Warner Music Earnings: Weak Streaming Growth Weighs on Results and Shares

Warner Music WMG posted better-than-expected fiscal second-quarter results as revenue was in line and adjusted EBITDA was ahead of FactSet consensus. However, shares fell by over 9.5% as streaming growth decelerated at the recorded music segment. Quarterly results also suffered from the impact of economic uncertainty on ad revenue and ongoing financial currency headwinds. Despite muted growth in recorded music, we still expect the firm to benefit from deals with newer emerging platforms and price hikes at larger music streaming services. We maintain our $36 fair value estimate.

Revenue improved 5% year over year on a constant-currency basis to $1.4 billion. Recorded music improved 3% to $1.1 billion. Streaming revenue grew 5% when accounting for foreign exchange. Ad-supported streaming fell by a midteens rate for the second quarter in a row, but was offset by mid-single-digit subscription growth. The relatively weak streaming results appear to be a mix of secular industry trends and weak release slate at Warner Music over the last two quarters. Universal Music reported much stronger streaming results in the calendar first quarter with subscription revenue up 10% and ad-supported streaming revenue only down 2%. Warner Music management does expect an improvement in the second half of the fiscal year due to a more robust slate. Physical media was up 1% organically to $118 million due to strength in the U.S., but was well behind Universal Music’s 33% growth. Adjusted EBITDA margin for the recorded music segment fell 10 basis points to 21.8% due to revenue mix.

Publishing revenue jumped 15% to $257 million on a constant-currency basis with strong growth in performance and digital. Streaming growth of 18%, driven by further adoption and deal renewals, propelled 18% growth in digital to $146 million. Digital publishing was the firm’s second-largest revenue source in the quarter behind only recorded digital revenue, underscoring the continued importance of streaming to Warner.