Ed Sheeran, Dua Lipa and Music Publishing Drive Warner Music Revenue Growth

Warner Music Group, home to the likes of Cardi B, Ed Sheeran and Bruno Mars, reported higher fiscal third-quarter revenue and net income on Tuesday as music publishing revenue grew 30 percent and a bounce back in some parts of the business previously affected by the COVID pandemic.

It also cited “solid underlying streaming growth despite ad-supported pressure” amid macro-economic clouds.

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Net income for the latest period ended in June amounted to $125 million, more than double the $61 million recorded in the year-ago period, the company said before the stock market open. Adjusted net income jumped 77 percent from $83 million to $147 million. The improvements came amid higher revenue and “the favorable impact of exchange rates on the company’s euro-denominated debt and a loss on extinguishment of debt in the prior-year quarter.”

Warner Music Group CEO Stephen Cooper told analysts his company was well positioned to withstand any recessionary threat. “Music is an essential need for humanity. This need has and will continue to make the music sector more resilient than many other industries,” he argued.

Cooper also pointed to strengths underpinning Warner Music Group during the latest financial quarter, including expanded opportunities in social media gaming, NFTs, vinyl record sales and a “bounce back” in touring-related revenue.

The company did face headwinds during the latest quarter, however, including the foreign exchange impact of a stronger American dollar on revenues converted from the Japanese yen and Chinese yuan, key album releases from Cardi B, Lizzo, Argentine artist Paulo Londra and other artists shifting to the fourth quarter, an ongoing suspension of Russian operations and a sharp slowdown in ad-supported streaming revenue.

CFO Eric Levin told analysts streaming revenue growth would rebound in the fourth quarter on the strength of new and delayed album releases and new agreements with online platforms, including the virtual world The Sandbox. “We are very confident in the resilience of music and the effectiveness of Warner Music’s strategy. We have a strong release schedule for Q4 and we’re looking to forward to further strong releases,” Levin said as he echoed Cooper’s earlier remarks to analysts.

Warner Music’s finance chief added subscription streaming growth, the larger share of overall music revenue compared to “contained” ad-supported streaming revenue, will continue to grow through fiscal 2023. Levin said Warner Music would continue to monitor ad-supported streaming, as emerging platforms like Web3 and the metaverse and its virtual worlds will take time to build interactive communities of fans that produce long-lasting business models.

“I would say stay tuned, and we look forward to having exciting news as our experiments get to the marketplace and yield results,” Levin argued. He also reported artist services, which does commerce and marketing for music artists, has returned to pre-pandemic revenue levels after stalling during the COVID-19 crisis as artists stopped touring.

Quarterly operating income before depreciation and amortization (OIBDA), another profitability metric, dropped 3.3 percent though, or 2.6 percent on a constant currency basis, to $233 million, “primarily as a result of revenue mix due to the growth of lower-margin artist services and expanded-rights revenue and the unfavorable impact of exchange rates, partially offset by the impact of the mark-to-market adjustment of an earn-out liability related to an acquisition.” Adjusted OIBDA for the fiscal third quarter decreased 3 percent to $255 million, or increased 2.4 percent in constant currency.

Quarterly operating income fell 10 percent to $146 million, with adjusted operating income down 8.7 percent to $168 million due to the same factors affecting OIBDA and “higher amortization expenses due to recent acquisitions and capital spending,” the company said.

The music major posted a 6.9 percent revenue increase, or 12.1 percent when assuming constant currencies, for the latest quarter to June 30 to $1.43 billion amid a big jump in music publishing, as well as growth in recorded music and digital.

In recorded music, major sellers in the fiscal third quarter included Ed Sheeran, Dua Lipa, Tatsuro Yamashita, GOT7, Jack Harlow and Gunna. Recorded music revenue in the second quarter rose 3.2 percent, or 8.5 percent in constant currency, to $1.19 billion “due to artist services and expanded-rights revenue growth … reflecting an increase in concert promotion revenue, which was disrupted by COVID in the prior-year quarter.”

Digital revenue represented 67.4 percent of total recorded music revenue in the latest quarter, down from 70.7 percent in the prior-year quarter. Physical revenue was down 5.4 percent in the latest quarter, or up 1.7 percent in constant currency, as an unfavorable impact of exchange rates was offset by higher sales “due to the success of new releases in Asia,” the firm said.

Quarterly adjusted OIBDA in the recorded music unit fell 9.1 percent, or 4.1 percent in constant currency, to $231 million. Warner Music cited the “revenue mix resulting from the growth of lower-margin artist services and expanded rights revenue and the unfavorable impact of exchange rates.”

Meanwhile, music publishing revenue jumped 29.6 percent, or 34.6 percent on a constant currency basis, to $245 million in the fiscal third quarter, “driven by growth in digital, performance and synchronization revenue, partially offset by a decline in mechanical revenue.” Digital revenue here was up 27.4 percent, or 32.1 percent in constant currency, with streaming up 29.6 percent, or 34.6 percent, due to the continued growth in streaming and the timing of new digital deals, among other factors.

Adjusted for the CRB Rate Benefit, streaming revenue increased 13.9 percent (or 18.3 percent in constant currency). Digital revenue represented 58.8 percent of total music publishing revenue versus 59.8 percent in the prior-year quarter. The slight decrease in digital revenue as a percentage of total music publishing revenue is due to an increase in performance revenue as bars, restaurants, concerts and live events continued to recover from COVID disruption. Synchronization revenue increased due to higher television and commercial licensing activity. Mechanical revenue decreased primarily due to the unfavorable impact of exchange rates.

Quarterly adjusted OIBDA in music publishing jumped 29.5 percent, or 32.6 percent in constant currency, to $57 million, with the music major lauding its “strong operating performance, partially offset by revenue mix and the unfavorable impact of exchange rates.”

In pre-market trading, Warner Music shares were down 3 percent.

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