Warner Music Group published its calendar Q1 (fiscal Q2) results today (May 8), with CEO Robert Kyncl acknowledging industry-wide challenges on the company’s earnings call.
“We recognize this is a moment of transition in the industry and for our company,” Kyncl stated on the call, while maintaining his outlook for future growth.
WMG reported company-wide revenue growth of 1.2% YoY at constant currency for calendar Q1, with recorded music revenues increasing 0.7% YoY, and music publishing revenue growing 3% YoY. Subscription streaming grew 3.2% YoY, compared to double-digit growth in the same quarter last year.
In his opening remarks, Kyncl identified specific factors behind these results: “Our results in [calendar Q1] reflect a lighter release schedule, market share pressure in China and a tough year-over-year comparison in subscription streaming, where we saw strong double-digit growth in the prior year quarter.”
Despite these figures, Kyncl outlined three reasons for optimism: “One, against the backdrop of global uncertainty, music is the most resilient art form and currently the least expensive,” he said.
“Two, the industry across music companies and DSPs is aligned behind driving growth through subscribers and price increases. And three, WMG has the right creative and commercial strategies in place, and we’re sharpening our execution as we stay focused on our long-term growth and profitability.”
The company continues to execute on its three-pronged strategy, which Kyncl described as: “Grow market share, grow the value of music and become more efficient, freeing up more capital, both for reinvestment and to drive greater shareholder return.”
Here are four key takeaways from Warner Music Group’s calendar Q1 earnings call:
Warner Music Group is intensifying its merger and acquisition activities as part of its broader strategy to grow market share. Kyncl outlined this approach during the call: “We take a twin-engine approach to growing our market share,” he said.
“Alongside organic and our investment, we’re also increasing our M&A activity. We expect to have more news about our M&A investment plans in the near future.”
No word then on the much-rumoured $1 billion+ partnership with Bain Capital to buy copyrights, but Kyncl has hinted at the types of deals he’d want to make with a $1 billion war chest. Last quarter, he announced the acquisition of the Tempo catalog and is clearly hungry for more IP.
On today’s call, Kyncl described the Tempo deal as “a prime example of [WMG’s] M&A strategy in action, reinvesting cost savings into high-quality essential music with high margins.”
He also noted that Tempo “will provide us with an evergreen catalog” and brings “robust margins and cash flow generation”.
“As we replicate the strategy across our other labels and geographies, we will augment our growth with M&A. In short, we’re putting more wood behind fewer arrows to turbocharge our core business.”
Robert Kyncl
A likely focus on music rights M&A was already becoming clear over the past couple of years following Kyncl’s unwinding of certain investments made under WMG’s previous leadership, for example exiting ‘owned and operated’ media platforms like Uproxx, HipHopDX, and other media assets.
Kyncl also suggested in March that WMG is unlikely to buy a distribution company, noting during a Morgan Stanley an interview that he has “looked at all distribution companies over the last 18 months, just being a responsible steward…and what I can tell you is that we’re not willing to grow [the market share of this area of the business] at all costs”.
The question then is, what might Kyncl be willing to splash cash on? Superstar artist catalogs could be one possibility. Red Hot Chili Peppers are reported to be close to striking a big-money deal with WMG.
Kyncl has also been bullish on emerging markets, especially those with high growth potential like India, where the company has made a number of investments in recent years.
“As we replicate the strategy across our other labels and geographies, we will augment our growth with M&A. In short, we’re putting more wood behind fewer arrows to turbocharge our core business,” said Kyncl.
But beyond India, a catalog deal in China could make a lot of sense, given, by its own admission, WMG’s loss of market share there. WMG hasn’t announced a big deal in China since 2014, when it bought Gold Typhoon.
Addressing China on today’s call with analysts, Kyncl said the market “is a big opportunity, obviously.”
He also revealed that Warner will “have a new Head of Asia starting in two months, who will play a pivotal role in helping us drive growth around the largest markets in Asia”.
Calendar Q1 was Bryan Castellani’s last quarter as CFO at WMG, with Armin Zerza succeeding him this past Monday (May 5).
Zerza was previously CFO at Activision Blizzard and is widely credited with playing a key role in the company’s $69 billion acquisition by Microsoft.
Earlier this year, WMG said it was expecting “high single-digit growth” in subscription streaming for this year and on a multi-year basis.
That won’t happen this year after all, Kyncl conceded on the company’s earnings call today, and signaled that new CFO Armin Zerza is influencing how the company sees its financial outlook: “As Armin settles into his new role, we’ll provide updates on our business and capital allocation priorities on the next earnings call,” said Kyncl.
Additionally, following calendar Q1’s results, and looking to the remainder of the company’s fiscal year, Kyncl closed his opening remarks with a candid observation: “We expect the challenges we experienced this quarter to persist for the remainder of the fiscal year, resulting in lower subscription streaming growth than previously expected.”
One thing seems clear from Kyncl’s statements on the call, however: WMG will continue to focus on freeing up more money to reinvest.
Kyncl explained: “As we make organizational changes to optimize our performance, while yielding benefits from tech upgrades, we are driving a virtuous cycle, so we can invest more for the benefit of artists, songwriters, and shareholders”.
He added: “Since 2023, we’ve announced plans to achieve a cumulative total of more than $300 million in annualized cost savings, the majority of which is being reinvested in music and technology.
“This is an ongoing process that has become part of our DNA, and we will continue to look for ways to drive even more efficiencies. By doing so, we will free up additional resources to pursue the most attractive opportunities through a disciplined capital allocation plan.”
A primary beneficiary of those reinvestments has been A&R spending.
Kyncl confirmed: “As I told you on our last earnings call, we saw our A&R spend increased double digits last year, and it will increase by even more this year. We’re starting to see signs of our strategy paying off.”
He added: “I’d like to highlight that our creative engine is firing on all cylinders. Our share on the Spotify Global charts has grown very consistently and by nearly 50% since mid-2023…with Q3 on trend to be our highest chart share in two years.
“In addition, right now, WMG’s recording artists hold five of the Top Ten tracks on the Billboard Global chart, including the Top 3, with Alex Warren, Bruno Mars, and Rosé.”
According to Kyncl, “the creative engine of the company is humming”.
“There are different ways to succeed in the market. And I am actually very pleased that we don’t have just a singular approach to our business.”
Robert Kyncl
During the Q&A, Kyncl specifically highlighted WMG’s success in the US, where Elliot Grainge took over as Atlantic Music Group CEO last year, while Warner Records, under the leadership of Tom Corson [Co-Chairman and COO] and Aaron Bay-Schuck [Co-Chairman and CEO], has hit its stride.
Commenting on the two flagship WMG labels during the Q&A with Kyncl, JP Morgan analyst Kiscada Hastings noted that “it seems like [Warner] has two different philosophies at [its] flagship labels now”.
Hastings added: “With Aaron at Warner, who seems to have more of a long-form and deliberate approach to artist management, and Elliot Grange at Atlantic, who seems to be pretty good at quickly identifying and blowing up artists.”
Responding to Hastings’ observation, Kyncl said: “As a company, we have to walk and chew gum at the same time. There are different ways to succeed in the market. And I am actually very pleased that we don’t have just a singular approach to our business, that we have talent that has different strengths.”
He added: “You’ve highlighted some of those, but it doesn’t mean, for instance, in case of Elliot that is all inclusively focused on quick hit. Elliot is also very much focused on artist development.
“And we are working much, much closer together as a leadership team across all the operators so that people also are sharing insights, not just competing with each other, but actually sharing insights together so that as a whole, as a company, we do better. This is exactly the kind of mix of executives we need.”
Kyncl also highlighted how Warner Music Group is taking an active role in addressing artificial intelligence regulation.
On today’s earnings call, he discussed his recent advocacy efforts: “I was in D.C. last month to support a revised No Fakes Act, the same legislation that I testified for at a Senate hearing last April.”
The bill aims to provide “protections against unauthorized deepfakes while setting up a licensing framework paving the way for new revenue streams and more trustworthy products,” Kyncl explained.
“By supporting legislation that creates clear licensing frameworks, Warner aims to both protect creators and enable new revenue opportunities in the rapidly evolving AI landscape.”
Robert Kyncl
This is “not only a bipartisan bill that we have gathered support across music, entertainment and tech industries, including MPA, SAG-AFTRA, YouTube, OpenAI and others,” but it “also could serve as a blueprint for the treatment of name, image, likeness and voice rights around the world.”
Kyncl emphasized that protecting artists and songwriters is fundamental to growing the value of music: “Growing the value of music starts with protecting our artists and songwriters. And today, nowhere is that more crucial than with AI.”
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