Earnings Call Transcript - WMG Q2 2025

Operator, Operator

Welcome to Warner Music Group's Second Quarter Earnings Call for the period ended March 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.

Kareem Chin, Head of Investor Relations

Good morning, everyone, and welcome to Warner Music Group's Fiscal Second 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 departing CFO, Bryan Castellani, who will take you through our results, and then we will answer your questions. Before our prepared remarks, I'd like to refer you to the second slide of the earnings snapshot to remind you that this communication includes forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance. We plan to present certain non-GAAP results during this conference call and in our earnings snapshot slides and have provided schedules reconciling these results to our GAAP results in our earnings press release. All of these materials are posted on our website. Also, please note that all revenue figures and comparisons discussed today will be presented in constant currency unless otherwise noted. All forward-looking statements are made as of today, and we disclaim any duty to update such statements. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs and projections will result or be achieved. Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties and other factors that can cause actual results to differ materially from our expectations. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our filings with the SEC. And with that, I'll turn it over to Robert.

Robert Kyncl, CEO

Thanks, Kareem, and hello, everyone. While you were waiting, you just heard new tracks from Rose and Don Toliver, both featured in the hotly anticipated F1 movie. The blockbuster Apple film, starring Brad Pitt, will be released in June. Its soundtrack will add to our run-off hit albums for movies such as Barbie and The Greatest Showman. As many of you know, Bryan Castellani will be leaving us, and I'd like to thank him for his counsel, partnership and contributions to our company. I know everyone joins me in wishing him the best in his next endeavor. Armin Zerza joined us as CFO this week, and he brings a strong track record of operational excellence, commercial innovation and financial discipline. He was previously CFO at gaming giant, Activision Blizzard, where he played pivotal roles in the company's growth for almost a decade. I look forward to working with Armin as we enter the next exciting era for music. I'll get into our broader strategy shortly, but first, let's talk about the quarter. Our results in Q2 reflect a lighter release schedule, market share pressure in China and a tough year-over-year comparison in subscription streaming, where we saw strong double-digit growth in the prior year quarter. As a result, the company's revenue increased 1% as Recorded Music revenue grew 1% and Music Publishing revenue grew 3%. Within Recorded Music, subscription streaming grew 3%. Total company adjusted OIBDA decreased 1% and adjusted OIBDA margin decreased 50 basis points. We recognize this is a moment of transition in the industry and for our company. Even so, we are very optimistic for many reasons, but 3 in particular. One, against the backdrop of global uncertainty, music is the most resilient art form and currently the least expensive. Two, the industry across music companies and DSPs is aligned behind driving growth through subscribers and price increases. And three, WMG has the right creative and commercial strategies in place, and we're sharpening our execution as we stay focused on our long-term growth and profitability. I'd like to dive deeper here and give you insight into the progress we're making across the 3 priorities we've previously shared. Grow market share, grow the value of music and become more efficient, freeing up more capital, both for reinvestment and to drive greater shareholder return. I'll start with growing market share. From great new signings to returning superstars to timeless legends across genres and geographies, every aspect of our artist and songwriter development engine is heating up. With our investment activities also gathering pace, we're well positioned to take a bigger slice of the pie. In Recorded Music, our new talent is really shining through from megahits like Teddy Swims - Lose Control, the longest running top 10 song in the history of Billboard Hot 100 to Benson Boone's Beautiful Things, the #1 song in the world for all of 2024. The next wave of rising stars includes Alex Warren, whose ordinary has topped the U.K. chart for 7 consecutive weeks and also rose to #1 on the Billboard Global 200 and Ovy On The Drums W Sound, whose La Plena is the biggest Latin song in the world, reaching #1 in 13 markets. There is also a huge momentum behind artists like Marías, Somber, Ravyn Lenae and Forrest Frank. At the same time, our superstars continue to build momentum. Ed Sheeran's Azizam is a top 10 in several markets, including the U.K. in advance of its latest album, Play, which comes out in September. Rose and Bruno Mars APT spent its 27th week in the Spotify global top 5 and Bruno Mars' record-breaking duet with Lady Gaga, Die With A Smile, currently sits at #1 for the 29th week. And we have more #1s across established markets with domestic artists like SCH in France, AleXa in Germany, Gang Parade in Japan and many more. We're also seeing real progress in high-growth markets such as MENA, Nigeria and India, where we've meaningfully increased our market share in an environment where monetization is rapidly shifting towards paid streaming. We recently signed a promising new deal with highly regarded entrepreneur, Anjula Acharia to help break artists of South Asian heritage in North America. I've known Anjula since my days at Netflix, and I partnered with her at YouTube, and I'm very excited to be working with her again. Our legendary catalog also consistently performs. We recently commanded nearly half of the top 50 best-selling albums for record store day in the U.S., the biggest record sales day of the year. Classic Tracks continue to resonate and impact today's culture. For example, Wale's 2013 single LoveHate Thing went viral on TikTok and so streams rise more than 6,000% over 7 weeks. In Music Publishing, Warner Chappell swept Billboard's publishers quarterly for the first time taking the #1 spot on the radio airplay, hot 100 songs and the country airplay charts. Composer, Daniel Blumberg, won the Best Original Score Oscar for The Brutalist and we continue to make exciting new signings, including Superstar DJ Diplo and Reggaeton Star Yandel. I'd like to highlight that our creative engine is firing on all cylinders. Our share on the Spotify global chart has grown consistently and by nearly 50% since mid-2023, with Q3 on trend to be our highest chart share in 2 years. In addition, right now, WMG's recording artists hold 5 of the top 10 tracks on the Billboard global chart, including the top 3 with Alex Warren, Bruno Mars and Rose. These results are a promising sign that our strategy is working. We take a twin-engine approach to growing our market share. Alongside organic growth and our investment, we're also increasing our M&A activity. We expect to have more news about our M&A investment plans in the near future. Now let's turn to our second priority, growing the value of music. One key shift in the industry is that it's moving from just subscriber growth to growth driven by both subscribers and price increases. Our collaboration with many of the biggest tech companies in the world, including Spotify and Amazon, provides more opportunities for innovation, along with greater certainty around our economic participation as price increases become more regular. Growing the value of music starts with protecting our artists and songwriters. And today, nowhere is that more crucial than with AI. I was in D.C. last month to support a revised NO FAKES Act, the same legislation that I testified for at a Senate hearing last April. The bill provides protections against unauthorized defects while setting up a licensing framework paving the way for new revenue streams and more trustworthy products. This is not only a bipartisan bill that we have gathered support for across music, entertainment, and tech industries, including MPA, SAG-AFTRA, YouTube, OpenAI and others. It also could serve as a blueprint for the treatment of name, image, likeness, and voice rights around the world. Our role as a music company has never been more relevant and is becoming increasingly pivotal as the ecosystem gets more complex, bringing together millions of copyrights across Recorded Music and Publishing. We use our scale and expertise to create value for artists and songwriters across a vast global network of multibillion-dollar tech companies. Finally, let's turn to efficiency. As we make organizational changes to optimize our performance, while yielding benefits from tech upgrades, we are driving a virtuous cycle, so we can invest more for the benefit of artists, songwriters and shareholders. Since 2023, we've announced plans to achieve a cumulative total of more than $300 million in annualized cost savings, the majority of which is being reinvested in music and technology. This is an ongoing process that has become part of our DNA, and we will continue to look for ways to drive even more efficiencies. By doing so, we will free up additional resources to pursue the most attractive opportunities through a disciplined capital allocation plan. As I told you on our last earnings call, we saw our A&R spend increase double digits last year, and it will increase by even more this year. We're starting to see signs of our strategy paying off. As I mentioned earlier, we have the strongest chart presence that we've had in a long time, which is translating to expanding market share in new releases across the U.S., the largest market in the world. As we replicate the strategy across our other labels and geographies, we will augment our growth with M&A. In short, we're putting more wood behind fewer arrows to turbocharge our core business. Our Tempo investment is a good signpost for the kinds of acquisitions you can expect us to make. The deal is a prime example of our M&A strategy in action, reinvesting cost savings into high-quality essential music with high margins. And we continue to invest in technology to sharpen our competitive edge and improve services for our artists and songwriters. A key example is the recent beta launch of WMG Pulse. This is an app which offers real-time insights drawn from every major DSP and social media platform. This week, we invited 100 artists and songwriters to use the app, and we'll be adding more sophisticated features and financial data in the coming months. In an ever-evolving industry, we're confident we'll drive more consistent long-term growth and profitability. However, we expect these challenges we experienced this quarter to persist for the remainder of the fiscal year, resulting in lower subscription streaming growth than previously expected. As Armin settles into his new role, we'll provide updates on our business and capital allocation priorities on the next earnings call. With highly anticipated new releases from Ed Sheeran, Lizzo, David Guetta, Benson Boone, Alex Warren, Rose, Burna Boy, Teddy Swims, Myke Towers and others coming this year, we are excited about the momentum we're building into 2026. I'll now pass it over to Bryan, who will take you through the numbers.

Bryan Castellani, CFO

Thank you, Robert, and good morning, everyone. Before I get into our results, I want to remind everyone that growth rate comparisons will be in constant currency. In Q2, total revenue increased 1% and adjusted OIBDA declined 1% with a margin of 20.4% and a decrease of 50 basis points over the prior year quarter, primarily due to revenue mix. Recorded Music revenue increased 1%, subscription streaming grew 3%, reflecting the challenging comparison to robust growth in the prior year quarter, compounded by a lighter release slate and market share loss in China. Ad-supported streaming declined by 3%, driven by a soft overall ad environment. Physical revenue increased 2% due to strong releases in the U.S. and Japan which was partially offset by the BMG roll-off. Artist services and expanded rights revenue decreased 6% due to lower concert promotion revenue, primarily in France as well as ongoing weakness in our e-commerce business, EMP. Licensing revenue increased 3%, driven primarily by activity in Japan and the U.S. partially offset by timing of legal settlements. Recorded Music adjusted OIBDA increased 1% with a margin of 23%, an increase of 10 basis points. Music Publishing total revenue increased 3%, while streaming revenue increased 2% due to the impact of digital deal renewals, primarily in the U.S. We have a tough comparison against the prior year quarter, which saw robust streaming revenue growth of 29%. Performance revenue grew 6% driven by an increase in concerts, radio and live events, primarily outside the U.S. Sync revenue increased 2% due to higher TV and commercial licensing activity and Mechanical revenue increased 14% due to higher physical sales. Music Publishing adjusted OIBDA increased 5% with a margin of 27.4%, an uptick of 50 basis points. Q2 operating cash flow increased to $69 million from a use of $31 million in the prior year quarter. The increase was primarily due to timing of working capital items. Operating cash flow conversion was 23% of adjusted OIBDA. Free cash flow increased to $33 million from a use of $57 million in the prior year quarter. As of March 31, we had a cash balance of $637 million, total debt of $4.3 billion and net debt of $3.7 billion. Total debt includes approximately $300 million related to our acquisition of Tempo. Our weighted average cost of debt was 4.1% and our nearest maturity date remains 2028. As I wrap up, I'd like to welcome Armin and thank Robert, our Board and everyone at Warner Music Group, especially our global finance team. I'm also grateful to everyone in the investment community who supports and follows Warner Music Group so thoughtfully. It's been a pleasure working with you. With that, we will take your questions.

Operator, Operator

Your first question comes from Michael Morris of Guggenheim Securities.

Michael Morris, Analyst

I want to ask a big picture question to start, Robert, given the challenging quarter that we had and the little visibility, what confidence can you give investors to reinforce why do you think Warner Music remains attractively positioned with an opportunity to return on a path to the growth goals that you have put out? And maybe if I could ask just one follow-up as well. Can you give us an update of how you're thinking about subscription streaming growth for the year at this point relative to the high single digits? And how much intra-quarter volatility should investors be considering given your release slate timing?

Robert Kyncl, CEO

Thank you, Michael. We're excited about our strategy, which I previously discussed in the last earnings call. It focuses on three key areas: increasing market share, enhancing the value of music with our digital service providers, and improving efficiency to free up capital for reinvestment in music and technology. This approach is intended to drive long-term profitable growth. Last year, we increased our A&R spending from freed-up proceeds, and we've maintained that approach this fiscal year, with early signs of success emerging from those investments. For instance, our recent chart success has been significant. Over the past two years, we’ve seen a 50% increase in our share on the Spotify Global 200, and we currently have five out of the top ten songs on Spotify Global Daily and six out of the top ten on Spotify U.S. Daily. Our A&R investments in artists and songwriters are clearly resulting in hits, and our creative engine is strong. We’re also seeing a positive impact on new release market share in the U.S., which is especially promising in our largest market where Warner Records and Atlantic operate. We must maintain a sharp focus on execution across the board. Additionally, we've introduced an app called WMG Pulse, which serves as a co-pilot for artists, providing them with valuable data regarding their albums, streams, audiences, and finances. This initiative stems from significant investments in our digital supply chain and data infrastructure. We plan to expand this app to more artists and songwriters, adding features along the way, marking a new way to engage with them. In summary, we are actively executing our strategy and need to enhance our focus on execution. Regarding this year, we anticipate trends similar to what we observed in Q2 for the remainder of the year.

Operator, Operator

The next question comes from Benjamin Black with Deutsche Bank.

Benjamin Black, Analyst

Robert, so from the outside looking in, it would appear that at least some of the heavy lift has been completed as it pertains to your deals with some of your larger distribution partners, at least here in the near term. And if I'm wrong here, certainly, please correct me, but I'd be interested if you could dig a little bit more into sort of your strategy to grow global market share. How do you think about scaling your presence in some of the faster-growing emerging markets? And how do you bring some of the success you're clearly seeing here in the U.S. across your sort of global footprint? And then secondly, just on subscription streaming, just a quick clarification question. Curious to hear what exactly happened in China? Was it just release slate driven? And can you maybe expand upon exactly what happened there and how big the impact was? And will that persist for the balance of the year as well?

Robert Kyncl, CEO

Sure. Thank you. So yes, indeed, it's a heavy lift, as you said, and it's a stated strategy to increase the value of music through greater certainty around rates and alignment with our biggest partners. As I said last time, we've been making great progress on it. Our job isn't done yet. We continue to work through it. And also as we achieve it, it takes time for it to percolate through the agreements and go into effect. But it is a core pillar of our strategy, and we're executing against it. And we're very encouraged by the collaborative nature with our largest partners. As it relates to developing markets, we have some great success, great leadership in places like Mexico and Brazil, 2 of the top global markets and also high-growth markets. So we've been doing a great job driving growth over there. And we have some more opportunities in other parts of the world. You're asking specifically about China. That is a big opportunity, obviously. We have a new Head of Asia starting in 2 months, who will play a pivotal role in helping us drive growth around the largest markets in Asia. And in terms of the current impact from China, we expect the same trend to continue for the balance of the year.

Operator, Operator

The next question comes from Kutgun Maral with Evercore ISI.

Kutgun Maral, Analyst

I apologize for the emphasis on subscription streaming, but if we take a step back from this year, there is considerable excitement surrounding the DSP renewals and how they will be implemented. It may look like these will primarily benefit us in 2026, though I could be mistaken. Could you elaborate on the timing of the impacts from those renewals and when we can expect to see advantages for your subscription streaming? I'll leave it at that, as that's the primary question we're receiving.

Robert Kyncl, CEO

Yes, sure. Obviously, I cannot go into the details of the agreement, but I would say through your questions, you can nail the answer. Most clear way to say it. And there's obviously still more work to do.

Operator, Operator

The next question comes from Batya Levi with UBS.

Batya Levi, Analyst

Can you explain what led to the changes in your expectations for high single-digit subscription growth? Was the primary factor the impact from China or did you anticipate some price increases? While I know you don't share details on core growth, it seems that tough comparisons play a significant role. If that weren’t an issue, what subscription growth rate might we expect? Additionally, is the release slate lighter than you initially thought? I recall you expected a more consistent release schedule moving forward.

Robert Kyncl, CEO

Thank you. Our results are influenced by four main factors. First, we have tough comparisons from last year, which Bryan will address shortly. Second, there's pressure in the advertising market; third, the lighter release schedule you mentioned; and fourth, weaknesses in China. These four elements combined have led to the current results. Regarding our slate, we always aim for growth, but there can be shifts for various creative reasons, including different artists and personal situations that may affect the volume of releases. Albums might get moved out of a quarter, and this ebb and flow is something we’ve come to expect. While it can be difficult to predict, it's part of our reality.

Bryan Castellani, CFO

Yes. And Batya, thanks. Just on the tough comp, it was 13.5% in the prior year quarter. So we did expect some deceleration. And we've also stopped talking about BNP normalizing, but that would have been a point here in this quarter as well.

Operator, Operator

The next question comes from David Karnovsky with JPMorgan.

Kiscada Hastings, Analyst

This is Kiscada Hastings on for David Karnovsky. I just wanted to ask a little bit about management at some of the labels. So it seems like you have some two different philosophies at your flagship labels now with Aaron Bay-Schuck at Warner, who seems to have more of a long-form and deliberate approach to artist management and Elliot Grainge in Atlantic now, who seems to be pretty good at quickly identifying and blowing up artists. Is this the right way to understand it? And how do you think the structure will help drive market share growth going forward for WMG as a whole?

Robert Kyncl, CEO

Yes. As a company, we need to manage multiple priorities simultaneously. There are various strategies to achieve success in the market, and I am pleased that we approach our business from different angles and have diverse talents within our team. While you pointed out some strengths, it's important to note that Elliot is not solely focused on quick wins; he is also dedicated to artist development. Our leadership team is collaborating much more closely across all divisions, encouraging the sharing of insights rather than competition. This collective effort will enhance our performance as a company. I believe this blend of executive talent is precisely what we need.

Operator, Operator

The next question comes from Stephen Laszczyk with Goldman Sachs.

Stephen Laszczyk, Analyst

Robert, could you perhaps talk a little bit more about the investments you're making in A&R. I'm curious what genres or markets you see the most opportunity in. Maybe how should we think about any near-term, long-term goals you have on market share for Warner? And to what extent could we expect A&R expense to increase, I think you mentioned it up more than double digits last year. Any context there would be helpful. And then maybe related to that for Bryan, I'd be curious just to get your latest thoughts on puts and takes on the outlook for margins this year. You have cost efficiencies, the A&R investment and then FX, which I know has been moving a bit in both directions, would just be curious of any thoughts you have on that front.

Robert Kyncl, CEO

Thanks, Stephen. I'll address the first question regarding our investment focus. We have been dedicating significant time to capital allocation, and with Armin's arrival, we will continue to refine this focus in the upcoming quarter. We evaluate opportunities based on the global value of local repertoire and aim to maximize our returns both in the short and long term. There are two perspectives to consider: a country view and a repertoire view, and we are increasingly leaning towards the repertoire view. This shift influences our overall strategy, resource allocation, and enhances our capital allocation approach.

Bryan Castellani, CFO

And Stephen, it's Bryan. On margins, in the quarter, what we pointed to was the revenue mix, the lower streaming growth, of course, translated to lower margin for us. And just to point out, if you exclude BMG, our physical was up 15%, which was a bright spot. But again, that comes at a lower margin. And then on the cost side, there were a couple of things that create some quarter-to-quarter variability. We mentioned the continued reinvestment in tech, including the launch of the app and as well, we continue to point to investing into A&R. Even though you will see overall that was down slightly within it, our unproven A&R was up modestly in dollar terms, more than double digits on percentage terms, and that unproven gets expensed to the P&L. So those created some margin headwinds. FX, as you know, was a significant headwind in Q1. Some of that did come back in Q2. But at this time, it's too early to update on any guidance. And as we said, Armin started this week, and we will come back to you on the next call with an update.

Operator, Operator

This concludes the question-and-answer session. I'll turn the call to Robert Kyncl for closing remarks.

Robert Kyncl, CEO

All right. So thank you all for dialing in and paying attention to our company. I want to reiterate that our strategy, we firmly believe in the strategy that we set ourselves on growing market share, growing the value of music and growing efficiency to reinvest in music and technology and drive long-term profitable growth. The early signs of success through our chart share success on a global level as well as U.S. level and many markets around the world are very, very encouraging and as well as our growing market share in the United States and new releases. And I'm very pleased that we're starting to ship technology products into the hands of artists and songwriters to start paying back on some of our investments in technology and to transform the company. So thank you so much, and we'll talk to you next quarter.

Operator, Operator

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