Warner Music Group Corp.

Welcome to the Warner Music Group third quarter earnings call for the period ended June 30th, 2024. At the request of Warner Music Group, today's call is being recorded for replay purposes. And if you object, you may disconnect at any time. Now I'd like to turn today's call over to your host, Mr. Kareem Chen, head of investor relations. You may begin.

Good morning, everyone, and welcome to Warner Music Group's fiscal third quarter earnings conference call. Please note that our earnings press release, earnings snapshot, and form 10Q are available on our website. On today's call, we have our CEO, Robert Kinsel, and our CFO, Brian Castellani, who will take you through our results, and then we will answer your questions. Before our prepared remarks, I would like to refer you to the second slide of the earnings snapshot to remind you that this communication involves forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance. We plan to present certain non-GAAP results during this conference call and in our earnings snapshot slides, and have provided schedules reconciling these results to our GAAP results in our earnings press release. All of these materials are posted on our website. Also, please note that all revenue figures and comparisons discussed today will be presented in constant currency unless otherwise noted. References to normalized revenue and adjusted OIBDA are adjusted for items that impact comparability. The details of these can be found in our filings. All forward-looking statements are made as of today, and we disclaim any duty to update such statements. Our expectations, beliefs, and projections are expressed in good faith, and we believe there's a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs, and projections will result or be achieved. Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties, and other factors that can cause actual results that differ materially from our expectations. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our filings with the SEC. And with that, I'll turn it over to Robert.

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