Warner Music Group Corp

NASDAQ:WMG

Earnings Call Transcript 2019-Q4

[Operator]

Welcome to Warner Music Group's Fourth Quarter and Fiscal Year Earnings Call for the period ended September 30, 2019. At the request of Warner Music Group, today's call is being recorded for replay purposes. [Operator Instructions]

Now I would like to turn the call over to your host, Mr. James Steven, Executive Vice President and Chief Communications Officer. You may begin.

[James Steven, executive]

Good morning, everyone. Welcome to Warner Music Group's Fiscal Fourth Quarter and Year Ended September 30, 2019, Conference Call. Both our earnings press release and the Form 10-K 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'll 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 expectations. 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-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. Please note that all revenue figures and comparisons discussed today will be presented in constant currency unless otherwise noted.

And with that, I will turn it over to Steve Cooper.

[Stephen Cooper, executive]

Thanks, James. Good morning, everyone, and thanks for joining us. Our fiscal year '19 results were excellent. We grew total revenue by 15% and OIBDA by 31%. We grew revenue in all regions of the world with the U.S. up 11%; Europe, 26%; Asia, 25% and Latin America, 17%. Our streaming revenue jumped by 26% this fiscal year, surging past $2 billion for the first time. It's now well over 50% of our total revenue, compared with under 20% just 5 years ago and next to nothing a decade ago.

Recorded Music revenue grew an impressive 17%, thanks to incredible music from our artists and world-class execution by our people. Among our global top sellers were Ed Sheeran, whose album, No.6 Collaborations Project, was a monster hit, featuring an all-star cast of performance, including Bruno Mars, Stormzy and Chris Stapleton. The record debuted #1 in 16 countries, including Australia, Belgium, Sweden, Taiwan, the U.K. and the U.S.

Our powerful presence in one of the world's most popular genres, hip-hop, was showcased by outstanding music from Cardi B, Meek Mill, A Boogie wit da Hoodie and Mac Miller. We also celebrated chart toppers from the likes of Warner Music Nashville's Dan + Shay; Japanese stars Aimyon and Twice; and French Legend, Johnny Hallyday.

Atlantic Records, the leading record label in the U.S. during both '17 and '18, remains on track to claim #1 again in '19. Atlantic's ability to discover and develop the world's most exciting and original artists was shown once again with Lizzo, the breakout star of 2019, who recently received 8 Grammy nominations, the most of any artist this year. Her album, Cuz I love You, spawned 3 hit singles, including Truth Hurts, which spent 7 weeks at #1 on the Billboard Hot 100. Three of our other frontline labels have all achieved significant milestones this year and each has delivered great results.

Warner Records' new management team launched a new logo and relocated the label to a new L.A. office, all while breaking new talent, like Ali Gatie and Swae Lee, and growing the careers of big names, such as Gary Clark, Jr. and Dua Lipa. Elektra Music had an outstanding first year as a stand-alone label group in the U.S., with hits from Tones and I, The Highwomen and Twenty One Pilots. Parlophone, the longest-running label in the Warner Music Group, welcomed a new leadership duo in January. And just last month, it scored a historic trio of U.K. #1s on the singles, albums and airplay charts from groups including Stereophonics and Coldplay.

During this fiscal year, Warner Chappell's revenue was slightly down. That said, we're excited about the future of our Music Publishing business, led by our 2 dynamic partners, Guy Moot and Carianne Marshall, who took the reins earlier this year.

We're already seeing signs of gathering momentum. Our biggest songwriters in 2019 represented a new generation of talent, which is shaping the sound of pop music. This includes Taylor Parks, who has cowritten hits for Ariana Grande and Panic! At The Disco; Tay Keith, who has produced songs for Travis Scott and Lil Wayne; Carter Lang and Swae Lee, who cowrote Sunflower with Post Malone; as well as breakthrough artists, such as Tones and I, Ava Max and Lizzo. The new energy at Warner Chappell is illustrated by its publisher year -- Publisher of the Year win at MBW's awards in London. And Warner

[Audio Gap]

Publisher of the Year at the ASCAP, BMI and SESAC awards, only the second time in history one company has won all 3 in the same year.

As we look to the future, we've had a busy and productive year positioning ourselves for growth in 2020 and beyond. We continue to invest in a consistent flow of great new music. This great music, in conjunction with the expansion of our global reach and local expertise, has allowed us to grow our year-over-year revenue consistently for each of the past 7 years.

We continue to grow our presence in non-Anglo-American music. We've established a new affiliate in Peru. We're launching an urban imprint at Warner Music Japan, we've acquired Finnish hip pop label, Monsp, and Slovakian music company, Forza.

Our Arts Music division turbocharged our activities in genres currently underserved by streaming. We purchased a musical theater label, First Night, and created partnerships with kids brands, such as Holly Hobbie, Build-a-Bear and Sesame Street. We added to the scale of our Music Publishing catalog through the acquisition of the Gene Autry Music Group and entered into exclusive relationships with independent music publisher, Round Hill, and film company Annapurna Pictures. We opened up bigger possibilities for a broader universe of artists through innovative deals with entrepreneurial indies like R&R Records, Producer Entertainment Group, Q&A and Chocolate City.

We're now 5 years into the industry's recovery. There are over 280 million streaming subscribers globally, and we still see plenty of room for more growth. Emerging markets, such as Brazil, Russia, China, Indonesia and India, hold vast untapped potential, while established markets, such as the U.S. and the U.K., continue to grow nicely.

Recorded Music retail revenues is up 18% in E.U. and U.S. for the first half of calendar '19, and album equivalent sales were up 9% in U.K. through October. As confident as we are about the future of subscription streaming, we know that the only constant in our industry is change. We must always be evolving and diversifying our business if we're to capitalize on new opportunities and overcome the industry's challenges.

To meet these challenges, we experiment with and champion new technology, often leading the pack when it comes to trying new business models. For example, we were early adopters of the short-form video platform, TikTok, enjoying huge success with artists, such as Fitz and the Tantrums and Ashnikko. We were the first major to sign a deal with streaming service Audiomack and we started our own seed fund, WMG Boost, in order to support and learn from start-ups in a wide variety of spaces, such as fitness, video games, VR, AI and digital instruments.

We're also exploring new forms of music and entertainment content while developing our storytelling expertise across all aspects of an artist's career. Our film and TV division, Warner Music Entertainment, is tasked with creating compelling music-based movies, documentaries, original series, branded content and more. Projects span a range of all artists, genres and decades with notable early successes including a theatrical film from pop star Melanie Martinez, which premiered in September, and a miniseries about Aretha Franklin, which will air on Nat Geo next year as part of its Genius series.

Finally, we continue to build the breadth and depth of the services we offer our artists and songwriters, in particular, forging more direct relationships with fans. Our investments in destinations, such as youth website, UPROXX, and live music app, Songkick, are paying off with improved traffic and better monetization.

Equally, merchandising e-tailer, EMP, grew both revenue and profit in its first full year under our ownership, with plans underway to further expand its business outside of current markets and beyond its traditional musical genres. We've only just begun to benefit from the collective reach and impact of all of our consumer touch points and we expect our D2C initiatives to be significant future contributors to our business.

We're passionate champions of our recording artists and songwriters and work tirelessly to help them build long-term global careers. Our focus and dedication made for excellent results this fiscal year. We're well positioned for the future and excited for what's next. Our holiday release schedule is looking great with new music from Coldplay, Blake Shelton, Stormzy, Carlie Hanson, James Blunt, Tones and I and Ali Gatie. We also have lots of exciting releases planned for the remainder of fiscal 2020 and I look forward to updating you on our momentum.

I'll now turn the call over to Eric.

[Eric Levin, executive]

Thank you, Steve, and good morning, everyone. We had a good fourth quarter with revenue growth of 10% in constant currency. There are a few factors impacting the numbers that I'd like to call out on a constant currency basis.

First, the net impact of M&A, which was about 2 percentage points of revenue. The revenue increase includes $54 million related to the acquisition of EMP, which was partially offset by $31 million decrease related to the sale of a concert promotion business.

Second, the impact of adopting the new revenue recognition standard, ASC 606. In the fourth quarter, it had a negative $1 million impact to our total revenue. This was comprised of a negative $4 million impact on Recorded Music and $3 million positive impact on Publishing. Adjusting for these items, our total Q4 revenue would still have been strong, up 8% in constant currency.

From an OIBDA perspective, certain adjustments are also necessary to make the year-over-year comparisons more meaningful. The details are in our press release. But in the current quarter, we had $12 million of onetime expenses related to restructuring and other related costs in our L.A. consolidation versus $23 million of adjustments in the prior year quarter. Q4 adjusted OIBDA rose 13% to $107 million, and margin rose 1.6 percentage points to 8.5%. The improvement was driven by revenue growth, which was partially offset by higher product costs related to revenue mix and a negative $17 million impact related to ASC 606.

Our Recorded Music revenue in the fourth quarter was up 12%, with digital up 15%, driven by a 20% increase in streaming. Physical declined 21% due to industry trends and timing of releases. Licensing rose 4% or 12% adjusting for ASC 606 due to higher broadcast fees. Artist services and expanded rights revenue rose 40%. Adjusting for the net impact of M&A, it was still up 21% due to higher merchandising and concert promotion revenue. Recorded Music adjusted OIBDA grew 25% to $105 million, and adjusted OIBDA margin rose 1.3 percentage points to 11%, driven by revenue growth, which was partially offset by an increase in product costs related to revenue mix.

Q4 Music Publishing revenue rose 1%, but declined 1%, adjusting for the adoption of 606. Digital rose 13% or 12% adjusting for 606. Performance declined 14% with no impact from 606 due to lower market share and lost administration rights, which have a lower margin. Mechanical, which only relates to physical sales, declined 7%, or 13% adjusting for 606, due to industry trends and the same factors which impacted performance revenue. Sync rose 3% or was flat adjusting for 606.

Music Publishing OIBDA declined 24% to $44 million, driven largely by the impact of 606. OIBDA margin declined to 25.4% from 32.8%, although it was about flat adjusting for 606. Our operating cash flow in Q4 was $151 million versus $160 million in the prior year quarter. Working capital was impacted by investment in A&R and timing of collections. CapEx was $22 million, down from $34 million in the prior year quarter, due to timing of spend related to our L.A. office consolidation, which increased full year CapEx to $104 million, up from $74 million in fiscal '18.

We have started on a program to upgrade our IT and finance infrastructure, which will enable us to be more nimble and efficient. Total onetime costs of the program are currently expected to be about $100 million to be taken over the next several years with a significant portion expected in fiscal '20. Annualized run rate savings from the program should be about $30 million to $40 million once fully implemented with benefits in technology, processes and capabilities.

Fiscal -- for fiscal '20, we expect our total CapEx to be about flat, with spend on our systems upgrade, which will continue into '21, but the absence of material costs related to our L.A. office consolidation.

We ended the year with $619 million of cash. Post quarter end, in October, we paid a variable dividend of $206.25 million, bringing the full year dividend to $300 million, compared with the total of $925 million paid in fiscal '18.

A few additional notes, looking towards the remainder of fiscal 2020. Our full year 2019 variable comp expense related to our long-term incentive plan was $71 million, down from $108 million in fiscal '18. The expense in fiscal '20 will ultimately depend on market trends and our business performance. From a cash perspective, we paid $22 million in fiscal '19 related to this plan. We currently expect the total payout to be $250 million to $300 million, with the majority over 2021 -- 2020 and 2021, recognizing this amount as correlated to our valuation. Cash taxes were $63 million in fiscal '19, and given our strong performance, we've now used up our NOLs. As such, cash taxes could be about $70 million to $75 million in 2020, and go up about $15 million a year until 2022, 2023 when our foreign tax credit carryforwards will have been utilized.

We had both a great quarter and a great year, and I look forward to delivering strong results for fiscal '20, noting the first quarter had difficult comparisons. With that, operator, please open the line for questions.

[Operator]

[Operator Instructions] I now return the call back to Mr. Steve Cooper for closing remarks.

[Stephen Cooper, executive]

Thanks again, everyone, for joining us. I hope you all have a wonderful Thanksgiving and a safe and wonderful holiday season. We look forward to chatting with you in 2020. Thanks again. Bye-bye now.

[Operator]

This concludes today's conference call. Thank you for attending. You may now disconnect.