Welcome to Warner Music Group's Second Quarter Earnings Call for the period ended March 31st, 2023. At the request of Warner Music Group, today's call is being recorded for replay purposes. If you object, you may disconnect at any time. Now I would like to turn today's call over to your host, Mr. Kareem Chin, Head of Investor Relations. You may begin. Good morning, everyone, and welcome to Warner Music Group's fiscal second quarter earnings conference call. Please note that our earnings press release, earnings snapshot, and the Form 10-Q we filed this morning will be available on our website. On today's call, we have our CEO, Robert Kyncl, and our CFO, Eric Levin, who will take you through our results and then we'll answer your questions. Before our prepared remarks, I'd like to refer you to the second slide of the earnings snapshot 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 during this conference call and in our earnings snapshot slides, 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. 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 there's 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 because 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 factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our filings with the SEC. With that, I'll turn it over to Robert. Thanks, Kareem. Good morning, everyone. It's been four months since I joined Warner Music Group from Google, and I'd like to talk today about some changes we've made so far and shed some light on what's to come. First, let me give you a summary of our Q2 results. As expected on our last earnings call, some of the macroeconomic currency and release slate headwinds from Q1 carried over into Q2. As a result, total revenue grew 5% and adjusted OIBDA increased 8%. Recorded music revenue increased 3% and streaming grew 2%, reflecting ongoing weakness in the ad market and modest growth in the United States. Music publishing had another impressive quarter with revenue growth of 15%. Our strategy at Warner Chappell continues to deliver long-lasting relationships with a wide array of global and local talent while expanding our services to songwriters and creating new opportunities for catalog. This quarter, highlights included our creative partnership with Belgian superstar Stromae, Max contributions as a co-producer of Bad Bunny's latest album, and 21 Savage's collaboration with Drake on the number one album, Her Loss. I promised I would be direct with you, I'll simply say that while our results in music publishing were best in class, we underperformed in recorded music. There's plenty of room for improvement, we're addressing both company-specific and industry-wide issues. As we signaled, we have had two consecutive quarters where our re-release schedule was less robust than normal. That is now changing with the slate we have planned for the remainder of 2023. The early results are promising, with new releases from the likes of Ed Sheeran, Jack Harlow, and Tiesto. I'll give some more details later on. While we're optimistic that our second half release slate will drive better results in the second half, this recovery may be gradual during the balance of the year. Overall, we're confident in our ability to return to a better cadence of releases, which should lead to more consistent results. At the same time, the music industry continues to morph, creating some risks and even more opportunities. This includes questions around the future of the streaming model and the rise of AI. It only increases our conviction in a tech-enabled strategy that will differentiate Warner Music Group. On our last earnings call, I said that we would be reallocating resources to accelerate our use of technology to empower artists and songwriters, as well as drive greater impact and efficiency in our business. In March, we made some tough but necessary decisions. We announced an approximately 4% reduction in our workforce that will yield annual savings of $49 million. We'll see approximately $20 million of savings in the remainder of this fiscal year. I want to be clear that this was not straightforward cost-cutting. We'll be reinvesting a significant portion of these savings into new expertise and tech initiatives that will drive company-wide benefits in the coming years. I want to frame for you how we're going to position Warner Music Group for long-term success in a highly proactive, fiscally responsible way. The demand for music is ubiquitous. As the use cases multiply, the opportunities on the horizon are bigger and more wide-ranging than ever. Many of the key ingredients for our long-term success are already in place. We have incredible artists and songwriters and one-of-a-kind catalog of iconic music. We have the expertise, resources, and reach to build artist careers and brands. Having said that, I don't underestimate our challenges either. The pace of change is faster, the competition for talent is fiercer, the world is growing noisier, and attention spans are getting shorter. If we are to maximize our opportunities and solve our challenges, we need to add great technology into our mix, and it can't be tools we borrow from someone else. It's got to be proprietary, central part of our value proposition. Technology can be our force multiplier, a force multiplier for the skills and capabilities of our team in service of our artists, songwriters, and our catalog. It's not going to happen overnight, but long term, we're looking at music and technology as the twin engines of our success. I'd like to tell you a bit more about our plan, starting, as always, with the music. Today, the majority of the music industry's revenues come from a relatively small fraction of the world's population. That makes growth potential in emerging markets enormous. This March, IFPI released a list of fastest-growing recorded music markets. I was pleased to note that we've been expanding our presence in these regions for years by appointing new leadership, opening additional offices, and partnering with influential local players. The recorded music industry's fastest-growing region in 2022 was Sub-Saharan Africa, jumping 35%. It's an area that's full of incredibly diverse, dynamic music cultures, and we've been steadily ramping up our A&R activities there for the past five years. Key moves have included acquiring Africa's leading independent distributor, Africori, at the start of last year. We now contend for market leadership, driven by the success of artists like CKay, Burna Boy, Master KG, and Nkosazana Daughter. The next three fastest-growing regions for the recorded music industry in 2022 were China, up 28%, MENA, up 24%, and Latin America, up 26%. In both China and MENA, our revenue growth outperformed the market in Q2, and in Latin America, we're taking the necessary steps to catch up and gain share. We have a great story to tell about how we're enhancing our profile in each of these key regions. In China, Warner Music Group has led the way as far back as 2014 by acquiring the Gold Typhoon catalog and by being the first major music company to partner with Tencent. In MENA, we established our regional office over five years ago, and we've since leapfrogged our competitors through deals with Rotana and Qanawat. In Latin America, we've rejuvenated our A&R strategy. Our breakout artists include Mexico's Yng Lvcas, who is currently number three on global Spotify chart. We're also looking to expand our presence in fast-growing genres. This April, the annual report for the International Music Summit revealed that the dance music industry generated revenue of $11.3 billion in 2022, an increase of 34% from 2021. We're fully primed to capitalize on this trend. Since 2017, we've acquired Spinnin' Records, launched new labels, including Major Recordings in the U.S. and Red Records in Asia, and partnered with dance music legend Patrick Moxey. In 2021, we acquired the catalog of French superstar DJ producer David Guetta and signed a new deal with him for future recordings. Amazingly, David, who released his first album in 2002, was the most-streamed dance artist in 2021, 2022, and so far in 2023. On technology, we're still evolving our plan, but let me share a glimpse into my vision. As the music industry transitioned from physical to digital, it continued to focus on high-touch areas it's always been good at and underinvested in its tech capabilities. These are the capabilities we're forging here under the guidance of Ariel Bardin, our new President of Technology. We're building the leadership, the team, and the culture that will bring an unprecedented level of tech expertise to the music business. As we look ahead, here's what you should expect us to do. Number one, create efficiency by enhancing our systems and decision-making, so we free up resources for higher ROI opportunities. Number two, increase our effectiveness as brand managers for our artists and songwriters. Number three, grow scale through services for greater range and number of artists and songwriters, all on one tech stack. Number four, evolving our products to better monetize the artist and songwriter superfan relationship. Switching to monetization. As I said before, music is undervalued. This is something we intend to change in order to create a healthier ecosystem for artists, songwriters, the streaming services, and us. Recent price increases have been successful and are a move in the right direction, they should be just the first step. Those subscription services which have raised prices have done the fiscally prudent thing for themselves, their shareholders, and the creative community. There is no sign that they're seeing elevated churn. At the same time, WMG has started to experiment with different streaming models. I cannot name all these services, as the deal terms are confidential. This is just the beginning, and we will continue to collaborate with our partners on new paradigms. When it comes to generative AI, it needs to be put into proper context. Framing it only as a threat is inaccurate. Our first priority is to vigorously enforce our copyrights and our right to name, image, likeness, and voice to defend the originality of our artists and songwriters. It is crucial that any AI-generated platform discloses what their AI is trained on, and this must happen all around the world. Europe is leading by example with the EU Artificial Intelligence Act. The European Parliament is considering amendments which would codify the position that copyrighted content may not be used to train AI without prior authorization from rights holders and would require AI developers to disclose a summary of the materials they use to train AI. As in Europe, all around the world, lawmakers are debating AI, but the primary focus has been on issues such as transparency, safety, algorithmic bias, privacy protection, notice to consumers, and an ability to opt out. Last month, Senator Chuck Schumer announced his intention to draft a U.S. AI bill coming later this year. I can promise you that whenever and wherever there is a legislative initiative on AI, we will be there in force to ensure the protection of intellectual property is high on the agenda. We must also see and seize the massive opportunity that generative AI will also be. Consider this. User-generated content containing copyrighted material was originally viewed as a big threat by media companies. From my personal experience at YouTube when I arrived in 2010, we were fighting many lawsuits around the world, and we were generating low tens of millions of dollars from UGC. We turned that liability into a billion-dollar opportunity in just a handful of years and a multibillion-dollar revenue stream over time. In 2022, YouTube announced that it paid out over $2 billion from UGC to music rights holders alone and far more across all other content industries. AI is just like any emerging technology. There will be challenges and opportunities, and with the proper expertise, it will be a powerful tool for the music industry, and we intend to be there at the forefront on how to best deploy it. Before I hand it over to Eric, I wanted to say that our strong second-half slate has begun to take shape. On Friday, immediately following a victorious outcome in the baseless copyright infringement case lodged against him, Ed Sheeran dropped his acclaimed new album, Subtract. The first single, Eyes Closed, which you may have heard on our pre-call hold music, became Ed's fourteenth number one single in the U.K.. The album has already hit number one in 41 countries on iTunes, while physical pre-orders have outstripped the numbers for Ed's last album in multiple territories. We're seeing encouraging signs from other recent releases. Rap superstar Jack Harlow surprised dropped a new album on April 28th, and it's already racked up over 70 million streams, while Tiesto released his new album on April 21st and quickly went double platinum in Brazil and Norway. Fifty Fifty's Cupid and Yng Lvcas' La Bebe remix have been two of the hottest streaming singles. Our releases from across the globe occupy four of the top 10 spots on the Spotify Top Fifty USA chart, with all four coming from outside the U.S., highlighting how we're bringing local artists to a global stage. Additionally, we have new music from Dua Lipa, David Guetta, Lil Uzi Vert, Burna Boy, Kelly Clarkson, Tiago PZK, and Bailey Zimmerman, and many more in the months to come. I'm very confident in the path forward as we combine creative and marketing excellence with tech innovation to propel our growth. Finally, in March, Eric announced that he will retire by the end of the calendar year. We started the process of searching for his successor, but we're fortunate that he'll be with us for a while longer. I'll give you an update on the search in the coming months. For now, I'll turn it over to Eric to take you through our results, and then we'll answer your questions. Thank you, Robert, and good morning, everyone. Despite the challenges Robert cited, we delivered growth in revenue, adjusted OIBDA, and adjusted OIBDA margin. Total revenue increased 4.6%, reflecting growth in both recorded music and music publishing. Adjusted OIBDA increased 7.9% with margin of 20.4% compared to 19.8% in the prior year quarter. These increases were primarily due to higher revenue and lower variable marketing spend, which is linked to the timing of releases. Recorded music revenue grew 2.5%. Streaming revenue increased 2.2% as subscription streaming grew in the mid-single digits and was partially offset by ad-supported revenue declining in the mid-teens. Our streaming results reflect a lighter release schedule and market-related slowdown in ad-supported revenue. Physical revenue increased 1%, driven by solid performance in the U.S. Artist services and expanded rights revenue decreased by 4% due to lower merchandising and advertising revenue, partially offset by higher concert promotion revenue. Licensing revenue increased 27%, including growth in brand income and a licensing settlement. Recorded music adjusted OIBDA increased by 2% with a margin of 21.8%, which was roughly flat compared to the prior year quarter. Music publishing continues to deliver impressive results, posting 15% revenue growth driven by strength in digital, performance, and mechanical. Digital revenue grew 18%, the same for streaming revenue, driven by continued growth in streaming and the impact of digital deal renewals. Performance revenue increased by 29%, primarily due to the timing of payments from collection societies and the remaining recovery from COVID disruption. Performance revenue is now fully recovered from COVID, and we expect the growth to moderate meaningfully starting next quarter. Mechanical revenue increased 23%, primarily due to a strong share in physical sales, and sync decreased by 4% due to lower commercial licensing activity in the U.S., partially offset by copyright infringement settlements. Music publishing adjusted OIBDA increased 25% to $76 million, with margin increasing 240 basis points to 29.6%, driven by strong operating performance. In March, we announced an approximately 4% reduction in headcount that will generate annual savings of $49 million starting in fiscal 2024. We expect to realize $20 million of these savings in fiscal 2023. In connection with these headcount reductions, there were non-recurring restructuring charges in the quarter of $41 million for severance costs. The cash outflows related to these costs will occur through the end of fiscal 2024. In April, we successfully launched certain components of our financial transformation program in select territories. The program remains on track to meaningfully roll out in a wave-based approach throughout the globe and with expanded functionalities during fiscal 2023 and 2024, yielding expected annualized run rate savings of $35 million-$40 million once fully implemented. Q2 CapEx increased to $35 million as compared to $28 million in the prior year quarter, mainly due to investments in IT capabilities. Operating and free cash flow were both a use of cash in Q2. Operating cash flow decreased to a use of $6 million from a source of $44 million in the prior year quarter because of higher income and withholding tax payments, primarily due to higher estimated U.S. taxable income, the utilization of certain remaining tax credits in the prior year quarter, and other movements in working capital. Free cash flow decreased to a use of $41 million from $16 million in the prior year quarter. As a reminder, our working capital will fluctuate from quarter- to- quarter, but our goal remains to deliver an operating cash flow conversion ratio of 50% to 60% over a multiyear period. As of March 31st, we had a cash balance of $601 million, total debt of $4 billion, and net debt of $3.4 billion. Our weighted average cost of debt is 4%, and our nearest maturity date is in 2028. We expect growth to re-accelerate in the back half of the fiscal year, driven by our robust release schedule. In Q3, we've already had successful releases from Ed Sheeran, Jack Harlow, and Tiesto. We look forward to more releases from some of our biggest stars and our next generation of talent from across the globe as we progress through the remainder of the fiscal year. We continue to position ourselves for long-term success, and we are reallocating resources to ensure we evolve our business in a fast, smart, and accretive way. Thank you to everyone for joining us today. We'll now open the call for questions. Thank you. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q and A roster. Our first question comes from the line of Michael Morris with Guggenheim Securities. Your line is now open. Thank you guys. Good morning. Robert, I'd like to ask you, hi. I'd like to ask you a little bit more about the DSP pricing progression that you touched on in your prepared remarks. I'd specifically love to hear your thoughts about Spotify. You mentioned a couple of your partners who have already raised price, and on their earnings call, Spotify management said that they would like to raise price in 2023, but that it's pending discussion with their music partners, their label partners. Can you share any insights on your discussion with Spotify, and if you see a path to collaborating on the price increase there? Then secondly, if I could, Eric, you know, as we think about the stronger release slate in the second half of the fiscal year, can you help us with how much you think the key categories of recorded music revenue and if streaming revenue, in particular, will be impacted relative to the first half? Thank you. All right. Thanks, Michael. On the first part of your question, there's no real update that I can provide you, because those discussions are private, obviously. When there is some update, I will make sure to share that. What I can tell you is this, which is, one, I'm excited that, they're sounding constructive, publicly about the price increases on their earnings call. More importantly I think it was you who published, a report that the price increase would result in EUR 1 billion uplift in annual revenue for Spotify in 2024. Which obviously, is quite, positive and accretive. Clearly, that will be a win-win not just for Spotify and us, but also for every DSP if price increases happen. That's really, that's all I have to say about that at this point. Thanks, Robert, and good to talk to you, Michael. On the kind of release slate and first half versus second half and the impact, I think we feel, you know, as we've said and signaled before, our release slate was a little lighter in the first two quarters of the year and will be quite weighted towards Q3 and Q4. As we said on the call, we already have some releases out for Q3, Sheeran, Jack Harlow, Tiesto, that are already showing strong results with a lot more to come. We have the Barbie soundtrack featuring Dua Lipa, which we're excited about. Bebe Rexha music, David Guetta, Charlie Puth, Yng Lvcas out of Mexico is a top three Spotify hit. We can keep going and going. The point is that, the releases are there, and the second half is looking quite strong. We absolutely expect this to improve our results in recorded music streaming in the second half of the year, and this would likely create uplift in both streaming and physical. Those two categories are the ones that would be most positively affected, Michael. Thank you both. Sure. Thank you. Thank you. Thank you. Our next question comes from the line of Ben Swinburne with Morgan Stanley. Your line is now open. Thanks. Good morning. Robert, with another quarter under your belt there, I'm wondering if you could update us a bit on some of the technology opportunities you see at the company and sort of where you think the biggest, I don't know if it's efficiency or optimization potential is as you've brought on a new team and sort of worked for at least another quarter on building out systems at Warner. You know, you guys, I think, made a comment in your prepared remarks, you expect a gradual recovery in the second half. I mean, do you think that we should be assuming that the major labels are growing slower than the industry on a go-forward basis because of just the growth of independents, maybe throw in some AI-generated music in there, maybe the sort of regional skew towards, you know, non-Western markets? Is that the right base case assumption? 'Cause obviously we've sort of seen, you know, results across the major labels kind of lag Spotify on a revenue growth basis. I'm curious if you think maybe that's the right assumption going forward. Those are my two questions. Thank you. Cool. Thanks. On a technology front, I think in my opening remarks, I highlighted the four areas that technology will impact Warner. 100% focused on efficiency. There is a lot that we can achieve using technology on that front. 100% focused on effectiveness of all of our activities, scale, and then focus on monetization of super fans. It is, you know, every area of our business that I look at can use technology as a force multiplier. What we're doing is, A, we've recruited the initial team of just A-list technologists, which are unprecedented in this music industry. We're having an incredible momentum with hiring more and more people of that type that want to come here and be part of what we're doing. At the same time, we're looking at all the activities inside the company, all the projects, and see how we apply them against the four areas that I was talking about. I think this is incredibly exciting and I, you know, I like to say is that we have to constantly parallel process on everything. This is the greatest example. We're parallel processing in four different areas with technology. What's even more encouraging is that the music part of company is embracing it, like, you know, in the most welcoming sense because everyone sees what a force multiplier this can be on all of our activities that we do developing artists and marketing artists and songwriters. It's an exciting journey to be part of. I can't underscore enough how unprecedented this is. Obviously, you know, we will have to prove it through our products that we ship and our actual delivery. I prefer actions speaking louder than words. I look forward to, at some point in the future, we actually prove that. I'm incredibly confident about this. Your second question on majors and sort of non-Western markets. I'm just about four months in on this, I'll reserve any sort of absolute statements on these things because it's, there's still a lot to unpack. What I can tell you is that music is far more global than it's ever been, and what I mean by that is that it comes from everywhere. The rise of local music in markets all around the world is undeniable. I've seen it from my seat at YouTube for many years. I'm glad that Warner has been investing over the past many years alongside the strategy. I highlighted some of that in my opening remarks in Middle East and China and other markets. I think it's an incredibly exciting time for music because of that. We're leaned into it. Obviously, you know, I'm very focused on making sure that we succeed all around the world, not just with distribution, but with sourcing of content, discovering new talent and helping them become global stars and global superstars. On majors versus indies, I think I touched on this in the last earnings call. Obviously, as there's more and more music being uploaded, that can put some pressure on us. All the same tools that everyone has at their disposal are the tools that we have at our disposal. I would not go to any foregone conclusion on long-term market share loss on that. Thank you very much. Thank you. Our next question comes from the line of Sebastiano Petti with J.P. Morgan. Your line is now open. Hi. Thanks for taking the questions. I just wanted to see if you could touch on, just Robert, in some of your prepared remarks, the investments in, you know, tech capabilities and the tech-enabled strategies. I mean, what is the glide path as we look at, you know, capital expenditures after the implementation of the financial transformation program? Should we expect a step down in fiscal 2024? Or will there maybe be some of these initiatives or some of these programs, and reinvestment of cost savings that will, you know, still be felt inside of, you know, fiscal 2024, perhaps beyond? My second question, just on the Warner Chappell, obviously, you know, segment and OIBDA growth, very strong in the quarter. Streaming, you talked about in your prepared remarks, you know, just the strong execution there. I mean, can you unpack perhaps, you know, some of the underlying drivers of that growth? How should we think about the, you know, the segment growth from here on a go-forward basis and, you know, any underlying, you know, maybe one-offs or comps that are impacting the, you know, recent kind of growth rates? Thank you. All right. I'll throw it to Eric. I think he's better suited to answer here. Go ahead, Eric. Thanks. Hey, Sebastiano. Great to talk to you again. On CapEx, I would say a few things. We are absolutely with Robert and the tech team developing, we'll call it the updated plan that shows increased investment in tech and tech capabilities to drive the business forward. As our financial transformation starts to wind down and costs come down, I would reasonably expect that our tech investment and CapEx costs are higher than they were historically. Whether that yields to something that stays relatively flat, but I would expect it to be $100 million or more. The exact numbers over a long-term plan will come out as we finalize our strategic plan and the financial plans that goes with it, which are still in flight with Robert and Ariel and the new team still, developing the plans forward. I think more to come, but certainly there'll be increased investment in technology. That said, some of the cost measures that we've taken, specifically the headcount reductions, which are gonna generate, $49 million of savings in fiscal 2024 and annually thereafter, our objective is for the technology costs to basically be funded by other cost savings measures. It's not incremental cost to the business, it is just a reallocation of resources to where it could have more impact, and drive growth and efficiency in the business. The plan and details are in flight, but the strategy is clear and already taking place. On OIBDA growth, Sebastiano, I think it's fair as you look at the business to say that, you know, our first half of the fiscal year had a lighter release schedule, which meant that it was very imperative for us to be managing costs very tightly and prudently, looking at every single line of the business, whether it's overhead, marketing, to make sure the cost being spent and what was deployed was having impact in the market. Because of that, we managed our margins and our OIBDA growth and EBITDA growth quite carefully, and we're able to deliver solid bottom line growth. Obviously, we'll continue to manage the business with financial discipline. As we look at the second half of the year and a deployment in the market of a significant amount of high-end music, you should expect us to support that with marketing appropriately to continue to make sure we're driving the impact and growth in the business. We'll continue to look at all cost lines to make sure we're driving opportunity for OIBDA growth, and, you know, we continue to focus on driving the business for margin growth over a sustainable period of time. That said, if we look at specific business lines on recorded music, I would look at opportunities to improve streaming growth in the second half of the year. I think sync, which has been affected by the ad market downturn and the production of commercials, we'll be looking carefully to see how the economy responds, and how ad markets and commercial production responds. You know, we'll be very close to that market, and if there's an opportunity to reaccelerate that growth like we did in 22, we'll be pushing that pedal hard. As we look at the publishing side of the business, Warner Chappell has continued Really solid teams growth. We expect Warner Chappell to continue very strong growth. I would say on Warner Chappell two things. One is that the performance line, which has had outsized growth because its recovery from COVID has taken multiple years, is about at the end of its recovery line, is about where it was pre-COVID, and we still expect that to be a growth area, but at a slower pace. Digital, specifically driven by the streaming market growth, we continue to expect to see, which in streaming is now our largest revenue line by far in Warner Chappell. We expect that to continue with strong growth trends going forward, driving the market and the effective strategies of the Chappell management team, which have been outpacing market growth and streaming. We see a strong growth profile going forward for Warner Chappell, an opportunity for acceleration of key lines on record. Thanks, Sebastiano. Thanks, Eric. Yes. Thank you. Our next question comes from the line of Benjamin Black with Deutsche Bank. Your line is now open. Good morning. Thank for the questions. Robert, I know you spoke a lot about technology, you know, UMG has been very vocal about the need to sort of redefine the DSP model to one that's perhaps more artist-centric. I was curious, you know, what are your thoughts on the way the model is currently constructed? Do you think there is need for a change? If so, you know, how would you like to see the industry evolve? One on sort of advertising. You know, it'd be great if you care sort of update on the advertising backdrop and trends that you're seeing in early April. Are you seeing growing stabilization? Related, you know, has the ad market dislocation impacted the pace of your emerging platform deals since many of these are tethered to the ad market? Thank you. On the DSP model, I think I've said publicly a few times that I am convinced, and various numbers back up that music is significantly undervalued, for instance, relative to streaming video, roughly $0.50 on the dollar, by multiple different analyses or versus inflation, et cetera. It is undervalued. When I look at that, I start thinking about like, what are the underlying causes of that? A great example of that is my own work at YouTube, where, you know, over the course of five years we have increased the price of YouTube TV subscription by 100%, and we have not increased the price of YouTube Music by any%. Same people, two completely different decisions, two completely different outcomes. By the way, both businesses grew very successfully. The cause of that is the structure of the agreements with DSPs. That structure was really good for the industry. It has taken it from, you know, a low point to an incredible recurring revenue stream all around the world with massive amounts of people and, you know, payment instruments on file, premium experience, personalization, all of that, and then has rebuilt the business. It does not mean that it is the right thing for the next 10 or 20 years. It has to change, and it will change. One of the reasons for that is that there is not a real incentive for price increases that you see in every other industry. The other is that every stream is valued exactly the same way, and that doesn't seem like something that's aligned with the way the world works. For instance, in sports, LeBron James earns more money than some of his teammates, not because he plays more hours per day. Plays exactly the same number of hours, but yet he earns more. ESPN commands more money per subscriber per month than any other TV channel, not because it's consumed more. There's propensity to pay, there's users' willingness to remain with the overall services, et cetera. It can't be that Ed Sheeran stream is worth exactly the same thing that a stream of rain falling on the roof. I think you're catching my drift, kind of where I'm going. I think we have a misaligned model at this point. You know, now that the industry has, you know, is healthy and has grown incredibly well, I think it's time to reevaluate how we're licensing to DSPs, do it together with them, you know, because there are ways to make all of this win-win. Music cannot be the only industry that doesn't assign value to high value artists and songwriters and that it doesn't drive ARPU growth the way every other industry does. I'm not trying to limit the volume of content. I understand that's important for personalization and choice. I'm looking at to change the value equation, the way it works today and put in new incentives. It's too early to talk about any other specifics. You can imagine it is one of the top priorities for me, personally to change. I'm happy to take the advertising one. Okay. Ben, on that one, I guess I would say we're seeing some positive signs, but I would continue to be cautious. I think in calendar Q1, we saw YouTube and Meta have some improved results. I think as we've talked about our stronger release schedule in the second half of the year, gives us optimism that advertising has the opportunity to do better. In Q3, we will start to have easier comps, as in Q3 of 2022 is when the market started to soften, and then in Q4 2022 is when it softened significantly. you know, we are more optimistic going forward, but I would also say that in prior quarters we've seen a stronger month or two and then a month that has been much weaker within a quarter. I think we wanna see a pattern of improvement before we really believe that the market has stabilized. There are some signs of improvement out there. With our stronger release schedule and easier comps, I think we feel much better about the second half of the year than the results from the first half of the year on advertising. Great. Thank you. Thank you. Our next question comes from the line of Rich Greenfield with LightShed Partners. Your line is now open. Rich Greenfield, your line is open. Please check your mute button. Hi, can you hear me? Sorry about that. Yes. Yes, we can. Sorry about that, Robert. You know, just want to expand on your last answer, Robert, 'cause I think it's so important thinking about sort of the future of this industry. You know, part of the issue at YouTube TV is you had obviously a lot of legacy cable companies that were charging, you know, $100 + a month versus a much lower price. You had a lot of stealing in order to grow price as a low-cost new entrant. With the music industry, you sort of have everybody sort of at the same price point, you know, within $1, I guess, of everybody. You don't have a lot of stealing to sort of grow. We're even seeing people who had sort of like new ideas. You know, you saw Resso come in, and they just got rid of their ad-supported service and go sort of subscription only. You know, how do you think about the evolution? Like, should this be a hybrid model of advertising and subscription? Should there be more of an advertising only model, a subscription only? Like, what do you think of the future of what's the business model of music look like in five or 10 years that you think we're moving towards? Yeah. I think there are two different things. One is sort of the user experience and the value proposition, right? Which is, I think, more what you are touching on. There is the sort of wholesale relationship between us and the DSPs. What I was talking about previously was the change of the wholesale relationship, which is necessary going forward. I do think that evolution of the, well, let's say, the retail relationship between the DSPs and the users is always open. I think dual revenue stream models are great. I think you always need a premium version as well. Obviously, we've experimented with all of that at YouTube. I do think the experimentation with paid models that have ads in it is also important, right? Obviously, we've seen that with Hulu successfully as their most adopted tier, despite having a completely ad free option. I think, innovation around the use cases for users is important because it basically helps optimize audience segmentation, right? Along different price points and different ARPU. We're 100% open to exploring all of these things with our partners. What I'm trying to stress is that the status quo of the way things work right now is not something that's going to work going forward. I think. Just to dig in on that. Go ahead. Is the issue that the way the wholesale relationship works makes an advertising business model or other hybrid business models not as appealing? Is that what you're essentially saying needs to get fixed, is by changing wholesale, you enable new retail models? Yes and no. One, even if nothing changed on the user proposition, the wholesale relationship has to change because today it does not incentivize price increases. As you've seen in every single subscription service, whether it's fitness services or video services, anything, have increased prices over the last five years, significantly other than music. That's probably the only industry that hasn't, other than the, you know, 10% price increases last year, you know, in the last few months. That's one. Two, that is not actually incentivized in the current agreements. It's actually the opposite. Two, it values every single piece of content exactly the same. That is not how the world works. That is not how media works. That is not how sports works and not how anything works. Those things will change. What you're getting at is the user proposition, which also requires changes in our relationship with the DSPs and open to that too, open exploring that as well, so that there can be yet additional model to audience segment and figure out a way to provide yet additional option to users that is driving increased ARPU versus another segment of our industry of our revenue streams. Thanks very much. Thanks. Thank you. Our next question comes from the line of Stephen Laszczyk with Goldman Sachs. Your line is now open. Hey, thanks. Good morning. For Robert or maybe Eric, it sounds like international is one of the more attractive areas for you to invest capital at the moment. I would be curious if you could update us on your view, on the return profile of investments in international markets compared to some of the other areas where you could perhaps invest capital today. Then looking ahead, how much capital you think you can manageably invest in international markets over the next few years. Any thoughts there would be great. Hi, Stephen. You know, we continue to focus on multiple ways to invest in the globalization of our business. Obviously, our A&R marketing spend continue to help drive local music in markets around the world. We also have looked and done selective M&A acquisitions and investments in key markets around the world, especially in emerging markets that help us build market share in markets that are fast-growing, and, you know, as I like to say, kind of coming online and coming of age with streaming. Whether that's investing in Rotana or acquiring Qanawat in the Mid East, which has given us significant market share growth in the Mid East, in the neighborhood of 20%, or Africori, which we acquired last year in fast-growing African market, which is, I think, the fastest-growing in the world. We continue to look at the globalization and specifically emerging markets as a way to supplement the development and growth and expansion of our market share in fast-growing markets around the world that have the opportunity for strong IRRs. As far as our return on capitals, you know, we look at them similar to how we look at any other deal. Obviously, we look at double-digit returns as our threshold. We do look at the risk of deals and the likelihood of them paying off and making sure that we have a strong return profile. Overall, the company has a high teens, consistent delivery of high teens, return on invested capital, so we keep that in mind as well, that the investments that we make are supportive of our ROIC. How much we invest, I would say, is somewhat opportunistic. We do not have a specific pool of capital to deploy in the globalization of our business, specifically through M&A. We are looking at kind of markets we see as high growth, we look at the kind of build versus buy trade-offs. In some markets, we build organically. In some markets, we see acquisition opportunities which can accelerate the development of market share, require upfront capital. The deal has to be right. The management team that we usually, the vast majority of the times want to stay with the business and help build out our business has to be a good fit for our company and want to stay and be part of the Warner Music Group. It really is flexible to what the structure is. We're very focused on developing emerging markets and have done so and will continue to do so going forward, which supplements our growth and help increase the reach and diversification of the business. Thanks, Stephen. Great. Thanks for that. Maybe just a second one on free cash flow conversion. Eric, it looked like it was pressured in the quarter by some one-time items. Could you help perhaps unpack some of those? As you look out over the next year or so, I know on the call you mentioned the 50% to 60%, you know, cash conversion as being the multi-year target. Is that within your scope this year, or should we be thinking, you know, about that as more of like a year two, three type target to achieve? Thank you. What I would say is I'll add to those two pieces. Fiscal calendar Q2 has traditionally been a lighter cash conversion quarter. There's several reasons for that. One is it's the quarter that we pay bonuses. Our VSP advances, which based on the timing of deals, could happen at different times throughout the year, but have not traditionally or certainly for quite some time, have been focused on fiscal Q2. They've generally been more focused towards fiscal Q4. Some of the things that drive working capital opportunities plus bonuses make fiscal Q2 generally a lighter quarter. Happens in this quarter, we had some additional tax payments. That's largely timing. That did affect this quarter as well. What I would say is that we're roughly in line with where our cash conversion was through the second quarter of 2022. Last year we, for the full year, had a over 60% cash conversion rate. I'm not saying that's gonna happen this year. I'm saying there's a lot of things that are in flight, timing of deals that are being negotiated, which could have cash advances that may or may not close in 2023 or might fall into 2024. Depending on the timing of those deals, we could meet our cash conversion targets very strongly in fiscal 2023. If some of those deals fall into 2024, then the delivery of the 50%-60% could be over multiple, you know, over 2023, 2024. We continue to say over a multi-year timeframe because the timing of some of the deals isn't fixed in stone, and we need that flexibility. On a sustainable basis, that 50%-60% is our target on a running basis, and we continue to focus on and are confident we can deliver it. Great. Thanks, Eric. Thanks, Stephen. Thank you. Our next question comes from the line of Matthew Thornton with Truist Securities. Your line is now open. Hey, good morning, Robert. Good morning, Eric. Maybe two, if I could. First one on emerging streaming. Eric, I apologize if I missed that, but was there any change in that revenue run rate and I guess just higher level without getting into any specifics, I guess. Do you feel like you guys are making progress on the emerging side towards getting some more renewals, you know, closed later this year. Any just progress on that front would be helpful. Second question is really around margins. Eric, I think previously you talked about 50-100 basis points OIBDA margin expansion this year. I think the long-term bogey over any multi-year period was roughly 100 basis points per year. Is that the right way to think about the business? Any call there would be helpful as well. Thanks, guys. Okay. I'll take the first one on the renewals. You got it. On the sort of emerging platforms renewals, my focus on. A, no update. B, the, I have one rule that I focus on, which is if traffic moves from one platform to another, I want us to feel neutral about that. I don't want to trade dollars for pennies, going one way or another. That is really, that is what I'm looking for, and I think that's the fiscally responsible thing to do for the long-term health of the business. That's all I can say as an update on that. That you understand, where our bottom line is. I'll let Eric answer the second question. Yeah. Matthew, no change on our margin outlook. We are continuing to focus on margin growth. In each of the first two quarters of this year, we've delivered very strong margin growth, and we'll continue to look at the full year and every year going forward for margin growth. I will say that as Robert and the technology team and the business overall look at the technology initiatives and its ability to drive efficiency and scale in our business and specific executions and operating plans develop that, we will fine-tune our financial plan with that. We expect margin to continue to be a focus. Might that, once we have that plan, tweak some of our perspective on margin? It might, but I expect our margin focus to continue to be positive and our outlook and focus continue to focus on margin improvements going forward. Right now, we continue to focus on the 100 basis points a year, and specifically this year, I'd said 50 to 100 basis points, given some of the dynamics, might be more realistic. Given the first half of the year, the margin improvement's been actually quite strong. Thank you. Our last question comes from the line of Tim Nollen with Macquarie. Your line is now open. Great. Thanks for fitting me in. I've got couple of questions related to AI, very interesting topic, both maybe offensively and defensively for you. Robert, you mentioned, you know, some of the copyright issues, and it sounds like you're quite confident about your ability to defend against those. Is this gonna be a running topic for some time, or do you think the legislation that you referred to might begin to help? Secondly, more sort of offensively for you mentioned using AI both for creating efficiencies, but also, you know, I think implying that you could use AI more for your artists' creation of music. Are you looking to be building sort of proprietary AI that your artists can use as opposed to maybe using other services? Maybe anything else you can give us in terms of what you can be using AI for productively? Thanks. Sure. Thank you. One, yes, this will likely be a topic that will be ongoing and we'll probably be talking about it for the next five years all the time. Until we all get tired of it. Yes, because it's a transformative technology. Yes, I look at both the threats as well as the opportunities and probably look at the opportunities even more so than the threats. However, as somebody who's working with thousands of artists, as you know, historic catalog, it's obviously we have to look at protection of copyright, name and likeness and voice, et cetera. Again, this goes back to my parallel processing. You know, this company is parallel processing. For us in AI, it means both defensive and offensive at the same time. I think the... There are a couple things on this. Number one, regulation is important. I think including people who are creating AI, generative AI, they agree on that. Lots of good actors in that area. That is important. Copyright protection as part of that is very important. The second part next to it is the actual detection and enforcement, which is because you can have regulation, but if you don't have detection and enforcement of that, then it's less useful to have the regulation. We're in discussions with partners who have, you know, who operate generative AI to figure that out, who operate platforms to figure that out. We obviously have lots of expertise on this front in-house with Ariel having overseen Content ID on YouTube. That's an important part of it. Then the sort of the use of AI for, sort of offensive, purposes, there is a very, very wide spectrum of things that it could be used for. I don't really want to go into the specifics of that because it's early, but what I can tell you is that we're running fast, exploring all of that. Yes, we are in the business of, and, creating tools for artists to do their work, you know, to have tools that basically supercharge their work, right? I'm not looking at technologies only, being a force multiplier for our teams and for Warner Music Group, but also for our roster. Parallel processing on all of these fronts, and I think it's an exciting time for a company like ours and to be part of this and to be able to figure it all out and do it together with all of our technology and distribution partners. Thank you. I would now like to hand the conference back over to Robert Kyncl for closing remarks. All right. Thank you all so much for your care, interest and all your questions, and I look forward to talking to you in 90 days. Thank you. Have a great day. This concludes today's conference call. Thank you for participating. You may now disconnect.