Warner Music Group Corp (WMG) 2015 Q4 法說會逐字稿

Welcome to Warner Music Group's fourth-quarter 2015 earnings call for the period ended September 30, 2015. 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.

(Operator Instructions)

Now I would like to turn today's call over to your host, Mr. James Steven, Executive Vice President Communications and Marketing. You may begin.

Good morning everyone. Welcome to Warner Music Group's fiscal fourth quarter and year ended September 30, 2015 conference call. Both our earnings press release and the form 10K we filed this money are available on our website.

Today our CEO, Steve Cooper will update you on our business performance and strategy, our Executive Vice President and CFO Eric Levin will discuss our financial condition and results, and then both of them will take your questions.

Before Steve's comments, let me remind you that this communication includes forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance. 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.

With that, let me turn the call over to Steve.

Good morning, everyone. Happy holidays and thanks for joining us today. I'm pleased to report another very good quarter, topping off a great year for the Warner Music Group.

For the year, we grew total revenue by 6% with the US up 3% and international up 9%. We grew digital revenue by 10%, we grew OIBDA by 28% with margin expansion of 3.5 percentage points to 14.7%, and we generated cash from operations of $222 million, up from $130 million in the prior year.

Our fourth quarter was also very strong. We grew total revenue by 7%, digital revenue by 20%, OIBDA by 6% and OIBDA margin by 1.2 percentage points to 15.1%.

It's worth highlighting that this marked the fourth consecutive year that we grew combined digital and physical revenue in our recorded music business. And this year, both segments grew.

It is all the more impressive that our sustained growth story is taking place against a backdrop of a music industry that is still going through an uneven digital transformation. For example, we had a 2% increase this year in physical revenue, a segment that has been in steady decline for 15 years. While we are optimistic about the long-term health of the music industry, we are also focused on creating our own opportunities and charting our own course.

As we shared last quarter, our strategic priorities include producing a steady and balanced stream of great music, strengthening our reach around the world and pioneering new commercial possibilities. I would like to provide you with an update on each of these priorities and explain how they are driving our results.

First, we remain focused on delivering a consistent flow of great releases. We are achieving this goal by drawing on the collective strength of our entire global organization with hits coming from many different repertoire centers around the world.

In FY15, our top 25 global sellers had a wide territorial reach featuring established superstars from the US such as Josh Groban and Jason Derulo and big international names such as Muse from the UK, David Guetta from France and Superfly from Japan. In addition, the list contains artists at all stages of their careers from new talent such as Clean Bandit to legends such as Pink Floyd.

Edge Sheeran's sophomore album Multiply was our biggest seller this year, hitting number one on the charts in 15 countries. In addition, Ed's tracks have been streamed nearly 3 billion times on Spotify with his single Thinking Out Loud becoming the first in history to surpass 500 million Spotify streams.

Digital technology is enhancing the viral spread of music, and great music is traveling around the globe faster than ever before. This year was a perfect example of what we can accomplish when the flow of music from every corner of our Company is combined with great local execution.

As a result, in FY15, we punched nicely above our weight. We saw local stars such as Sweden's Mans Zelmerlow and Spain's Pablo Alboran break out of their home territories and build international fan bases for the first time.

In addition, many of our newly signed artists have had first hits of their careers in places other than their home territories. This includes Sweden's Galantis in the Netherlands and the UK's Jamie Lawson in Australia. Importantly, FY15 a shaping up to be another well-balanced year in terms of our release schedule, beginning with Coldplay's seventh studio album, A Head Full of Dreams, which was released last Friday and is off to a great start worldwide.

Second, we're focused on sustained growth on a global basis, not just in the US and UK. Around the world, the opportunities for revenue growth vary greatly. From territory to territory, there is huge diversity in revenue mix. For example according to EFP data for calendar 2014, 82% of Japan's revenue is physical while 83% of Sweden's is digital.

There's also huge diversity in the appetites for international repertoire. In Indonesia, 87% of revenue is domestic, while in Chile, 91% is international. As a result, as we look to grow revenue across all of our territories, we're very thoughtful about tailoring our strategies to the unique conditions that exist in each market.

This year through a combination of initiatives, we have made particularly strong progress in countries that were previously ripe with piracy. For example, in Brazil, we continued our investment in domestic music, breaking two new superstars -- Ludmilla and Anitta.

We were also the first major to license our physical leases to a third-party, redeploying the resulting cost savings to A&R and marketing. In Eastern Europe, we published the Polskie Nagrania catalog, continuing our strategic acquisition of local recorded music assets which began with the Parlophone label group and was followed by investments in Russia, China and South Africa.

In China, we've aligned our interests with the Internet giant Tencent. This deal represents a significant step in creating a legitimate music market in China, and it turbocharged our presence in the region just a few months after our acquisition of the Gold Typhoon catalog. As a result, our performance in key emerging markets has been outstanding, with 2015 revenue up nearly 60% in China, 35% in Russia, and 25% in Latin America.

At the same time, we've continued to grow in our core territories. For example in Germany, the world's third largest music market, our revenue increased 12% this year thanks to outstanding execution by our local team.

In particular, we enjoyed huge success with Robin Schulz. Robin has had five top 10 hits in Germany and has also become one of the most successful German artists outside his native country. His latest track Sugar went top 10 in France, Italy and Sweden and hit number one in Germany, Austria and Switzerland.

As we have capitalized on opportunities in territories outside the US and the UK, we've seen our revenue in those markets experience more significant growth. Specifically, our total global revenue grew 6% this year while our ex-US and UK revenue was up 8%.

Third, we've established ourselves as a leader in the industry's digital transformation. In May, we were the first major to report that our quarterly reported music revenue from streaming had exceeded our revenue from downloads.

Today, we are the first major to reach another milestone. 2015 was our first fiscal year in which our recorded music streaming revenue exceeded download revenue and did so by a significant amount. For FY15, our streaming revenue grew 34% with the fourth quarter up an impressive 47%, the highest growth rate of any quarter this year.

Streaming continues on a trajectory to become our largest revenue source, and recent industry data underscores this point. In June, Spotify announced it had 20 million paying subscribers, roughly double where it was in the prior year.

In September, the RIAA announced that during the first half of calendar 2015, industry streaming revenue in the US should grow 23% to a bit over $1 billion, accounting for a third of US revenue. I should note that those last two stats cover the period -- (technical difficulties)

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Hello? I want to apologize, we seem to have gotten one of our main trunk lines crossed with another line, but hopefully we are back on and hopefully everyone can hear me.

Where was I? We're talking about us taking leads in commercialization, and I wanted to note that the two stats I gave about digital growth and announcements from the RIAA cover the period before the launch of the Apple Music subscription service. While the long-term impact of this launch remains unclear, early signs are encouraging.

With services such as Spotify and Deezer joined by the services of giants such as Apple, Google and Amazon, we now have meaningful competition in the subscription streaming business. This is especially positive when you remember that the download space has been dominated by Apple for well over a decade.

While there are plenty of reasons to be upbeat about the future of the music industry, we remain vigilant when it comes to receiving fair value for our music. We are continuing to work with our partners to improve monetization and are carefully monitoring ongoing developments in the streaming space.

As the contest for consumer time and money heats up, we would expect to see industry consolidation in the subscription streaming business. This consolidation would likely intensify competition among key players, hopefully leading to better marketing, faster innovation and a greater demand for music.

Turning to our detailed results starting with recorded music, for the year, recorded music revenue rose 7% with every segment contributing. Digital led the way as our largest source of revenue, growing 10%, physical was up 2% and licensing revenue grew 16% owing in part to strong synch activity. For the quarter, our recorded music revenue rose an impressive 8% with 21% growth in digital driven by a 47% increase in streaming.

During the quarter, we celebrated number one albums all over the world. Artists who marked their first number one albums in the quarter included [JusFlynn] in the UK with her debut album, Meek Mill in the US and Canada, and [Leanne Lohobus] in the Netherlands. Artists who scored their second number one albums included Rudimental in the UK and Jill Scott in the US.

We also saw artists with long, fruitful careers continue to break new creative and commercial ground. For example, Disturbed's sixth album was their fifth consecutive US number one, and Iron Maiden's 16th album topped the charts in 24 countries including their fifth number one in the UK.

I am pleased to say there's a lot more great music on the way from the Warner Music Group. In Q1 of FY16 alone, we have new releases from Coldplay, Enya, Missy Elliott, and Seal as well as the Grateful Dead's Fare Thee Well recordings from their final concerts this summer.

Turning to music publishing, for the year, music publishing revenue rose 1% with 8% growth in digital revenue and 6% growth in sync, compensating for a slight decline in performance revenue and softness in mechanical. For the quarter, music publishing revenue rose 5% with softness in mechanical and performance offset by 17% growth in digital and 22% growth in sync.

Our music publishing results continue to be driven by our ability to attract and nurture the world's best songwriters and composers. In the past few months, we signed a new agreement with hit maker Taio Cruz and extended our partnerships with Grammy award-winning rock band Muse and two-time ASCAP country songwriter of the year Ben Hayslip among others.

In the quarter, Warner/Chappell songs had an approximate 20% share of the US radio market. That is the highest share Warner/Chappell has recorded since Billboard began tracking spins in 2006. Also in the quarter, Warner/Chappell songs had a 21.5% share of US country radio, again the highest in our history.

Our team also celebrated some landmark achievements. In the US, we were named ASCAP country publisher of the year for the third year running. At the Latin Grammy awards, our songwriters picked up top honors including producer of the year and best rock song. And in the UK, Benjamin Clementine won the UK's prestigious Mercury prize.

Finally, I would like to highlight the fact that last month, Jon Platt was promoted to the role of Warner/Chappell's global CEO following an incredible run as the Company's President for North America. This past Monday, many of our recording artists and songwriters were recognized by the Recording Academy with nominations for the 58th annual Grammy awards. In fact, we earned nods in 23 out of the 29 fields.

Notably, Atlantic's Ed Sheeran earned nominations in three coveted categories for Thinking Out Loud: record of the year, song of the year, and best pop solo performance. Also earning three nominations was the Wiz Khalifa Charlie Puth collaboration, See You Again, their hit from the Furious 7 soundtrack. Other of our recording artists who received more than one nomination include Andra Day, Skrillex and Diplo, Emmylou Harris, Rodney Crowell and Ashley Monroe.

Warner/Chappell also had a strong showing, and in total, our songwriters received 17 nominations across the eight songwriting categories including three in the coveted song of the year category and all five of best R&B songs. In songwriter, Kendrick Lamar was the most nominated artist this year with 11 nods including album of the year, song of the year, and best rap song. We wish all of our nominees the best of luck at the awards in February.

In conclusion, I'm extremely encouraged by our momentum. Our results are testament to our great music, our great artists and songwriters and our great global team. There's a lot to remain excited about, and I look forward to our continued success in FY16. With that, I would like to turn the call over to Eric.

Thank you Steve and good morning everyone. Let me first note we are presenting certain non-GAAP results during this conference call. Please note that all revenue figures and comparisons discussed today are presented in constant currency unless otherwise noted. We have provided schedules reconciling these results to our GAAP results in our earnings press release posted on our website.

Our fourth-quarter and full-year results are impressive owing to outstanding music, strong growth in streaming revenue and excellent execution globally. We grew on the top and bottom line, all the while leaving flexibility to reinvest in the business.

We stayed focused on cost and cash management throughout the year and saw significant improvement in key financial metrics. As I reflect on my first full year at Warner Music, I'm pleased by our progress and excited by our potential.

Turning to our results, in the quarter, total revenue was up 7% and for the year, it grew 6%. Currency continued to impact as-reported results with a 10 percentage point drag on revenue growth for the quarter and an 8 percentage point drag for the year so that on an as-reported basis our revenue declined 3% for the quarter and 2% for the year.

From an OIBDA perspective, certain adjustments are necessary to make the year-over-year comparisons more meaningful. We have highlighted these in our press release, but let me walk you through them.

In the quarter, we had $1 million in PLG related expenses, which is down significantly from $16 million in the prior-year quarter, and $7 million in expenses related to other cost savings initiatives versus none in the prior-year quarter. For the quarter, adjusted OIBDA, which excludes these items, declined 2% to $121 million or was up modestly if also excluding a onetime music publishing related benefit in the prior-year period.

Adjusted OIBDA margin rose 10 basis points to 16.1%. For the year, adjusted OIBDA rose 1% to $465 million, and adjusted OIBDA margin expended 50 basis points to 15.7%. Currency had a moderate tempering effect on OIBDA for both the quarter and the full year.

Recorded music quarterly revenue was up a healthy 8%. Digital revenue increased 21%, driven by growth in streaming and a lower rate of decline in downloads. Physical revenue was down 14%, reflecting industry trends and timing of releases.

Licensing revenue grew 8% in the quarter, primarily related to sync activity. Artist service and expanded rights revenue rose $14 million or 17% in the quarter, driven by the timing of European tours.

For the year, recorded music revenue grew an impressive 7%. Recorded music adjusted OIBDA was up 6% to $85 million in the quarter, and recorded music adjusted OIBDA margin rose by 1.1 percentage points to 13.5%.

The margin increase was driven by benefits from revenue mix as well as continued cost management. For the year, adjusted recorded music OIBDA grew 6%, and recorded music adjusted OIBDA expanded 1 percentage point to 15.9%.

Music publishing revenue rose 5% in the quarter in constant currency but declined 5% on an as-reported basis. Mechanical revenues declined 5%, directly associated with the overall declines in the physical business. But digital revenue was a standout, increasing 17%.

Sync rose 22%, and performance declined 4%. Music publishing OIBDA declined 15% for the quarter with OIBDA margin down 5.1 percentage points to 47.2% driven by the as-reported revenue decline and in part by a one-time benefit in the prior-year period.

For the year, music publishing revenue rose 1% in constant currency but was down 7% on an as-reported basis. Digital revenue rose 8%, more than compensating for continued softness in mechanical revenue, which is attributable to declining physical sales.

Sync revenue rose 6%, and there was a slight decline in performance revenue. Also for the year, music publishing OIBDA fell 12% with margin down 1.8 percentage points to 30.3% due to the same factors which impacted the quarter.

We remain focused on cash and working capital management. Operating cash flow was $104 million for the quarter and $222 million for the year, up significantly from $130 million for FY14.

For the year, CapEx came in at $63 million. As expected, this represented a decrease versus the prior-year spend of $76 million, driven by lower PLG related costs and lower costs related to the Company's 2014 headquarters move, which were partially offset by continued investments in IT systems.

For FY16, we expect to have no costs related to moving our headquarters versus about $15 million in FY15. That said, we will continue to invest in IT. Our cash balance was $246 million as of September 30 with no outstanding revolver draw during or at the end of the quarter as compared to a cash balance of $157 million at the end of FY14.

I would like to make a few additional notes before I close. First, you may have seen news coverage of the settlement related to the Happy Birthday copyright. While we respect we disagreed with the court's decision in September, we're pleased to have now resolved this matter.

Recognizing this is a class action settlement, the terms would need to be approved by the court and are not yet public. That said, I wanted to let you know that the settlement is not material to our results.

Second, I want to remind you that the December quarter, the first quarter of our fiscal year, is traditionally a negative working capital quarter due to normal operating activity. Third, we, Sony, Universal and APCO recently reached a settlement with Pandora related to pre-72 sound recordings. As part of this important deal, Pandora will pay $90 million to the plaintiffs. This follows the $210 million settlement with Sirius XM related to pre-72 sound recordings discussed last quarter.

The process of allocating these settlements is underway, and we expect to begin to flow these through our results during FY16. As a reminder, we will be treating our allocations of the settlement proceeds like any other payment from Sirius XM and Pandora with the artist share being distributed through sound exchange.

And fourth, we remain focused on bringing down our leverage ratio. While no decision has been made on any specifics, including any decisions related to our [Holdco] notes, we continue to carefully evaluate all options for the best use of cash. I have every confidence in our ability to continue delivering growth on the top line, bottom line, and in free cash flow for FY16 and beyond.

With that, operator, please open the line for questions.

(Operator Instructions)

Aaron Watts - Deutsche Bank

Good morning. We appreciate all the details as always. One clarifier for me. I think you said streaming growth in the quarter at least on the recorded side was 47%. What was the download decline in the quarter?

Download decline remains stable with the past, if anything slightly better. It was below 10%, and on a constant currency basis was significantly below 10%.

As we think about the cost base you're now operating at, I know you talked about the headquarter cost coming down in FY16. Any other big moving levers on the cost side that we should think about additive or taking away from that over the next 12 months that we should factor in?

So you are asking cost in both directions? Additive, I don't see anything coming at this point that would be additive. On the additional cost savings, which you look at, we did have a cost savings program in 2015 which was quite effective, we're looking at a series of initiatives going forward, some of which would rely on incremental technology to find efficiencies and otherwise we're not announcing anything today. But we are developing a series of programs. When we have something that is ready to launch, we will make sure we share that. But it's part of our culture and something we are working aggressively towards.

I know we talked about this on past calls, as we think about revenue translation down to EBITDA, as streaming becomes a bigger component of your revenue pie, is there any reason why we shouldn't see the flow through continue from revenue to EBITDA or see a change from the experience of the past?

I would say two things. I think digital revenues tend to have a higher margin than physical revenues because you don't have the physical production and physical supply chain. However, within digital revenue streaming versus download, in general you will have comparable margins differing depending on artist agreements, et cetera. As streaming grows, if it is eating into physical, we would expect to see margin accretion. It is coming from downloads, then you would see less of that.

Okay. Last question for me. There has been some reports over the past week of Spotify on a case-by-case basis perhaps allowing artists to put their music on the platform even if it's not available to all their subscribers, just the paying ones.

How do you think about that from your seat? Is it good that they may make that change, or is that not necessarily as positive a change or not a material change?

We haven't been able to verify that position, Aaron. Just speaking hypothetically, we believe being able to differentiate between a free and a premium service makes sense. That's being said, we will have to wait and see if the Spotify position is a verified by Spotify per se, which to date we haven't been able to do.

Fair enough, thank you for taking the question.

Have a good holiday.

David Farber, Credit Suisse.

Good morning. Some of my questions have been asked. I did want to talk a little bit about, I think on December 14, we may hear more on the streaming and royalties for 2016 and 2017. So maybe you could update us on your thoughts and what you're hearing and how you think that could impact your business positively or negatively. And I have a couple follow-ups.

We continue to feel good about the SoundExchange case. We thought the content providers had very good arguments. We will know in the next few days as to how the situation turns out. I think the decision has to be rendered no later than the 15th. Our expectations are positive.

Okay, that's helpful. On cash flows, I had two questions. You touched on it a little bit in the beginning, but just on the currency side, anything you are considering to alleviate some of the currency concerns inherent in the business.

And second, there's obviously some seasonality in the working capital as you talked about at least historically in the cash flows. I'd be curious to hear what you think the cadence is of the cash flows in 2016, anything we should think about there, and that is it for me.

Appreciate it David, thank you. Let me tackle both of those. On currency, clearly the dollar has been strengthening, and that has an impact on revenue.

We should note two things. One is our cost of our international affiliates are largely local, so there is a natural hedge with operating cost, and the impact on OIBDA is more moderate than on revenue. Two, we have commenced a hedging program. Although we hedge cash flows and not OIBDA, it is a reasonable approximate of that and will be helpful.

We do want to continue to urge a little bit of caution there. I always say we're not in the manufacturing business, that is highly predictable month in and month out. We're in the music business where individual performance of releases is variable and timing of releases can move. So we have to be somewhat conservative in our hedge ratios, but we have begun that program, and we expect that to be effective -- or we've done it in what we think is an effective way to be helpful going forward.

Working capital, our forecast indicates most likely that some of the key things that indicate trends of the past will repeat in the future. The first fiscal quarter of every year is a heavy working capital quarter related to a series of things in part because of the holiday season and fiscal manufacturing that comes in that quarter when collections come in later, in part due to royalty and interest and A&R payments that tend to fall in that quarter.

We start slow and build throughout the year. The first quarter we expect to be one with working capital needs, and then obviously we expect to build and improve throughout the year.

That's helpful. Very high level, if you could talk a little bit more about the release schedule in 2016 anything you're particularly excited by either front-half or back-half related. And then that is it for me in total.

We're excited about all of our releases. What we try to do is as we mentioned a couple times, is to have balanced releases throughout the year and have a constant flow of music that moves both globally and locally.

We should have a number of our very prominent artists hopefully dropping music during this fiscal year, and at the same time at the local level, both our local and regional artists and as we've seen over this last year, they can go global at any time. Continue to be very productive. I am hopeful that will continue throughout 2016.

Thank you.

Davis Hebert, Wells Fargo Securities.

Thanks for taking the questions. I wanted to ask a question on the publishing side of the business. I think there has been some speculation in the press that one of the largest publishing catalogs could be looking at strategic alternatives. I know you can't comment on that specifically, but I wanted to know your interest in owning more publishing assets given the changing landscape on the streaming side versus looking at recorded music opportunities.

And secondly on publishing, just curious if you see more opportunities like the deal we saw with Pandora and Sony recently. Do you feel like there is going to be more of these privately negotiated deals away from the CRB?

On the first, we are constantly both on the music publishing side as well as the recorded music side looking at opportunities to acquire additional assets. That is a normal ongoing aspect of our business. We don't however acquire assets if in fact we don't believe that we can acquire them from a reasonable rational financial perspective.

We do not look to acquire market share for the sake of acquiring market share if we don't believe that it can be profitable and profitably managed. Every year, we probably look at one, two, three, four, five dozen opportunities to acquire more catalogs on the music publishing side. I think as we continue to report, I think the number's probably less, but we continue to look at opportunities on recorded music and when they make financial and operational sense for us, we spring on them.

Okay, that's helpful. If I could ask one on the streaming side, you said the growth was 47%. I want to understand how much of a skew in streaming is there toward the US versus international? I know international can be a fairly broad-based bucket. I want to get a sense for how sustainable that streaming growth.

I will give you a top-down view and Eric can comment on more specifics. When you look at streaming today, it's my understanding that globally, there's somewhere between 40 million and 50 million paying subscriptions. When you look at that as a percentage of the global population of 7.5 billion people plus or minus, it looks to me as if we have barely scratched the surface by way of the upside potential for both premium and free models on a global basis. So I'm hopeful that because of that, we will continue to see relatively speaking very robust growth.

When you look in the United States, I think there is from the numbers we get something in the area of 10 million plus or minus paying subscribers. And when you think about that, that is 3% of the US population. When you look at those counties, the Nordics, Benelux, where streaming has had more opportunity to take root and grow, music delivered vis-a-vis streaming is a very high percentage. In some of the Nordic it's 70% to 80%. I think that also speaks to the potential opportunities with respect to our domestic market in addition to the comments on international. Eric, do you want to add anything to that?

Yes. I will add one quick point. Davis, to get to part of what I think you are interested in, it's very balanced both in terms of the base streaming revenue and the growth of steaming revenue is very balanced between the US and international.

We would also say international isn't dominated by a market -- it's across many markets globally. It's an extraordinary global balance in terms of the base and growth and where it comes from.

Anything more David? Hello? David? Hello? I guess that's it.

Before we go, I would like to apologize one more time for the technical breakdown today in the conference call. Will take whatever steps we have to take to hopefully ensure that it's not a repeat performance so to speak.

I want to wish everybody a very happy, safe, warm, comfortable, relaxing and enjoyable holiday season, and we look forward to chatting with you in 2016. Thanks everybody.

This concludes today's conference call. You may now disconnect.