Warner Music Group Corp. Class A Common Stock 2026 Q3 Earnings Call

You may begin. Good afternoon, welcome to Warner Music Group's fiscal third quarter earnings call.

Please note that our earnings press release, earnings snapshot, and Form 10-Q are available on our website. On today's call, we have our CEO, Robert Kyncl, and our acting CFO, Lou Dickler, who will take you through our results and then answer your questions. Before our prepared remarks, I would like to remind you that this communication includes forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance. We plan to present certain non-GAAP results, including metrics that are adjusted for notable items during this conference call and in our earnings materials, and have provided schedules reconciling these results to our GAAP results in our earnings press release. All of these materials are posted on our website.

Also, please note that all revenue figures and comparisons discussed today will be presented in constant currency unless otherwise noted. All forward-looking statements are made as of today. We disclaim any duty to update such statements. Our expectations, beliefs, and projections are expressed in good faith. We believe that there is a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs, and projections will result or be achieved. Investors should not rely on forward-looking statements as they are subject to a variety of risks, uncertainties, and other factors that can cause actual results that differ materially from our expectations. Information concerning these risk factors is contained in our filings with the SEC. With that, I'll turn over to Robert.

Hello, everyone, thank you for joining us today. We have remained focused on execution against our strategic goals. We're proud to have delivered or over-delivered against our targets for the fifth quarter in a row. As you will have already seen in the preliminary financial results we released on Monday, this was yet another quarter of healthy top and bottom-line growth, led by a robust 12% increase in recorded music subscription streaming revenue on an adjusted basis. We also saw continued progress on our cost-savings initiatives. Our operating leverage resulted in margin improvement and strong cash flow generation in the quarter.

Highlights include a 9% increase in total revenue, rising to 11% on an adjusted basis, 15% growth in Adjusted OIBDA, which led to 100 basis points of margin expansion, and a 209% increase in operating cash flow that resulted in a roughly $100 million increase in our cash balance. These impressive results are a testament to the hard work of our global teams and a culture that celebrates human creativity while embracing technology shifts to future-proof our business. Before diving deeper into performance and strategy, I'd like to provide an update on recent management changes. As you know, Armin Zerza has stepped down from his position for personal reasons, and I'd like to thank him for the lasting contributions he has made to WMG. Lou Dickler, our Global Controller and Chief Accounting Officer, will serve as Acting CFO as we conduct a search.

Lou will walk you through the financial results later on. As part of these management changes, Tom Corson, Co-Chairman and COO of Warner Records, will step into the role of COO of Warner Music Group. Tom is one of the most dynamic, respected, and effective executives in the music business and a fierce champion of talent. Together with Aaron Bay-Schuck, he's helped architect Warner Records' resurgence and will leverage his vision, disciplined execution, and deep experience across the entire company as we continue to deliver for our artists and songwriters. I want to reiterate our commitment to our previously articulated financial targets of high single-digit consolidated revenue growth, double-digit Adjusted OIBDA growth, double-digit Adjusted EPS growth, and 50%-60% operating cash flow conversion. These targets are supported by our long-term strategy, enduring structural changes, a focused capital allocation framework, and a disciplined execution already underway.

Moving on, we continue to make great progress on our three strategic priorities, growing our share, increasing the value of music, and becoming more efficient. First, growing our share. We're focused on sustainable market share growth, and year-to-date, our overall U.S. streaming share and our U.S. new release streaming share are up. We're achieving this through intensified focus across our portfolio. We're developing the next wave of talent like Bella Kay and Stella Lefty, who recently broke into the Billboard Hot 100 top three. We're amplifying breakthrough stars like Sombra, PinkPantheress, and Alex Warren, as well as hit-makers like Kehlani and Charli XCX, who just became the first British female artist ever to land two U.K. number one albums in the same year. We're also continuing to attract new superstar talent, with Miley Cyrus recently signing to Atlantic Records and signaling that her next project is underway.

Under Elliot Grainge's leadership, Atlantic's share of new releases has ballooned, jumping to the number two spot on Billboard mid-year report, up from the number four spot in 2024, reflecting the label's creative renewal. Globally, "Dai Dai," Burna Boy's official FIFA World Cup collab with Shakira, became the number one song in the world, topping both the Spotify and Billboard global charts for multiple weeks. Meanwhile, Madonna's new album, "Confessions on a Dance Floor," debuted at number one in the U.S. and U.K., leading the way for the 17% growth in our physical revenue in the quarter. The successful release of her album is a true company effort, as she's signed to us for both recorded music and publishing. We're proud stewards of her amazing catalog, which is seeing record new audience growth, particularly with people under age 35, who now make up to 60% of her Spotify streams.

Leveraging our frontline approach to marketing our top 500 off-roster catalog artists is driving market share gains year-over-year. As I've talked about before, our teams are also expertly using proprietary AI tools across our entire catalog of over 1 million songs to detect opportunities, to optimize all of our music for streaming services, and using automated workflows to fuel long-tail performance. We're able to give all of our musical gems the care and attention they deserve, something that was humanly impossible a year ago. More specifically, we're utilizing AI to create new marketing content derived from our catalog, like motion art, lyric videos, and visualizers to drive engagement. We've built a proprietary marketing identification model that helps us prioritize opportunities to drive user engagement and revenue. A quick example. Using these tools, we were able to boost Chris Rainbow's 1979 recording, "Be Like a Woman," from just 50,000 streams in all of 2025 to over 140 million streams so far this year.

Our ability to effectively deploy end-to-end automation across our catalog represents a tremendous untapped opportunity that we will continue to build towards. We're proud of the fact that our share improvements to date have been largely organic, differentiating us from some of our peers. We're now taking steps to accelerate and fortify these gains through disciplined, patient, and return-focused M&A. For example, our joint venture with Bain Capital has deployed $650 million in catalog acquisitions and has a strong pipeline for the future. We've expanded our distribution business through the acquisition of independent music platform Revelator.

Distribution is an important part of the ecosystem. We're taking a thoughtfully balanced build-and-buy approach, which is driving profitable growth in this area. Our ADA distribution business is already large and growing and profitable. Under Alejandro Duque's leadership, we've exported the best practices from our successful business in Latin America, where distribution deals are the norm, and are applying these learnings to power our distribution across the globe. In addition, by embedding and integrating Revelator's cutting-edge tools, ADA will enhance its value proposition for artists and labels with next-generation digital distribution, rights management, royalty accounting, and real-time analytics. Our momentum in the space is attracting new partners. We recently signed a global distribution deal with GoDigital Music, an independent music group bringing over 85,000 new tracks into the ADA ecosystem. We also inked a distribution partnership with AIM Music, a newly founded Berlin-based independent label.

Our publishing business continues its winning streak, growing 11% this quarter. Recent highlights include Raye releasing a self-penned U.K. number one album, superstar songwriter Amy Allen contributing to Olivia Rodrigo's number one global smash, "Drop Dead," and Ilya contributing to Ariana Grande's Billboard Hot 100 number one single, "hate that i made you love me." We've renewed deals with Billboard's 2026 Country Hitmaker of the Year, Riley Green, and Latin Grammy-winning global Spanish superstar Quevedo, a testament to the best-in-class reputation that Warner Chappell has built over the years. Next, turning to increasing the value of music. As you know, I've always championed the deal structures that better reflect the true value of music. Just over two years ago, we took a much more proactive approach to pricing.

Fast-forward to today, we, along with our DSP partners, have evolved the industry standard to contractual wholesale rate increases occurring in a much more regular cadence, providing us, the rights holders, with greater baseline certainty. This also benefits the DSPs, which are taking the opportunity to increase subscription prices while innovating to provide new offerings to their consumers. It's truly a win for everyone. The latest proof point in this evolution is our renewed deal with Apple, which completes alignment across all of our major DSP partners around contractual PSM increases, giving us better visibility into our outlook. The success of our strategy is evidenced by the marked acceleration in our subscription streaming growth, which we expect to be resilient for the years to come.