Warner Music Earnings: Top and Bottom Line Benefit From Return to Growth for Streaming

Warner Music WMG reported better-than-expected fiscal third-quarter results as revenue and adjusted EBITDA both beat FactSet consensus. Share traded up over 7% as recorded music streaming revenue returned to growth after four straight quarters of decline. Warner benefited from not only a stronger release slate but also growth in ad-supported streaming. Like Universal, we think Warner is well-positioned to benefit from increased streaming usage and price increases at subscription services. We are maintaining our $36 fair value estimate.

Revenue grew 10% year over year on a constant currency basis to $1.6 billion. Recorded music expanded by 7% to $1.3 billion. Streaming revenue improved by 7% when accounting for foreign exchange. Ad-supported streaming rebounded after two quarters of midteens decline to low-single-digit growth while subscription growth accelerated to low-double-digit growth. The strong subscription growth should get a boost over the next year as Tidal, YouTube, and Spotify all announced price increases. With these announcements, most of the major music subscription services in the U.S. and Europe have increased prices over the last year. As this is the first round of price hikes since Spotify started charging $10 per month in 2011, we don’t expect any further increases over the two to three years. Physical media was up 24% organically to $126 million due to a strong slate including Ed Sheeran and Linkin Park. Adjusted EBITDA margin for the recorded music segment jumped by 120 basis points to 20.6% due to lower marketing spending, cost-cutting efforts, and top line expansion.

Publishing revenue increased 16% to $283 million on a constant-currency basis, driven largely by digital growth. The streaming growth of 22%, driven by further adoption and deal renewals, propelled the 26% growth in digital to $182 million. Publishing adjusted EBITDA margin improved by 280 basis points to 26.1% as the revenue growth more than offset the impact of the mix shift.