Quick Take
Warner Music Group (WMG) has filed to enable selling shareholders to raise $1.7 billion in a U.S. IPO.
The company provides music artists with recording, publishing and promotional services worldwide.
WMG continues to grow as the industry’s #3 player, generates significant free cash flow and the IPO appears reasonably valued.
Company & Technology
New York, NY-based WMG was founded to source and sign musical artists, facilitate the recording and distribution of music and provide music publishing services.
Management is headed by Chief Executive Officer Mr. Stephen Cooper, who has been with the firm since 2011 and was previously CEO of Metro-Goldwyn-Mayer, Hawaiian Telcom and Krispy Kreme Donuts.
Below is a sample music news week video by WMG:
Source: Warner Music Group
WMG is majority owned by Access Industries, the conglomerate controlled by billionaire Len Blavatnik.
Customer/User Acquisition
The firm uses its market presence to acquire, nurture and promote new musical artists via online and offline channels.
WMG has existing offline music labels but more recently acquired Uproxx to expand its business via online pop culture and news.
Selling, G&A expenses as a percentage of total revenue have fluctuated as revenues have increased, as the figures below indicate:
Selling, G&A
Expenses vs. Revenue
Period
Percentage
Six Mos. Ended March 31, 2020
39.4%
FYE Sept. 30, 2018
33.7%
FYE Sept. 30, 2017
35.2%
Source: Company registration statement
The sales & marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales & marketing spend, dropped to 0.0x in the most recent reporting period, as shown in the table below:
Selling, G&A
Efficiency Rate
Period
Multiple
Six Mos. Ended March 31, 2020
0.0
FYE Sept. 30, 2018
0.3
Source: Company registration statement
Market & Competition
According to a 2019 research report by SelectUSA, the market for just U.S. music reached $22 billion in 2019, which was an estimated one-third of the worldwide market.
Digital royalties were expected to reach $1.1 billion in 2019 and digitally recorded music was forecast to reach nearly $1 billion in the same year.
The main drivers for this expected growth are the rise in digital technologies as the primary means through which musical entertainment is both produced and consumed.
Additional growth is expected to come from ‘diversified services as they capitalize on vertical business opportunities to license brand name products and services, packaging consumer experienced around touring and live music, bundling music services with other online content services and more.’
Major competitive vendors include:
Management says its market ranking was #3 in both the recorded music market and music publishing market.
Financial Performance
WMG’s recent financial results can be summarized as follows:
Growing topline revenue, although at a decelerating rate of growth
Increased gross profit, also decelerating
Growing gross margin
Decreasing operating profit and margin
Positive but decreasing cash flow from operations
Below are relevant financial metrics derived from the firm’s registration statement:
Total Revenue
Period
Total Revenue
% Variance vs. Prior
Six Mos. Ended March 31, 2020
$ 2,327,000,000
1.5%
FYE Sept. 30, 2018
$ 4,475,000,000
11.7%
FYE Sept. 30, 2017
$ 4,005,000,000
Gross Profit (Loss)
Period
Gross Profit (Loss)
% Variance vs. Prior
Six Mos. Ended March 31, 2020
$ 1,127,000,000
1.7%
FYE Sept. 30, 2018
$ 2,074,000,000
13.1%
FYE Sept. 30, 2017
$ 1,834,000,000
Gross Margin
Period
Gross Margin
Six Mos. Ended March 31, 2020
48.43%
FYE Sept. 30, 2018
46.35%
FYE Sept. 30, 2017
45.79%
Operating Profit (Loss)
Period
Operating Profit (Loss)
Operating Margin
Six Mos. Ended March 31, 2020
$ 116,000,000
5.0%
FYE Sept. 30, 2018
$ 256,000,000
5.7%
FYE Sept. 30, 2017
$ 307,000,000
7.7%
Net Income (Loss)
Period
Net Income (Loss)
Six Mos. Ended March 31, 2020
$ 46,000,000
FYE Sept. 30, 2018
$ 243,129,000
FYE Sept. 30, 2017
$ 291,626,000
Cash Flow From Operations
Period
Cash Flow From Operations
Six Mos. Ended March 31, 2020
$ 164,000,000
FYE Sept. 30, 2018
$ 400,000,000
FYE Sept. 30, 2017
$ 425,000,000
As of March 31, 2020, WMG had $484.0 million in cash and $6.4 billion in total liabilities.
Free cash flow during the twelve months ended March 31, 2020, was $330.0 million.
IPO Details
WMG’s selling shareholders intend to sell 70 million shares of Class A common stock at a midpoint price of $24.50 per share for gross proceeds of approximately $1.7 billion, not including the sale of customary underwriter options.
Class A stockholders will be entitled to one vote per share and Class B shareholders will be entitled to 20 votes per share.
The S&P 500 Index no longer admits firms with multiple classes of stock into its index.
Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $15 billion.
Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 13.73%.
Per the firm’s most recent regulatory filing, all of the net proceeds from the IPO will go to selling shareholders (Access Industries) and the company will receive nothing.
Access will continue to be a controlling shareholder after the IPO is completed.
Management’s presentation of the company roadshow is available here.
Listed underwriters of the IPO include Morgan Stanley, Credit Suisse, Goldman Sachs BofA Securities and a total of 28 firms.
Commentary
Warner Music is attempting to go public at what it believes is a valuable juncture given the historical growth of streaming in recent years combined with increasing consumption of online entertainment by consumers in the era of the Covid19 pandemic.
WMG’s financials show a firm that has grown revenue impressively, but that growth rate appears to be slowing, with the most recent quarter showing a notable drop in results, which I believe to be temporary.
Selling and marketing expenses have fluctuated as revenues have grown, so there isn’t a clear trend as to the firm’s economies of scale.
The market opportunity for music content is global and forecast to grow appreciably in the years ahead and consumers continue to shift usage to digital sources.
However, the firm wants to add adjacent services and while there are numerous opportunities, some of them involve event-oriented services, which may be attenuated in the near-term as a result of changing consumer interest in in-person events due to the pandemic.
As a comparable-based valuation, we don’t have a direct public comparable, but I thought it interesting that WMG is asking investors to pay a lower Enterprise Value / Sales multiple of 3.33x than Spotify’s (SPOT) current enterprise value revenue multiple of 4.42x.
It’s interesting because investors are apparently valuing music distribution more highly than music content generation, publishing and licensing.
There are 28 firms selling IPO shares, which must be some kind of record for the number of I-banks involved in a single IPO.
While revenue has begun growing more slowly, that may be only temporary due to passing external factors such as the economic dislocation stemming from the Covid-19 pandemic.
One aspect of WMG that I especially like is its cash flow yield of 2.64%. The firm has a history of high operating cash flow and most recently, $330 million in free cash flow over the past twelve months.
That cash flow and related balance sheet will likely place the firm in an excellent position to acquire technologies or companies and invest in new initiatives as it seeks to expand its service offerings.
Expected IPO Pricing Date: June 2, 2020.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
