Welcome to the Warner Music Group Third Quarter Earnings Call for the period ended June 30, 2024. At the request of Warner Music Group, today's call is being recorded for replay purposes, and if you object, you may disconnect at any time. Now I'd like to turn today's call over to your host, Mr. Kareem Chin, Head of Investor Relations. You may begin.

Good morning, everyone, and welcome to Warner Music Group's fiscal third quarter earnings conference call. Please note that our earnings press release, earnings snapshot, and Form 10-Q are available on our website. On today's call, we have our CEO, Robert Kyncl; and our CFO, Bryan Castellani, who will take you through our results, and then we will answer your questions. Before our prepared remarks, I would 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. References to normalized revenue and adjusted OIBDA are adjusted for items that impact comparability. The details of these can be found in our filings. 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's 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. Good morning, everyone, and thank you for joining us. Our commitment to our artists and songwriters has been bearing fruit, and I'm very pleased with the work our team is doing from signing and developing great talent to strengthening our global presence to improving efficiency to drive the business forward. Let's turn to Q3 results. Subscription streaming was strong, accelerating to 14% on a normalized basis, driven by improved performance as well as subscriber growth and price increases. This impressive performance was offset by the effects of a softer ad market and challenging comparisons in both artist services and physical revenue. As a result, Q3 total revenue increased 1%, with recorded music decreasing 1% and music publishing increasing 9%. On a normalized basis, total revenue grew 3%, with recorded music up 1% and music publishing up 12%. Total adjusted OIBDA increased 8%, with margin growth of 130 basis points. On a normalized basis, total adjusted OIBDA grew 10%, with margin increasing 120 basis points. As you may have seen, last week, we announced organizational changes in our recorded music business. Before I go into further detail on this, I'd like to thank Max Lousada for his exceptional contributions to this company over the past two decades, especially for his last seven years as our recorded music CEO. A first-class leader, he's been instrumental in building the WMG of today and creating a strong foundation for our future. He's agreed to stay on until the end of our fiscal year on September 30, and after that, he'll remain an adviser through the end of January. Our reorganization will help us achieve three important things: first, we'll have a new, flatter structure that will elevate our creative regional leadership, setting up more direct channels between local expertise and global opportunities. We have a deep bench of executives. Going forward, we'll be organized into four major regions in recorded music, each overseen by a talented leader who will report directly to me. Second, we'll be compounding our strength in the United States, the world's biggest music market by organizing our frontline labels into two groups: Warner Records, which is on an incredible run with chart-topping orders such as Zach Bryan and Benson Boone, will expand its responsibilities to oversee Warner Music Nashville. Atlantic Music Group, which already includes Atlantic Records and 300 Elektra Entertainment, will now also encompass the recently acquired 10K Projects. At the same time, there will be changes at the top of Atlantic Music Group. Julie Greenwald is beginning a leadership transition. She will take on a new role as Chairman, with Elliot Grainge coming in as CEO. We're excited by the prospect of taking Atlantic's culture-making capabilities and adding Elliott's digitally native approach into the mix as we grow the label's outstanding reputation. Third, we'll be strengthening our central operations in order to maximize our worldwide impact and provide operating leverage across the entire organization. As a result, the Heads of Global Catalog, Marketing, WMX, and ADA will directly report to me. When you take these three things together, I am confident that over time we will become both more effective and more efficient in how we serve our artists. Today, music moves at the speed of light. Our new structure better reflects the fast-moving nature of cultural trends. We'll nurture artists through our local expertise while plugging them into a big, powerful platform that will amplify their success globally. We're making changes from a position of strength, and I'm happy to say that we're firing on all cylinders across new releases, catalog, distribution, and publishing. For decades, one of the hallmarks of WMG's success has been our focus on artist development, building careers from the ground up from Aretha Franklin, Led Zeppelin, and Madonna to more recent superstars like Ed Sheeran, Bruno Mars, and Dua Lipa. Each of them is a homegrown WMG artist. And this remains true today. So far, in 2024, WMG has more new artists debuting on the Spotify Global Top 10 than any other music company. And many of them are homegrown successes signed very early in their careers, including Artemas, Benson Boone, Teddy Swims and many others. Meanwhile, our recent successes include blockbuster albums from Megan Thee Stallion and Gunna, who both went #1 in the U.S.; Dua Lipa, who reached #1 in numerous countries, including the U.K., Spain, and France; Zach Bryan, who topped multiple Billboard charts, including the top streaming album chart; and Charlie XCX, when we signed in 2010. Her sixth studio album, 'Brat', has received rave reviews and spawned rap culture, becoming the pop sensation of the summer, with many influencers, celebrities, and even politicians joining in. Globally, we've had dozens of massive hits across multiple regions, including Capo Plaza, Baby Gang, and Rose Villain in Italy; SCH and Soprano in France; Myke Towers in Mexico and Spain; and Charlie Xiao in China, and TitoM, Yuppe, and Burna Boy in Nigeria. The beauty of streaming is that newly released hits have a halo effect on the rest of an artist's catalog. As we help artists develop loyal fan bases, each new hit drives an uptick in their catalog. And when we amplify and extend that halo effect, it builds the stickiness that transforms hits into evergreen deep catalog. As one example, Twenty One Pilots released their latest album, 'Clancy'. It more than doubled the streams across the band's entire body of work that week. We continue to reinvigorate our entire catalog, which extends back over seven decades and includes legendary artists such as the Eagles, Fleetwood Mac, Prince, Joni Mitchell, Ray Charles, The Doors, and Tracy Chapman, among many others. Turning to distribution, ADA, which serves independent artists and labels, has been generating solid momentum this year. We launched ADA over 30 years ago, and in the streaming universe, where scale is especially important, it plays a key role in our recorded music ecosystem. Recent developments include a global distribution deal with regional Mexican label, Elegante Records, and a partnership with Brazil's Sua Música. In Music Publishing, Warner Chappell's impressive run continues, and we're seeing an increasing number of artists who want to partner with us across both recorded and publishing rights. There is power in having a unified global team supporting every aspect of their careers and catalogs, and it's true for everyone from legends like David Bowie and Tom Petty to current stars like Teddy Swims and Lizzo. Our amazing songwriters continue to contribute to huge hits, including 'I Had Some Help' by Post Malone featuring Morgan Wallen and Shaboozey's 'A Bar Song Tipsy', both of which hit #1 on Billboard Hot 100. Amy Allen is also on a spectacular hot streak as she co-wrote Sabrina Carpenter's Summer Smash, 'Please Please' and 'Espresso'. A powerful example of our ecosystem in action is Benson Boone, the breakout star of the year who signed with us for both recorded music and publishing. Benson was first discovered by Warner Chappell, who worked closely with him to hone his songwriting skills. He later joined Warner Records before he had even released a single record. Supported by a targeted strategic artist development plan, his single 'Beautiful Things' became a global smash, topping the charts in over a dozen countries and holding the #1 spot on the Billboard Global 200 chart for seven weeks. It was also the first record released in 2024 to hit 1 billion streams, keeping it in the top 10 of the Billboard Hot 100 for 24 of the last 27 weeks. Benson, like all of our newer artists and songwriters, is already beginning to grow his catalog of tomorrow, demonstrating how we can help turn dreams into careers and build lasting value in partnership with genuine talent. As we look forward, we're excited about the future of the music industry and our horizon for WMG. I know that investor attention has recently been focused on the dynamics between the labels and the DSPs, with some speculating that we are adversaries playing a zero-sum game. That's simply not the case. We're actively engaged with our partners around ways to drive growth for all of us. Streaming dynamics remain healthy with plenty of headroom for subscriber growth in both established and emerging markets across multiple partners. Also, price optimization and improvements in the royalty models will provide ongoing opportunities for additional growth. On the AI front, as I told you last quarter, I testified at the Senate Judiciary Committee hearing in April on the needs for Deepfake legislation. I'm grateful to Senators Coons, Blackburn, Klobuchar, and Tillis for their thoughtful crafting of the NO FAKES Act, which was introduced in the U.S. Senate last week. This act strikes the right balance between propelling the next wave of technology-powered creativity while safeguarding every American's right to control the use of their own image and voice in the age of AI. We're closing the year with great new music coming from Coldplay, David Guetta, Benson Boone, Myke Towers, and many others. It's been a transformative year for WMG and the entire industry, and there's lots to be optimistic about. Now here is Bryan.

Thank you, Robert, and good morning, everyone. Before I get into details of our Q3 results, I want to remind everyone that growth rate comparisons will be in constant currency and where appropriate, I will reference normalized growth metrics. The items affecting recorded music streaming revenue comparability include the previously disclosed BMG digital revenue roll-off, which was $25 million unfavorable in the quarter, and the renewal with one of our international digital partners, which was $3 million unfavorable this quarter. Additionally, the CRB rate increase provided a $7 million benefit to music publishing digital revenue in the prior year quarter. In Q3, total revenue grew 1%, and adjusted OIBDA increased 8% with a margin of 20.3%, an increase of 130 basis points over the prior year quarter. On a normalized basis, total revenue grew 3% and adjusted OIBDA increased 10%. Recorded Music revenue declined 1% and grew 1% on a normalized basis as strength in streaming was offset by lower physical and artist services revenue. On a normalized basis, streaming revenue grew 10%, with subscription streaming growth accelerating to 14% while ad-supported revenue increased 1%. The improvement in subscription growth was driven by subscriber growth and price increases. The deceleration in ad-supported revenue was driven by a challenging comparison to the prior year quarter. Physical revenue decreased 4% due to the timing of releases and strong U.S. physical releases in the prior year quarter. Artist Services and Expanded Rights revenue decreased 26% due to lower merchandising revenue, lower concert promotion revenue in Japan and France, and foregone revenue related to the previously announced exit from our owned and operated media properties. Licensing revenue decreased 1% driven by increased revenue from copyright infringement settlements in the prior year quarter. Recorded music adjusted OIBDA increased 8% with a margin of 22.5%, an increase of 190 basis points. On a normalized basis, adjusted OIBDA increased 9% and margin increased 160 basis points. Music Publishing continues to deliver strong results with revenue growth of 9% or 12% on a normalized basis, driven by streaming, performance, and sync revenue. Digital revenue increased by 7% or 11% on a normalized basis. Streaming revenue increased by 8% or 12% on a normalized basis, reflecting continued market growth, continued investment in and the expansion of our catalog and timing of payments. Performance revenue increased by 33% due to an increase in touring activity outside the U.S. and an increase in U.S. radio airplay. Sync revenue increased 2% driven by timing of copyright infringement settlements. Mechanical revenue decreased 19% due to lower physical sales. Music Publishing adjusted OIBDA grew 8% with a margin of 26.2%, an increase of 10 basis points. On a normalized basis, adjusted OIBDA increased 11%, margin increased 20 basis points. Total operating cash flow increased 29% to $188 million from $146 million in the prior year quarter. Operating cash flow conversion was 59% of adjusted OIBDA. We remain on pace to achieve our 50% to 60% multiyear target for the full year. Free cash flow increased 42% to $160 million from $113 million in the prior year quarter, driven by strong operating performance and timing of working capital. As of June 30, we had a cash balance of $607 million, total debt of $4 billion, and net debt of $3.4 billion. Our weighted average cost of debt was 4.5%, and our nearest maturity date remains 2028. As we look ahead, we continue to estimate the roll-off from BMG digital distribution will be in the range of $25 million to $30 million in Q4. Looking at Q4, we see continued strength in subscription streaming revenue, while ad-supported revenue is expected to be challenging comparisons to the prior year quarter. As we approach the two-year anniversary of our existing Meta deal, we want to flag that they will no longer be making available premium music videos to their users. This change to Meta's offering will result in a revenue impact of approximately $10 million per quarter across both recorded music and music publishing, which will start to impact us in Q4. We continue to be excited about the portfolio of emerging streaming platforms and expect this category to be a driver of long-term growth. We are focused on delivering a strong close to the year, and I'm pleased that Q4 is off to a solid start. While macro challenges in the ad market persist, the health of the industry remains strong with multiple vectors for growth, and we continue to position ourselves for long-term success. We look forward to delivering exciting new music in the quarters to come. Thank you for joining us today. We'll now open the call for questions.

Thank you. Our first question comes from Kutgun Maral with Evercore ISI. Your line is open.

Good morning and thank you for taking the questions. Two, if I could. First on subscription streaming. Some of your peers have called out pressure points on the streaming outlook as it relates to a slowdown in subscriber growth at certain DSPs. I know you've touched on a number of opportunities for the industry and WMG and called out continued strength into Q4. But is there any more you can share on the trends you're seeing at recorded music subscription streaming and the outlook ahead? And second, on the recorded music reorganization, it's sometimes hard for us on the outside to appreciate the implications of these decisions and how it might impact the business. Robert, you called out a number of items that you hope to achieve to ultimately become more effective and efficient in the ways that you serve artists. I know it's early days, but any thoughts on how these moves might impact the financials over the coming years? Thank you.

Thank you for the question. I appreciate it, and good morning. So first, on the streaming market. The demand side of our business is very resilient and strong. And I think other industries would wish for that kind of demand to continue. Two, we're not seeing any change in our revenue mix. So I'd like to caution the financial community to make sure that you don't look to just one company, Spotify, as the proxy for the entire industry because it's much more diversified, and we're not seeing any change in our revenue mix. Three, I am very encouraged and deeply engaged, along with our teams and our DSP partners, around four things to drive growth. First, the continued growth between emerging and established markets and taking different approaches within those. Second, price optimization, which includes family plans and various pricing increases. Third, the evolution of royalty models, and fourth, audience segmentation by adding non-music content to the offering. Overall, I'm very bullish on streaming for all of these reasons, and we're leaning into it as hard as we can, together with our DSP partners. On the reorganization, I'll repeat the three things: a flatter organizational structure allows us to really lean into the global nature of the business, which has accelerated overall; we are compounding our strength in the U.S. by consolidating Warner Records; and third, centralizing several functions for operating leverage. As to the financial impact of it, this is a strategic decision, not a cost-saving exercise, and therefore, it’s far too early to speak to any impact.

Kutgun, it's Bryan, and Robert took the words out of my mouth on the second part of that. But on the first part of that, just to reiterate what we believe is the health, resiliency, and growth of the industry, we continue to see pretty consistent growth across our handful of top DSPs, certainly led by subscriber growth and to a lesser extent, price, and underpinned by a strong slate of releases that gave us momentum in this quarter.

Very helpful. Thank you both.

One moment for our next question. Our next question comes from Cameron Mansson-Perrone with Morgan Stanley. Your line is open.

Thanks. Good morning, guys. Two if I can. One, just on DSP pricing over time. I think historically, you've talked about wanting to facilitate different strategies and approaches across your distribution partners. But if we start to enter a world where there's a meaningful divergence across DSPs in terms of how well they're monetizing streaming users, how does that impact your approach or mentality? And then obviously, a couple of lawsuits against Suno and Udio. Any update on how you're thinking about the risks and opportunities around those technologies? And maybe just how you see the relationship between content owners and generative or IP owners and generative AI businesses developing over time? Thanks.

Sounds good. Thanks, Cameron. So on the divergence between approaches between the different DSPs, I think generally, diversity is good. What you're calling divergence in strategies is actually positive because from that, you learn what works and what doesn't. When you have a strong demand side of the business, if something may not work, people will adjust and pursue what does work. On GenAI risks and opportunities, our prioritization of stakeholders in this space is as follows: first, the platforms where content is consumed; second, the Generative AI engines; and third is the government. We focus first and foremost on our current DSP partners because that is where we can have the most thoughtful approaches in solving things for the future. We're making great progress with regulation and government, and I am quite optimistic about this. Regarding Suno and Udio, there's nothing new to report on that. We're waiting for the next step there, but we're very focused on this and will religiously defend our IP, artists, and songwriters.

That's really helpful. Thanks.

One moment for our next question. Our next question comes from Batya Levi with UBS. Your line is open.

Thank you. Can you confirm if you experienced any price increases in fiscal 3Q and how we should consider the upcoming roll-offs? Also, regarding the recent price increase from Spotify for bundled services, do you believe you will be able to benefit from that increase?

Batya, hey it's Bryan. Thanks. On the price increases, we're at the end of lapping the YouTube. We still have a bit of lapping of Spotify, and those are really the biggest. But there are geographic and certainly tier mixes around the world that can influence it as well.

Yes. And I'll take the second one. So as you know, there are many different SKUs already in existence between the various family plans and duals, etc. We've never disclosed how we participate in any of those. So we obviously don't plan to change that going forward, but I can tell you that any assumption that key anchor tenants such as us would not participate is not the best assumption to put in mind.

Thank you.

One moment for our next question. Our next question comes from Stephen Laszczyk with Goldman Sachs. Your line is open.

Hey, great. Thanks. Two, if I could. First, maybe on the release slate. Robert, you talked a little bit about your expectations for the upcoming slate into the back half of the year. I was wondering if you could elaborate a little bit more on that. It feels like some artists who are releasing albums later this year might have some deeper catalogs. You might have the potential to move the needle on market share a little bit. Just curious if you would agree with that? And then on emerging streaming, I appreciate the meta deal and the headwinds from premium video, but just curious if you could update us on how you're thinking about the opportunities for incremental growth across some of the emerging streaming IP rights holders just the opportunity there in general of the next year to more broadly? Thank you.

Thank you, Stephen. First, while the question is about our new release slate, I believe we often overlook the value of our catalog during these earnings calls. We have a strong lineup for Q4 and beyond, but I also want to highlight that our catalog's performance is robust and continues to improve. Much of this is due to Shallow Catalog benefiting from new releases, but the strength of our company stems from a mix of three areas: New releases, Shallow Catalog, and Deep Catalog. In Q4, we'll have music coming from Coldplay, David Guetta, Benson Boone, Myke Towers, and many others, so there is a lot on the way. Our team is extremely busy and doing an excellent job delivering this slate. In terms of emerging streamers, music holds significant relevance across all generations, and we are well integrated into these platforms. These markets continue to expand, and we are actively enhancing our relationships with them to ensure strong growth. I'm excited about the future. Music's relevance is at an all-time high.

Stephen, it's Bryan. I'll add to that, and I called out the Meta in my commentary as we come upon our anniversary of that they have changed their offering and moved away from premium music video licensing. Having said that, our underlying relationship with Meta is strong and growing. There is real and Instagram are also growing well, and so we remain excited about the category. Like last year, we had our TikTok step-up. So we also have that. But the category continues to be a growth category.

Great. Thank you both.

One moment for our next question. Our next question comes from Omar Mejias with Wells Fargo. Your line is open.

Thank you for the question. First off, subscription streaming growth was very strong this quarter and increased sequentially. Can you explain some of the factors that contributed to this growth, including pricing and any internal initiatives that have helped enhance our catalog? Additionally, regarding the overall health of the industry, based on the trends you're observing, has your perspective on the long-term total addressable market changed?

Thank you, Omar. Regarding subscription streaming, I want to provide some clarity. The growth drivers are widespread. We continue to experience consistent growth across major digital service providers, fueled by increased subscriber numbers and price hikes, along with a strong release calendar last quarter and more releases this quarter. In terms of industry health, music subscription penetration remains relatively low at around 15%. We believe there is potential to increase from 700 million to 800 million subscriptions currently to over 1 billion in the next five years. Additionally, there is room for improvement in pricing and audience segmentation, which keeps us optimistic. As for catalog optimization, we are advancing with targeted marketing campaigns for selected titles and making sure the entire catalog is effectively set up on all digital service providers to enhance recommendations and drive growth.

One moment for our next question. Our next question comes from Kannan Venkateshwar with Barclays. Your line is open.

Thank you. Maybe just drilling into the subscription streaming trends a little bit more. As you're probably aware, when your competitors reported different numbers, they called out a few headwinds in terms of industry growth between different DSPs diverging to some extent. Maybe you could just talk about what you're seeing broadly across the landscape.

Thank you. So again, I want to reiterate that we are not seeing any change from what we've been saying before. We have no change in our revenue mix. There’s strong demand on the platform, and we are pleased with the progress that our DSP partners are making. The interplay between emerging platforms and music services elevates the role of music today, making it more relevant than ever. We must continue to grow our share in both catalog and new releases and also grow the overall time spent on music with our DSP partners.

All right. Thank you.

One moment for our next question. Our next question comes from Tim Nollen with Macquarie. Your line is open.

Hi, this is Ross on for Tim. Robert, some in the industry have expressed dissatisfaction with the ad-supported tier at some DSPs given they don't sufficiently monetize the value of the music that artists produce. I'd be interested in getting some of your thoughts on what role you think the ad-supported tier should take and how you see the relationship between content owners and generative AI businesses developing over time.

So one, I don't have an opinion on windowing today. I think that's a very detailed topic to consider with our partners. However, I do believe we're in the correct advertising market, which is essentially addressable across mobile devices, desktops, and TVs. The advertising market fluctuates with the economy, but generally, we are in a very good place. My focus is on how to ensure that both subscriptions and advertising grow together, which can be done in collaboration with our partners.

Right. Thank you.

One moment for our next question. Our next question comes from Rich Greenfield with LightShed Partners.

Thanks for taking the question. Robert, given your experience at Google and YouTube, they were really the first to bundle and I'm curious how you think about what that meant for the music business at Google and how that translates to Spotify as they look to bundle. I have another question regarding potential advertising by Apple on Apple TV Plus; would you think Apple might move in that direction?

Great questions, Richard. My past experience taught me that creating unique offerings in the market is crucial. Diversity in approach allows companies to leverage their strengths. I'm open to experimenting with companies in any direction as long as it promotes mutual objectives and achieves strong outcomes. I don’t currently have any specifics on Apple’s moves, but I'm definitely willing to explore avenues with any of our partners to drive growth.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Robert for any closing remarks.

I want to close by expressing how excited we are about the momentum that we have, the hits that we have on the board, and the execution of our teams going through obviously complicated things such as reorganizations and transitions. I once again want to give heartfelt thanks to Max Lousada and Julie for their incredible contributions to the company. I appreciate both of their efforts to ensure a smooth transition while focusing on our artists and songwriters. I welcome Elliott to Atlantic and challenge him to build upon Julie's incredible legacy. We're excited about the direction of the company and the strong team we have and look forward to talking to you guys in 90 days.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.