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Warner Music Posts Solid Earnings, Execs Discuss Universal IPO, Vinyl on Call

Warner Music Group WMG
Shirley Halperin

Warner Music Group posted a solid fiscal fourth quarter and strong fiscal year results in earnings reported Monday, with revenue up 22.2% (20.8% in constant currency) driven by digital revenue growth of 19% (17.5% in constant currency) across recorded music and music publishing for the quarter; and revenue up 19% (15%) and net income of $307 million (versus a $470 net loss for 2020) for the year. The quarter’s results were a strong boost from the same period last year, which were essentially flat, largely due to the pandemic, and were spurred in part by the return of live performances and retail outlets. (The fiscal quarter and year both ended on Sept. 30, 2021.)

In a Q&A taking place during the earnings call, WMG CEO Steve Cooper and controller Lou Dickler also answered questions about Universal Music’s recent IPO, the booming music market, A&R costs, the profit margin on physical product and more.

Digital revenue represented 67.3% of total revenue in the quarter, compared to 69.1% in the prior-year quarter. According to the report, the decrease in digital revenue as a percentage of total revenue is due to a partial recovery of certain COVID-impacted revenue streams in the quarter, including recorded music artist services and expanded-rights revenue which increased 71.4% (69.7% in constant currency). Physical revenue grew 21.0% (or 22.1% in constant currency) primarily due to an increasing demand for vinyl products and continued recovery from COVID disruption. Music publishing performance revenue increased 7.1% (3.4% in constant currency) and recorded music licensing revenue decreased 7.9% (9.1% in constant currency).

Operating income was $100 million compared to $88 million in the prior-year quarter. Net income was $30 million compared to $1 million in the prior-year quarter. OIBDA was $179 million, an increase from $155 million in the prior-year quarter, and OIBDA margin decreased 0.8 percentage points to 13% from 13.8% in the prior-year quarter. Adjusted operating income, Adjusted OIBDA and Adjusted net income exclude non-cash stock-based compensation and other related expenses, COVID-related expenses and expenses related to restructuring and other transformation initiatives in both the quarter and the prior-year quarter. Adjusted net income was $69 million compared to $20 million in the prior-year quarter.

For the year, total revenue increased 18.8% (or 15.4% in constant currency). The revenue increase was driven by strong digital revenue growth of 21.9% (19.1% in constant currency) across recorded music and music publishing. Digital revenue represented 66.8% of total revenue, compared to 65.0% in the prior year. Recorded music physical revenue increased 26.5% (22.3% in constant currency) and recorded music artist services and expanded-rights revenue and Music Publishing synchronization revenue also had double-digit growth.. Music publishing performance revenue decreased 14.1% (or 17.0% in constant currency). 

Operating income was $609 million, compared to an operating loss of $229 million in the prior year and operating margin was 11.5%, up from (5.1)% in the prior year. Net income was $307 million compared to a net loss of $470 million in the prior year. OIBDA was $915 million, an increase from $32 million in the prior year and OIBDA margin increased 16.6 percentage points to 17.3% from 0.7% in the prior year.

While earnings-call Q&As are often perfunctory, wonky or both, this one was unusually lively, beginning with a question about rising costs of A&R (presumably artist signings and recording budgets) and the booming music market, which has seen an infusion of billions of investment dollars in recent years.

Cooper replied that “We manage a portfolio,” noting that as artists’ careers grow and such costs can rise, that is often balanced by a decrease in promotional expenses (since the artist is already established), and also said that the company’s A&R, marketing and promotional costs have “kept the same relationship with [the company’s] revenue” as they have in the past.

He also said that Warner’s goal is “not to get caught up in the exuberance of the market — we’re careful about how we allocate capital and thoughtful about structuring deals.” Later, he also noted that “we won’t acquire market share at a loss.”

A later question asked how Warner has been affected by Universal Music’s recent IPO; Cooper and Dickler also refuted the questioner’s claim that UMG’s profit margins are “better.”

Cooper responded that UMG’s IPO is “good news” in that it has “put content in a brighter spotlight and made the financial community aware of music’s value”; indeed, WMG’s stock rose in the days following UMG’s IPO. He added that Warner execs “wish them all the success possible” with their public listing.

He and Dickler both disputed the claim that UMG’s margins are “better,” saying that an apples-to-apples comparison is misleading and that WMG’s margins “are essecually identical, with half the leverage,” referencing UMG’s status as the world’s largest music company by far.

The pair were also asked about the surge in physical-product revenue in recent years — which is primarily driven by vinyl — which were up 26% for the quarter and 21.5% for the year.

Cooper spoke broadly about the increasing popularity of vinyl, which has risen every year since 2006 and last year overtook CD sales for the first time since 1986, noting that fans enjoy the artwork, lyrics and experience of physical product. When asked about the margin on physical product versus streaming, Dickler stated that the margin on physical is some 15% — while vinyl is expensive to manufacture, clearly it is a worthwhile expense.