Warner Music Group Corp (WMG) 2017 Q1 法說會逐字稿

Welcome to Warner Music Group's first-quarter earnings call for the period ended December 31, 2016.

At the request of Warner Music Group, today's call is being recorded for replay purposes and if you object, you may disconnect at anytime.

(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, sir.

Good morning, everyone.

Welcome to Warner Music Group's fiscal first quarter ended December 31, 2016 conference call.

Both our earnings press release and the Form 10-Q we filed this morning 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 we 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 that differ materially from our expectation.

Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our earnings press release, our Form 10-Q and Form 10-K and other SEC filings.

We plan to present certain non-GAAP results during this conference call.

We have provided schedules reconciling these results to our GAAP results in our earnings press release posted on our website.

Also, please note that all revenue figures and comparisons discussed today will be presented in constant currency, unless otherwise noted.

With that, let me turn it over to Steve.

Good morning, everyone, and thanks for joining us today.

Our strong momentum continues with excellent first-quarter results.

Once again, we demonstrated our ability to deliver sustainable revenue growth with year-over-year increases in each of the past six quarters.

This quarter we grew total revenue by 11% on top of 11% in the prior-year quarter; digital revenue by 30% on top of 25% in the prior-year quarter; and OIBDA by 15% on top of 34% in the prior-year quarter.

Importantly, these figures reflect growth in both recorded music and music publishing in all regions across the globe.

Of course, we recognize that our results are benefiting, at least in part, from an improved industry environment.

In calendar 2016, the top four recorded music markets all grew, driven mainly by increases in subscription streaming revenues.

On a consumption basis which includes physical downloads and streaming, the US rose 3% powered by a 70% -- 76% increase in streaming; the UK grew 2%, led by streaming which rose 68%.

On a trade revenue basis, Germany rose 2% thanks to streaming growth of 73%; and in Japan for the first nine months of calendar 2016, digital revenue rose 13% while physical declines were fairly modest, down only 3% for the full calendar year.

Even in Sweden where streaming accounts for over 85% of revenue, revenue rose 9% in the first half of the year with streaming up 10%.

While we cannot expect the industry's transformation to be entirely predictable or for its trajectory to be linear, we believe global growth will continue for the foreseeable future.

Although there are now over 100 million music subscribers around the world, that still only represents a bit over 1% of the global population.

It is just a drop in the bucket.

As an industry, we have only fulfilled a fraction of the streaming model's long-term potential.

We are determined to work with our partners to attract the next 100 million subscribers and beyond.

I want to highlight that our outperformance is being driven by the strength of our own strategies and execution.

We would be disappointed if all we did was grow at the very same pace as the industry.

Our goal, as always, is to beat the market trends.

It is clear that once again we achieved that goal in calendar 2016.

To name a few highlights for the calendar year.

In the US, we were the only major to increase our track equivalent album share and we were up nearly 3 percentage points to 21.4%.

In the UK our artist album share rose 1.3 percentage points to 20.5%.

We are over- indexing in the Nordics which is predominantly a track-driven market.

Specifically, we took the number one spot in Sweden's singles and airplay charts, and we maintained our number one position in Finland's airplay chart with share now approaching 50%.

In music publishing, Warner/Chappell's share of US airplay has averaged 20% over the last 12 months, the highest since Billboard developed this measure.

Our results are evidence that the focus on our strategic priorities is paying off.

First, we have a commitment to delivering a consistent flow of great new music.

During the quarter our top sellers included Bruno Mars' third studio album, 24K Magic; and Michael Buble's new album, Nobody But Me, as well as carryovers success from twenty one pilots' Blurryface, and from the Hamilton cast album which further benefited from the December release of the Hamilton mix tape.

It is important to note that we are both the record label and the music publisher for the four key artists responsible for this great new music.

Bruno Mars, Michael Buble, twenty one pilots, and Lin-Manuel Miranda.

We pride ourselves on the seamless collaboration between our recorded music and music publishing divisions.

Our quarterly top sellers are proof that this collaboration continues to drive success for our company, our recording artists and our songwriters.

Our second priority is global expansion where we are making prudent local investments to build our worldwide footprint.

In the quarter, we had very strong performance in the US where our revenue across recorded music and publishing was up 18%.

Internationally, our revenue increased 6% as the results in some markets such as Japan were tempered by the timing of release activity.

Our growth was nonetheless widespread across all regions, both developed and developing.

In recorded music, standout performances included Germany and Latin America where revenue was up over 20%, and the UK where revenue was up over 10%.

In music publishing, we saw close to 30% growth in Latin America as well as 20% growth in Asia and the UK.

Turning to our third priority, we are making significant strides in commercial innovation.

As part of our effort to turbocharge streaming growth, we are committed to exploring original ways to market our music.

A great example of this is the 1-2 punch from Ed Sheeran who debuted two singles on January 6. Both tracks topped the charts in the US, UK and globally, crushing multiple streaming records.

This innovative launch strategy has contributed to the buzz around the March release of Ed's third studio album, Divide.

In addition, streaming makes it easier for fans to enjoy an artist's full repertoire.

We are already seeing an uplift in activity for Ed's first two studio albums, Plus and Multiply.

At the same time, we are staying alert to new consumer behavior patterns and exploring additional revenue streams.

This includes the rise of voice-activated devices like Amazon's Echo, as well as continued experimentation with early-stage technologies such as high-resolution audio, virtual reality and augmented reality.

We are fortunate to have an impressive operating team executing our strategies, and we continue to enhance our expertise.

We promote internal talent such as Gregg Nadel to President of Elektra Records, Ben Vaughn to President of Warner/Chappell Nashville and Tony Harlow to President of WEA, our artist and label services division.

We are also bolstering our existing resources with external talent such as Ralph Munsen, our new Chief Information Officer, and Vinnie Freda in the newly created role of Chief Data Officer.

In addition, Ole Obermann joined us as Chief Digital Officer at the end of last year.

These positions are all critical to helping us evolve our infrastructure, improve our insight into business trends, and create new possibilities for our recording artists, songwriters and company.

2017 is clearly off to a great start and with the outstanding music that we have lined up for the rest of the year, I am confident that we will continue to deliver solid growth.

We with the best of luck to all of our nominated recording artists and songwriters at this weekend's Grammy Awards and at the Brits later this month.

Before turning the call over to Eric, I wanted to pay tribute to Warner/Chappell songwriter George Michael.

We join millions of fans in mourning the untimely passing of this hugely popular and influential superstar.

He will be greatly missed, though given his extraordinary musical legacy, he will never be forgotten.

With that, Eric.

Thank you, Steve, and good morning.

We had another great quarter, and I am very pleased with our revenue, OIBDA, and cash flow results.

Our formula for sustainable growth is working.

In the quarter, total revenue growth of 11% came on top of 11% in the prior-year quarter.

Currency had a 3-point impact, so as reported revenue grew 8%.

While these growth rates are clearly impressive, there are two factors which tempered them, so that on a truly organic basis our revenue grew closer to 13%.

First, during the quarter we received our share of the Pandora pre-1972 settlement which was $18 million in cash, booked as streaming revenue.

While settlements like this one tend to be one-time in nature, the $18 million from Pandora is less than the $24 million we booked from the Sirius XM settlement in the prior-year quarter.

Second, as we indicated in December, our growth rate was impacted by PLG related sales such as Chrysalis and Radiohead, and by other non-core asset sales including [New], the French touring company I mentioned on our last call.

There will be more PLG related sales during the year.

While it is difficult to forecast with precision the revenue impact of any future sales, we expect it to be no more than a couple of percentage points on an annualized basis.

From an OIBDA perspective, certain adjustments are necessary to make the year-over-year comparisons more meaningful.

The details are in our press release, but in the quarter we had $4 million of nonrecurring expenses versus the prior-year quarter where we had none.

The adjustments in the quarter relate to costs from the move of our shared service center to Nashville which ultimately will deliver net savings, and to PLG related sales.

Adjusted OIBDA, which excludes nonrecurring expenses, rose 18% to $161 million.

Adjusted OIBDA margin rose 1.5 percentage points to 17.6%, due largely to revenue growth, revenue mix and the absence of legal settlement costs that impacted the prior-year quarter.

Recorded music revenue was up a healthy 11%.

Digital revenue increased 27%, driven by 49% growth in streaming which more than compensated for a 16% decline in downloads.

Our streaming revenue exceeded $1 billion in the calendar year.

Starting this quarter, we are disclosing the breakdown of digital revenue between streaming and other digital revenue.

As you will see in table 5 in today's press release, we have also provided a full-year of historical quarterly data for comparison purposes.

Our physical revenue this quarter was down 6%, reflecting industry trends somewhat offset by strong physical centric releases.

Licensing revenue declined 2.5%, which was related to timing.

Artist services and expanded rights revenue rose 10%, driven by higher merchandising revenue in the US.

Recorded music adjusted OIBDA was up 11% to $168 million, and recorded music adjusted OIBDA margin was up 0.5 percentage points to 21.1%.

Margin benefited from revenue growth and revenue mix to streaming.

Music publishing revenue also rose 11%; digital grew 72%, benefiting from streaming; performance revenue declined 10% which was largely timing related.

Mechanical revenue remained soft, consistent with industry trends, and was down 16%.

Sync rose 4%.

Music publishing OIBDA more than tripled to $16 million.

Adjusting for costs related to a legal settlement in the prior-year quarter, OIBDA rose 45% with margin up 3.3 percentage points to 12.7%.

Music publishing OIBDA and margin also benefited from revenue growth and revenue mix.

Our cash generation remains very strong.

We had operating cash flow of $156 million, up from $61 million in the prior-year quarter.

This was driven by OIBDA improvement and thoughtful working capital management.

CapEx came in at $8 million, a bit below prior-year levels.

That said, we continue to expect an increase in total CapEx for the fiscal year as we start the buildout of our new LA offices.

Our cash balance was $455 million as of December.

This compares favorably versus a balance of $359 million at the end of fiscal 2016, and $278 million at the end of the prior-year quarter.

In early January, we paid the previously disclosed $54 million dividend as well as employee bonuses.

Given our strong operational and cash performance, we expect to make further progress reducing our leverage ratio this year.

2017 has all the signs of being another positive year for us, and I am optimistic about the future.

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

(Operator Instructions) Aaron Watts, Deutsche Bank.

Thanks for taking my questions.

Eric, maybe I will just follow on one of your comments there at the end.

Is there any kind of leverage target or comfort leverage zone that you would like to get to in the near-term or medium-term that you could offer up?

Well, thanks for the question, Aaron.

So what I would say is first, we are comfortable where we are, but we still focus on continuing to reduce our leverage.

Similar to last year where we really focused on operational growth, driving our business, continuing to reinvest in our business, and opportunistically looking at whether the most immediate choice is to invest in growth or reduce debt, we will continue to focus on that path and those priorities going forward.

Okay, great.

Just one other one for me, a little bit bigger picture, but you are coming off a good year and obviously off to a solid start for fiscal 2017.

As you think about the release slate this year broadly, the continued transition to streaming, contracts that you have entered into or renewed or plan to renew this year, do you think that the company can grow revenue and cash flow this year?

Again, high-class problem to have because you have some challenging comps to the prior year.

Well, we don't give guidance.

but we certainly focus on driving our business for growth every year.

If you look at the dynamics, we think we have a terrific release schedule this year.

Steve already talked about Bruno and Ed Sheeran is coming out, and twenty one pilots continues to perform as Hamilton does, and more terrific releases beyond that.

So we believe in our release schedule and think we have a strong schedule this year.

We think the market continues to show signs of growth streaming, which recently hit the 100 million subscriber mark, has recently had new significant entrants into the market.

Amazon, Pandora and the paid subscription market title recently raised significant capital.

So we think the dynamics for competitive growing, streaming market globally remains strong.

So we are quite optimistic about the business and think there are reasons to believe that the market will grow and that we will continue to -- our goal as Steve said is not to perform at the market, but to outperform the market.

All right, great.

Thanks for the time.

Thank you.

David Farber, Credit Suisse.

Good morning, Steve and Eric.

I had a couple questions.

You spent a good amount of time in the prepared remarks walking through your growth, the market, and gave us a wide array of numbers.

I was hoping to sort of revisit this for a minute, given what I think are some additional disclosures related to digital this quarter.

And I was hoping maybe you could walk us through again how you think your streaming is doing versus the overall market.

I wanted to touch on that a minute.

And then specifically, it looks like you are growing at north of 50%.

So I guess how does that compare to how you think other guys are doing, and then how do you see this sort of developing over the next 12 to 18 months?

Thanks.

So we think our streaming is growing in a very strong way.

And what I would say is if we look at the market share for our music, and our market share has grown I think according to music and copyright from, I think, 13.8% to 17.1% from 2013 to 2015.

They haven't necessarily published 2016 full-year results, but we believe our 2016 results will continue to show that trend.

So we think that as the market grows, and as we continue to increase our share of music and strive to increase our share of music listening, that our streaming performance should continue to perform very well.

And we hope and expect to actually outperform the market.

So we think our numbers show up quite well, so that is how I would lay that out for you, David.

That is helpful.

Obviously, free cash flow was much better in the quarter, better than I think we expected.

And I was curious how -- if this continues to improve if you have any incremental thoughts you could share with us in terms of its uses.

You briefly mentioned at the end of the prepared remarks, and we are looking at the Q, this small dividend.

So maybe just update us on the dividends, acquisitions, paydowns, any incremental thoughts given the strong free cash flow.

Then I had two follow-ups.

Thanks.

Okay.

Well, I think for us we view our priorities for cash in a bit of a waterfall.

So our first priority is to continue to reinvest in the business, to continue to support the business's growth and critical infrastructure.

So whether it is kind of the tuck-in M&A that you see that we have done over the past years.

Last year we bought X5 which gave us digital capacities, and ISS which increased our portfolio in Indonesia.

So we continue to look at strategic tuck-in M&A.

We continue to invest in music directly and, obviously, to try and increase and strengthen our roster.

We also look at critical strategic infrastructure, whether it is the LA project combining all of our offices into one group, or critical IT evolution.

We then also look at delevering.

Last year we paid down $175 million worth of debt, and we continue to opportunistically look at ways to improve and optimize our capital structure.

If after those two, we have cash remaining for a dividend, then we would consider a modest dividend paid in cash.

Again, we look at those priorities kind of in that waterfall, in that order.

Understood.

In terms of dividends, any thoughts around a special versus something that is more ongoing in nature?

No.

At least at the moment, our thinking is given those priorities that we want to make sure that we have sufficient cash to accomplish the first two before we move on to the third one or dividend.

So from that standpoint, we have decided that making a special dividend and making sure that we fully accomplished our first two priorities has been achieved.

Very good.

My last two was, I'm curious if you could touch a little bit on since iHeart put out their pay service app; I was curious if you are seeing any impact plus or minus for you guys in your business, if that has impacted you at all?

And then just again a different question, but you discussed some one-timers in the quarter related potentially to a settlement or ruling.

Can you just give us those details again and its impact to OIBDA in the quarter?

That is it.

Thanks.

So on iHeart, so iHeart has launched their streaming service and as have others, Amazon has launched their paid streaming service.

Generally we view these as quite positive.

So the more competitors there are competing to grow and market subscription services, and especially paid subscription services, we think more likely that the category is going to continue or expand its growth and continue the pace of growth.

So we are heartened to see iHeart launch their service, and obviously they have a lot of listeners, both in terrestrial and digital, listening to their service for free.

And moving them up the ladder to a paid service is really a revenue optimization opportunity for both them and potentially for us.

The one-timer I think you are referring to, David, is the Pandora pre-1972 settlement.

If you recall about a year ago, we also had a settlement with SiriusXM that we recognized in the first fiscal quarter of 2016.

This quarter we recognized the pre-1972 settlement for Pandora.

The revenue impact is about $18 million recognized in this quarter, and the royalties in artist related costs will be processed through sound exchange, so obviously it will be somewhat less than that as our net OIBDA impact.

And you said in the prepared remarks that is getting booked in the streaming, or where did that end up getting booked?

That does get booked into streaming.

We should note, though, if you see it as a one-timer, again remember last year in the same quarter we had the SiriusXM settlement.

The SiriusXM settlement a year ago was actually $24 million.

This year the Pandora settlement is $18 million.

So if you pull them both out, you would actually increase our streaming trend this quarter.

Yes, that is where I was going.

Okay, thanks.

Good quarter.

I appreciate it, David.

Davis Hebert, Wells Fargo Securities.

Good morning, everyone.

Thanks for taking the questions.

A lot of positive things to talk about here.

I just wanted to focus on a couple of things.

Do you worry anything around piracy or stream ripping, any of those technologies that are emerging?

Then secondly, I can't help but notice that in the last share of air from Edison Research that YouTube's share of listening is increasing.

And do you think that is something we should be worried about, because I guess it could be viewed as an opportunity for you, but a lot of people have viewed YouTube as perhaps being negative for the music industry?

So just kind of curious if you could comment on both those factors.

Sure, so let me talk about stream ripping and piracy; that is a terrific question.

So I think there is kind of two angles I want to tackle that on.

So one is that stream ripping is clearly a new form of piracy, but the music industry is absolutely committed to pursue legal action against those entities that are doing that.

There is legal action now against u2mp3.org, one of the most popular stream ripping sites.

And so our objective is to make sure that illegal services providing stream ripping capabilities are dealt with, and dealt with aggressively.

However, I think the bigger picture is that streaming provides a new type of service for the consumer.

Whereas kind of downloads is an easier thing to replicate for a consumer with a pirated service, the access capability of streaming, the full service and access to a global catalog in the cloud is much harder to replicate as a pirated service.

So the ability for streaming overall to represent a better service and experience for the consumer, to bring people who previously might have been pirates into the streaming world, we think that is a compelling proposition.

And we think over time that represents a real opportunity to potentially reduce piracy.

On YouTube, look, YouTube has clearly been a very popular, for years, consumer opportunity.

And there are multiple things where YouTube provides both benefits to promote music, but also concerns in terms of how it monetizes music and in terms of how they use safe harbors for content that isn't the original and official videos.

So YouTube has been out there for a while and remains an issue that the industry continues to work on addressing the use of safe harbor.

Specifically in Europe where the EC is proposing legislation that could help address and fix those issues, there are important things moving forward.

That said, the rest of the industry is continuing to move forward aggressively.

Consumers are finding out the benefits of subscription streaming and other, and we see no signs of that slowing up because of YouTube or otherwise.

Okay, very helpful commentary.

Thank you.

Then if I could ask a question on the publishing industry, it seems like that industry is also benefiting from the lift from streaming.

But we continue to see headlines, legal headlines, around the PROs, SESAC under new ownership; Irving Azoff embattled in a legal dispute with the RMLC.

So I'm just curious, is this something we should pay attention to?

Is it positive for the music business as we go forward?

Well, I will try and answer that as I can.

So on publishing, I think what we are seeing this year is, again, much of the streaming revenue is processed through PROs and, therefore, the revenue gets recognized in our business with a lag to recorded music.

So much of the growth that we would have seen in 2015 or 2016 in recorded music is now coming through and showing in the numbers for publishing.

So I think fundamentally with publishing the growth of streaming, which we didn't see as strongly in the past two years, we are starting to see flow through economically this year.

So I think those trends are something we can continue to look forward to.

I would also say because much of the revenue is processed through PROs, it is not necessarily going to be as smooth as it might be on recorded music, because it comes in releases which are timed and periodic.

So it might be lumpier in some ways, but we are expecting to see the streaming revenue to flow through on publishing from the past two years, really starting this quarter; if that answers your question, Davis.

That is fair.

Thanks for that.

Then if I could just ask a couple more, if you will.

360 deals, know it is something that is referred to in your Ks and Qs, not talked about much on the calls.

Just kind of curious where things stand with some of these contracts.

Is that still a priority focus for you?

It is.

When we do artist deals, we are very focused on making sure that we have a strong two-way relationship where we are supporting them, not just in their music but also in other aspects of their career, and 360 is part of our strategy.

The 360 revenue is generally very stable.

It does move quarter to quarter, year to year, based on which artists are touring which affects both touring and merchant, things like that.

So it is a relatively stable part of our business.

Because streaming is driving the growth, we tend to focus more on those areas because they are moving more significantly.

But 360 continues to be a strategy of ours and the revenue continues to be quite stable.

Okay, that is helpful.

Last question on the balance sheet; I appreciate the commentary on leverage.

Oh, and by the way, I wanted to thank you guys for breaking out streaming revenue.

That is really helpful for us.

On the balance sheet, 6.75% senior notes callable in April; it seems like you could save some coupon.

Just kind of curious how you are thinking about that bond.

Well, we haven't declared anything at this time.

So I wouldn't want to say any specific outcome.

I would say that we continually evaluate ways to optimize our capital structure.

That is, we are aware of what you are saying and we'll look at opportunities to continue to move forward on the path that we have started, which is continuing to push out maturities, continuing to reduce our overall cost of debt and interest.

So certainly that is on our mind and we'll be considering it going forward.

Okay, look forward to seeing that.

Thank you very much for the time, appreciate it.

Thanks, Davis.

(Operator Instructions) Mary Pollox, Credit Suisse.

Thanks for taking the question.

One sort of housekeeping one, if you could go over your pipeline of new releases over the next couple of months.

I know you don't like to do that, so any color would be really helpful.

The second one is much more big picture.

I think in retrospect, it could look like the music industry is really at an inflection point right now.

And I was wondering if you feel like you are having new conversations with other players, other content owners or distributors who have not traditionally been in music who want to work with you in new ways; if you think that there are going to be new revenue opportunities available to you.

Any color you could provide on that front would be great.

Mary, this is Steve.

As is our practice, we don't really give a lot of advance notice on our releases.

It is somewhat volatile from time to time, so we would rather be safe than sorry.

We do think that we have got some fantastic music coming through the balance of the year.

And as Eric said, we think that with the music that is coming, we will continue to have a very nice fiscal 2017.

On your bigger picture question, we look at partnerships and investments almost on a day-in/day-out basis by way of marrying our music with new technologies, marrying our music with new ideas that are popping up like rabbits in spring; and figuring out whether it be through investing in, partnering with or other solutions, how we can continue to identify and develop new revenue streams through these new relationships.

So we are constantly looking at innovative technologies and how music can bolster or strengthen those emerging technologies.

So the answer is yes, we are always on the hunt for new ideas, new partners, new relationships, new investments, all of the above.

Okay, great.

Thanks.

There are no further questions at this time.

I will turn the call back over to the presenters.

All right, everyone, thanks again for your time.

We will talk to you in a few months and if you are in New York, pray for spring.

Have a great day.

Bye-bye.

This concludes Warner Music Group's first-quarter earnings call.

You may now disconnect.