Universal Music Grp U/Adr

Good evening and welcome to Universal Music Group's third quarter earnings call for the period ended September 30th, 2022. My name is Nadia and I'll be your conference operator today. Your speakers for today's call will be Sir Lucian Grange, Chairman and CEO of Universal Music Group and Boyd Muir, Executive Vice President, CFO and President of Operations. They will be joined during Q&A by Michael Nash, UMG's Executive Vice President, Digital Strategy. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star, followed by two. Please let me remind you that management's commentary and responses to questions on today's call may include forward-looking statements which by their nature are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may vary in a material way. For a discussion of some of the factors that could cause actual results to differ from expected results, please see the Risk Factors section of UMG's 2021 Annual Report, which is available on its website at universalmusic.com. Management's commentary will also refer to non-IFRS measures on today's call. Reconciliations are available in the press release on the Investor Relations page of UMG's website. A supplemental historical revenue fact sheet is also available on the Investor Relations page of UMG's website. Thank you, Sir Lucian. You may begin your conference.

Thank you, and thank you all for joining us. Today, I'm pleased to report that Universal Music Group's third quarter was another quarter of strong growth. Our fifth consecutive quarter of strong growth as a standalone public company. Revenue was up 13% in constant currency and adjusted EBITDA increased by 9%. I believe these results demonstrate how successful we've been at diversifying our revenue streams by creating and assembling a broad-based and strategically integrated portfolio of businesses we are better positioned to navigate the inevitable ebbs and flows in revenue of any particular business, as well as to whether the macroeconomic headwinds adapt to changes in formats and consumer habits that we see and to seize opportunities in new and emerging categories. Here's just one example of what I mean. When we reported earnings for the second quarter, We noted we would not be immune to a downturn in the advertising market, which is indeed what happened in the third quarter, as ad-supported streaming revenue grew 5% in constant currency. The slower growth in the third quarter in ad-supported streaming revenue was offset by growth in so many other areas of our business. from subscription to licensing, live touring to merchandising to continued growth throughout music publishing, and even by legal settlement with an internet service provider, which delivered positive outcomes for our artists as well. Over the longer term, we believe UMG's streaming performance will benefit from overarching trends, such as the increasing migration of advertisers to the digital space, especially to social media and obviously video. But our strategy goes far beyond positioning our company to passively benefit just from trends rather we are catalysts of change driving innovation finding new ways to leverage our existing assets. Creating new business models, all of this in service to our artists advancing their careers creatively and commercially, while at the same time, growing the larger music ecosystem. Before Boyd gives you a detailed picture of the numbers, I want to highlight a few areas we're especially proud of and expect even greater results going forward. How our diversification strategy is playing out internationally, our recent innovations in business models, and some technological advances we're particularly excited about. Let me begin in Japan. Japan is the world's second largest music market by revenue. in that fragment fragmented market a market in which the majority of sales are still physical the performance of universal music japan has been outstanding our competitive position has risen sharply and we are working to drive the adoption of streaming which represents an extremely significant opportunity there we're building on our consistent success in domestic sales of local artists as well as global superstars by also exporting the best Japanese talent to the rest of the world. In that regard, we recently announced an expansion of our relationship with Japan's leading talent management company, Johnny & Associates, which represents superstars King and Prince already on Universal Music in Japan. We've now signed a new band with them, Travis Japan, a promising boy band with plans to launch the group globally through our Hollywood-based Capitol Records. That launch will be the first artist to initially be digitally only, bringing one of the hottest new J-pop groups to streaming platforms worldwide. In India, as we're doing in Japan and other markets around the world, We are building our company, not only to be a leader in recorded music and publishing, but also to engage in the business of artist management, live events and brand sponsorships. In September, we announced the acquisition by Universal Music India of a majority stake in TM Ventures, one of India's leading music and entertainment companies. Universal's leadership of the domestic Indian non-film music business will accelerate, while TM clients will have access to and the benefit of the resources of UMG India locally, as well as UMG globally. Recent proof of our global reach was Apple's use of the track Voodoo in its launch of the next generation of AirPods, a track by Badshaw, an artist signed to us last year, who has since also become a TM client as well. Expanding into artist management is nothing new for us. In 2007, during a time when piracy in Latin America was still decimating the traditional recorded music revenue, we launched the management division called GTS. Today, in seven markets in Latin America and Iberia, GTS enables us to build multifaceted long-term relationships with local artists in management, live, and branding. Through these partnerships, we started to build long-term relationships that allowed us to get ahead of the Latin music explosion and forge lasting multifaceted relationships with some of the biggest Latin artists, including J Balvin, David Bispel, and Sebastian Yatra, amongst many others. Turning now to new business models, I want to stress how much their development and exploitation are absolutely central to our entrepreneurial culture. In that innovative spirit, we have announced the creation of Virgin Music Group, which represents a significant acceleration of our independent label and artist services strategy. This new global division unifies three entities, UMG's Virgin Music Label and Artist Services, InGroove, our industry-leading global distribution platform, and UMG's recent acquisition, the Artist Partnerships Division of mTheory. a company that provides a range of marketing and advisory services to independent artists. To serve as co-CEOs of this new Virgin Music Group, we've appointed M Theory founders JT Myers and Matt Pastel. Matt and JT will lead the expansion of our independent music capabilities across all our business units and regions. At inception, Virgin Music Group is the only independent distribution company There's a truly global presence with boots on the ground in major markets around the world, including the US, UK, Japan, Germany, France, and Latin America, as well as more than a dozen markets in Europe, Australasia, Africa, and Latin America. This is not top-down distribution offering, but a truly global organization that offers a world-class continuum of services artist development, marketing, promotion, strategic insights, to name just a few. Independent artists and entrepreneurs with a level of hands-on expertise and resources that is unique to the industry. Whether an artist is DIY, independent, or major, they can partner with us at every stage of their career, moving along this continuum of services as their career progresses. I'm particularly passionate about Virgin Music Group because I firmly believe that leveraging our world-class infrastructure to work with independent artists, labels, and obviously entrepreneurs presents a significant opportunity for UMG. First, the approach spurs overall growth in the developing music markets. Second, by increasing our artist touchpoints, this strategy will bring us many benefits from artist discovery and A&R, to data and analytics, while also lowering the risk of profile of our capital allocation and improving operating leverage against certain fixed costs. Many of our most successful artists, The Weeknd, Taylor Swift, and Drake, to name just a few, started as independent artists working with us via a distribution deal, whose relationships with UMG then evolved into multi-rights deals covering many aspects of their careers. One of the many reasons we've become such a powerful magnet for artists drawn to UMG as their home is our relentless drive to discover new talent all over the world and the innovative ways we employ just to do that. For example, last week we announced a new music initiative called Stem Drop, a partnership with Simon Cowell's Psycho Entertainment with TikTok. StemDrop allows TikTok's community of over 1 billion users to collaborate with iconic songwriters like Max Martin to create new versions of tracks written specifically for the program. UMG and Republic Records will have the exclusive right to sign creators that are discovered through this initiative. This highly innovative project harnesses the scale of TikTok while leveraging the artistry of creators worldwide. Our years of experience with emerging platforms has made it clear that experiments like StemDrop often provide the most productive route for us to continue to lead the commercial evolution of the music ecosystem. At the same time, our track record of innovation is not limited to our partnerships with platforms. Within UMG itself, we have some of the world's leading experts in data and analytics, consumer insights, sound recording, and consumer audio products. These individuals are creating some of the most exciting and transformative technologies for years to come. We'll change the way fans enjoy music. I'd like to give you two examples. The first involves Ingrooves, which, as I mentioned earlier, is now part of Virgin Music Group. Ingrooves, a world leader in music distribution, marketing, and technology, was recently issued its third in a series of US patents that are transforming the way artists reach new audiences. and sustained listeners in today's engagement economy and increasing streams on leading DSPs. The new pattern extends the capability of detection technology to short form video platforms such as TikTok, YouTube Shorts, and Instagram Reels. The technology enables artists and labels to analyze early trends to determine which user generated content UGC will be highly likely to migrate to digital streaming services. This patented invention will give a head start. There is additional lead time for marketing activities even before significant growth in streaming occurs by spotlighting those particularly clear opportunities to grow audience on digital streaming services such as Spotify and Apple Music. The technology will be available to in-group clients and will also be leveraged as part of UMG's proprietary A&R and marketing tools. The second example involves our work in immersive audio. UMG has been working for years with Dolby on the development of what is the single most important evolution in music listening in decades. Immersive audio, a real breakthrough in technology that dramatically improves the listening experience for consumers. Dolby's immersive audio format, branded Atmos, creates a music experience unlike anything that has come before. This new format not only lets us reinvigorate classics from our vast industry-leading catalog, but offers artists such a much wider sonic palette, which they will be able to express themselves in the future. An advancement of this significance was no easy feat. It required years of investment and innovation, building state-of-the-art recording studios within our network of iconic studios, including Capitol Studios in Hollywood and Abbey Road in London, and then training some of the world's top engineers in how to take the best advantage of it. And we have also been conducting an extensive campaign to educate artists and states about the limitless creative opportunities that immersive audio provides. But now we're seeing the results. Today, UMG has delivered Dolby Atmos music versions for 80% of our top 50 streaming artists, and nearly half of UMG's streaming consumption has Atmos mixes available, and fans can't get enough. Our global insights team found through our proprietary consumer research that already 50% of Apple music subscribers listen to spatial audio, Apple's version of immersive audio. with Gen Z subscribers over indexing at nearly 67%. Consumers who experience it love it, with 8 out of 10 saying that it's much better quality than traditional stereo audio, and 90% saying they will likely listen to artists' music longer if it is in spatial. As opportunities to experience this groundbreaking technology increase, so will consumer adoption. Earlier this month, UMG, along with Apple and Mercedes-Benz, announced that Mercedes will be the first automaker to natively offer spatial audio with Apple Music. And we expect similar announcements to follow from other automakers soon. Analysts have estimated that the connected car represents a more than $10 billion opportunity for services, including music. So we are deeply engaged with the other leading car manufacturers to enhance music listening in their vehicles. Moreover, spatial audio is not limited to the car or home audio systems, as new headsets from Apple, Sony, Samsung, and many others will increasingly incorporate the technology and make the immersive experience available to hundreds of millions of consumers. Research from Agora found that 80% of Gen Z users would be willing to pay more for headphones if those devices support spatial audio. As we look to some of the most eagerly anticipated albums from music's biggest stars, two perfect examples come to mind. The Beatles' 1966 masterpiece, Revolver, will be released for the first time in immersive audio tomorrow. And Taylor Swift's Midnight was released last Friday in Atmos. And it already broke the all-time record for the biggest album released in spatial audio on Apple Music Worldwide and the biggest pop album of all time on Apple Music by First Day Streams. In addition, Midnight's was the biggest album debut for Spotify ever and also remarkably broke the all-time record for the most single-day streams for an artist in Spotify history, surpassing the record set by Bad Bunny earlier this year. On Amazon Music, Taylor received the most Alexa requests ever. And on YouTube, the single antihero is the number one trending video in the US. Before I turn things over to Boyd for a dive into the financials, let me leave you with one closing point. Driving this level of innovation, diversifying revenue streams, developing new business models that work for our artists as well as for our partners, creating new ways of identifying and marketing artists, significantly enhancing the very quality and value of the music we deliver to consumers. All that requires vision and imagination and years of hard work and commitment by the most talented teams in music to make them a reality. Efforts like the ones I've talked about today and many others, frankly, that I haven't been able to mention, are essential to delivering long-term sustained growth to UMG. and to the broader industry. Even as we continue to deliver strong quarterly results, we remain focused on building an organization that will drive meaningful growth and shareholder value, not just for the next quarter or the one after that, but over the long term for years to come. Our focus on the future has enabled us to successfully navigate some of the industry's most challenging times, and I've been there. And I'm confident that focus will keep us on track to an even brighter future for our artists, their fans, and our shareholders alike. Thank you. And Boyd, can I pass over to you? Thank you.

Thank you, Lucien. As Lucien just mentioned, the diversity of our revenue streams allowed us to generate solid Q3 results. As usual, All of the growth figures I'll discuss today will be in constant currency. UMG's revenue for the quarter of just under €2.7 billion grew 13%, and adjusted EBITDA of €553 million grew 9%. This included a €72 million settlement from a copyright infringement lawsuit with an internet service provider, which is included in other digital revenues. In addition, there is a negative impact of €21 million related to a previously disclosed change in revenue recognition policy in music publishing. Excluding these two items, our revenue growth was 11%. This revenue growth was broad-based as we continue to effectively monetize a growing number of opportunities throughout the company. This diverse revenue growth profile is what supports our continued confidence in the business. Recorded music revenue grew 10% in the quarter. If you exclude the legal sentiment, recorded music was up 6%. Within recorded music, subscription revenue grew 9%. Although still quite healthy, the slower growth relative to the growth seen in the first half of this year was largely timing-related as a result of a lighter release schedule against a strong prior year quarter, which included new releases from Billie Eilish and from Drake, as well also a significant Olivia Rodrigo carryover. Additionally, our shutdown in Russia had just under a point of impact on the year-over-year growth. Subscriber growth at the DSPs remains healthy and as expected we have not seen any signs of economic related slowdowns and supported streaming as lucien referenced grew five percent in the quarter in q3 the slowdown of streaming growth is consistent with worldwide advertising trends which continue to impact this part of our business while it's difficult whilst it's difficult to predict the continued market impact in the short term As Lucien alluded to, we feel confident in the growth of our ad-supported business in the medium and long term as we right-size certain deals in the social space and bring new digital partners on board.