Welcome to Warner Music Group's First Quarter Earnings Call for the period ended December 31, 2023. 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 would like to turn today's call over to your host, Mr. Kareem Chin, Head of Investor Relations. You may begin.

Good morning, everyone, and welcome to Warner Music Group's fiscal first quarter earnings conference call. Please note that our earnings press release, earnings snapshot, and the Form 10-Q are on our website. On today's call, we have our CEO, Robert Kyncl and our CFO, Bryan Castellani who will take you through our results and then will answer your questions. For our prepared remarks, I'd like to refer you to the second slide of the earning snapshot to remind you that this communication includes forward-looking statements that reflect 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 I've provided schedules reconciling these results to our GAAP results in our earnings press release. All of these materials are posted on our website. Also, please note that all revenue figures and comparisons discussed today will be presented in constant currency, unless otherwise noted. All forward-looking statements are made as of today, and we disclaim any duty to update such statements. Our expectations, beliefs, and projections are expressed in good faith, and we believe there's a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs, and projections will result or be achieved. Investors should not rely on forward-looking statements because they 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 contained in our filings with the SEC. And with that, I'll turn it over to Robert.

Thank you, Karim. Good morning, everyone. Thank you for joining us today. We're moving at velocity to seek the growth opportunities that exist in the music industry today and we see in the future. I'll talk about how the industry is transforming, the unique opportunities here at WMG, and how we're laying the groundwork to propel our growth for the next decade. But first, I'll start with Q1 results. My references to year-over-year growth rates will be in constant currency, and references to normalized revenue and Adjusted OIBDA are adjusted for items that impact comparability. The details of these can be found in our filings and Bryan will provide commentary as well. I'm happy to report that the momentum we saw in the second half of 2023 has not only continued, but accelerated into Q1 with both our recorded music and music publishing segments generating record high quarterly revenue. Total revenue increased 16% and on a normalized basis 11%. Recorded music revenue accelerated to 15% and on a normalized basis revenue grew 9%, streaming grew 11% and subscription streaming increased 12%. These results reflect solid new release and catalog performance, which were supported by DSP price increases. Music publishing continued to deliver impressive results, with revenue growth of 20%, driven by streaming growth of 30%. Total adjusted OIBDA increased 33% or 10% on a normalized basis. I am thrilled with the momentum we're building with recorded music, driven by our ability to deliver great hits across multiple labels and geographies. Recent artist successes and developments include Atlantic's, Jack Harlow, who topped Billboard Hot 100 with his single, Lovin on Me, Warner Records' Kenya Grace, who climbed to number one in the UK. CHER, whose album Christmas debuted at number one on the Billboard Top Holiday Albums chart. Myke Towers, whose…

Thank you, Robert, and good morning, everyone. In Q1, we returned a healthy double-digit growth on a recorded and normalized basis, that was underpinned by strength across both recorded music and music publishing. Before I get into details, I want to remind everyone that our references to normalize will adjust for items that impacted year-over-year comparability. The previously disclosed items affecting comparability include the BMG digital revenue roll-off, which was $13 million unfavorable in the quarter, and a catalog licensing agreement extension, which had a favorable impact to recorded music licensing revenue and adjusted OIBDA of $68 million and $67 million, respectively. In addition, there was a renewal with one of our international digital partners that resulted in upfront incremental revenue recognition of $27 million in the quarter. This favorably impacted recorded music streaming revenue. The adjusted OIBDA associated with this renewal was approximately $10 million. The details relating to these items can be found in our earnings press release. In Q1, total revenue grew 16% and adjusted OIBDA increased 33% with a margin of 25.8%, an increase of 330 basis points over the prior year quarter. On a normalized basis, revenue grew 11% and adjusted OIBDA increased 10% with a margin of 22.6%, which was in line with the prior year quarter. Recorded music revenue grew 15% and 9% on a normalized basis. Additionally, streaming revenue grew 11.4% on a normalized basis, an improvement from the 9% we reported last quarter. Subscription streaming revenue grew 14% or 12% on a normalized basis, supported by DSP price increases. Ad-supported revenue increased by 10%, reflecting sequential improvement from traditional formats as well as the impact of the TikTok renewal, which went into effect last quarter. Physical revenue increased 13%, driven by strong releases in the U.S., Japan, and UK, including releases…

Thank you. [Operator Instructions] Our first question comes from Kannan Venkateshwar with Barclays. You may proceed.

Thank you. So Rob and Bryan, one for both of you, if you could. If you could help us understand what you would do differently as a result of the new plan you announced? And also you mentioned an increase in music investment. Could you help us scale that and also what that really involves in terms of things that you might change? I mean, does it mean A&R steps up or you invest in over a longer term in different assets? And along the same lines, how should we measure success of the plan? If you could outline that, that would be helpful. Thank you.

All right, thank you. So, what we're doing is, we're creating a flywheel that starts with efficiency and operating leverage that's helping us grow efficiently and free up more money all along the way. The use of the money is really in two areas, predominantly in music and a little bit in tech to support all of that. In music today, if you look at our deal pipelines, we have quite a lot of opportunities that we can fully materialize, because how we manage our balance sheet, our dividends, we're operating responsibly, and we have a lot more opportunities that today we can effectively afford. So looking at that combined with an investment framework that we've developed which allows us to be even more selective about those opportunities. This is a framework that we developed based on the data that we're collecting from third party -- third parties, our first party data and real time trends, et cetera. And we're being really thoughtful and intentional about where we want to invest. So all of this work is giving us a lot more dry powder to put that in place. And obviously with tech, it's really important that tech is supporting efficient growth of the company and introducing as much automation as possible into our systems and processes, both on the recorded site as well as on the publishing site. It also helps us monetize our entire catalog. I'll give you one small example, which is, when you manage millions of copyrights, that's a lot of metadata, that's a lot of thumbnails on whole bunch of DSPs and freshness of thumbnails or motion art things of that nature help streams, which helps revenue. But it's really difficult to do that manually across such large volume of content. So we developed an AI tool that helps us update it, create new one, et cetera. So there are lots of tricks of this trade that we can deploy with technology to help drive revenue as well. And then there are other new monetization opportunities that we can lean into. So in combination, both of those -- that helps us to be more efficient. And music, we believe, has lots of opportunities, and we're much more intentional about them based on the framework that we develop.

And Kanan, it's Bryan. I would just add, as Robert said, that the charge here is that these efficiencies will add operating leverage and help us drive that flywheel. For 2024, you should expect the impacts to be fairly muted. It will take some time for us to implement and start to ramp the savings. And it's similar on the investment side, that, as Robert said, we'll continue to drive our pipeline of not M&A necessarily, but also A&R and acquisition of catalogs, as well as license of artists. And those take time as well. And those investments, I think, you will start to see in our results. And we'll continue to update on that. But the overriding benefit of this is to add confidence and flexibility to our long-term goals for healthy top line and margin expansion on a consistent basis. And so, I think you'll start to see this ramp in 2025.

Got it. Thank you.

Thank you. One moment for questions. Our next question comes from Benjamin Swinburne with Morgan Stanley. You may proceed.

Thanks. Good morning. Robert, two questions for you, one about sort of the industry and one about your company. On the industry front, over the last year, particularly when you first started, you talked a lot about better aligning incentives between streamers and labels and artists. It feels like a lot happened positively last year in 2023 in that direction, but knowing you, I'm sure you think just getting started. So just wanted to get sort of an update on where your focus areas are in terms of continuing to move that alignment forward to the betterment of the whole industry. And then on the company, there's a lot of change happening at Warner Music, a lot of technology that seems to be getting implemented, particularly in the hands of your creative executives, how is the system handling that? Any stress that has popped up, or do you think there's sort of alignment across the organization as you sort of bring technology and creativity together internally? Thanks a lot.

Thanks, Ben. So, your first question on the industry and how we're aligning. You're right, a year ago we were just talking about things and today we've got a full round of price increases by all the important DSPs and we have new artist focused models around the actual remuneration of the initial stages as you pointed out. So it's incredible to actually see the progress and what I would say in a fairly short amount of time, because these things are complex and people compete with each other. So it's not easy to orchestrate all of that. And so, I think what you will see is continued progress on that on both sides. I am very focused on this. In my opening remarks, I mentioned that this is one of our three priorities. And for me, it's personally a very, very high priority. I spent a lot of time thinking about it, a lot of time working on it with the team, and a lot of time working on it with our DSP partners. It is important, I think this is one of our very large opportunities, pricing overall is a very, very large opportunity for the industry. And we just need to do it responsibly so that we maintain growth together with our DSP partners, but at the same time, focus on ARPU and expand it. And the way I talk about it is, we should be not only hunting, but we should also be harvesting. And the industry obviously has focused on growth over the last 15 years and was only hunting, and we just need to do both of those things in different markets and be much more intentional about that. The second thing on the company, Ben, you asked about how -- obviously I've refreshed…

Thanks a lot.

Thank you. One moment for questions. Our next question comes from Michael Morris with Guggenheim Securities. You may proceed.

Thank you. Good morning, guys. Two questions, one about your content slate and one about your TikTok relationship. So on the first one, can you talk about how much of the revenue momentum that you saw, particularly in recorded music streaming, was fueled by that improved content performance as opposed to some of the underlying trends like price increases in the industry? And as we look at the fiscal second quarter, should we expect further acceleration in the rate of streaming growth given that you have this robust slate and the comparisons ease a bit? So that's my first question. And then second, on the TikTok relationship, you guys reached an agreement with TikTok. There's a very high profile dispute in the market with one of your peers having taken their content off of the service and not reaching an agreement. So I understand you can't speak about somebody else's deal, but maybe in light of what we're seeing in the market, what gives you confidence that the TikTok deal you did was right for you and your artists, and how is it contributing to your growth at this point? Thank you.

Hey, Michael, it's Brian. I'll take the first part of that just on the acceleration, particularly in recorded music streaming in the quarter. And as you know, there's a lot that goes into that, but certainly price increases contributed, and I think we called that out, but also the stronger slate, particularly year-over-year, came out of Q4 with momentum, some launches in Q1, and as we sit here today, as Robert alluded to, the slate is strong coming into Q2 and we're excited about the back half of the year. So as we've said and it has been a focus for Robert, Max, and the team is consistent pipeline of releases. And that has been showing up in the results. And so we are expecting for that to continue.

And I guess I'll take the TikTok one. So, yes, as you said, obviously, I don't know the details of their dispute. What I can tell you is, I have a pretty unique experience in this. Obviously, I haven't been on the other side, and having gone through these types of disputes where we have -- where content has come down. And so, I know exactly what both [indiscernible] are feeling. I've gone through all of those feelings multiple times. And it is not great for either side, obviously, because I think everybody wants to consummate a deal. Whatever you read in the press, don't believe it, because you don't know the definitions of any of the words that are there and that is where all the disputes begin. And the thing that I can tell you is that I know both really well and I'm confident that they will at some point find an agreement, because from the YouTube experience, music is incredibly helpful to virality of content, right? People when they're creating content, they love trends, they love music. That's what helps it significantly, makes it better if they soundtrack it. So obviously, that's valuable to a platform. And conversely, TikTok, YouTube, Reels, all of those platforms are obviously helpful to making music popular. We all love that on the music side. And user engagement is great. I spoke about it in my opening, that this is also what makes music great and different from all other forms of media. So there are mutual benefits here and it's just about what is the right fair value exchange. And sometimes you have to go through the price discovery [indiscernible] and that's okay too, because people find out exactly what it is and what it means to them. Obviously, I have an interest in them working it out. I want them to work it out. And I think they're both reasonable people that will find a compromise. But as far as our deal, I'm always very confident in the deals that we do. We don't follow other companies. We don't do carbon copies of other deals. We do our own, which is why we did the one last year. Again, I've had sort of unique experience from both sides to bridge our dissonance. It wasn't easy with TikTok. I think it was very difficult, too. But we got there. And for us, it was fair. But it was a year ago. It was also a different time. So I don't know what is driving Universal's positions. But there's any way we can help them, we will, all of us. And I'm confident they'll sort it out.

And Michael, just to add, I mean, Robert said we're obviously wishing for a collaborative resolution there. But TikTok, as you see our ad-supported revenue growth at 10% in a quarter, TikTok and the deal we executed last quarter certainly contributed to that. So we like our TikTok deal and it continues to be a driver of growth.

Thank you, Rob. Appreciate it.

Thank you. One moment for questions. Our next question comes from Benjamin Black with Deutsche Bank. You may proceed.

Great. Good morning. Thanks for taking my question. So, Robert, could you give us an update on some sort of your thoughts around, perhaps, or maybe the discussion you're having with some of your larger DSPs and their respective moves to more of an artist-centric model? It sounds like you're optimistic for some incremental positive change in near to medium terms, so it'd be great to hear your thoughts on that. And then secondly, on the publishing side of the business, it just continues to outperform. So I'd be curious if you could unpack what's going on there from operational standpoint and how sustainable or durable are the current trends there? Thank you very much.

Thank you. So, on the DSPs, so our discussions are in early stages, because we first had to develop our frameworks and how we think about the world developing from here. This is one of the reasons also I brought Carletta Higginson into the company. She's a very strong innovator of deal structures, both across publishing and recorded music and doing so in a very collaborative manner, but she knows how to drive significant change. And so, we've been we've been developing this strategy and started to talk to DSPs about it. There are multiple different ways to look at it. Once there are options that provide zero disruption to users and there are some that provide mild ones, and then there are some that provide more radical ones. And the work that we need to do is figure out how we explore them across the spectrum. And what is the best way to roll it out and how to do it in a way that continues to drive growth. Subscribers, more and more people in the [indiscernible] experience, but at the same time optimizes it. And - so none of this should be interpreted as we want to increase pricing dramatically, but then slow down the growth at the same time which is what happened to some other companies. That is not it. Again, I have an experience from the other side to drive growth and I want to maintain that. So I think being thoughtful about what also drives the DSPs is really, really important and that is how we get there. So that's one. So I joined business plans together with them to reach higher levels of growth for both of us. On the publishing side, publishing is an incredible business. It's like -- when you see it from the [indiscernible] outside, when you see it from the inside, it's truly an incredible business and it's really -- it's -- obviously there's the creative component of it, which we do incredibly well. But there's also the administration component of it, which is very tedious, very operational, very scaled and it's finding pennies all around the world and every couch around the world. It's the biggest thing you have to do. And that is also where we can deploy technology to do it better, with higher return, and more skill. And I think Guy and Carianne are dividing their duties incredibly well, an excellent team, leading Warner Chappell, and they've been very, very operational for a long time. So the results are showing up based on that. So I'm confident in their continued performance.

Great. Thank you. Very helpful.

Thank you. One moment for questions. Our next question comes from Rich Greenfield with LightShed Partners. You may proceed.

Hi, thanks for taking the question. Robert, part of the TikTok dispute, seems like it's focused around AI. And essentially not -- there's obviously the obvious problem of third-party AI content from outside of things like TikTok being put onto TikTok. But part of this dispute seems to be TikTok actually creating tools and enabling the creation of AI music that would count sort of as part of how they value or decide who gets what payments. And I'm just curious, as you think about your relationship with TikTok, could you just give us your view on sort of how you're dealing with them on AI music and sort of that broader of like, how Warner gets paid relative to the creation of AI music within their platform, if that makes sense?

So I would actually expand your question a little bit because the issue is not just TikTok. It's TikTok, YouTube, Meta…

Totally fair, totally fair.

Yes, Correct. It's a -- you're asking question that is obviously -- it's very relevant across all of the platforms, because the reason -- I can't recall which quarter it was, but I basically, at some point I spoke about my prioritization of partners for AI, starting with the platforms. Then the secondary focus would be the generative AI engines, and the third is governments and regulation in that order, because the platforms not only have the GenAI engines, but they are really the place where the content ends up. Like those platforms that I mentioned is where no matter what the engine is, the people will want the views, streams, that's where it's going to end up. So our work is focused on making sure that the rules of the road on those platforms respects copyright. And we have a lot of copyright. Universal has a lot of copyright. Sony has a lot of copyright, and many others, Disney, etc. So it's really important to have clear rules of the road, not only for the first-party content that they're creating with their tools, but even more importantly, for content that's created with other tools that end up there. And I think that's generally the forgotten thing. That is really important, so it has to govern all of that. So that is why there are squarely all of them in my site. And this is something that we have been working on. I can't share any details on this, but it is a very top area of priority. This goes into my second bucket on increase in the value of music. Like this is because copyright has to be respected. The outputs and training on our copyright has to be respected. And eventually the laws will reflect it, but the platforms will run ahead of the laws and it's important that they do the right thing and I think they will. We just need to make sure it's also aligned across all of them, not just one and not the others because then we'll just advantage them. So I can -- there's disputes between, let's say, Universal and TikTok over that, because these are fast-evolving technologies and the ground is shifting.

Thank you.

Thank you. One moment for questions. Our next question comes from Batya Levi with UBS. You may proceed.

Great, thank you. A follow-up on the streaming revenue growth side, can you talk about if you have already started to see any change in trends since Spotify implemented the policy change in the beginning of the year. And on ad-supported, how should we think about revenue growth going forward? Are there any changes in the royalty structure that could impact that trend? Thank you.

Batya, thanks. It's Brian. I think you're referring to Spotify's reallocation of roughly the $200 million over five years. Too soon to say. I think that's also going to take some time to wrap up. So we have not seen an impact with that yet. On the ad-supported side, again, you saw we broke it out versus subscription streaming, and it includes the emerging platforms like TikTok. And we continue to see favorable stabilization there in the core ad-supporter piece, excluding the emerging platforms. And so that does tie more closely to the overall marketplace where coming off I think easy weaker comps year-over-year, so we're seeing continued growth of stabilization there as well.

Got it. Thank you. one more follow-up if I may. On the pacing of margin expansion through the year, how should we think about that this year as you approach the 100-bibs expansion target? Thank you.

As we had called out earlier in last quarter, our back half, just given the release slate, stronger release slate, we will see our margin expansion tick up through the course of the year in Q3 and Q4.

Okay. Thank you.

Thank you. One moment for questions. Our next question comes from Sebastiano Petti with JP Morgan. You may proceed.

Hi, thanks for taking the question. I think Robert, just stepping back for a second, high level multi-year, I guess your thoughts on a multi-year basis, thinking about some of the initiatives you're driving. I think you talked about catalog again today seems to be a priority for you. Some of the changes or the approach to distribution for independence seems like a longer term kind of priority for you as well. How long does that take to manifest itself perhaps in the recorded music streaming metrics? Maybe just how you're thinking about the pacing of that, is there additional implementation or changes from an investment perspective that need to go into that? And then also again, Robert, another one I guess, the hunt and harvest, how are you thinking about the timeline perhaps of maybe some of the segmentation changes perhaps that may occur at the DSP level? Is that going to be bifurcated to some extent between developed markets, emerging markets, and maybe just how you're thinking about that evolving over time. Thank you.

Perfect. Thank you. So on some of the initiatives, Yes, there are quite a few. They're in flight already. So this is not like something that we're just planning. Like one of the reasons that we decided to step on the pedal and accelerate is because we already started to work on our growth levers months back, and a clear vision on what we need to accomplish. And our teams have started to gel, and this goes actually back to one of the earlier questions to how the team is gelling well together. We have work stream, growth streams across technology and the business and we're focused on those and some of them I think will start yielding results this year already. But think of all of this as continued incremental improvements. That is my goal. That every year from all of these initiatives, we just drive incremental improvement and just stay and forever. But you'll start seeing that this year. And I would say on the distribution front, as you discussed, obviously, first we're focused on efficiencies with our own supply chain. But then, really, distribution is how we externalize that to third parties. So it's the right sequencing of that. And I would say you'll start seeing the results of that over the course of, I don't know, next one to two years. Obviously, on the supply chain internally, that will start to be much faster. And then on the distribution side, it will be on the time frame that I just mentioned. On the DSP hunt and harvest process, so changes like this, if you do them responsibly, usually take nine months, a year to figure out together with partners. And so this is not something where you go and strong arm somebody. You have to work together collaboratively, do lots of analysis, figure out what the business plan is, and that is the right approach. And we've done that several times when I was on the other side. So that is how I think about it. And you have to do it with multiple partners, you have to coordinate. So that is the responsible way to approach it. And I think when you think about the different markets, it is very obvious that dual approach makes sense or discerning approach based on the properties of the market. And I'm glad that some of our partners are already seeing it that way as well, because it is in our mutual interest. So we're just going to do it right and we're going to do it together, and be very methodical and analytical about it together.

Thank you.

Thank you. One moment for questions. Our next question comes from Kutgun Maral with Evercore ISI. You may proceed.

Great. Good morning, and thanks for taking the question. I just wanted to follow up on the outlook for recorded music ad-supported trends. I think growth accelerated from low single digits two quarters ago to 7% last quarter to now 10%. So clearly encouraging trends. Bryan, you just talked about some continued stabilization in your answer to Batya's question regarding core ad trends. Can we see that improving further given some of your key partners like YouTube are seeing fairly notable improving trends. And on the emerging side, can we still expect to see some benefits from renewals with those partners later this year? Thank you.

Thanks, Kutgun, for the question. On the renewals, we don't necessarily comment on our negotiations with partners. And it's a promising growing platform with the emerging partners, and we'll continue to work with them collaboratively to grow the space. On the ad-supported, again, there, YouTube, Spotify continuing to see favorable trends there in core ad supported. And we would expect that to flow through over time. It does take time and I think we're all seeing a stabilization there, although choppy in places across the ad marketplace, but that stabilization we continue to see and based on their results we would look to see that coming in future quarters as well. Thanks for the question.

Thank you.

Thank you. I would now like to turn the call back over to Robert Kyncl for any closing remarks.

All right. Thank you. Well, what I'd like to say is that, being a year on the job, I feel we're in a very strong position. It's incredible to see the amount of work that we've done preparing ourselves for it. We have a refreshed team. We know what we need to do. We're confident to put it out there publicly and we're going after it. And all of this is truly underpinned by having the right leadership team that gels together really well and amazing teams that we've been in investing into all around or delivering results seeing us having success on the charts with great talent that we signed just a few years ago. It's incredible. So I'm very confident about our continued performance and I have great belief in the team that's here with me, so thank you very much, and we'll talk to you in the quarter.

Thank you. Thank you for your participation. You may now disconnect.