Universal Music Group (AS:UMG) has reported a robust third quarter with a 5% increase in revenue and an 8% rise in EBITDA, as announced during their earnings call on October 29, 2024. Sir Lucian Grainge, Chairman and CEO, underscored the implementation of strategic initiatives including the "streaming 2.0" approach, a partnership with YouTube Music, and collaborations for ethical AI in music. The company also highlighted its expansion through acquisitions and the success of artists like Sabrina Carpenter and Post Malone.
Key Takeaways
- UMG's Q3 2023 revenue rose to €2.87 billion, a 5% increase year-over-year, while EBITDA increased by 8% to €621 million.
- The company's Recorded Music revenue grew by 6%, with significant contributions from artists such as Sabrina Carpenter and Post Malone.
- Subscription revenue increased by 8.2%, with a projection of 8% to 10% CAGR through 2028.
- UMG announced collaborations with YouTube Music and partnerships in AI music development with Clay and Roland.
- Acquisitions of PS Play It Again Sam, Outdustry, and RS Group (LON:RS1R) aim to bolster UMG's global market presence.
- A new division has been launched in China's Greater Bay Area, and a standalone Global Talent Services division has been established for Latin artists.
- Boyd Muir has been promoted to Chief Operating Officer while still performing CFO duties until a successor is appointed.
Company Outlook
- UMG is targeting a subscription growth of 8% to 10% CAGR through 2028.
- Investments of €350 million to €400 million are planned for the second half of 2024.
- Restructuring charges are expected to reach €150 million to €160 million.
Bearish Highlights
- The company anticipates a deceleration in subscription streaming growth to mid-single digits.
- Challenges in the home fitness market have impacted subscription revenue growth.
- A cautious outlook on ad-supported revenue due to slow advertising revenue growth among major partners.
Bullish Highlights
- UMG aims for a 10% CAGR in EBITDA by 2028, driven by revenue growth and operational efficiencies.
- The company is focusing on enhancing relationships with digital service providers and optimizing monetization strategies.
- There is potential for pricing adjustments to capture content value amid rising inflation.
Misses
- No significant misses were reported during the earnings call.
Q&A Highlights
- Michael Nash emphasized the importance of strengthening relationships with partners and fans.
- UMG is exploring adjustments in wholesale pricing to better capture content value.
- The company is committed to innovation and collaboration in the evolving streaming landscape.
Universal Music Group (ticker: UMG) continues to build on its strategic initiatives to enhance its position in the global market and support its artists. With a focus on streaming innovation, ethical AI practices, and market expansion, UMG is poised for continued growth and operational success.
Full transcript - None (UMGNF) Q3 2024:
Operator: Good evening, and welcome to Universal Music Group's Third Quarter Earnings Call for the period ended September 30, 2024. My name is Nadia, and I'll be your conference operator today. Your speakers for today's call will be Sir Lucian Grange, Chairman and CEO of Universal Music Group; and Boyd Muir, Executive Vice President CFO and President of Operations. They will be joined during Q&A by Michael Nash, Executive Vice President and Chief Digital Officer. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions]. As a reminder this call is being recorded. Please also let me remind you that management's commentary and responses to questions on today's call may include forward-looking statements, which by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may vary in a material way. For a discussion of some of the factors that could cause actual results to differ from expected results. Please see the Risk Factors section of UMG's 2023 Annual Report, which is available on the Investor Relations page of UMG's website at universalmusic.com. Management's commentary will also refer to non-IFRS measures on today's call. Reconciliations are available in the press release on the Investor Relations page of UMG's website. Thank you. Sir Lucian, you may begin your conference.
Sir Lucian Grainge: Thank you. Hello to everyone. Thank you once again for joining us. I'm pleased to report that Universal Music Group achieved yet another quarter solid growth in revenue as well as EBITDA. Let me give you some color on our operational performance this quarter. I'll begin today with the progress we're already making on strategic initiatives we outlined in our Capital Markets Day last month at Abbey Road Studios. First, our Artist-Centric strategy, which we view is crucially important for the Streaming business to grow and flourish. Artist-Centric is a key pillar of our work to evolve the underlying business model for streaming, what we call streaming 2.0. Take, for example, YouTube Music, which has become one of the fastest growing players in subscription. On the strength of the very successful partnership we've built together, YouTube has recently committed to us that they will elevate priority given to surfacing premium artist content and enhancing content categorization measures to provide users with an improved experience and a more mutually rewarding connection between artist and fan. YouTube is also making the platform more attractive in numerous other ways. For example, offering user friendly ways for fans to create and share collaborative playlists and their own artwork, including AI generated images. And elements of this gamification in the form of badges for super fans are being introduced to create special identities for fans. We've been advocating such approaches with all of our platform partners, because social enhancements like gamification lead to higher fan engagement and greater consumption of our artist's music. YouTube Music is now the first DSP to offer these features. We've also extended the application of our Artist-Centric philosophy to the AI arena in several important ways as we seek to drive innovation, while future proofing the music ecosystem. For example, we've just announced our strategic collaboration with Clay. This adds to our ever expanding portfolio of tech entrepreneurs who are working with us to set generative AI on a course that is deeply aligned with the rights and interests of the entire creative community. KLAY is developing a new ethical model for AI generated music that works with the music industry and its creators to grow musical creativity and human artistry. We've also elevated our advocacy of artist interests through initiatives like our partnership with Roland on the principles of music creation with AI. More than 90 companies and organizations have signed on to the principles and we've lent our support to the recently published statement of AI training, which has now been signed by over 25,000 people. Finally, as you might have had the chance to hear, if you joined this call early enough to listen to the whole music, we're also delighted to have collaborated with SoundLabs and Brenda Lee to bring you the iconic holiday season classic, Rockin Around The Christmas Tree to Spanish language audiences in their native language for the first time ever through this very inventive use of responsible and responsibly trained AI technology. And this will be we anticipate just the first of many, many developments. It's another way, another example of the many ways that AI can be employed to serve the creative community as long as we steadfastly adhere to Artist-Centric tenants. As we discussed at our Capital Markets Day, streaming 2.0 will build on the enormous scale we've achieved in the first stage of streaming and create a sustainable and growing Artist-Centric ecosystem that improves monetization and delivers great experiences to fans. One key to this will be improving customer acquisition strategies to drive greater conversion from free to paid and then from paid onto the SUPERFAN theater. This will enable us to segment and capture customer value at higher than ever levels. Achieving this requires a highly nuanced approach adapting to the specific nature of each platform, taking into account the platform's individual product roadmaps, its distinct subscriber basis and regional variations, particularly in fast growing developing regions. Our work to Usher in Streaming 2.0 is underway, and I look forward to providing you further updates in the weeks and months ahead. I'd like to say a few words now about our global acquisition and partnership strategy and the recent moves we've made in Belgium, the U.K., India, Thailand, Latin America as well as China. When you look at our history, it's clear that Universal Music Group is an organization that was built over time by entrepreneurial visionaries. That is we're constantly looking for entrepreneurs with unique visions with whom we can partner and when we see a company that's a strong strategic and cultural fit, we summon our resources, expertise, and nimbleness and our networks relationships to acquire it. When we bring the acquired company into the fold, we don't make it disappear. We allow it to retain its identity, keeping its unique and thriving -- keeping itself unique and thriving within the UMG family. This is exactly the case with our recent completion of the acquisition of PS Play It Again Sam, which builds upon our 2021 agreement when we formed a strategic global alliance with them and acquired a minority stake in them. PS was first launched in Brussels over 40 years ago and operates two core businesses. The first, the PS label group is home to the group's own and associated record labels. The label group will remain a standalone unit within UMG and continue to be run by PS Co-Founder, Kenny Gates. Some of its in house labels are placed against Sam, Harmonia Mundi, Domaines, SpineFarm. Their partner labels include ATO, Heavenly, Mute and Transgressive. PIAS' second core business is Integral, a label services division, which provides physical and digital distribution services to more than a 100 independent label partners around the world. Integral is joining forces with our Virgin Music Group. The combined teams will provide independent entrepreneurs with premium services and access to a best-in-class international distribution network. This aspect of the acquisition enhances our ability to support the independent artist and label community globally, while dramatically increasing our presence in this growing segment of the industry. Speaking of Virgin Music Group, just last week, it was announced the acquisition of Outdustry, a leading artist and label services business used by many of the world's premier independent labels and artists to market their releases into China and India. Outdustry has deep relationships with local labels and DSPs in China and we're extremely happy to be bringing that expertise to UMG. In addition to its marketing services business, Outdustry also has a music publishing business and a record label, both focused on signing local artists in China and India. As we previewed at the Capital Markets Day, our strategy includes expanding our reach into high potential markets. Our acquisition of Outdustry provides another instance of that strategy in action. Yet another example of our commitment to grow in the high potential markets is RS Group, the second largest recorded music catalog in Thailand. Last week, we acquired a 70% -- sorry, last year, we acquired a 70% stake in RS Group and it was just last month that we acquired the remaining 30%. RS Group has a catalog of more than 10,000 unique master recordings and 6,000 copyrights, publishing rights and licenses dating back more than four decades. Also in September, we announced the launch of a new label division, Universal Music China Greater Bay Area, that once again makes UMG a true pioneer. The launch marks the first time a major music company has established a division in China's Greater Bay Area, the world's most populous urban area, which includes Hong Kong and Macau. The region's rich cultural fabric, woven from a diverse range of dialects, predominantly in Cantonese has significantly shaped both local and Asian pop culture. The new label will be headquartered in Shenzhen. I've yet another significant development in China to highlight. The wrap of China is a nationwide TV hit that first aired in 2017. The show has attracted billions of views in the Greater China region and launched the careers of multiple local rappers. As recently announced, Universal Music Greater China has entered into a strategic agreement with ITE, a leading provider of online entertainment video services in China under which we will exclusively distribute worldwide new releases from the signed contestants of The Wrap of China as well as those from its roster of over 20 breakthrough Chinese rap act. This partnership will further enhance those artists' international presence and facilitate collaborations between Chinese hip hop artists and top international talent. We love that kind of cross pollination creatively. It should create groundbreaking musical works that carry cultural signatures and expressions, again, something that we love to do and facilitate. Still another high growth region of particular focus for us is, as you know, Latin America. We recently announced that our Global Talent Services Business or GTS will become a standalone division company within UMG. GTS is a full service company for Latin artists, spanning management, booking, live events, promotion, and brand partnerships. By separating from our local labels, GTS will now be able to also offer its services to artists outside of the UMG family. We also spoke extensively at Capital Markets Day about another strategic initiative to engage super bands with new products and experiences to unlock the economic potential of their fandom. With our partners as well as our own, we are creating and monetizing new ways to meet super fans demand for products, experiences and access that will bring those fans closer to the artist that they love. I'd like to share a recent example. Olivia Rodrigo debuted her concert special, Olivia Rodrigo: GUTS World Tour on Netflix (NASDAQ:NFLX) on October the 29th. The program was recorded as part of her 95 date sold out arena tour with Interscope's team both producing and executive producing the Netflix special. I'll now finish up by briefly focusing on the lifeblood of our company, our artists and some of their recent achievements. Sabrina Carpenter, who we're so proud of, her album Short n' Sweet debuted at number one in 15 markets, including Canada, France and Spain. It then went on to be number one for six weeks in Australia and four in the U.S. And Sabrina's latest single Taste has spent nine weeks at number one in Australia and the U.K. In addition, in the U.K., she's been number one on the singles chart for a record breaking 21 weeks, including seven weeks for Espresso and five for Please. In addition to the nine weeks, I just mentioned for taste, breaking the record for the most weeks in a year for any artist, since 1953. Post Malone's new album F-1 Trillion debuted at number one in the U.S., U.K., Australia, Canada, Norway, New Zealand and the Netherlands. His single with Morgan Wallen, I Had Some Help had already spent six non-consecutive weeks at number one in the U.S. Then Lady Gaga and Bruno Mars single, Die With A Smile has spent eight consecutive weeks atop the Billboard Global 200 and Global Excl. US Charts, marking the longest uninterrupted run atop each tally this year. Ireland records in the U.S. continues its remarkable winning streak with emerging artist, Gigi Perez, who currently has the number one song in the U.K. alongside Stablemates Sabrina, as I mentioned earlier, as well as Chappell Roan and other phenomenon we're immensely proud of. In the U.K., alternative rock band Snow Patrol captured their first number one album in 18 years with their recent release, The Forest is the Path. And Backbone, a collaboration between Chase & Status and Stormzy has spent multiple weeks at number one on the U.K. singles chart. Lastly, in Japan, Mrs. Green Apple (NASDAQ:AAPL)'s Lilac spent two weeks at number one on the Billboard top 100 and 18 consecutive weeks on the Billboard Japanese streaming songs job. Let me close my remarks with one final note, before I'll hand things over to Boyd. Actually, it's probably more than a note, more than a sort of a headline and actually one that this time concerns Boyd himself. I'm delighted to announce that effective immediately, Boyd has been promoted to Chief Operating Officer at UMG Worldwide. As a result, we will be commencing a search for a new CFO. Of course, until a new CFO is appointed, Boyd will continue to perform in that role for us as well. Boyd's done an outstanding job leading the company's financial and operational functions through a period of unprecedented growth and change. Over the last 20, 25 years, how the industry has changed, including our successful spin off and IPO as well as our first three years as a standalone public company. Now with our strategic plan ahead of us that we outlined at Abbey Road at the Capital Markets Day. It's important that Boyd be able to fully focus on overseeing some of our key operational and strategic functions as COO. You're able to somehow technologically be great if you could join me in congratulating Boyd on his much deserved promotion. And on that, Boyd, let me turn it over to you to walk through our financials for this quarter. Thank you for that.
Boyd Muir: Lucian, thank you very much. What you said is a lot to me. And I'm really looking forward to this new role and all of the exciting opportunities that are ahead of us. Anyway, now turning to the results for Q3. I'm pleased to be reporting on another quarter of solid revenue and adjusted EBITDA growth at UMG. As usual, all of the growth figures that I will discuss today will be in constant currency. But before I go through our results, let me remind you that the third quarter of 2023 included an accrual for a catch-up payment from certain DSPs relating to the Copyright Royalty Board, phone records three ruling and music publishing. This prior year accrual amounted to €53 million in revenue and €11 million in EBITDA. In my remarks, I will present figures both including and adjusting for this item. And all of the details are also laid out in today's press release. Please note that there are no onetime items in the third quarter of 2024. UMG's revenue for the quarter of €2.87 billion grew 5% year-over-year and grew 7%, excluding last year's CRB accrual. Adjusted EBITDA of €621 million grew 8% or 10% excluding last year's CRB accrual. Recorded Music revenue grew 6% in the quarter, with strong performances from Tara Swift, Sabrina Carpenter, Billy Ellish, Chaperon, post malona amongst many, many others. Within recorded music, subscription revenue grew 8.2% for the quarter. Our third quarter results are reflective of similar underlying trends to those we saw in the second quarter. As we have previously highlighted, some level of quarter-to-quarter variability is to be expected due to factors such as deal structures, the timing of reporting from DSPs and other smaller items that can be difficult to predict. There are also items that cause differences in our quarterly reporting compared to our peers. For example, we include revenue from fitness partners in our subscription revenue. This quarter's result reflects ongoing challenges in the home fitness subscription market. It's also worth mentioning the loss of a distributed level that was acquired by our competitor. Collectively, these items negatively impact our subscription growth by just over 1 percentage point this quarter. As we outlined at our Capital Markets Day presentation, we see an opportunity to accelerate subscription growth through premium tier revenue enhancement, the development of super premium tiers and the conversion of more free users to subscription. We therefore continue to affirm or subscription growth guidance in the 8% to 10% CAGR range through 2028. As a reminder, in the fourth quarter of 2024, we will anniversary Spotify (NYSE:SPOT)'s 2023 price increases. Now turning to ad support and streaming. Revenue was largely flat against the prior year quarter. Performance was mixed across partners as the digital ad market is reacting to an evolving consumer preferences around short form and social content as consumption and engagement has shifted faster than the monetization. The rate of growth did improve sequentially as compared to the prior quarter. largely thanks to our new Meta deal. As we look ahead, we remain confident about the mid- to long-term growth drivers stemming from the advertising economies, digital migration and we anticipate sequential gains in the quarters and years ahead. Physical revenue was also in line with the prior year quarter, a good result considering the difficult comp. As expected, we faced a very difficult comp with lower CD sales in Japan. But this was offset by the strong growth in vinyl sales, particularly in the U.S. We saw strong vinyl sales from Taylor Swift, Stray Kids, Sabrina Carpented and Chapel Road. License and other revenue grew 22% and thanks to increases in synchronization income, particularly from increased ad things in the U.S. and in Europe as well as greater live and brands income. Download and other revenue declined 29% as this revenue continues to shift to streaming. Moving on to Music Publishing. Revenue grew 2% in the quarter and 15% when excluding the prior year CRB catch-up approval. Within Music Publishing, digital revenue grew 23% and excluding last year's onetime items, driven by the growth of streaming and subscription, particularly in the U.S., U.K. and China. Synchronization income also saw a healthy growth from ads and trailers in the U.S. and syncs with several luxury brands in France. In Merchandising and other, revenue increased 4%, again despite the difficult comp. Direct-to-consumer sales grew with improvements across Europe, while touring March revenue also increased, thanks to higher activity in the U.S. with tourists from artists, including SlipKnot, Imagine Dragons, Nikki Minaj, Blink-182 and Post Malone. As I mentioned at the beginning of my remarks, adjusted EBITDA of EUR 621 million grew 8% or 10% when excluding last year's CRB accrual. Adjusted EBITDA margin expanded by 0.5 percentage points to 21.6%, helped by cost savings from our previously announced realignment plan as well as lower A&R and marketing costs. These savings were partially offset by the negative margin impact from repertoire mix, physical product mix and license and other revenue mix where a higher share came from lower margin activities in the quarter. Moving on to share-based compensation expense. The total was EUR 65 million in the quarter compared to EUR 103 million during the third quarter of 2023. We expect our share-based compensation for 2024 to be between EUR 290 million and EUR 300 million as this number can fluctuate based on performance. The third quarter also included EUR 30 million of restructuring charges, which are excluded from both EBITDA and adjusted EBITDA. While we originally anticipated 2024 would only include Phase 1 of our previously announced organizational realignment plan, which carries EUR 125 million in restructuring charges we have accelerated the start of Phase 2 of the plan. We now expect restructuring charges for 2024 to come in between EUR 150 million and EUR 160 million while most of the incremental cost savings will begin in 2025. The total size and timing for implementation of the full plan has not changed. From a cash flow perspective, we estimate EUR 65 million of cash restructuring charges in the second half of 2024. Additionally, aside from closing the transactions that Lucian discussed today, there are several other investments, which we expect to make in the second half of 2024. Collectively, we expect an outflow of EUR 350 million to EUR 400 million in investment spending in the second half of 2024. At the same time, as I've said previously, we continue to expect net advances in the second half of the year to be significantly lower than the first half of 2024. As we shared at our Capital Markets Day, we continue to see enormous opportunity for value creation, both for our artists and for the company. as we advance our artist-centric and superfan initiatives and work to further capture the value of the engagement being driven by our unparalleled roster of artists and songwriters. Thank you. Lucian, Michael and I will now take your questions. So operator, could you please open the line for Q&A.
Operator: Of course. [Operator Instructions]. Our first question goes to William Packer of BNP Paribas (OTC:BNPQY). William, please go ahead.
William Packer: Hi, there. Many thanks for taking my question. Two for me, please. Firstly, after the recent volatility, the market particularly focused on subscription streaming trends and to those acceleration is obviously very welcome. Could you help us think through the dynamics in Q4? In the prepared remarks, you referred to the cycling of the 2023 Spotify price increase. On the other hand, we recently heard the YouTube premium had some price increases. Is it reasonable to think that subscription streaming should decelerate towards mid-single digits? And then secondly, the dust has now settled on the CMD, which is very interesting. One of the key focus of the event was the outlook for mid-single-digit ARPU growth. Could you think -- could you help figure through the tools you have to help drive that? Specifically, would you consider using the wholesale price lever with DSP partners or perhaps incentives for pricing? And in that scenario, should we think of the contract renewal, would DSP partner with the key cassette? Thank you.
Boyd Muir: Will or should I say, William. Will, Boyd, just on your first question, we don't give guidance specific guidance on a quarterly basis. I'm just mentioning -- I did just mention or remind people about the Spotify 2023 price increases and inverse out in Q4. So I think that's all I really have to say in relation to Q4 in terms of subscription. And thank you for your positive comment on Capital Markets Day. Yes, we did, I mean, we talked about in terms of that guidance that we gave of 8% to 10% through CAGR through 2028. We said that approximately half of that was going to come from improvement and half it would actually just come from, we just don't move, but we come from subscriber growth. And I think it is important to actually say that as a content owner, we are on -- we are in a position to be able to charge for that content at a price of -- to reflect the value that the content is actually delivering. So that is a very important part of our consideration as we go forward in terms of the ARPU improvement. It's not just in that regard, the ARPU improvement. I mean we're looking at a number of different aspects. I'll point out as well. We've talked about premium tiering. We do believe there's a significant opportunity for premium tiering in the marketplace. Again, I think as we mentioned at Capital Markets Day, we believe that there's 20% of subscribers -- today's subscribers who are prepared to pay a higher price for a premium tier. So I think that's an important part of ARPU improvement in the more evolved market. There's also the question which -- or the point I would make, which goes back a little bit to ARPU centric, one shall we see, which was -- there's definitely an opportunity to improve the quality of hygiene on the platforms where we continue to see various activity that really does need to be addressed. So there's a combination of a number of things that we're actually working on it with all of the platforms, which will contribute towards that 50% of the ARPU, of the subscription revenue CAGR growth coming from ARPU improvement.
Michael Nash: To Boyd's very comprehensive response to your question, Will. I just -- I picked up one specific thing I wanted to follow-up on. You asked about the YouTube premium price increases. And I just wanted to directly respond. While we obviously can't get into specifics, we do benefit from YouTube premium price increases, which apply to the bundled music product. We're always working to maximize participation of our artists and songwriters in the value that their content creates on our partners' platforms. We have an excellent ongoing strategic dialogue with YouTube and all of our partners about our rates with respect to their product portfolio. So I just wanted to specifically pick up on that point. I think that Boyd did a very good job of covering the rest of your two questions.
Operator: Thank you. The next question goes to Adam Berlin of UBS. Adam, please go ahead.
Adam Berlin: Yes, hi. Good evening. Thanks for taking the questions. Two from me, if I can. The first one is, can you just give us a bit more detailed explanation on why ad streaming isn't growing. It seems like YouTube and Spotify, two of your biggest partners are growing nicely. You've signed new deals with TikTok and Facebook (NASDAQ:META). Can you just -- are there any one-offs in there that help explain it? And should we -- and should those one-offs come out in Q4, so we do get some growth in on streaming in Q4. That's the first question. And my second question is there was a small but important improvement in the subscription streaming growth from Q2 to Q3, about 130 bps. And I know you said that there's lots of moving parts in there, but can you help us understand what you think is the most important reason why we did see that improvement in the subscription stream of growth in Q3? Thank you.
Michael Nash: Adam, thank you for your question. So with respect to ad supported, we've cautioned for several quarters now that we need to see broad-based improvements across multiple partners and geographies over a longer time frame before already to adopt a less cautious view. So our outlook right now remains cautious in the short term. The slow growth this quarter was largely driven by slowdowns in advertising revenue growth at major partners, as Boyd commented on in his remarks. Well, YouTube reported advertising growth over the last quarter, they don't break out music revenue from other entertainment verticals, and we would note that on their earnings call, management called out non-music content like sports as a growth category highlight in their quarter, high engagement creator content surround the NFL and Paris Olympics there. On our ad supported stream revenue, I would note that we've seen sequential improvements year-over-year comparison of 4.2%. And in the second quarter, we were minus 3.9% and for the currently reported quarter, were plus 0.3%. And that's due in part to a contribution from our new Meta deal. Our streaming revenue includes income from a wide variety of global regional partners. It's important to keep that in mind. The composition of this category is much more varied than the subscription category in terms of the revenue capture models, in terms of the business models of the partners in terms of the geographic mix. We've also noted, and we're continuing to see that the digital ad market remains volatile through the third quarter of this year with mix results by platforms. And the other thing I want to emphasize with which Boyd covered in his comments, but just to double click on this, we see a monetization gap that continues with long-form, short-form video platforms with the increased activity on short form and the monetization lagging on short form. We expect that this will improve over time as budgets shift to follow growing engagement in the short form, but there's still a lag there. So that's contributing to the slowdown that you commented on. And then just in terms of subscription, I don't think there's anything to call out in this quarter to Boyd's comments, the trends in Q3 were broadly similar to those in the second quarter. So I don't think that there's anything there to particularly highlight.
Boyd Muir: Yes. Just on that last point, Michael. Adam, I took a deep intake of breath there. But I still continue to please encourage you to look beyond individual quarters. There are always going to be fluctuations, both positive and negative. And I tried to give some examples of why this does happen. So I just want to encourage you to look at trends over a longer term. And in fact, in Capital Markets Day, when we talked about the 8% to 10% on subscription growth in the -- over the next few years. Again, I did emphasize and I'll continue to emphasize there's always going to be event-driven fluctuations that will cause some quarters, maybe even some years for the growth to be higher or lower in individual kind of period. So I just want to encourage you to look at the trend over the longer term than overly fixate on small fluctuations within any given quarter.
Sir Lucian Grainge: Can I just also add, actually, I believe that if you look back over the last decade or so, it's -- what we now describe as streaming 1.0 is we've been stimulating new businesses and new business models with a variety of partners in different segments. And part of that has been to help them scale the business and inject health into the entire music ecosystem. So here we are today with an ad-funded model with new segments like social, which didn't exist five years ago, with well over 600 million, 650 million people paying for subscription. This has been intentional and by design, and here we are now at the advent of 2.0. Everything that you're asking and we're talking about, whether it's ad-funded or premium subscription or super fans, it will all come from the development of our business relationships with the platforms. The critical importance that our music and our products and our audiovisual rights has to them. How we focus on that product innovation and how we focus on it with our artists, with our own imagination internally with our teams as well as in partnership with the various DSPs, who as I said in my opening remarks, we've all got different agendas and different products and different strengths, and different views on different parts of the world markets and that part of that will come along over this next period, and we can't be anything that we're not, which is long-term thinking. I've been in the company for several decades. We've been through this journey, and we will continue to go through this journey of long-term strategy and long-term growth. And the proof has been in -- the proof in our putting has been in the eating. So with regard to ARPU, it's all part of innovation product segment, how we work with the platforms and how we work with our artists to actually develop and have them believe in what we're doing to create these new segments. So it's one of the reasons why we continue over the long-term to be as positive and optimistic about everybody's future in the same way that I hope that we reflected at Capital Markets Day.
Operator: Thank you. The next question goes to Ed Young of Morgan Stanley (NYSE:MS). Ed, please go ahead.
Edward Young: Thank you. My first question was actually building on that answer. And you've been very comprehensive. So perhaps it will be a relatively quick one. But you made comments about the drivers to -- being pretty broad-based. You mentioned tiering in Artist-centric. It feels like you've established, and you mentioned in your opening comments, some very constructive dialogue with your partners around those two in particular. When it comes to potential for a change to the payment model, whether that's subs or streaming, is that an open door or is that something that you think may take a least amount of time to convince your partners that's in everyone's long-term interest? Just related to the long-term thinking you gave there. And the second question was just sort of echo the congratulations to Boyd, but I wonder if you might be able to touch a little bit on the kind of transformation projects you'll be focused on in this new role. Thank you.
Michael Nash: Questions. With respect to the question on ARPU and our plans and our timing, to amplify a little bit the comments that Lucian made and that Boyd made. We've got very strong relationships with our DSP partners. We work collaboratively with them to grow the business. I think there's a bit of a misunderstanding about incentives and alignment. We're highly aligned with incentives around improving the monetization of music. And I think we've made the case articulately in passionately about how undervalued music is that there is a tremendous core ARPU opportunity. I'm just to state this plainly like any media company, we have the ability to charge an appropriate wholesale rate for our content. We've used this prerogative judiciously to enable the ecosystem to grow, to be vibrant and competitive. We're at a juncture right now. We've described this viewpoint around streaming 2.0. We have an obligation to our artists, set appropriate wholesale price for our content. We do that today through a variety of platform deal structures, and that creates the portfolio of optionality that addresses, I think the core of your question. Lucian, spoke about all the work that's been done over the past 10, 15 years, with what we call streaming 1.0 for the development of ecosystem. And that the underlying growth has been driven by a very compelling consumer value proposition. All the world's music, everywhere you go on any device, we've waxed eloquently about that on Capital Markets Day. But could just consider that in 2011, when Spotify entered the U.S. market, over that period of time in the U.S., there has been 40% inflation, and there has been one 10% price increase. So it's almost like we're reducing the price of this incredibly attractive value proposition over time. And that's obviously not the direction that makes sense from the standpoint of the interest that we have in advocating for our artists and working with our partners to maximize the value of music. So we think that we're at this juncture right now where we can consider, as Boyd articulated, that the path to future growth is equally about the underlying growth of the marketplace and also attending to the various opportunities to grow ARPU. So that is very much around product innovation and super premium tiers. It's about segmentation, doing a better job at looking at monetization of ad-supported and it's definitely around optimizing how we're taking advantage of this very attractive core value proposition. Again, I think that ultimately, we're fundamentally aligned. There is no diametric opposition in the relationships that we have with the DSPs around how we think about going after the customer value opportunity, and we expect to be able to make significant improvements, both from the standpoint of product innovation, customer segmentation and also rate structure associated with the underlying value proposition.
Boyd Muir: Ed, thanks for your congratulations. Much appreciated. We -- during Capital Markets Day, we outlined and read the strategy for us going forward and not wanting to repeat in all of those various pillars or those various initiatives. This new role is really for me to support Lucian and how we execute on all of those strategic initiatives, which are so important in how we actually position UMG in the marketplace, how we redefine our relationships with the partners and how we enhance our relationship with the fans and building that particular aspect of the business. So that's really how the role without going into kind of greater specifics about it. It's just how I can help Lucian execute on the strategic priorities that lie ahead of us.
Sir Lucian Grainge: Well, we -- our focus, my focus is product, product, product people, people and entrepreneurs and continuing to grow our business throughout every single region and every single culture. And then you add on to that, how we develop and how we innovate and how we bring along the entire ecosystem into Streaming 2.0, which obviously includes not only subs, but premium and ad funded. We are the market leader. And this new role will help me and support me from an organizational point of view, and we will focus and have more -- even more focus on looking at the various commercial opportunities that exist not only internally, as we see is how we actually develop the business and the business continues to alter and change over this next period in exactly the same way that it has done over the previous one.
Operator: Thank you. The next question goes to Michael Morris of Guggenheim Partners. Michael, please go ahead.
Michael Morris: Thank you. Good afternoon. A couple of questions for me. First, Lucian, you mentioned providing further updates on Streaming 2.0 in the weeks ahead. And I'm curious if that means any type of product or additional detailed announcement would happen before the end of the year. Secondly, the topic of wholesale pricing has come up a fair amount came up at the Capital Markets Day and on this call. I'm curious if you would share whether you would be interested in having your DSP relationships shift to wholesale relationships pretty much exclusively kind of like we've seen in the video industry where there's pricing with escalators as opposed to having some volatility around sort of per stream on a periodic basis. And then last thing, just quickly, TikTok announced they're shutting down the music business after your Capital Markets Day, so we didn't get a chance to ask you about that. I'm curious if you think that will impact your business at all in and your thoughts on why maybe it's not working for them where stream music clearly has worked for a number of other major platforms? Thank you.
Sir Lucian Grainge: It's good questions. Michael, I think I'm going to ask you to respond to some of the technical details, and then I may give an overview later.
Michael Nash: So with respect to the question on pricing and the models and looking at a wholesale with escalators type of arrangement -- right now, we have underlying rate structure very commonly three different prongs of revenue capture around per play per subscriber minimum and rev share. I think the question of looking at the rate card, the adjustments of the rate card is a little bit separate. And I think that we actually have a more sophisticated model than simply setting a price and then having a future agreement on price increases because we have measures in our agreements that capture the value that our content is creating on the platforms in more than just like a kind of a single principal or single-pronged way. But we're at a stage right now of evolution and development and innovation, and we're considering all the options that will enable our artists and songwriters to appropriately participate in the value that their content creates on our partners' platforms. In terms of TikTok Music specifically, I think it's really a question for them. I would say this that they have successful integration program with the DSP services, that does enable conversion of consumption on TikTok to subscription platforms that we've noted. So they continue to have kind of like a direct instrumental relationship in taking consumers on that journey from discovery on their platform to becoming customers of subscription platforms. And they have their own priorities, which, again, I think makes this question one that is better suited to be directed to TikTok.
Sir Lucian Grainge: Just on the first part of the question. As we continually remind everybody, we don't control the price. We don't control the retail price. And I'm not prepared to share confidential information or confidential internal strategies on how, what our innovation is and the innovation in the various segments that we focus, 90% of our time on with these business partners. But this is what our focus is, and it will come from innovation. It will come from their innovation and our innovation for what we need as simultaneously for what they need and how the business is developing. I bring you back to -- the point that I made earlier about subscription Streaming 1.0, we are at the beginning of 2.0. And 1.0 was in its, I suppose, individual format for a decade or so. And we have segments of revenue that were completely unimaginable three or four years ago. And my prediction is that we'll be having exactly the same conversation in over this next period. And everything that we do with the platforms as well as our office as well as all the creative teams within the business internally in a thoughtful, confidential strategic way is about accelerating that as quickly as we can. So it's game on.
Operator: Thank you. The next question goes to Devin Brisco of Wolfe Research. Devin, please go ahead.
Devin Brisco: Hi, in your prepared remarks, you mentioned another recent AI collaboration, this one with KLAY -- to the extent AI assist artisan creating new music, can you discuss how you participate in those streams. Should we think about your net economics as similar to any other album release you're providing more value to artists, but I'd also presume these AI partners get some share of economics. So how should we think about the net margin impact of those two dynamics? And related to that, I'd imagine there's some benefits from more music being created due to improved overall efficiency. Is there anything you can share about adoption of AI tools by your artist so far? And how that could accelerate your output over time.
Michael Nash: Devin, thank you for your question. So with respect to AI, the creation of new music and the KLAY partnership that you specifically referenced -- let me just provide a little more detail on this new partnership that we announced with KLAY. Our strategic collaboration there, as Lucian said, is expanding this portfolio that we've developed with tech entrepreneurs -- and they're working across a variety of different areas in the field of AI and generative AI. Our focus is really on the core underlying philosophy, which translates into our strategy along simple lines, focus a conversation on artists, protect their rights, advance their interests and from that foundation, build the creative and commercial opportunities. So everything we're doing is really about enabling artists and recognizing and protecting and advancing their rights. Now with KLAY, what they're doing is developing a new ethical model for AI-generated music that works with the music industry and our creative ranks to enhance user pool creativity and end human artistry. They're part of the latest cohort of Amazon (NASDAQ:AMZN)'s AWS AI accelerator program. And with that help, they're developing a foundational model for music that they see is significantly advancing the state-of-the-art there in conjunction with these rights holders. So this is really about establishing an ecosystem for specific AI-driven experiences and content they will prioritize accurate attribution in working with right holders. And this isn't something that's going to really compete with artist catalogs at traditional music services. Now just unpacking your questions a little bit and kind of going to how the economics work, as Lucian commented, at the end of the whole music, you heard the new Spanish language version of Brendale [ph] iconic holiday season classic. And that's an instance of creating -- and we've talked about this before, an opportunity for the artist to address a new audience in their native language that they haven't been addressed directly before by the artist. So that content was created working with Brendale developing an AI vocal model trained on her content and then married to a Spanish language performance and then in the production studio bringing these elements together into a unique creative composition and all the rights there in the monetization exploitation of the content, basically will transpire in the same way that we would monetize any other copyright of content. Then in terms of the question around tools, we're working with a number of different partners. We've announced in our relationship with YouTube, the establishment of an AI music incubator, which is all about putting artists directly into the conversation about advancing AI development in relationship to their creative ambitions. We've announced partnerships with other companies that Lucian hit on in his comments. Roland now has 90 different enterprises and institutions -- signed up to their ethical AI initiative, and that's really about music creation and ethicality and expanding the pilot for artists to work on. And we've also established partnerships. The SoundLabs partnership was the underlying partnership that enables the Brendale composition, partnerships with BANDLAB in the past -- and others that we've announced recently with pro rata with other entrepreneurs in the space. So there's a wide variety of different AI enterprises that we're enabling. The portfolio is expanding the opportunities for artists. We're at the very beginning stage of putting the tools in the hands of artists. But everything that we're doing goes back to this artist-centric philosophy of focusing the conversation there on artists, looking at their interests and advancing them at the same time that we're protecting their rights and building new creative and commercial opportunities on top of that.
Operator: Thank you. Our final question go to James Heaney of Jefferies. James, please go ahead.
James Heaney: Great, thanks for taking the question. Lucian, you started off this call talking about YouTube and the work that they're doing to create a better experience for music fans. Could you talk about how these initiatives translate into better financial results and if there are any specific features that you've called out as being most impactful. And then for Boyd, as part of your Capital Markets Day outlook, you talked about growing EBITDA to 10% CAGR for 2028. Could you just talk about the specific drivers of margin expansion in the business going forward? And are there any particular areas that you're most focused on? Thanks.
Michael Nash: Maybe I can pick up some of the detail on the question around artist-centric initiatives and Lucian's comments on YouTube, and that we can maybe go to kind of a more general and higher level of conversation from there. So with respect to our partnership with YouTube, the prioritization of premium content on the servicing premium content and enhanced content categorization goes to improving the experience of our artist content on the platform. And -- it's part of what we highlighted at Capital Markets Day in addition to the specific implementations of artist-centric models with Spotify and Visa (NYSE:V), you see our artist-centric philosophy being advanced a variety of different ways with a number of partners, supporting entrepreneurial anti-fraud efforts, our partnership with [indiscernible] which we announced earlier, embracing royalty model rewards for higher-quality artists music. And Apple Music, royalty boost streams has been publicly reported. We're more broadly applying these principles to protect human artistry with respect to AI proliferation. And we've commented on that to a pretty significant rate. All of these efforts are about reorienting the ecosystem to focus on artists and music that truly matter. So all these incremental steps are part of that journey -- but we also see significant changes in terms of the royalty model with the implementation of artist-centric with Deezer and Spotify and then the focus on super premium tiers. It's all part of the same conversation. So ultimately, what we're working to do is to focus in our partnership with the platforms on enhancing the experience and enhancing the artist relationship that's really driving the business model of these platforms. So all these elements are part of that equation.
Boyd Muir: And James, maybe I'll take the second question, which was about the 10% adjusted EBITDA CAGR through 2028. I mean the primary driver of our EBITDA or adjusted EBITDA growth is really coming from the revenue growth. We guided to a 7% plus CAGR on revenues. We talked a little bit earlier in terms of subscription growth, we talked about between an 8% and a 10% per CAGR through 2028. So really is the operational leverage that we have and that revenue growth will be the primary driver of the adjusted EBITDA CAGR. And then secondly, we have we talked again today. We have the strategic realignment, the organizational realignment program that we are undertaking that we've largely completed on Phase 1. We commenced on Phase 2 a little bit sooner than we had initially envisaged. And our commitment in that program is that we will deliver €250 million of savings in terms of run rate by the end of 2026. So I think they are the two -- and there's a hundred things underneath that. But they are the two major drivers, which will give rise to the 10% adjusted EBITDA growth CAGR.
Operator: Thank you. That's all the questions that we have time for today. This now concludes today's call. Thank you for joining, and you may now disconnect your lines.
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