Warner Music Group Corp. Q1 FY2026 Earnings Call

Welcome to Warner Music Group's First Quarter Earnings Call for the period ended December 31, 2025. 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 afternoon, and welcome to Warner Music Group's Fiscal First Quarter Earnings Call. Please note that our earnings press release and snapshot are available on our website, and we plan to file our Form 10-Q on February 9. On today's call, we have our CEO, Robert Kyncl; and our CFO, Armin Zerza, who will take you through our results and then answer your questions. Before our prepared remarks, I would like 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, including metrics that are adjusted for notable items during this conference call and in our earnings materials, 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 that 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 as they are subject to a variety of risks, uncertainties and other factors that can cause actual results that materially differ from our expectations. Information concerning these risk factors is contained in our filings with the SEC. And with that, I'll turn it over to Robert.

Thanks, Kareem, and hello, everyone. Greetings from Los Angeles, where we celebrated the successes of our artists and songwriters at the Grammys this past weekend. In fact, you just heard songs from our winners, Kalani, FKA Twigs, Turnstile as well as Bruno Mars, who gave two incredible performances at the show. Our momentum continues as we delivered a third consecutive quarter of strong profitable growth. Total revenue increased 7%, led by 9% growth in recorded music subscription streaming on an adjusted basis. Total adjusted OIBDA increased 22% and margin increased 310 basis points. It's clear that our strategy is working as we continue to deliver on the three key components of our plan: growing our share, growing the value of music and driving efficiency. I'll talk about our progress on each front and then I'll explain how we plan to leverage AI to further accelerate progress towards each of these three goals. Our strong Q1 results reflect a steady market share improvement we've been delivering. We saw approximately 1 percentage point of U.S. streaming market share growth over the prior year quarter, with strength across new releases and catalog, and our market share on Spotify's top 200 chart is up 3 percentage points fiscal year-to-date. We started the year with a bang as we released Zach Bryan's new album With Heaven on Top, sending it to #1 on Billboard 200. Meanwhile, just after his collaboration with ROSE on APT finished at #1 on the Billboard year-end global chart, Bruno Mars released his new single, I Just Might. It quickly jumped to #1 on the Billboard Hot 100 and on both the Spotify U.S. and global charts. Bruno's long awaited first new solo album in a decade, The Romantic, drops on February 27. Both Zach and Bruno are signed to us for recorded music and music publishing which is a true testament to our One Warner approach. Outside the U.S., our focused approach is also paying off with talent resonating across markets, languages and cultures. We scored #1 in France, Italy, Spain, the Netherlands, Finland, Korea and China and also on the Billboard Latin Airplay chart. Turning to our global catalog division, we've taken a new strategic approach that's also driving our share, including an always-on marketing philosophy that ensures we keep artist brands alive and fresh with new generations across all forms of media. And we continue to find powerful sync placements to fuel consumption of our catalog and introduce our iconic catalog to new fans. An example is this season's Stranger Things on Netflix, where syncs resulted in major streaming upticks on and chart movement for classic songs from legends like Prince, David Bowie and Fleetwood Mac. Momentum from a placement in the show's finale drove a more than 600% year-over-year increase in weekly streams following the premiere of the finale on Prince's 1984 hit, Purple Rain, which led to reentering the Billboard Hot 100 for the first time in over a decade. Importantly, we've seen baseline weekly streams of Purple Rain settle to a new baseline that's 6x higher than before the sync. And for David Bowie's Anthem Heroes, we saw more than a 300% year-over-year increase in weekly streams and a new baseline that's 2.5x higher than before the sync. Amazing results, as you can see. In Publishing, we focused on accelerating our proven A&R strategy by building and acquiring high-margin IP, executing admin and sub publishing deals and growing revenue through AI partnerships. Warner Chappell songwriters contributed to half of the top 10 most streamed songs of 2025 in the U.S. and a huge congrats to Amy Allen, who won Songwriter of the Year at the Grammys for the second year in a row. Turning to growing the value of music. We're now seeing the impact of the deals we've reshaped with the DSPs last year. These agreements are finally shifting the industry toward price-driven growth that better reflects the ever-increasing value of music to users and providing us with greater economic certainty. I'm also pleased to announce we renewed our deal with TikTok, resulting in improved deal economics. Moving to our third priority of improving efficiency. Through our investments in technology over the past few years, such as overhauling our supply chain, building new tools for artist songwriters and employees and rolling out our financial transformation program, combined with our reorganization, we have impressively been able to accelerate growth while cutting costs. This strategic overhaul of our foundational technology infrastructure has not only enabled us to increase efficiency but has positioned us favorably to leverage AI across our three strategic priorities: growing share, growing the value of music and efficiency. That, combined with our management team's deep tech and transformation experience, uniquely positions us to capitalize on this tremendous opportunity. Starting with growing share, we're quickly deploying AI to accelerate new artist discovery and enhance and automate our marketing. This enables us to scale our marketing efforts beyond what's humanly possible, a transformational step for a large rights holder like us. We have an attractive opportunity to better monetize one of our most cherished assets: our extensive music catalog of over 1 million recordings that includes some of the most iconic songs ever recorded. With the use of AI, we can quickly and inexpensively generate assets like motion art and music videos and others that stimulate greater exposure and engagement with our catalog at scale. At the same time, we're developing tools to amplify the creativity of our artists. And we've been hosting workshops and songwriting camps to help our creators leverage the latest technologies to hone their work, cut through the noise and build fandom in today's fast-moving world. We also see a clear and tangible opportunity to leverage AI against our second priority, which is to increase the value of music by leaning into partnerships with new entrants such as Suno and Udio as well as our digital service providers that provide fans with the opportunity for deeper engagement at higher-priced tiers, and we're already in discussions with some of them. By taking an early and aggressive approach to embracing new technologies, we are authoring ethical guidelines that will enable us to protect and super serve artists and songwriters, while creating incremental opportunities for the entire ecosystem. To reiterate on my blog post from November, WMG is harnessing AI as fuel for music industry growth guided by several non-negotiable principles. One, our partners must commit to license models; two, the economic terms must properly reflect the value of music; and three, artists and songwriters must have a choice to opt in to any use of their name, image, likeness and voice in new AI-generated recordings. The latest example of these principles in action is our recently signed deal with Suno, the leader in AI music. And when it comes to our third pillar, efficiency, as I mentioned earlier, over the last three years, we laid the infrastructure foundation for us to effectively deploy AI across many different departments across the company. This includes departments such as legal, finance and HR to further increase our efficiency and effectiveness. AI is leading to an explosion in creative and commercial possibilities that will create even greater demand for original talent. Shifts in culture and tastes have and will always be defined by real artistry, identity and vision that define the strongest creative brands. In adhering to our principles, we are protecting and supporting our artists and songwriters' original creativity, increasing fan engagement and unlocking even greater value for the entire industry. We are well positioned to capitalize on a healthy and growing industry. Momentum is strong, and we're seeing creative success that is translating to steady market share improvement, progress in economic terms with major DSPs and deals with existing and new innovative platforms that will leverage the use of AI to drive a step change in the value creation for the industry. And finally, we have a steady stream of releases from new and established stars dropping every week for the rest of Q2. Be sure to look out for new music from Bruno Mars, Charli XCX, Kalani, Hilary Duff, Sombr, Alex Warren, Fred Again, Charlie Puth, Tiesto and many more. And now I'll pass it over to Armin.

Thank you, Robert, and good afternoon, everyone. I'd like to thank our teams for a very strong start to the year. It's rare to see a company undergo such significant transformation in such a short time frame while delivering accelerated growth and profitability. Yet, we've accomplished just that and it's a testament to the incredible work of our employees. It's an exciting time at the company with lots of momentum and opportunities ahead of us. When I arrived, we were committed to delivering against three key metrics, which we view as essential to creating shareholder value. First, accelerating revenue and share growth; second, driving margin expansion; and third, improving cash flow. This is now our third consecutive quarter of profitable growth, underpinned by healthy margin expansion and cash flow generation. Encouragingly, our performance was broad-based, demonstrating strength across divisions and market share gains in key regions and by consistently delivering on a sustainable growth model, which is anchored in high single-digit total revenue growth, double-digit adjusted OIBDA growth and 50% to 60% operating cash flow conversion, we have established a solid baseline for how we expect our business to perform. In short, we're doing exactly what we promised and are just getting started. I will provide details on how we will accelerate on the solid foundation in a moment. But first, I want to talk about the key drivers of our performance in Q1. Total revenue growth of 7% reflects solid performance across Recorded Music and Music Publishing. This was highlighted by sequential improvement in Recorded Music streaming led by subscription streaming growth of 11% or 9% when adjusted for notable items. Ad-supported streaming grew 4%, driven by strong performance from traditional DSPs. Physical declined 11% due to a difficult comparison in the prior year quarter, which saw releases from Linkin Park as well as in Japan and Korea. Artist Services and Expanded rates revenue increased 13%, driven by concert promotion revenue primarily in France. Music Publishing revenue grew 9%, which reflects the impact of historical match royalties in the prior year quarter. Adjusting for this notable item, Publishing grew 15% and saw double-digit growth across performance, mechanical, sync and streaming. Adjusted OIBDA rose by 22%, and our margin increased by over 300 basis points, reflecting the operating leverage that is inherent in our business as well as the benefit of our cost savings program and favorable movements in FX rates. These factors also drove robust operating cash flow growth of 33% for a conversion ratio of nearly 100% of adjusted OIBDA. Accordingly, we saw a significant increase in our cash balance, which grew by more than $200 million since last quarter to $751 million. These results are just the beginning and our focus is on accelerating growth by our strategic priorities and initiatives, which include: first, investing into our core organically and inorganically; second, expanding opportunities for music monetization by continuing to work with traditional streaming partners, and building their capabilities, forging the partnerships and making investments necessary to win with AI; and third, driving margin and cash flow through a combination of top line growth, operating leverage and cost efficiencies. First, on investments in our core. Our refined approach to capital allocation and investment is clearly working as we are seeing more consistent, broad-based results driven by resilient and growing market share. As we have said in the past, we are using M&A as an accelerant with a focus on high-quality, accretive catalog acquisitions. We have a robust and growing pipeline of opportunities, which has led us to increase the capacity of our joint venture with Bain as detailed in the 8-k we filed earlier today. WMG and Bain have increased our equity commitment by $100 million each and expect to maintain the existing equity to debt ratio, which will increase the JV's total capacity from $1.2 billion to approximately $1.65 billion. You can expect some exciting announcements coming in the near future as we plan to deploy a significant portion of the JV's total capacity by the end of this fiscal year. This combination of organic and inorganic investments will fortify our core, giving us greater scale to capitalize on favorable industry trends as well as emerging opportunities like AI that will lean heavily on iconic content. Which leads me to expanding opportunities for monetization. Now that we have fortified our core business through more favorable terms with traditional streaming partners, we are focused on leveraging AI to drive significant incremental top and bottom line growth to benefits for our artists, songwriters, and shareholders. Understandably, this topic has been a focus of investor attention with the right range of views. Robert and I believe that AI is a tremendous opportunity for the music industry when executed ethically and responsibly. Our priorities have been to, first, invest into and forge partnerships to establish terms early and in a way that artists, songwriters, labels and publishers are protected and fairly compensated; second, design business models with our partners that are consumption-based and accretive to current ones; and third, with the capabilities to drive increased engagement with our treasure trove of recordings and compositions. Our recently completed AI deals with Suno, Stability, and Udio are based on these principles and have the potential to unlock significant incremental revenue at accretive economics. Importantly, in all of our deals, we will be compensated on a consumption basis, ensuring that our economic scale as our partners' business grows. Also, our partners' offerings will result in higher ARPUs, reflecting the interactive nature of the platforms. We were the first major label to sign a deal with Suno, the market leader in generative AI music content. Suno is already earning several hundred million dollars of annual revenue and is empowering music fans to create and play with music in groundbreaking ways. Through an innovative partnership we entered into last fall, we, Suno and most importantly, our artists and songwriters will begin to reap the benefits of our music in fiscal year '26 while also showing what the future of music looks like. We expect this partnership to be a material top and bottom line growth driver starting in fiscal 2027. Our goal is to maximize fans' ability to engage more deeply with the music they love. So, of course, we are also exploring opportunities with our large DSP partners to incorporate the AI tools that will enhance their consumer offerings. Doing so in ways that are consistent with our principles for ethical and responsible use of AI represents the potential for significant industry value creation. And as Robert mentioned, the impact from AI-generated assets that spike engagement by the catalog can be a significant one. Using AI to quickly and cost-effectively create motion art, which can boost attractive push on DSPs and marketing and other assets that are derived from our catalog, such as remixes and music videos will enable us to drive incremental revenue much more effectively. Finally, AI will be an advantage for us on the cost side as well, aligning with our initiatives to operate more efficiently to accelerate margin and cash flow growth. The use cases will range from music production, where many of our artists and songwriters are already leveraging these tools to more analytically driven, precise deployment of marketing dollars as well as more real-time forecasting and analytics. Further, on driving efficiency, I'm pleased that our cost savings plan is delivering on schedule and is on track to contribute 150 to 200 basis points to margin in fiscal '26 as we work to drive even greater efficiency through the use of AI and improving the operating leverage in our business, we believe that the margin in the mid-20s is achievable in the short term and have a longer-term goal to deliver margins in the high 20s. We will provide you with an update on our path to meaningful margin expansion as our brands evolve in the upcoming quarters. One housekeeping item, I'd like to note, with the roll-off of BMG, digital distribution revenue now largely complete, we intend to provide year-over-year adjustment for the remainder of fiscal 2026. As disclosed in our notable items table in the earnings press release, the impact in Q1 is $6 million, and we estimate the impact for the remainder of the fiscal year to be approximately $10 million each in quarter 2, 3 and 4. All the other notable items in fiscal year '26 have been disclosed previously, and as usual, you can find these items in our press release. In summary, we are very optimistic about the road ahead. With greater certainty around DSP deal terms, more consistent market share performance and our refined approach to capital allocation, our path to accelerating growth in 2026 and beyond is clear. The key components of this will include a strong release slate, anchored by big new releases from Bruno Mars, Zach Bryan and many others. Contractual PSM increases starting in Q2 and laying in throughout the balance of fiscal 2026. Acquisitions of high-quality accretive catalogs as well as bolt-on capabilities that will accelerate our distribution and e-commerce businesses and AI partnerships and initiatives resulting in a material contribution to revenue and margin in fiscal 2027. We look forward to providing regular updates as we continue to achieve our goals.

Your first question comes from Michael Morris with Guggenheim.

I'd like to ask each of you for some more detail about your AI comments. Robert, first, can you expand a bit on your philosophy as it relates to the deals that you have made with those AI partners you referenced? I'm particularly interested in how your approach differs from the approaches of some of your peers and why you've chosen that path. And for Armin, can you provide some more detail about the financial impact that you're expecting to see from the deals? Regarding the economic terms, can you clarify, are these per stream payments similar to DSPs? Or will Warner Music participate in the subscription revenue of the AI platforms themselves? It would be great to get some clarity on that.

Thanks, Mike. I won't comment on our competitors, but I'll explain our approach. Everything we do in AI aligns with our priorities of increasing market share, enhancing the value of music, and improving efficiency. I've mentioned some of this earlier, but we are actively using AI for asset management, discovery, catalog monetization, and creativity to grow our share. We also see opportunities for audience segmentation, as creation reflects deep fan engagement. Our superfan tiers will incorporate AI features. Our partnerships with the four companies we mentioned are essential to shape the market's evolution and ensure healthy growth for our business and partners. We've implemented AI in finance, legal, marketing, HR, and more, and there's still much to accomplish, but we're progressing in line with our priorities. Regarding deal terms, we've established clear principles: the licensing models must accurately reflect the value of music, we must be satisfied with the commercial terms, and artists should have the right to opt in regarding the use of their name, image, likeness, voice, and related content. It is crucial to strike a balance between user preferences and the needs of rights holders, artists, and songwriters. Achieving this balance can lead to substantial business growth and value creation. A rigid approach could hinder progress, as evidenced by previous media initiatives like TV Everywhere, which didn’t succeed. In contrast, companies like Netflix gained an advantage by being more adaptable. Similarly, DRM music slowed the adoption of streaming services, suggesting that we could have navigated the post-Napster era more smoothly with flexibility. At Warner, we've learned from past experiences and believe we've struck the right balance in our deals, aiming to protect the rights of our artists and songwriters while delivering significant value for our shareholders. We see this as a significant opportunity, and we are confident that we have the right approach.

Thanks, Robert. I want to begin with what you just mentioned. We see this as a major opportunity for creating value. It enables us to enhance the experiences for our fans, allowing them to engage with our content more effectively. It also helps us provide improved services to our artists and songwriters, as Robert noted, and enhances our financials as well. Music remains one of the least monetized sectors globally, and as fans become more engaged with our content, we have a chance to boost our average revenue per user. Having spent about ten years in gaming, I've observed a similar situation there: when the industry transitioned from physical products to digital, players began to interact with games and with each other more. This shift not only increased player engagement but also provided the chance to introduce various business models, which our partners plan to implement. The newly launched or soon-to-launch services will feature multiple subscription tiers and will gradually include digital items and services. This will significantly increase the average revenue per user in the industry. Moreover, as Robert mentioned, we do not believe that growth will occur solely through our innovative AI partners; we are confident that our current partners will also offer higher tiers. Engaging deeply with content presents the best chance to reach super fans, who typically invest more time, engage more, and spend more on our offerings. Therefore, we see this as a remarkable opportunity. Regarding the deals, Mike, we believe their impact next fiscal year will be substantial. We have secured an agreement with our largest partner, whose revenue already amounts to several hundred million dollars and continues to expand, and our revenue share is strong, meaning we will experience significant effects next fiscal year. Additionally, the deals are structured to be variable and beneficial, as we will grow alongside those platforms and see increases in average revenue per user. Importantly, we have constructed these agreements to ensure that our artists and songwriters are protected and will all gain from the revenue growth and its advantages. This is our perspective moving forward.

The next question comes from Peter Supino with Wolfe Research.

A couple of related questions on your financial outlook. I wondered if you could talk in greater detail about the coming year from two perspectives. First, about your paid streaming growth and how that outlook corresponds to your DSP deals inked in 2025? And then parallel on the financial outlook, if you could talk about potential growth accelerants that may be in your plan and how much incremental growth those could contribute to the outlook.

Thank you, Peter. I appreciate the question. As mentioned in our prepared remarks, we are pleased with our progress and I want to thank our teams for their outstanding efforts during this significant reorganization. We have achieved three consecutive quarters of strong high single-digit revenue growth in streaming, indicating our success in the market. At the same time, we have enhanced our margin and cash flow, which is important as I have committed to enhancing shareholder value. We plan to achieve this through rapid revenue growth, improved margins, and better cash flow productivity. Looking ahead, while we are not offering guidance, we see numerous opportunities for growth. With the recent PSM increases, we anticipate a shift from volume-led subscription streaming growth to a combination of volume and value-led growth, and I believe we can leverage AI to introduce premium service tiers. Additionally, we are making significant advancements in both our organic business investments and mergers and acquisitions, as demonstrated by our decision to raise the capacity of our joint venture with Bain from $1.2 billion to about $1.7 billion due to a strong pipeline of upcoming announcements this year. We also have growth opportunities in areas where we haven’t previously expanded quickly, such as distribution and direct-to-consumer efforts in physical products and merchandising. Lastly, the potential growth driven by AI presents a significant opportunity in our industry. Overall, we are highly confident in our momentum and the growth potential available for our shareholders, as well as for artists, songwriters, and employees.

The next question comes from Ian Moore with Bernstein.

Robert, you've been delivering market share improvement for several consecutive quarters now. Can you maybe talk to us a little about what you're doing differently to drive that consistent growth and how sustainable you believe that performance is?

Sure. Thanks, Ian. First, I want to emphasize that the positive aspect here is its broad-based growth across regions and business units. The area needing the most attention is Asia, where we've changed leadership in Japan and throughout the region. We know what we need to do and have the right people in place, but it will take some time. We’re committed to making progress there. Other than that, all our business units are experiencing significant growth, which is reflected in our results. Looking back to 2024, we underwent a substantial restructuring and indicated that we would reinvest the proceeds into growth through technology and A&R investments. Those are now coming to fruition in fiscal '25, and we’re beginning to see the outcomes. Additionally, with the sharper capital allocation that Armin mentioned and our strong pipeline of initiatives across the company, along with the leadership changes in various divisions, we are starting to reap the benefits. We're very pleased with our consistent performance. We're operating at a high capacity, underpinned by our exceptional ability in artist development, evidenced by our success in discovering new and remarkable artists who cut through the noise globally, like Alex Warren, The Marias, Sombr, and others. Moreover, we have an impressive lineup for Q2, featuring artists such as Bruno Mars, Zach Bryan, Charlie XCX, Kalani, Hilary Duff, Don Toliver, and Charlie Puth. Across the company, we are fully committed to maximizing our efforts.

The next question comes from Cameron Mansson-Perrone with Morgan Stanley.

Two, if I could. First, trying to maybe approach some of what you've discussed already from a different angle. Both of you have kind of talked about AI tools and a premium or a super fan offering as being potentially tied together or related. I'm curious, when you think about your traditional DSP partners, whether you're having conversations with those partners to that effect already or how those conversations might be evolving? And then separately, there's been some pricing announcements recently from Spotify and from Amazon. Maybe if we take Spotify as an example, given their scale. How do you expect to benefit from that pricing this year? And then I think they left the basic tier pricing unchanged, whether there's any consideration in terms of impact to Warner from that dynamic, I'd appreciate it.

Sure. Regarding the first part of your question, we are indeed in discussions with our partners. As we have previously noted, AI presents a significant opportunity for user engagement, allowing music listeners to create content and develop audience segmentation strategies and premium tiers. It was crucial for us to establish clear terms with independent players in the market, which we have successfully done with four of them. This was a strategic move on our part, and we are prepared to engage with our partners, particularly our digital service provider partners. As for the second part of your question, our consistent approach has been to emphasize that music is undervalued, and we need to raise prices since its value is only half that of video. Thus, when there is a price increase, we naturally appreciate it. However, our primary objective is to ensure certainty regarding our rates, which we committed to last year and have successfully achieved with four of our top five digital service providers. If I had mentioned during last year’s earnings call that we would consistently grow at high single digits before any of those price increases took effect, you would likely have valued our company much higher, given the remarkable achievement that represents. We are genuinely excited about our relationships with both existing and new partners and feel optimistic about the industry's trajectory in terms of both volume and pricing, particularly with our audience segmentation strategy. We believe there is substantial value we can create together.

The next question comes from Benjamin Black with Deutsche Bank.

Maybe a two-parter for Armin. So the recent results demonstrate that your investment philosophy is working. So how are you approaching capital allocation differently when evaluating deals? And secondly, can you provide an update on your M&A plans? Why did you increase the capacity of your Bain and JV? and how much do you expect to deploy this fiscal year? It seems like a lot of the major labels have announced financing partnerships on UMG, for instance. So what does all this capital flowing into the space actually signal?

I guess it shows the opportunity, Ben. On the investment philosophy, you and I have talked this before, but for the audience here, we have moved from basically looking at individual deals to looking at our entire deal portfolio. And why is that important? If you're an investor, we want to understand the landscape of opportunities out there, and that's exactly what we do with our deal portfolio. We do thousands of deals a year. So it's really important for us to understand what deals are the best ones for us to put our money behind. But we also bought these more promising ones to put our money behind. We have now created a deals office that has a view of all those deals over multiple years, which not only allows us to prioritize the best deals but also gives us much better visibility of what the impact of those deals are on future revenue, some future growth and share growth and future margin and future cash flow, which, in turn, allows us to optimize our investment flow over time. That's why you see the results, you're seeing growth, share growth, margin expansion and cash flow productivity. Now obviously, we are doing all of this in collaboration with our creative teams and operators. This is not just a financial exercise, and we'll review bi-weekly now with our creative teams and our operators and our leaders in the regions and our entire deal portfolio and ensure that the creative and operating voices are heard. And number two, obviously, this is behind our strategy to invest into the core business. We're really focused on making and ensuring that all of our investments are focused either organically or inorganically to our core business. Now on M&A, which is the inorganic part of that, we are seeing tremendous opportunities around the world to invest into highly attractive and margin-accretive catalog businesses, both on the side. Because of the pipeline that we have been developing, which is very attractive for us, we've expanded basically the scope of the JV from $1.2 billion to $1.7 billion, as I said. Also, I have to say that we have a great partner with Bain. The leader who is working with us has experience in the industry to identify opportunities and working them together, which gives us really a competitive edge relative to some of the other partners that are out there. So net-net, we're very, very happy with the progress, and you see it in our results.

The next question comes from Kutgun Maral with Evercore ISI.

Armin, I wanted to follow up on the margin color you provided. I think it would be helpful if you could provide a bridge on how you get to your longer-term margin target? What are the building blocks? And how do you expect them to contribute? And then given this outlook, why is 50% to 60% operating cash flow conversion the right target? Is it possible that you could deliver more?

Thank you, Kutgun. I want to emphasize that our main goal is to enhance total shareholder return. While we are improving our margins and cash flow, a key focus for us is also to accelerate revenue growth and meet that objective. We aim to maintain balance among these three priorities. Regarding margin progress, we are quite pleased and actually advancing more quickly than anticipated. Our first quarter results showed a margin increase of over 300 basis points to 25%. This improvement is driven by three main factors: a reorganization that led to cost savings, accelerated growth in high-margin streaming, and the operating leverage associated with that growth. As we move forward, we will continue to focus on these drivers, while also exploring new opportunities. The first is the DSP pricing and tiering mentioned by Robert. The second is high-margin catalog M&A that I discussed. The third, which I believe could be a significant factor, is the growth in accretive AI revenue expected over the next few years. We are very optimistic about our margins and think a target in the mid- to high 20s is realistic for our industry. This is vital for us as it provides the flexibility needed to invest in the business. Regarding your M&A question, I mentioned Bain earlier. We are excited about the opportunities worldwide. There are possibilities everywhere in various parts of the market. We will pursue these opportunities in collaboration with our partner, Bain, while also looking for ways to acquire capabilities that can accelerate our business. Overall, we feel very positive about this area as well.

That's great. I just wanted to follow up and apologize if I missed it. Could you provide more detail regarding the 50% to 60% operating cash flow conversion as we look ahead and if there’s a possibility of exceeding that?

On cash flow, it's interesting. We delivered almost 100% cash flow conversion in the first quarter, which shows you how strong our capital allocation model works. And there's also some benefit from lower capital spending as we normalize some of the tech spending we did in the past that Robert alluded to, to get ready for this AI push that we are doing now. Looking forward, we will continue to work on those drivers, but also continue to improve margin, which will improve cash flow. Now is there an opportunity that on a quarterly basis, we'll see higher conversion than the 50% to 60% target that we declared? For sure, and you've seen it just last quarter. But at the same time, we want to retain some flexibility to invest into the business to accelerate growth. We have so many opportunities to invest into, as I mentioned before. And while we are very disciplined, we want to maintain the flexibility. So at this point, we're not changing that target. It may change over time, possibly, but at this point, we're not ready to do that.

The next question comes from Batya Levi with UBS.

Great. Can you talk about the underlying performance that you're seeing at music publishing? I think you mentioned the One Warner approach and how we should think about longer-term growth for this business? And the second one, maybe a follow-up. Can you give us a sense of the response from artists and their willingness to update opportunities with AI platforms? And maybe some thoughts on how you get comparable with an open studio approach that you have with the Suno deal versus a walled garden to protect attribution and to measurement.

Well, thank you, Batya. I'll take the first part of your question, and Robert will take the second part. On Publishing, we are very, very happy with the performance. In fact, we just did a strategic review of the business and if you look at the business over the long term for the past 5 years, we have doubled the business top and bottom line. And I want to take the opportunity to thank the entire team, but also leadership at publishing, who are leading this business for the tremendous achievements they've had over the past 5 years. Now looking at the more recent past, that we have seen double-digit growth in publishing for the past three quarters. And as you see last quarter, we take out a one-time item from last year, we delivered 15% growth. So again, an amazing performance. Looking forward, we reviewed the plan as part of this strategic review with the team, and they have many, many opportunities to continue that growth profile, but also accelerate it. The first one is we will double down like we do in other parts of our business on the proven A&R strategy that the team has. And by the way, we have enough firepower to do that than in the past. Secondly, we'll double down in regions, specifically developing regions, where we have seen strong traction behind investments that we're doing, specifically in Latin America. Thirdly, we'll also obviously leverage our Bain joint venture and the increased capacity we have also in our publishing business as highly attractive catalog in that area, too. And last, but not least, that business will also benefit from acceleration in growth by the AI partnerships we are doing. So in summary, we're really confident that we can continue to deliver double-digit growth in that business. And by the way, also continue to improve margins. So we're very, very confident about the business and the leadership we have there.

I'll address the second part of your question. Regarding artist and songwriter engagement, we have seen unexpectedly high levels of interest. Many artists and songwriters are keen to learn about the future, and they want to get involved early. Recently, two of them visited our office to discuss how they can participate and engage with us more closely. We are actively communicating with many artists, their lawyers, and managers to ensure they have clarity and understand everything as they ask questions. Our outreach efforts have been extensive, and we believe this communication is essential to our success. We aim to provide tools for those who want to use them, and we are pleased with the level of engagement we’ve encountered. As for your question about walled gardens, I think the issue is often oversimplified. In my two decades of experience at Netflix and YouTube, I’ve learned that the industry involves complexities that go beyond a black-and-white perspective. When creating significant value and strong consumer offerings, it's crucial to find a balance in the nuances between extremes. That's the skill we apply in our company, leveraging our experience to generate value for artists, songwriters, our organization, and our shareholders while also protecting our artists and songwriters. We strive to empower users to engage with the content in ways they prefer. While this process is challenging, it is essential for finding the right balance that drives value, and we are confident that we've achieved this. History has shown us that rigid black-and-white solutions often fail, so our focus remains on making well-informed decisions that ensure success.

The next question comes from Stephen Laszczyk with Goldman Sachs.

Robert, you mentioned the renewal of the deal with TikTok in your prepared remarks. I was curious if you'll be willing to speak maybe more about some of the priorities that you feel like you advanced in the new deal. And then as you look out ahead here, I was curious if there was any other deals of this kind where you feel like you might be able to meaningfully advance the narrative in favor of your artists?

Thank you. So first I want to say that we're very happy with our partnership with TikTok in general. There's a lot of collaboration between us around our artist releases. Many of our artists are extremely popular on TikTok, and we utilized it quite a lot as we're launching new records, and we're very happy with our new deal. Obviously, I cannot disclose the deal terms of it, but it contains structural changes that better reflect the value of music, which we're happy about. And also, our deals are never just about money. They're also about data promotion, insights and all the things that can help advance our business overall. But having said all that, as a percentage of revenue, it’s in lower single digits for the company. So it’s not like material to our fortunes every day. Nothing immediately on the horizon. We're very focused on advancing our AI initiatives across the board. As I said, we see it as a great value creation tool and making sure that we get things right with our current DSP partners, taking our holistic relationship with them into consideration, making sure we deliver on, obviously, our second priority with them, which is increasing the value of music on a consistent basis. And as part of that, adding AI into the mix to further accelerate that. Okay. Well, I want to thank you for spending time with us today. I want to reiterate our happiness with the company being in steady state, consistent delivery, three quarters in a row with strong outlook, strong initiative pipeline and that through many of the things that are happening, you realize that we do what we say. Whether it's PSM increases, whether it's margin expansion, whether it's consistent growth, we said what we would do, and we did it. And we continue to do it, and we'll continue to do that. So it's a pleasure to be able to say that and have the confidence to say that. And the reason I have it is Armin and I went through it on the call. There are so many things that we have improved in the company. All the work that we've done over the past few years is starting to pay off, and we're incredibly excited about the future. So thank you for your time, and have a great day.

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