Earnings Reports
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Warner Music Group’s stock was up around 3% Wednesday (Aug. 7) as investors optimistically received its fiscal third-quarter earnings report, which showed that streaming revenue continues to grow for the third-largest major music company.
On a call discussing the company’s earnings, Warner Music Group (WMG) CEO Robert Kyncl answered questions and shared his perspective on Spotify’s bundling controversy; discussed what WMG is doing to get more mileage out of its catalog; and shared a broad update on the company’s previously-announced $200 million cost savings/reinvestment plan — while remaining mum on the more recent executive restructure that’s been reverberating through the music industry since last week.
See below for three major takeaways from the call.
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Bundling is not inherently bad
Overall streaming revenue was up 5% for Warner this quarter, with recorded music streaming revenue up 8.7% — reflecting growth in subscription revenue of 7%. While that was welcome news to investors, the subject of Spotify’s contentious decision to bundle music and audiobooks — allowing them to qualify for the lower mechanical royalty rate reserved for bundles under the Copyright Royalty Board’s (CRB) Phonorecords IV agreement — did not go unmentioned. But in his opening remarks and later, during a Q&A period with analysts, Kyncl said the company derives its streaming earnings from a diversity of partners and appeared to tamp down talk of the controversy that erupted over the bundling policy.
“I know that investor attention has recently been focused on the dynamics between labels and DSPs, with some speculating that we’re adversaries playing a zero-sum game. That’s simply not the case,” Kyncl said. “We’re actively engaged with our partners around ways to drive growth for all of us. Streaming dynamics remain healthy … with plenty of headroom for subscriber growth in both established and emerging markets … across multiple partners. Also, price optimization and improvements in the royalty models will provide ongoing opportunities for additional growth.”
Kyncl went on to note that bundling, which could result in lower payments to songwriters, has been used in other industries, like TV, for the purpose of market expansion. “The job of wholesalers like the music companies is to ensure that the sanctity of our pricing are in line with each other. You can expect us to pursue that strategy,” Kyncl said. “As it relates to CRB, I don’t see it as something that will persist in the long term.”
Radio silence on executive restructuring
WMG executives did not directly discuss the internal restructuring plans made public last week, which led longtime co-leader of Atlantic Records and Atlantic Music Group chairman/CEO Julie Greenwald to announce she was stepping down on Tuesday (Aug. 6). During his opening remarks, Kyncl did highlight the “commercially and creatively … successful” partnership between WMG and 10K Projects — whose CEO/founder Elliot Grainge has been picked to succeed Greenwald — by noting English-Cypriot singer-songwriter Artemas’ single “I Like The Way You Kiss Me,” which reached No. 1 on Billboard‘s Global Excl. U.S. chart in April.
However, Kyncl did share details about a restructuring plan he mentioned on WMG’s last earnings call, which included selling the entertainment websites Uproxx and HipHopDX — with the overall goal to increase investment in music, technology and new skill sets and deliver $200 million in savings by the end of fiscal 2025.
“The majority of changes have already been implemented,” Kyncl said. “We are laying a strong foundation to accelerate our progress and yield greater value over time. We made improvements to our royalty systems and the tools used to identify unclaimed revenue, we overhauled our global supply chain, unlocking our ability to scale our third-party distribution business, and we’ve transformed our proprietary tools that identify fan trends while building new ways to engage with super fans.”
Catalog optimization is a major priority
One area where Kyncl is investing in technology is through a project he says is aimed at increasing the “performance of catalog…across all of our DSPs.”
Speaking of recent spikes in streaming for artists in Warner’s “deep” catalog — like Joni Mitchell and Tracy Chapman — as well as “shallow” catalog like Ed Sheeran, Kyncl said generating continued digital success stories for those acts is a top priority.
“We have a project on this across our technology and business teams to move down the entire catalog and make sure it’s properly optimized for streaming and on every large DSP,” he said on the call. “All of this augments our marketing campaigns against catalog which we have done in the past and continue to do and we’re applying more and more frontline focus on catalog.”
The music business is seeing the results of doing more with less.
The slew of earnings reports over the past two weeks have revealed that companies achieved better margins and greater profitability — even in cases with lower revenue or disappointing growth in some areas. And nearly all these companies share one important thing in common that boosted their latest earnings results: layoffs.
Universal Music Group’s share price fell 24% the day after its second-quarter earnings showed recorded music subscription growth had slowed to 6.9%, down from 12.5% in the prior-year period. Investors are interested in music companies because streaming has transformed the industry, bringing growth in the wake of falling CD and download sales and opening new markets around the world. So, when the industry’s most attractive revenue stream stumbles, investors are going to take notice.
But despite the hiccup that wreaked havoc on its share price, many of UMG’s financial metrics showed the company is headed in the right direction. Revenue grew a hearty 9.6%; adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose 11.3%; and adjusted earnings per share rose to 0.44 euros ($0.47), up from 0.42 euros ($0.45) a year earlier. Setting aside the main reason investors want to own UMG shares — the global music subscription business — UMG’s earnings had a lot of positives, some of which undoubtedly had to do with the layoffs that occurred in February. According to the company’s 2023 investor presentation, that round of job cuts is expected to save 75 million euros ($81 million) in 2024 alone.
In other earnings news, Spotify — which cut roughly a quarter of its global workforce in three rounds of layoffs in 2023 — had an incredible turnaround in the second quarter, posting an operating income of 266 million euros ($286 million) — a 513 million-euro ($552 million) improvement from the second quarter of 2023. Despite the much smaller staff, the streaming giant’s revenue grew 19.8% to 3.81 billion euros ($4.1 billion) while its gross margin rose to 29.2% from 24.1%. Spotify’s share price jumped 12% after the release and had almost increased another 2% through Thursday (Aug. 1).
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Spotify’s latest layoffs in December, which affected 17% of its staff, attracted criticism —“Spotify is screwed,” Wired proclaimed — but they made a large and immediate impact. In the second quarter, total operating expenses dropped 16.5% as every component had a double-digit decline (general and administrative expenses were down 23%, sales and marketing fell 16.3%, and research and development expenses dropped 16.5%). When Spotify announced the staff cuts, CEO Daniel Ek admitted the scope of the layoffs would feel “surprisingly large” but was steadfast in the need to become “relentlessly resourceful.” At the time, he said, “We still have too many people dedicated to supporting work and even doing work around the work rather than contributing to opportunities with real impact.”
Recent staff cuts also appear to have benefitted SiriusXM, which laid off 8% of its workforce in 2023 and another 3% of its headcount in February. Though the satellite radio giant’s share price fell 6.4% on Thursday after the company announced it lost 173,000 satellite radio subscribers and 41,000 Pandora subscribers in the second quarter, net profit grew 1.9% to $316 million even as revenue fell 3% to $2.18 billion. Thanks to its cost-cutting efforts, general and administrative expenses dropped 31% and engineering, design and development costs fell 14.5%.
Not all companies reporting earnings over the last two weeks had to lay off workers to improve their margins. French music streamer Deezer, citing improved cost control and margin improvement through more favorable terms with record labels, improved its first-half adjusted EBITDA by 8 million euros ($8.7 million). The company also raised its target for full-year adjusted EBITDA by 5 million euros ($5.4 million).
Reservoir Media, which reported earnings on Wednesday (July 31), similarly improved operational efficiency without layoffs. The company’s share price fell by 8.8% in the two days after it announced quarterly recorded music revenue had dropped 7%, but the company’s publishing revenue improved 15% overall revenue grew 8% and adjusted EBITDA soared 25%. While investors found reason for concern, CEO Golnar Khosrowshahi struck an optimistic note on Wednesday’s earnings call. “We’re off to a good start in fiscal 2025 and remain on track to again hit our annual targets,” she said.
In addition to cost-cutting, streaming companies are also enjoying the benefits of price increases. Not only did Spotify raise its subscriber count by 26 million in the previous 12 months, but price increases pushed average revenue per user (ARPU) up 8.2%, or 0.35 euros ($0.38), per month. Even though Deezer didn’t gain subscribers over the previous year, its ARPU rose 6% for direct subscribers and 3.5% for subscribers gained through partnerships due to price increases it instituted last year.
Of course, music companies have their share of challenges that cost-cutting can’t solve. Streamers can’t raise prices too frequently and are dealing with ongoing sluggishness in ad-supported streaming. Record labels need to re-set expectations for their subscription businesses and continue to see sluggish ad-supported streaming revenue. And music publishers are getting a pay cut from Spotify’s decision to treat its premium service like a bundle in the U.S. Considering all this, their decisions to cut costs and focus on operational efficiency couldn’t have come at a better time.
Believe turned in strong double-digit revenue growth in the first half of 2024, helped by its 2023 acquisition of Sentric Music Group but hobbled slightly by weak ad-supported streaming revenues. Revenue grew 14.1% to 474.1 million euros ($512.7) and adjusted earnings before interest, taxes, deprecation and amortization (EBITDA) improved 29.3% to 31.3 million euros ($33.8 million), the company announced Thursday (Aug. 1).
“Despite persistent market headwinds in some of our key territories, Believe continued to generate solid profitable growth during the semester,” CEO Denis Ladegaillerie said in a statement. “We pursued our strategic roadmap to build the best artist development company in the music industry, while finalizing the restructuring of our capital structure providing us with greater financial flexibility and partners who can accelerate our profitable growth story.”
The Paris-based company lowered its expectations for full-year revenue, however. Because Believe will lose the year-over-year growth benefits of streaming price increases and is “cautious” about ad-supported streaming, the company lowered its guidance for organic revenue growth to 12% from 18%. That said, it increased its guidance for full-year adjusted EBITDA margin to greater than 6.5% from the previous 6.5% figure.
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Thursday’s earnings release was Believe’s first since a consortium including Ladegaillerie acquired nearly all of the company’s shares through a tender offer that ended June 21. The consortium, which includes funds managed by TCV and EQT X, now owns 96.02% of share capital and 94.87% of voting rights. Believe continues to have a small number of minority shareholders and its stock still trades on the Euronext Paris exchange, but due to the small float, the company will release only mid-year and full-year earnings results and no longer release quarterly results.
First-half revenue grew 17.9% to 78.4 million euros ($84.8 million) in France, Believe’s home and largest market, where it claimed to have 40% of the top local singles and 30% of the top local albums during the period. Revenue dropped 1.2% to 53.5 million euros ($57.9 million) in Germany, its second-largest market. In Europe excluding France and Germany, revenue jumped 24.7% to 121.9 million euros ($131.8 million).
The Americas grew 21.8% to 73.9 million euros ($79.9 million), helped in the second quarter by the reallocation of most of Sentric Music Group’s revenues to the U.S. Believe acquired Sentric, a Liverpool-based music publishing company, in 2023 from Utopia Music. Asia/Oceana/Africa grew just 3.7% to 116.3 million euros ($125.8 million); while revenue was “slightly up” in India, it fell in some Southeast Asian markets that are heavily based on ad-supported streaming.
Believe’s Premium Solutions division, which includes its publishing, label and artist services businesses, grew revenue 13.5% to 440.9 million euros ($476.8 million) in the first half of the year. Most of that improvement came from organic growth, while Sentric accounted for 2.3 percentage points of growth. Revenue at the Automated Solutions segment, which includes digital distributor TuneCore, increased 23.4% to 33.2 million euros ($35.9 million).
Live Nation continued on its post-pandemic growth trajectory with another record-setting second quarter. Revenue grew 7% to a record $6.02 billion, and adjusted operating income (AOI) improved 21% to $716 million due to a 61% gain in the concerts segment’s AOI, the company announced Tuesday (July 30).
Despite occasional news about canceled tours and festivals, Live Nation’s results suggest fan demand is strong enough to meet the supply of artists on tour. Cancellation rates for North American concerts are tracking lower than they were in 2023, according to the company, and Live Nation hosted 39 million fans globally in the quarter, up 5% from the prior-year quarter. As tours shifted from stadiums to smaller venues, the total number of concerts increased 23.2% in North America and rose 19.9% overall.
Through the first six months of 2024, total revenue grew 12% to $9.8 billion and AOI improved 19% to $1.08 billion. The number of events grew 16.9% to 25,881, while the number of fans at Live Nation concerts and festivals rose 10.4% to 61.8 million.
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“We continue to see strong demand globally, with a growing variety of shows attracting both casual and diehard fans who are buying tickets at all price points, which speaks to the unique experience only live concerts can provide,” CEO Michael Rapino said in a statement.
With fewer stadium shows than the prior year, Live Nation is leaning on arenas and high-margin amphitheaters in 2024. Arena attendance was up by double digits globally, theater and club attendance rose 15% and amphitheater attendance was up about 40%. Amphitheaters in particular are good for Live Nation’s bottom line. Almost a third of Live Nation’s amphitheaters have been updated since 2022 — including with new bar designs and upgraded VIP boxes — and have produced an aggregate return of over 30%, according to the company.
In the ticketing division, revenue was up 3% to $731 million and AOI was flat at $293 million, and the quarter ranked among the company’s top five in terms of transacted and reported ticket sales. Ticketmaster sold 78 million fee-bearing tickets in the quarter, about the same as the prior-year quarter. Fee-bearing gross transaction value was even at $8.4 billion.
Sponsorships and advertising revenue grew 3% to $312 million and AOI rose 10% to $223 million. Live Nation secured a multi-year, multi-festival partnership with Coca-Cola and an extension with video streaming service Hulu to be the official streaming destination for Bonnaroo, Lollapalooza and Austin City Limits.
The latest numbers show the extent to which Live Nation has grown since the touring business returned from pandemic-era shutdowns in 2020 and 2021. Second-quarter revenue was 36% greater than the $4.43 billion the company saw in the second quarter of 2022, and AOI was 49% above Live Nation’s $480 million of AOI in the same period in 2022. What’s more, the business is considerably larger than it was before the pandemic. Second-quarter revenue and AOI were up 90.8% and 124.4%, respectively, from the same quarter in 2019.
Topline results for Q2:
Total revenue of $6.02 billion, up 7%, driven by an 8% increase in concert revenue.
Adjusted operating income of $716.2 million, up 21%, driven by a 61% increase in concerts AOI.
Total attendance rose 4.9% to 38.9 million.
The number of concerts rose 19.9% to 14,678.
French music streamer Deezer reported a nearly 15% increase in revenue for the first half of 2024 and raised a key financial target for the year, according to earnings results filed on Tuesday (July 30).
The Paris-based company generated 268 million euros ($287 million) for the six months ending June 30 — up $35 million from the year-ago period — as average revenue per user (ARPU) improved for both direct subscribers and business-to-business subscribers by 6% and 3.5%, respectively.
Deezer executives called it a strong financial performance and said the company is on track to become profitable, as it was free-cash-flow positive in the first half of the year, with around 65 million euros ($70.4 million) at the end of June.
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“These positive results are [due to] strong performance throughout Deezer,” Stu Bergen, interim CEO of Deezer, said in a statement. “Deezer occupies a distinctive position within the music ecosystem,supporting artists, songwriters and rightsholders alike through initiatives focused on transparency, fairness, and innovation.”
Available in more than 180 markets, Deezer’s roughly 10.5 million subscribers was flat from the prior quarter.
The company raised its target for adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to a 10 million euro deficit, compared to Deezer’s previous expected deficit of 15 million euros for 2024, and reiterated its target to grow revenue by 10% for the year. Deezer generated 485 million euros ($525 million) of revenue in 2023, a 7.4% increase from 2022.
Last week, Deezer announced that ex-Walmart executive and consumer goods company founder Alexis Lanternier would become the streaming company’s next CEO, taking over from Bergen, who served as interim CEO after the previous CEO, Jeronimo Folgueira, left the company in February following a nearly three-year run in the role.
Lanternier co-founded and developed Branded, a digital-first consumer goods company, and was previously an executive vp at Walmart Canada.
Universal Music Group (UMG) got a boost from physical sales in the second quarter, but the conversation during Wednesday’s earnings call was mostly focused on streaming. Subscriptions, which accounted for more than half of total recorded music revenue, were a key factor in the company’s 8.7% revenue growth in the quarter. Even so, UMG’s streaming business is not firing on all cylinders. Ad-supported streaming continues to show weakness and UMG revealed that Facebook no longer licenses its premium videos.
CEO Lucian Grainge said the industry has entered “the next phase” of the streaming and subscription business, one characterized by collaboration with streaming companies to produce new products and allow artificial intelligence to allow artists to sing their music in different languages. “The amount of work, win-win dialogue [and] creative discussions that are going on between us is really extremely exciting,” he said.
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Here’s what else you should know about UMG’s most recent quarterly earnings and what was said on the call.
Streaming is growing — unevenly
Although UMG’s recorded music subscription revenue improved 6.5%, not all subscription platforms are performing equally well. CFO Boyd Muir cited a “slowdown in subscriber growth at certain platforms” while noting that Spotify, YouTube “and many regional and local platforms” continue to show healthy growth. Generally, UMG is optimistic about the overall marketplace’s ability to find new subscribers. Michael Nash, executive vp of digital strategy, said UMG’s consumer research has identified 180 million consumers from the top 19 territories “that will form the next wave of subscription adoption,” even taking into account price increases.
“Other” streaming revenue dropped 3.9% in the quarter, which Muir attributed to a decline in ad-supported streaming and some platform-specific issues (see Facebook below). UMG warned of weak ad-supported streaming last quarter, and Muir said UMG needs to see “broad-based improvement across multiple partners and geographies over a longer timeframe before we’re ready to adopt a less cautious view.”
Meta is no longer licensing UMG premium videos for Facebook
Another reason for a slowdown in non-subscription streaming revenue was Facebook’s departure from music videos. “Meta had previously offered previous music videos on Facebook,” Muir explained. “This product offering was less popular with Facebook’s user base than other music products, and as a result, Meta is no longer licensing premium music videos from us. As of May of this year, Meta is now focusing instead on other areas involving music content, and we are working together to expand these areas as part of a multifaceted renewal.” Showing premium videos is not the only aspect of Meta’s licensing agreements with labels, however. As Billboard has previously reported, Meta reached a licensing deal with UMG in 2017 that allowed UMG’s repertoire in user-uploaded videos on Facebook, Instagram and Messenger. And a deal reached in 2020 allowed users to add songs from UMG’s catalog to videos on Facebook’s gaming platform.
The noncontroversial Spotify bundle controversy
After Spotify began offering both music and audiobooks, the company asserted it can pay a discounted “bundle” royalty rate to publishers and songwriters for premium streams. When asked about the audiobook bundle controversy on Tuesday, Spotify CEO Daniel Ek described it as a not-unusual disagreement between counterparts. “That’s the nature of all supplier and distributor relationships,” he said during the company’s earnings call. UMG had a similarly unsensational response when asked about the bundle controversy. Rather than feeling cheated out of royalties, Muir said UMG “[is] confident our revenue participation reflects the value our artists and our music is bringing to their platform.”
UMG invested 519 million euros ($562 million) in the first half of 2024
Three transactions accounted for 450 million euros ($487 million) of investments in the first half of the year: a majority stake in Nigerian label Maven Global; an investment in Complex; and a $240 million investment in Chord Music Partners, a joint venture of KKR and Dundee Partners that owns over 60,000 copyrights. UMG spent 96 million euros ($104 million) on catalog acquisitions in the half-year, including 75 million euros ($81 million) that had been sitting in an escrow account.
Taylor Swift’s The Tortured Poets Department, strong gains in publishing revenue and a jump in merchandise sales propelled Universal Music Group (UMG) to solid revenue growth in the second quarter of 2024.
Despite a fall in ad-supported streaming that hampered streaming revenue gains, UMG’s overall revenue rose 8.7% to 2.93 billion euros ($3.16 billion at the quarter’s average exchange rate), the company announced Wednesday (July 24). Earnings before interest, taxes, depreciation and amortization (EBITDA) rose 17.4% to 580 million euros ($624 million) and EBITDA margin improved 1.1 percentage points to 19.8%. EBITDA was helped by revenue growth and cost savings from layoffs announced earlier in the year, though those benefits were partially offset by an increase in lower-margin revenue from merchandise and physical sales.
In the recorded music segment, revenue grew 5.8% to 2.2 billion euros ($2.37 billion). Subscription revenue improved 6.5% to 1.14 billion euros ($1.23 billion) while other streaming revenue dropped 4.2% to 343 million euros ($369 million). Overall, streaming revenue fell 4.2% due to slower growth at ad-supported platforms and the timing of deal renewals.
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Subscription growth was slowed by two factors, CFO Boyd Muir said during the earnings call. First, price increases in 2023 provided a boost a year ago. Second, while Spotify, YouTube Music and “many regional and local platforms” have continued to show strong growth, some other subscription services “have been less successful in driving global adoption.”
Physical revenue rose 9.5% to 357 million euros ($384 million) thanks to releases by Swift and Billie Eilish, which helped offset a tough comparison against a strong quarter in Japan for physical sales in the prior year, said Muir. Licensing and other revenue climbed 18% to 315 million euros ($339 million). Download revenue fell 21.3% but amounted to just 48 million euros ($52 million).
At Universal Music Publishing Group, revenue rose 10.1% to 511 million euros ($550 million). Digital revenue rose 17.8% to 311 million euros ($335 million) and accounted for most of publishing’s gains. Performance royalties improved 3.1% to 100 million euros ($108 million), while synch royalties grew 1.7% to 61 million euros ($66 million) and mechanical royalties fell 10.3% to 26 million euros ($28 million).
Of the 15 different songs to reach No. 1 on the Billboard Hot 100 this year, UMPG had songwriters n 13 of them, which CEO Lucian Grainge called “an extraordinary achievement.”
Merchandising revenue jumped 44.6% to 227 million euros ($244 million) due to higher direct-to-consumer sales and gains in touring merchandise sales. Muir credited tours by Olivia Rodrigo, The Rolling Stones, Nicki Minaj, 21 Savage and Morgan Wallen for that growth.
Topline results for Q2:
Total revenue of 2.93 billion euros ($3.16 billion), up 8.7%.
EBITDA: 580 million euros ($624 million), up 14.9%.
Recorded music revenue of 2.2 billion euros ($2.37 billion), up 6.8%.
Recorded music subscription revenue of 1.14 billion euros ($1.23 billion), up 6.5%.
Recorded music other streaming revenue of 343 million euros ($369 million), down 4.2%.
Publishing revenues of 511 million euros ($550 million), up 10.1%.
Merchandising revenue of 227 million euros ($244 million), up 44.6%.
It’s earnings season once again, with Spotify the first music company set to report second-quarter earnings on July 23. Which is fitting — not only is the Swedish streaming giant the most valuable publicly traded music company by market capitalization at $60.4 billion, it’s also an important bellwether for much of the music business.
Music subscriptions will continue to be the driving force for Spotify, other streaming companies, record labels and music publishers. Subscriber gains mean more money flowing through to creators and rights owners, while rising prices are benefitting streaming services and could flow down to creators and rights owners, too — although analysts have mixed opinions on whether price increases have those downstream benefits or simply pad streaming companies’ bottom lines.
Another giant of the music business, Universal Music Group, is up next, with its earnings slated to drop the day after Spotify’s (July 24). Believe and SiriusXM earnings are due the following week (both Aug. 1), while Warner Music Group is set for the week after (Aug. 8). Follow Billboard‘s list of upcoming industry events for more earnings release dates once they’re announced.
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On the touring front, for all the hullabaloo about weakened consumer demand and canceled tours and festivals, the live music market is likely to have produced another banner quarter. While everyone’s eyes will be on Live Nation to gauge the health of the business, the concert giant has yet to announce its earnings release date; CTS Eventim, which will report earnings on Aug. 22, is the only promoter to have announced so far.
Here’s what to expect in the upcoming slew of earnings reports.
Subscription gains — but without churn?
The recorded music market is having its cake and eating it, too: subscription prices are increasing, and customers don’t appear to be leaving in droves. Music subscription services are benefiting from price increases — namely Spotify in 2023, with some additional price hikes in 2024 — with little churn. Higher prices and continued subscriber growth will lead to gains in total revenue and average revenue per user (ARPU); Spotify expected 245 million subscribers at the end of June, which would be 6 million net additions in the quarter and a whopping 25 million greater than the 220 million subscribers it had on June 30, 2023. Watch out for any indications that higher prices negatively affected Spotify’s churn rate, however — although the company does not release specific churn data, it will likely warn investors if subscriber losses were greater than expected and are headed in the wrong direction. So far, however, any consumer complaints have been more bark than bite. In another good sign, streaming activity has been healthy, too. U.S. audio streams — by count, not by dollar value — were up 8.1% in the second quarter, according to Luminate.
Payoffs from price increases and cost-cutting
Spotify expects to have operating income of 250 million euros ($273 million) in the second quarter, which would be a nearly 500-million-euro ($545 million) improvement over the 247-million-euro operating loss it saw in the second quarter of 2023. If attained, that big shift from loss to profitcould be chalked up to r Spotify’s decisions in 2023 to raise prices and drastically cut back on its headcount (including a 17% workforce reduction in December). Those moves quickly produced benefits: Gross margin increased to 27.6% in the first quarter of 2024, up from 26.7% in the fourth quarter of 2023 and 25.2% in the first quarter of 2023. The reduced expenses from layoffs also helped operating margin improve to 4.6% in the first quarter — a big gain from the -2% and -5.1% margins it saw in the fourth and first quarters of 2023, respectively. Additionally, Spotify’s second-quarter guidance of 3.8 billion euros ($4.1 billion) of total revenue would be a 19.6% improvement from the prior-year period revenue of 3.18 billion euros ($3.47 billion). ARPU also increased 7% in the first quarter and is likely to improve again in the second quarter.
More advertising weakness
Music subscription services chose a good time to raise prices. Weak advertising revenues have been a recurring theme since music and tech companies began warning investors in 2022, and continued unsteadiness in the advertising market will impact ad-supported revenues for streaming companies, record labels and music publishers. On July 1, Guggenheim lowered its estimate for Universal Music Group’s recorded music ad-supported streaming growth to 10.6% from 11.1% “to better reflect more challenging comparisons” against the prior quarter, as Guggenheim analysts wrote in an investor note. However, that revision was still above the first-quarter estimate of 10.3% due to UMG’s renewal of a licensing agreement with TikTok in May.
Continued strong demand for live music
For all that has been written about fans’ lessened appetites for live music, public companies appear to be in stable conditions. In its first-quarter earnings report in May, Live Nation said that through mid-April, the percentage of large shows booked was up double-digits while concert margins had improved, too. “We are seeing no weakness,” said president/CFO Joe Berchtold, adding that artists who toured in both 2023 and 2024 are seeing better sell-through this year. And with fewer stadium shows in 2024 than 2023, Live Nation will have more concerts in the more profitable arenas and amphitheaters that it owns or operates. Analysts are still bullish on Live Nation in the wake of the Department of Justice’s antitrust lawsuit against the company filed in May: As of this week, 18 analysts have “buy” recommendations on Live Nation, four have “hold” recommendations and only one has a “sell” on the stock. CTS Eventim expects another solid year, too. In April, the German promoter and ticketing company reiterated comments contained in its 2023 annual report that predicted “further moderate sales growth” in 2024.
The Taylor Swift Effect
UMG’s financials will get a boost from Taylor Swift’s latest album, The Tortured Poets Department. Released on April 17 through UMG’s Republic Records, Tortured Poets has remained at No. 1 on the Billboard 200 album chart for 11 consecutive weeks since its April 19 release, with sales boosted in subsequent weeks by additional variants that helped it maintain chart position. In the most recent chart week, for example, two CD versions of the album that fans initially ordered through Swift’s webstore in early June were shipped. In all, Swift’s latest album topped the Billboard 200 for 9 of the second quarter’s 13 weeks and sold 2.4 million units in the U.S., with about 2 million of those coming from CD and LP sales, according to Luminate. That led Republic Records’ U.S. market share to reach an industry-leading 15.72%, up from 12.42% in the first quarter – greater than Warner Music Group. UMG’s total market share in the quarter was 36.37%, up from 34.48% in the prior-year quarter and well ahead of its 33.9% share in the first quarter of 2024.
Subscription gains and a string of acquisitions helped Reservoir Media’s fiscal year revenue grow 18% to $144.9 million, beating the company’s guidance from February of $140 million to $142 million, the company announced Thursday (May 30). Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in the period ended March 31 climbed 20% to $55.6 million, topping guidance of $53 million to $55 million.
Organic growth, which strips out the impact of acquisitions made during the year, was 14% for the full year. Among the company’s catalog purchases during the fiscal year were four members of R&B group The Spinners, Latin music artist Rudy Perez, hip-hop producer Mannie Fresh and 2Pac collaborator Big D Evans. Reservoir also invested in Egyptian company RE Media and Saudi Arabian hip-hop label Mashrex.
Among Reservoir Media’s signings during the year were songwriter Steph Carter, who shares a co-writing credit on Sabrina Carpenter’s “Espresso,” and Rob Ragosta, co-writer of “Need a Favor” by Jelly Roll. The company also landed publishing deals with rock band Kings of Leon and rock legend Joe Walsh.
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The company said it expects fiscal 2025 revenue to be between $148 million and $152 million, which would reflect 3.5% growth at the midpoint. Adjusted EBITDA is expected to be $58 million to $61 million, which implies 7.0% growth at the midpoint.
“Our financial guidance reflects our confidence in growth driving organic growth with our value enhancement efforts and capitalizing on the projected growth of the music industry,” CEO Golnar Khosrowshahi said during Thursday’s earnings call. Some of that organic growth will come from additional price increases at music subscription services, she added: “Looking forward, we are poised to benefit from what we believe will become a regular cadence of price increases across streaming platforms.”
Shares of Reservoir Media jumped 15.5% to $9.00 Thursday morning before falling to $8.26, up 6.1%, by late afternoon.
Elsewhere, full-year publishing revenue at the company rose 15% to $96.2 million. Digital revenue grew 17% to $51.6 million and performance royalties jumped 36% to $22.8 million. CFO Jim Heindlmeyer said the “improvement is largely derived from higher royalty rates and price increases at multiple music streaming services, as well as the expansion of our catalog through M&A.”
Recorded music revenue grew 22% to $42.4 million in the full fiscal year largely due to price increases at subscription services and the timing of Reservoir Media’s release schedule, Heindlmeyer said. While physical revenue climbed 49% to $8.9 million, digital revenue rose 17% to $26.9 million and accounted for the majority of recorded music’s $7.6 million in revenue growth.
Fiscal fourth-quarter revenue grew 12% to $39.1 million. Operating income grew just 2%, however, to $8.8 million, while adjusted EBITDA improved 6% to $16.0 million.
Reservoir’s pipeline of potential acquisitions dropped by 50% to $1 billion, down from $2 billion at the end of December. Khosrowshahi downplayed the change, however, noting the company is seeing “ample deal flow” despite “a couple of larger deals” having moved. Liquidity at the end of the year of $132.3 million from $18.1 million of cash and $114.2 million available in a revolving credit facility “gives us the capital to fund our strategic objectives,” said Heindlmeyer. Added Khosrowshahi, “I’m generally quite optimistic about what that pipeline looks like.”
At the beginning of 2024, the always-changing music business is going through rapid transformation unlike anything in the last decade. How music companies organize themselves is changing. How royalties are calculated and paid is changing. How companies engage with fans is changing. And investors have different expectations of public companies — more focus on margins, less obsession with growth.
Music companies’ earnings results for the fourth quarter of 2023 will provide insights into how companies have performed and, more importantly, what they expect to do in the future. Only one company, SiriusXM, has announced to date. Next week’s earnings releases include Spotify (Tuesday, Feb. 6), Reservoir Media (Wednesday, Feb. 7) and Warner Music Group (Thursday, Feb. 8). Universal Music Group (UMG) announces earnings on Feb. 28. Here are some things to watch for in upcoming earnings calls.
The scope of layoffs
In October, UMG executives primed investors for cost-cutting measures that would improve margins and allow for investments in growth opportunities. The result would be hundreds of layoffs, according to a Jan. 12 Bloomberg report. On Thursday, UMG revealed some details of a bi-coastal label group restructuring. But what’s missing, so far, are details on the number of layoffs and the cost savings UMG expects to get from a restructuring. UMG’s fourth-quarter earnings release on Feb. 28 will be an opportunity for analysts to ask the company to give an update on its restructuring plans. As Billboard noted last week, the music industry is seeing widespread layoffs despite continued streaming growth. Warner Music Group (WMG), Downtown Music Holdings and BMG cut jobs in 2023. Digital music companies have shrunk their head counts, too: Spotify, Amazon Music, SoundCloud, Tidal and Bandcamp went through downsizings of various sizes.
More troubles in TikTok-land?
When UMG failed to renew its licensing contract with TikTok, it made licensing to the social video platform a major topic of conversation for upcoming earnings calls. Analysts and investors should want to know how a company’s negotiations with TikTok are proceeding and whether to expect an interruption if the two sides cannot reach an agreement. TikTok and WMG reached an agreement in July 2023, but investors may want progress reports from other public companies — Reservoir Media, Believe, Sony Music — about their licensing talks.
UMG’s decision is not without precedent: In 2008 and 2009, WMG pulled its catalog from YouTube for nine months while the two companies’ licensing negotiations were at an impasse. In 2011, Google launched an audio music streaming service, Music Beta by Google, without licenses from both Sony Music Entertainment (SME) and WMG. When Google added MP3s to its Google Music service later that year, the SME and WMG catalogs were initially absent.
The direct financial hit to UMG will be minimal since TikTok accounts for 1% of the company’s revenue, UMG stated in an open letter about the licensing talks. But because TikTok is an important promotional vehicle and a popular place to discover music, the indirect financial hit is more substantial. Investors always want to know about direct dollar impacts of a company’s moves, and they should want to understand the downsides of leaving a hit-making social platform.
How much have price increases mattered?
Music subscription prices didn’t budge for over a decade before succumbing to change in 2022 and 2023. The big fish was Spotify, which finally raised prices in the United States and other major markets in July. A higher price creates a multiplier effect on top of existing subscriber growth and will augment what would have otherwise been record quarterly revenues. The gains should come without an increase in churn: Spotify CFO Paul Vogel said during an Oct. 27 earnings call that Spotify didn’t lose any subscribers in the third quarter due to the price increase.
For record labels and publishers, a 10% price increase atop year-over-year subscriber growth stands to accelerate revenue growth. Guggenheim analysts said in a recent note to investors that they expect price increases at Spotify, YouTube and Deezer to raise UMG’s subscription revenue growth to 14.8% in the fourth quarter from 13.0% in the third quarter.
The state of the advertising business
While the subscription market has been strong, the ad-supported side of the business has struggled to keep chase. Through the first three quarters, Spotify’s ad-supported streaming revenue increased 14.9% year over year. That’s better than the 11.4% improvement in subscription revenue but well below the 22.2% and 62.1% gains in ad revenue in full-year 2022 and 2021, respectively.
Broadcast radio has fared even worse. Companies such as iHeartMedia, Cumulus Media and Audacy have blamed a slowdown in national broadcast advertising on some disappointing earnings in recent quarters.
SiriusXM provided the latest clue about broadcast advertising. “SiriusXM’s advertising revenue remains challenged,” CFO Tom Barry said during Thursday’s earnings call, “which we believe is a product of a tough broadcast advertising market.” Elsewhere, however, SiriusXM’s digital advertising improved versus 2022: Pandora had “strong growth” in its podcasting and programmatic advertising businesses, added Barry.
Some positive news in recent days shows advertising — perhaps not for broadcast businesses — is rebounding. U.S. ad spending in November was up 25% year over year, according to MediaRadar, an advertising intelligence company. The number of advertisers declined 8%, however, suggesting existing advertisers were ramping up spending.
More good news came from major ad-driven tech companies. Google’s advertising revenue in the fourth quarter increased 11% from the prior-year period, the company announced Wednesday, up from year-over-year improvements of 3.3% and 9.5% in the second and third quarters, respectively. Meta’s revenue grew 25% and its ad impressions rose 28% in the fourth quarter, the company announced Thursday.
The mission to reach superfans
Major music companies are suddenly taking a greater interest in serving superfans, those heavy-spending consumers that drive the concert and merchandise businesses but have less effect in a world of flat-rate, all-you-can-eat music subscription services. The 80-20 rule says 80% of a company’s business comes from 20% of its consumers. With music streaming, however, a $10.99-per-month service doesn’t capture a superfan’s willingness to pay more for additional value. Spotify hinted that “superfan clubs” were in the works in an announcement about the Digital Markets Act in the European Union. UMG CEO Lucian Grainge’s letter to staff in January said the company will focus on “strengthening the artist-fan relationship through superfan experiences and products.”
The problem isn’t that consumers won’t pay more money to engage with their favorite artists. The problem is no platforms have found a winning formula. Numerous previous attempts to court superfans fizzled. Drip, a platform that allowed artists to provide fans with music and other items for a recurring monthly fee, lasted from 2011 to 2016 (it relaunched a Kickstarter in 2017 but shut down in 2018). PledgeMusic shut down in 2019 amidst financial problems and allegations of improprieties. Most recently, startups’ attempts to use Web3 technologies to build superfan communities ran headfirst into the public’s sudden distrust of cryptocurrency and disinterest in NFTs. Given Spotify’s market size and resources, though, the company could make a real impact.