Warner Music Group Corp.

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

Good morning, everyone. Welcome to Warner Music Group's fiscal second quarter earnings conference call. Please note that our earnings press release Earnings Snapshot and the Form 10-Q we filed this morning will be available on our website. On today's call, we have our CEO, Steve Cooper, and our Executive Vice President and CFO, Eric Levin, who will take you through our results, and then we will answer your questions. Before our prepared remarks, I'd like to refer you to the second slide of the Earnings Snapshot to remind you that this communication includes forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance. We plan to present certain non-GAAP results during this conference call in our earnings snapshot slides and have provided schedules reconciling these results to our GAAP results in our earnings press release. All of these materials are posted on our website. Also, please note that all revenue figures and comparisons discussed today will be presented in constant currency unless otherwise noted. All forward-looking statements are made as of today and we disclaim any duty to update such statements. Our expectations, beliefs, and projections are expressed in good faith, and we believe there'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're 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 Steve.

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