Warner Music Group Corp. (WMG) Q1 2025 Earnings Summary

Executive Summary

• Q1 FY2025 revenue was $1.666B, down 5% YoY, while Adjusted OIBDA margin declined to 21.8% from 25.8% YoY; EPS jumped to $0.45, driven by below‑OIBDA FX gains on euro‑denominated debt and hedging gains rather than core profitability .
• Recorded Music subscription streaming growth decelerated as expected (laps DSP price increases), but underlying subscriber trends remained healthy; management reaffirmed full‑year Recorded Music subscription streaming growth (high single‑digit, adjusted for BMG) and operating cash flow conversion, while withholding FY2025 margin expansion reaffirmation due to FX headwinds .
• Strategic moves: new multi‑year Spotify agreement (recorded + publishing) enabling new tiers, bundles, and video; controlling stake acquisition in Tempo Music Investments (accretive over time) .
• Near‑term stock catalysts: execution on DSP monetization/wholesale pricing, “superfan” initiatives, and integration/expansion of Tempo catalog; watch FX trajectory and comparability items (BMG roll‑off, prior‑year licensing extension) .

What Went Well and What Went Wrong

• What Went Well

  • Music Publishing grew 6% YoY to $323M with strong digital (+6%) and performance revenue (+10%); management emphasized catalog strength and global touring/radio tailwinds .
  • Physical revenue in Recorded Music rose 8% (21% ex‑BMG impact), led by strong releases in the U.S. and Japan (Linkin Park, Charli XCX, Teddy Swims, Mariya Takeuchi, Benson Boone) .
  • Strategic partnerships and M&A: multi‑year Spotify deal to expand tiers/bundles/video and “artist‑centric” models; Tempo acquisition adds high‑margin evergreen catalog and increasing control over rights over time .
  • Quote: “We are increasing our A&R spend, acquiring valuable catalogs, and striking important agreements with streaming services…enhance our virtuous cycle of reinvestment” — CEO Robert Kyncl .

• What Went Wrong

  • Adjusted OIBDA down 20% YoY to $363M; margins compressed 400 bps YoY due to prior‑year licensing items and roughly $36M operational FX headwinds (~200 bps margin drag) .
  • Recorded Music licensing revenue fell 39% YoY, reflecting the $75M prior‑year catalog licensing extension; without this, licensing grew 6% .
  • Ad‑supported streaming declined 8%; management cited macro and timing with emerging platforms; TikTok ban risk noted as muted exposure but still an uncertainty .
  • Analysts flagged FX headwinds and margin outlook prudence; CFO: unable to reaffirm FY25 margin expansion target given persistent FX .

Financial Results

Segment Revenue

Recorded Music Components

KPIs: Streaming Breakdown (Recorded Music)

Notes:

• Q1 2025 EPS strength reflects $153M “Other income (expense), net” including FX gain on euro debt ($61M), hedging gains ($15M), and investment sale gain ($29M) ; core margins compressed vs prior year due to the prior‑year licensing items and FX .
• Comparability items: prior‑year licensing extension ($75M), BMG termination impacts ($32M total, $16M streaming/$16M physical), and a prior‑year digital license renewal ($30M streaming) .

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• Strategy: “Grow the pie…increase our share…become more efficient…increase A&R, acquire catalogs, strike agreements with streaming services” — CEO Robert Kyncl .
• DSP deals: “This major agreement [with Spotify]…expands music ecosystem…new fan experiences, deeper video catalog, paid tiers, bundles…direct licensing with Warner Chappell in additional countries incl. U.S.” .
• FX impact and margins: “FX represented ~$36M headwind to adjusted OIBDA and ~200 bps margin drag; we cannot reaffirm FY margin expansion this year due to FX” — CFO Bryan Castellani .
• Cash conversion: “Operating cash flow conversion was 91% of adjusted OIBDA; Free Cash Flow up 12%” — CFO .
• M&A: “Tempo…evergreen catalog…robust margins and cash flow…more accretive over time as rights revert” — CEO .

Q&A Highlights

• Spotify economics: Management focused on achieving “certainty” in deals and is confident the new agreement improves value capture and innovation; specific terms not disclosed .
• FX and hedging: FX headwinds hit OIBDA; hedges flow below OIBDA in other income; unusual dollar strength post‑election cited .
• Ad‑supported outlook: Macro‑driven, expected to stabilize; emerging platforms impacted by deal timing/content delivery; muted exposure to potential TikTok ban .
• Subscription cadence: Deceleration from lapping DSP price increases; underlying subscriber trends healthy; high single‑digit growth reaffirmed (adj. for BMG) .
• Superfan tiers: Seen as greenfield; varied by partner/region; WMG engaged but features/pricing to be defined by DSPs .
• Video monetization: Expect more video on Spotify; formats/tiers/bundles are levers to grow pie and music value .

Estimates Context

• S&P Global consensus estimates could not be retrieved due to a temporary SPGI rate limit; as a result, explicit beat/miss vs Street is unavailable at this time (we will update when accessible).
• Key areas for potential estimate revisions: near‑term margin expectations (FX headwind ~200 bps), underlying subscription streaming growth maintained at high single‑digit (adj. for BMG), and incremental monetization upside from new DSP tiers/bundles and Tempo accretion .

Key Takeaways for Investors

• Underlying engine healthy: ex‑notable items and FX, Recorded Music revenue up 2.8% and Publishing up 6%; subscription streaming growth supported by global subscriber trends .
• Mind the mix: EPS strength in Q1 was driven by below‑OIBDA FX/hedging/investment gains; core margins compressed vs prior year — focus on Adjusted OIBDA and cash conversion (91%) .
• Monetization catalysts: New Spotify agreement (tiers/bundles/video, artist‑centric) and wholesale pricing optimization initiatives can expand ARPU and capture more value .
• Physical resilience and slate: Physical growth and a robust release pipeline (U.S./Japan) provide diversification against ad‑supported cyclicality .
• FX sensitivity: Near‑term margin expansion target not reaffirmed; monitor dollar moves — stabilization would improve margin visibility .
• Accretive catalog M&A: Tempo controlling stake adds high‑margin, evergreen assets, with rights reverting to WMG over time; expect incremental admin/distribution economics .
• Tactical positioning: Weight toward subscription exposure and publishing growth; watch emerging platform monetization and superfan tier rollout timelines for upside .