishing revenue increased by 16%, and adjusted OIBDA increased by 28%, with margin expansion of 270 basis points. We continue to successfully launch certain components of our financial transformation program in select territories. The program remains on track to meaningfully roll out later this fiscal year and into FY '25. Once fully implemented, we expect the program to yield annualized run rate savings of $35 million to $40 million. Q4 CapEx of $38 million was the same as the prior year quarter. Q4 operating cash flow decreased 17% to $338 million from $406 million in the prior year quarter. The decrease was primarily driven by working capital items, which included higher royalty advances and the timing of digital deal renewals. Free cash flow decreased 18% to $300 million from $368 million in the prior year quarter. For the full year, operating cash flow decreased 7% to $687 million, and free cash flow decreased 8% to $560 million. We delivered operating cash flow conversion of 56% for the full year, in line with our target of 50% to 60% over a multiyear period. As of September 30, we had a cash balance of $641 million, total debt of $4 billion, and net debt of $3.3 billion. Our weighted average cost of debt is 4.1%, and our nearest maturity date is in 2028. While growth was muted in the first half as we had some release scheduled softness, we recovered to end the year on solid footing and already have momentum in 2024. We are off to a strong start with new releases from Dua Lipa, David Guetta, Jack Harlow, PinkPantheress, and many others. As we look ahead to the fiscal Q1, I want to call out a couple of items that will impact comparability. First, we announced that our digital distribution agreement with BMG will end. To frame the impact, the total revenue contribution from BMG in fiscal 2023 was approximately 4% of total recorded music digital revenue with negligible contribution to adjusted OIBDA. BMG has already started to bring its digital distribution in-house, and it will be largely rolled off by the end of October 2024. The impact to our Q1 24 recorded music digital revenue will be approximately $15 million as both Spotify and Apple will transition this month. This impact will increase in Q2 and beyond as we will see the full quarter impact from the roll-off of these DSPs and as BMG gradually brings other digital partners in-house. We will also discontinue BMG's physical distribution by the end of October 2024. BMG's physical distribution revenue represented less than 2% of our recorded music revenue in fiscal 2023. We will provide details going forward and disclose normalized growth adjusted for the impact of these items. Second, we have granted a licensing agreement extension for a catalog that will have a one-time favorable impact on recorded music licensing revenue and adjusted OIBDA of approximately $70 million in fiscal Q1 2024. While this is a multiyear licensing agreement extension, the revenue and adjusted OIBDA will be fully recognized in Q1. Our goal is to deliver healthy top line growth, margin expansion, and cash flow conversion on a consistent basis. 2024 has started with much stronger momentum than we had entering 2023, and we expect our slate throughout the year. We will invest more heavily in A&R and marketing in 2024 to ensure the success of our slate. We still expect to deliver approximately 100 basis points of margin expansion for the full year, which will be back half weighted, as well as 50% to 60% of operating cash flow conversion on a multiyear basis, in line with our targets. The momentum in the music entertainment business is strong, and we continue to position ourselves for long-term success and growth. Before I close, I also want to take a moment to thank Eric. His contributions to Warner Music Group and leadership of the finance team have been immeasurable. I'm grateful for his and the team's support in such a smooth transition. Thank you to everyone for joining us today. We'll now open the call for questions.

Our first question comes from Omar Mejias with Wells Fargo. Your line is now open.

Robert, maybe first, I wanted to ask, if you continue to evaluate some of the necessary investments to better position the company, how do you think about the balance between investment in A&R versus tech? And second, now that you've freed up some resources in ADA, how should we think about your priorities to drive growth and maximize ROI in that business going forward?

All right. Thanks for the question. So here's the way to think about it. We're a music company that's benefiting from the tailwinds of the music industry that we just described. The way we invest and grow is, first and foremost, into IP, and that has multiple different ways, multiple different forms. One, which is organic A&R, which we do day in, day out, investing into new artists or existing artists, and there are new releases. Two, we acquire stakes in going concerns; the acquisition of 10-K is a really good example from a couple of months ago. Three, we acquire catalogs, whether it's on the publishing side, on the recorded side; David Bowie’s catalog from a couple of years ago is a good example of that. And then we look at all of these activities all around the world. I just described in the earnings call our success in many different high-growth markets. So we're replicating all of these activities in different geographies. So it's like a four-pronged approach. Then we layer on top of that investments into technology, which becomes a force multiplier on everything I just mentioned. That is the main goal. And what we do with the technology investments are 100% self-funded. That's what we committed to earlier last year, and that's what we are committing to going forward as well. And when we do this, we're creating a flywheel that is allowing us to continue our investments into growth, continue our overall growth, and continue to expand our margins at the same time. That's the strategy for our investment framework. As it relates to ADA and the freed-up resources, the best way to think about it is we have an amazing team of executives that have driven the ADA business for quite a few years. We are focusing on growing both our top line and our bottom line with a very strong global orientation, just again, in line with what I just mentioned earlier and even a minute ago. And we're focused on working with more and more labels and more and more artists all around the world and scaling that business. Technology is a really big part of that because it helps us do that more efficiently and faster and with less friction. And a great example of that is the focus of Ariel's team, who runs our technology group, to overhaul our supply chain and all of our partner-facing tools that, from a technology standpoint, enables this for the business team to drive acceleration in that business. So all in, the strategy to grow ADA is there as it was before because the independent space is growing, and we're leaning into that space. And two, we're just doing it differently. We're doing it in a way that is driving both top line and bottom line at the same time.

That's very helpful.

Our next question comes from the line of Ben Swinburne with Morgan Stanley.

Welcome Bryan to Warner Music, and congratulations on your public earnings call debut. Robert, could you talk a little bit about streaming growth? Recorded music streaming growth as you head into fiscal '24. It would seem between the Spotify price increases, some of the activity in artist-centric, and your slate, we should see some acceleration from the kind of exit rate of high single digits that you guys just delivered? That's my first question. And I guess, secondly, I think you called out $10 million of incremental investment in technology in the quarter. I'm sure you will share everything. But can you talk a little bit about where that money is going? And when that might translate into sort of business outcomes that you think we would see externally?

Sure. Thank you. So, first, on sort of overall streaming growth, obviously, we're pleased with the industry returning to a high. I mean, to a very healthy double-digit growth. The way I think about it is that I'm not really looking at our competitors. I'm not looking at the world around us. I'm focusing on our own continual and sustained improvements. I want our company to just keep on improving on a steady basis and most importantly, on a sustained basis. It's very, very important. The investments into A&R and all of that, that I just mentioned a few minutes ago goes into that. But at the same time, we're investing in technology. And the best way to think about that is there's a lot of foundational work that helps us actually deliver on that sustained growth promise from a technological standpoint. I just mentioned overhauling our supply chain infrastructure. While that may sound very unsexy, what benefits the business is very exciting because it's removing lots of friction and increasing speed in the way we can process more music, more partners, and more artists through our supply chain. And so, whether it's something that we wholly own or whether it's a partner of ADA with greatly externalized tools and improved tools, all of that contributes towards the growth of the company while delivering on our margin expansion. So that's just one example on the technology front.

Ben, it's Bryan. Nice to talk to you. I want to comment on the streaming growth and refer back to my earlier remarks about Q4 year-over-year. We had a very strong Q4 in 2022 with subscription streaming growth of 13%, which I believe was 400 to 500 basis points above some of our competitors. This comparison might slightly impact the quarter, but as Robert mentioned, we are positioned well with continued momentum into the second half of the year and a stronger release slate in 2024, especially in the latter half. We feel positive about this. I also want to remind you that the price increases involve various factors and take time to be implemented across the industry. This includes the transition from announcement to implementation, geography, and product mix, so there’s a lot involved as these changes reflect in our numbers, but we are well-prepared for 2024. Thanks for the question.

Our next question comes from the line of Sebastiano Petti with JPMorgan. Please go ahead.

Bryan, welcome aboard. Eric, congratulations again on your retirement. I would like to ask you to clarify the margin expansion target for the year. Is that 100 basis points on a reported basis, or is that excluding BMG? Additionally, could you help us understand the phasing? I believe you mentioned that most of it is back-half weighted, but you also have significant licensing coming through in the first half. So, I'm trying to get a better understanding of that. Robert, could you tell us about the AI feature you announced this morning with YouTube, and more generally, how you view AI's impact on the industry, as it seems to have become less of a concern than it was a couple of quarters ago?

Yes. Sebastiano, thanks. On the margin expansion, as I said in my remarks, that 100 basis points a year target remains for us, and we had a strong over-delivery on an organic basis of a couple of hundred plus basis points in '23. And so that is an organic target ex-BMG for us and that will, particularly as we work through the year, it will be gradual as we work through and get the benefit, I think, of many releases in the second half. And that margin would also be excluding the catalog license sale in Q1. We continue to challenge ourselves in that regard, and we feel good about it as the team continues to be, I think, really active and vigilant cost managers and disciplined on the financial front. So we continue to keep focused on that target.

Let me take the second part of the question on the beta that was announced this morning with YouTube, the AI beta. So first, I'd like to actually point out to the significance of this, which is to imagine in the early 2000s if the file-sharing companies came to the music industry and said, would you like to experiment with this new tool that we built and see how it impacts the industry and how we can work together. It would have been incredible. Obviously, that didn't happen. So this is the first time that a large platform at a massive scale that has new tools at its disposal is proactively reaching out to its partners to test and learn. And I just want to underscore the significance of this kind of engagement and the sort of the orderly fashion in which this is happening. I really applaud YouTube and DeepMind and all of Google and our counterparts in the industry for participating in this because this is the right way to engage with this. Whenever I say responsible engagement with our partners, this is precisely what I mean. And so we're excited about it. We're excited to learn from it. And together, we then develop a great blueprint for how things should work, but develop it based on learnings. More broadly, the way I think about our engagement on AI and what we practice is along the following lines. We have three constituents. One, which is generative AI engines, right? So whether it's DeepMind, Anthropic, Lambda, etc. And there, that's obviously where it begins. And there, our efforts in the music industry are focused on making sure that they're licensing content for training, they're keeping records of inputs so that provenance can be tracked, and then there's watermarking of the content. The second group is the platforms where most of the content, irrespective of where it will be created and by which tools, will end up because people who are creating will want views, streams, or lots of user engagement. So with YouTube, TikTok, Instagram, etc., obviously those are the platforms Spotify. We're focused on three things, which is control, attribution, and monetization. And all of those wrapped in choice for artists; artist and songwriters making sure that they have a choice. We have a blueprint from all of our work on user-generated content over the past 15 years or so, which created a multibillion-dollar industry on an annual basis for the music industry. So we just need to now write the fine print for the AI with them. And then the third set of constituents is government. Over there, we are both through our trade organizations as well as ourselves working hard to make sure that regulation around AI respects the creative industries, music industry specifically from our standpoint that licensing for training is required and also that name, image, likeness, and voice are afforded the same protection as copyright. I personally have spent time over the last month with leading politicians on these issues and regulators in London, Brussels, Tokyo, and a few other cities around the world. So, lots of effort underway, but I'm really excited and positive about the YouTube beta.

Our next question comes from the line of Batya Levi with UBS. Your line is open.

Great. Can you provide a bit more color on the recent deals you've signed with the DSPs and some of the benefits you expect to see beyond the price increases we've seen at them? And a second question in terms of acquiring new catalogs. Can you talk about what you're seeing in the market right now? We've seen some activity among the smaller labels. What do you think about valuations and availability of new IP?

Thank you. While we can't disclose the specifics of our DSP agreements, we are very excited about our most recent partnership, which aligns with our strategy to enhance the value of music. The first part of this strategy is price optimization, and the second involves developing new royalty models. This partnership falls into the latter category. It’s important to note that we value collaboration with multiple partners in the industry, not just one. My experience has shown me that relying on a single company isn't as effective; we need a collective effort across the ecosystem. Our goal is to work with various large, independent firms to create improved models that elevate the value of music. We're dedicated to this on multiple levels to ensure that this value is appropriately reflected. Regarding catalog acquisitions, I view our catalog as an incredible asset. Warner Music Group possesses a priceless catalog that continues to generate value. For instance, my 20-year-old daughter recently discovered Fleetwood Mac and has become their biggest fan, illustrating how timeless our catalog is and its potential for driving company value. We're continuously working on expanding our catalogs through new releases and discovering new talent, like Zach Bryan. There has been considerable activity in catalog sales recently, impacting valuations, and we are closely monitoring fluctuations in the market. Our focus is to be both opportunistic and strategic in deploying our capital at favorable prices, based on our forecasts for strong growth in the entities involved.

Yes. And I would just add on that capital allocation that Robert mentioned. And I think he had mentioned it before as well. We were always looking to invest in A&R and new artists and licenses. There are also JVs like 10-K that we can do that through. And then, there is the purchase of catalog that is certainly a big part of our business that we continue to mine, and their value continues to grow. And then that's supplemented by marketing and tech investments to fuel some growth in those returns. But overall, we look at this through the lens of how do we drive our return on invested capital and keeping that and growing in the high teens.

That's great. Just a quick follow-up. I think, Robert, last time you had mentioned that you did not renew with Spotify yet. We seem to think that you have since then, would you be willing to provide an update?

Yes. So generally, we do not provide updates on the timing of our deals. So, I would say speculating on those is probably not the best practice. And there's really nothing to announce. And when we have something, we will. But there's nothing of note to speak of.

Our last question comes from the line of Benjamin Black with Deutsche Bank.

Robert, I just want to go back on your comments around sort of optimized retail pricing. So beyond just broad-based price increases, what would that entail? Are you sort of speaking about the introduction of new tier segments in the market a little bit differently? Sort of how should we interpret your comments there? Because you dig into that a little bit? And then my second question is on the advertising side of the business. So what are we seeing in terms of core music ad-supported revenue if we exclude the impact of some of these new platform deals? And just looking forward, can you sort of talk about the ad market environment and how we should think about ad-supported revenue going forward?

Sure. When it comes to price optimization, it's crucial to expand our thinking beyond just the basics. This applies not only to our partners but also to us as suppliers. For example, while it's important to keep pace with inflation and analyze price elasticity, we must also consider the pricing relationship between family plans and individual plans. Are they appropriately priced relative to each other? Even amid price increases, we should assess if this ratio is correct. Looking at international markets like China, where there are only individual accounts, also offers valuable insights. For instance, artists or bands on Tencent may sell their albums in addition to a subscription. Therefore, it’s vital to maintain a broad perspective and not just focus narrowly on revenue. Collaboration with our partners is essential to ensure that any changes benefit both sides and help improve the overall ecosystem more rapidly.

Yes, Ben, it's Bryan. I'll take the ad-supported revenue. We're seeing definite improvement there. I think everybody is familiar with the first half challenges and advertising recession. That rate of growth, that rate of improvement continues. Even without the addition of TikTok in the combined revenue report there, we'd still be up. We'd still see a good improvement on the rate of change. And so, we like the trends there and are encouraged, also encouraged, I think, by even with Spotify's remarks. As you look across, performance and streaming is probably being stronger, while performance and targeted advertising in the streaming space is stronger than the larger advertising space. And so it sets it up well for '24, and we feel good about the outlook there.

Fantastic. And Eric, congrats on the great run, wish you all the best in your retirement.

Our last question comes from the line of Jason Bazinet with Citi. Your line is now open.

I really appreciate your approach to the business in terms of getting pricing right and finding mutual benefits with your distribution partners. Where do you think there is the most consensus for a win-win, where you feel aligned with your distribution partners? I share your view that there is value there, but I believe The Street may have concerns about whether you can make significant progress with new agreements with the DSPs.

Sure. I mentioned earlier that we've made significant progress, but this is just the beginning. I genuinely feel we are in the early stages of our journey. This isn't just something I say during an earnings call; it's my honest belief when I consider all the work ahead of us and the opportunities that lie in front of us. With some partners, we've made considerable advancements, while with others, we still have a long way to go. Typically, progress with one partner can lead to progress with others within a year. We are approaching this with clear priorities. It's agreed that the total addressable market may be larger than we initially thought regarding revenue, and other industries have optimized their pricing better than we have. This doesn't indicate any mistakes on our part; we had to bring a significant number of users into our premium offering first. What we need to resolve is how to ensure that our partners achieve success through this process, which will, in turn, drive success for us. This will require us to broaden our thinking beyond our traditional approaches. A lot of this work takes time and doesn't yield immediate results, but it's crucial that we start and do so analytically, as that's how DSPs operate. Collaboration is also essential since we need to involve the entire industry, not just a few partners. That's our current focus. I want to share a personal highlight from the weekend. While listening to music on Spotify, I checked the charts on my phone and noticed that 'Lovin On Me' by Jack Harlow was number two, 'I Remember Everything' by Zach Bryan was number three, and 'My Love Mine All Mine' by Mitski was number four. Three out of these four top songs belong to us, which is a fantastic endorsement of our teams. Earlier this year, during my first earnings call, I was not feeling well, and we didn't have the best results. Yet, we believed in our strategy, and we have delivered—our team has truly stepped up. I'm grateful to everyone in the company for their hard work, and I assure you we will continue this momentum. Lastly, I want to express my appreciation to Eric for everything he's done for the company. We might reach out to you occasionally to keep things interesting, but thank you for your invaluable contributions.

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