Warner Music Group Corp.

Good morning, everyone. Welcome to Warner Music Group's fiscal third 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 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 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'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 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 Steve.

Thanks, Kareem. Good morning, everyone, and thanks for joining us today. Given these turbulent times, I'd like to start by reaffirming why we're so positive about WMG's future. As the pandemic proved, music is an essential need for humanity. This need has and will continue to make the music sector more resilient than many other industries. Streaming, our largest revenue source, has a long runway and there's substantial headroom for both subscriber growth and subscription fee increases. We continue to see an explosion of new opportunities in sync, social media, gaming, and NFTs, as well as the resurgence of vinyl sales and the bounce-back in touring-related revenue. Over the long term, we're no longer reliant on any single format. Today, music propels and monetizes across every form of entertainment. In the digital age, artists have more ways than ever to engage and excite fans, which magnifies the importance and value of music companies such as ours. Against this backdrop, we're uniquely positioned for long-term success. We have the scale, skill set, and agility to best capitalize on trends in artist development and drive the globalization and diversification of our business. It's from this position of strength that we want to be clear about some challenges that we encountered in Q3. We've had to deal with very, very significant FX headwinds as we report in dollars, not euros or yen. The slippage of a number of key album releases into Q4. macro advertising trends resulting in a slowdown in ad-supported revenue, and the ongoing suspension of our Russian operations. In addition, our reported results were impacted by several previously disclosed one-time items that affect year-over-year comparisons. These include the deal renewal with one of our digital partners, which affects all four quarters of this fiscal year but not beyond, and the benefit in the prior year quarter from a catch-up payment related to another of our digital partners. As always, our goal is to help you reconcile reported results to underlying performance. We're committed to making sure that these items are more clearly understood in the future. Eric will go into more detail about our normalized numbers shortly. So on to our results. Total revenue in the quarter was over $1.4 billion. This represents year-over-year growth of approximately 7% and 12% on an as reported and constant currency basis compared against an incredibly strong Q3 in 2021. Adjusted EBITDA declined 6.7% to $263 million, with a margin of 18.4% compared to 21% in the prior year quarter. The year-over-year adjusted EBITDA decline was driven primarily by FX headwinds. The margin decline was impacted by the strong resurgence of our lower-margin artist services offerings. In recorded music, our revenue was approximately $1.19 billion, an increase of 8.5% from the prior year quarter, with streaming revenue up 2.7%. As I mentioned, factors such as ad-supported streaming weakness impacted these results. However, these percentage increases do not accurately reflect the true strength of our streaming business. Normalizing for the previously discussed one-time items, recorded music streaming revenue grew by 9.2%. Artist services continued to show impressive recovery with revenue growth of 55.7%, while licensing was up 8.7%, and physical was up approximately 2%. Publishing had a very strong quarter with revenues of $245 million, approximately 35% more than the prior year quarter. I'd like to note we expect an uplift in our Q4 recorded music streaming revenue, driven by a very strong release slate, including new music from Cardi B, Lizzo, Panic at the Disco, Argentina's Paolo Laundra, Nigeria's CK, and South Korea's ESPA. In addition, we have recently signed new deals with Meta that will deliver additional revenue in Q4. Our new deals include an expanded revenue-sharing model that will open up additional opportunities for both frontline and catalog artists. Excuse me. With that in mind, I'd like to spend the rest of my remarks today picking up on the theme of why we're so confident about our future. Many of you have heard me talk before about the key pillars of our long-term strategy. Music, globalization, innovation, and people. I'd like to explain how we're distinguishing ourselves in each of these areas and talk a bit about our ambitions. As always, let's start with the music. We often get asked whether all the major music companies are just tracking the same data and chasing the same artist. If you look at our biggest stars, you can see that that's not true for us. Long-term artist development has been a hallmark of WMG for decades, with stars like Madonna, Joni Mitchell, and Fleetwood Mac, among many others. Today, We remain absolutely committed to backing originality. Ed Sheeran, Cardi B, Anita, Dua Lipa, Bruno Mars, and others are all extraordinary artists that were signed to our labels very early in their careers. It should be noted that last month, Ed Sheeran became the first artist to hit 100 million followers on Spotify. Q3 saw the return of Lizzo, one of our most talented new superstars. Her monster hit, About Damn Time, achieved number one status in the U.S. while reaching the top three in Australia, Belgium, Canada, New Zealand, and the U.K. Released last month, her acclaimed new album, Special, hit the top ten in key markets, including the U.S., U.K., Canada, and Australia. The sophisticated multi-platform campaign behind Lizzo's new release is a great example of what's possible when a true original is backed by our creative global team. By way of example, in April, Lizzo made her debut in the metaverse by performing at Songbreaker, the first music awards show on Roblox. In July, she celebrated her album release with an exclusive light show experience in concert in New York, sponsored by American Express and live-streamed on Twitch. In the fall, a documentary about Lizzo's life is coming to HBO Max. The film is co-produced by Warner Music Entertainment and Atlantic Films. Around the world, we've had a string of smashes from some of our most exciting international stars, including Nigeria's Burner Boy, Japan's Tatsuro Yamashita, and the UK's LF System. Back in the U.S., Jack Harlow celebrated his first solo single, Number One, while the Red Hot Chili Peppers' 12th studio album debuted at number one in the U.S., the U.K., Germany, and 13 other markets around the world. We also helped propel the explosive success of Kate Bush's Running Up That Hill in the new season of Netflix's Stranger Things. Originally released in 1985, the song returned to number one on Billboard's Global 200 and Spotify's Daily Global Charts. This is a great example of the evergreen power of unique songs and recordings, as well as further proof that there are no barriers in the modern music business. Irrespective of genre, geography, or generation, a hit can emerge and reemerge from anywhere, from anyone, at any time. Meanwhile, our publishing arm, Warner Chapel, is really humming. Our songwriters scored 86 songs on the Billboard Hot 100 in Q3. Our Nashville team was named Billboard's Top Country Music Publisher in for an unprecedented 21 consecutive quarters. Culture-shifting songwriters welcome to Warner Chapel this quarter include 2Dope, who co-produced Drake's Way Too Sexy, Puerto Rican rapper Deyano Antiano, an influential figure in the queer Latin rap scene, and Tyson Yoshi, one of Hong Kong's top hip-hop singer-songwriters and independent artists. We also signed a wide-ranging partnership with Hollywood star and popular comedian Kevin Hart and his media company, Heartbeat. We're administering all of Heartbeat's songs covering past and future works for film, TV, gaming, and Web3. Our shift to becoming a truly global music enterprise continues to pay off. We've taken a two-pronged approach, growing our local expertise and talent while making targeted investments and forging partnerships with local best-in-class operators. A case in point, back in 2014, we were first movers in China, taking two important steps that year. We acquired one of the largest independent catalogs, Gold Typhoon, and we were the first major music entertainment company to strike a wide-ranging partnership with Tencent. In 2014, China was the 19th-ranked music market in the world. Last year, it was in sixth position in climbing. Deals made a number of years ago have been critical to us being in the pole position to capitalize on continued growth in China, where our revenue is 7x what it was in 2014. We continue to spot the markets that are going to ignite and deploy a bespoke strategy for each one. We've spoken to you in the past about the launch of Warner Music in India and our organic growth market share in Brazil. More recently, we've transacted with Kahnawatt and Rotana in the Middle East and Chocolate City and Africore in Nigeria and across Africa. This quarter, we launched Warner Music in Israel. which is a fast-growing market with real global potential. Our roster there already includes superstars Noah Carell and Noga Erez, and we have some exciting plans to further turbocharge our growth in this market. As a company that thrives at the intersection of art and tech, our commitment to innovation is helping us create a bright future for our artists, our songwriters, and ourselves. We're constantly experimenting with ways to improve, expand, and diversify our revenue streams. Last month, we became the first major music entertainment company to adopt SoundCloud's fan-powered royalties model, which pays artists based on individual users' streaming habits. This quarter, our in-house podcast network, Interval Presents, added shows to our portfolio, such as the acclaimed series Rap Radar and the Webby-nominated Holding Court. At the same time, we've established a reputation as the company to come to first if you want to do anything really groundbreaking in music. We continue to harness the tools, tech, and protocols that collectively make up Web3. By constantly learning and evolving, we are simultaneously strengthening our role as the connective tissue between fans and artists by unlocking new opportunities in these rapidly changing environments. Here are just a few examples of our many recent initiatives. Two of our artists, Jason Derulo and 2-2-Gs, teamed up with TerraZero to recreate real-life landmarks on the virtual platform Decentraland. This partnership helped us expand our horizons across multiple metaverse worlds and tap into new promotional avenues. Warner Records UK partnered with Bose to offer a first-of-its-kind NFT collection called Stickmen Toys. Using a custom-built algorithm, visual art was mapped to audio stems, creating a set of unique collectible characters. Stickmen Toys has been extremely successful, peaking at number two on OpenSea, the world's largest NFT marketplace. And finally, through our participation in a funding round for authentic artists, we're helping to redefine communal music experiences for the metaverse. Authentic Artists is an industry-leading music platform powering virtual artists, digital collectibles, and interactive music experiences using cutting-edge AI. Before I move on, I'd like to mention that we were pleased by the July 1st remand decision by the U.S. Copyright Royalty Board, or CRB, in Fono Records 3, which covered streaming royalties for the 2018 to 2022 period. After a long, drawn-out appeals process, streaming services are finally being required to pay songwriters and publishers the percentage of revenue rates that were set by the CRB in February 2019. These rates escalate annually from 11.4% in 2018 to 15.1% in 2022. This marks a hard-won increase from the 10.5% rate previously set by the CRB for 2017 in Fono Records 2. Since many digital services were continuing to pay songwriters and publishers at that 10.5% rate during the appeals process, the remand decision will require them to make significant retroactive payments. It's an important step in the fight for fair compensation for songwriters. Before I talk a bit about our people, I want to honor Mo Austin, the legendary former chairman and CEO of Warner Brothers Records. On August 1st, we announced that Mo had passed away peacefully at 95. There was an unbelievable outpouring of loving tributes from across the entire spectrum of artists and executives, who have been part of our industry for decades. Mo was one of the greatest music executives ever. He was a driving force in shaping the Warner Music Group as we know it today. He will be hugely missed, and our deepest condolences go out to his family. I'll now give a few brief updates about our commitment to diversity, equity, and inclusion, and the ways our people are impacting local communities. First, we're reinforcing our unique company culture through state-of-the-art headquarters in different territories. The latest example is our music station in Madrid, a creative hub housed in a renovated train station originally built in 1861. This facility encodes recording studios, a content creation lab, and a live music venue. Providing round-the-clock access to spaces like this not only helps us attract and retain talented executives, artists, and songwriters, but also fosters creativity and collaboration in a post-COVID world. Second, Our Warner Music Group Blavatnik Family Foundation Social Justice Fund announced its fourth tranche of grantees this quarter and held its first grantee convening event. 56 leaders from 26 organizations came together to advance social reform across the arts, education, and criminal justice. Third, 300 Entertainment and Atlantic Records are leading the fight to prohibit prosecutors in the U.S. from using rap lyrics as confessional evidence in criminal trials. We're supporting the Project Black Initiative, whose mission is to end these racially discriminatory attacks on creative expression. In the wake of the Supreme Court's decision to overturn Roe v. Wade, our priority is keeping our people safe. We believe that everyone has the right to control their reproductive health. To that end, we've expanded our health care services, including financial and legal support, so our employees can exercise that right no matter where they live. In addition, we've matched employee donations supporting the important work of the Center for Reproductive Rights. To wrap up, I know that in this current macroeconomic climate, everyone is being inundated with information about short-term trends. But while we're very focused on consistently delivering quarterly results, that's not the primary lens through which we look at our businesses. Over the past five years, we've grown revenue by 63% on an as-reported basis and adjusted EBITDA by almost 100%, while generating about $2.5 billion of operating cash flow. In this industry, real success and real returns come from taking the long-term view. It's about setting the right trajectory that will take us to new heights. We believe that the Warner Music Group is absolutely on the right path, and we look forward to keeping you updated as we continue to build tomorrow's story. With that, I'll turn it over to Eric.

Thank you, Steve, and good morning, everyone. Our Q3 results reflect the inherent resilience of our business that comes from our diverse portfolio of revenue streams. Even in a quarter where ad-supported streaming revenue came under pressure due to macro trends, we still grew most of our revenue lines and saw significant growth in operating and free cash flow. Total revenue increased by over 12% on a constant currency basis, reflecting growth in both recorded music and music publishing. Total company streaming revenue increased 6.5%, driven by growth across both segments. Adjusted for the one-time items that I will describe in a moment, total revenue and streaming growth were 14.9% and 10.3% respectively. Company-wide streaming revenue from emerging platforms was sequentially flat at $345 million on an annualized basis. As Steve mentioned, this revenue will increase in Q4 driven by new deals with platforms, including our recently signed deals with Meta. Adjusted OIBDA declined 3%, with margins of 17.8% compared to 19.6% in the prior year quarter. On a constant currency basis, adjusted OIBDA increased 2.4%. The decline in margin was primarily due to revenue mix driven by the growth in lower margin artist services revenue and the impact of exchange rates. the impact to adjusted EBITDA growth and margins was magnified by the reduction in streaming revenue, which was primarily driven by one-time items. Normalizing for these items, consolidated adjusted EBITDA on a constant currency basis grew 13%, and margins would have declined by only 40 basis points. Adjusted EBITDA decreased 6.7% with margins declining from 21% to 18.4% due to the same factors that impacted adjusted EBITDA. Recorded music revenue grew 8.5%, driven by growth across all revenue lines. Streaming revenue increased by 3% compared to a very strong prior year quarter that saw impressive growth of 27%. Our prior year quarter performance was driven by outsized growth in ad-supported streaming revenue that was recovering from COVID, new deals with emerging streaming platforms, and some especially successful releases. By comparison, our streaming growth in Q3 22 was more muted due to deceleration in ad-supported streaming revenue driven by the challenging macro environment and shifts in the timing of new releases. Normalized subscription streaming revenue grew in low double digits, in line with the market. However, ad-supported streaming growth, which had been trending in the high teens, fell into the low single digits in Q3. Additionally, there were several previously disclosed items that impacted comparability for the quarter. A new deal with one of our digital partners, which commenced in Q1, created a $34 million Q3 headwind, and an $11 million benefit in the prior year quarter due to a catch-up payment related to one of our digital partners. Adjusting for the impact of these one-time items, recorded music total revenue and streaming revenue grew 13.1% and 9.2% respectively. While the macro challenges to add supported streaming revenue may persist for some time, We expect streaming growth to improve for us in Q4, bolstered by a robust release schedule, a less challenging prior year comparison, and new deals with emerging streaming platforms. Artist services and expanded rights revenue growth accelerated and increased by 56%, primarily reflecting a boost in concert promotion revenue as touring activity returned. Physical revenue grew by 2%, primarily driven by strong performance in Asia. Licensing revenue increased 9%, mainly due to higher synchronization revenue led by the U.S. and U.K. Adjusted EBITDA decreased 9% on an as-reported basis and 4% on a constant currency basis. Adjusted EBITDA margin declined from 22% in the prior year quarter to 19.4%, primarily due to revenue mix. Normalizing for the one-time items described above, adjusted OIVDA grew 7% on a constant currency basis, and the year-over-year margin decline would have only been 100 basis points. Music publishing continues to deliver impressive results, posting 35% year-over-year growth. Digital revenue grew 32%, reflecting continued momentum in streaming, which increased 35% and was driven by strength across traditional and emerging streaming platforms. Additionally, digital revenue growth reflected a $17 million benefit, resulting from the July 1st decision by the U.S. Copyright Royalty Board in Fono Records 3, which Steve mentioned earlier. Adjusted for the benefit from this decision, digital revenue increased 16.5% and streaming revenue increased by 18.3%. Performance revenue increased by 80% as bars, restaurants, concerts, and live events continued to recover from COVID disruption. We saw a rebound in Germany, UK, France, and the U.S., Sync revenue increased by over 20% due to higher television and commercial licensing activity. Mechanical revenue declined slightly. Music publishing adjusted OIBDA increased 30% to $57 million, while margin remained flat at 23%. On a constant currency basis, adjusted OIBDA increased 33%. Normalizing for the impact of the CRB rate benefit, adjusted EBITDA would have increased 23% on a constant currency basis, and margin would have been essentially flat. In line with our expectations, Q3 CapEx increased to $35 million as compared to $20 million in the prior year quarter, mainly due to investments in IT infrastructure and expansion of our EMP facilities. As a reminder, our financial transformation is expected to deliver annualized run rate savings of $35 to $40 million once fully implemented. Operating and free cash flow growth in Q3 were very strong. Operating cash flow increased 79% to $163 million from $91 million in the prior year quarter. The increase was largely driven by the timing of A&R investment. Free cash flow increased 80% to $128 million from $71 million in the prior year quarter. We expect strong cash flow generation in Q4 as well, driven by the timing of deals that will be favorable to working capital. As of June 30, we had a cash balance of $345 million, total debt of $3.8 billion, and net debt of $3.4 billion. Our weighted average cost of debt is 3.4%, and our nearest maturity date is 2028. Before we conclude our call, I want to mention that we recently settled a number of copyright infringement cases that will impact our Q4 results. We expect that the proceeds from these settlements, after netting litigation expenses and artist and songwriter royalties, will have an estimated favorable impact to consolidated orbita of at least $25 million. We are closely monitoring... the rapidly changing macro environment, and we'll adapt as we always have. We have full conviction in music's resilience and will aggressively pursue new opportunities for our artists and songwriters, even during market dislocations. The fourth quarter is off to a strong start with our new releases, Performing Well, and new deals with emerging streaming platforms. We are on an upward trajectory and are positioning ourselves to take advantage of the opportunities for growth that lie ahead. Thank you for joining our call today, and we will now open the call for questions.