Common Music Group‘s Q2 revenues, introduced final month, have been up by round 10% YoY – however that didn’t cease the market from responding negatively.
Wall Avenue analysts have been upset that UMG’s subscription streaming revenues ‘solely’ grew 6.9% YoY within the quarter. A number of downgraded their scores of the corporate’s inventory, and UMG’s share value stays round 17% decrease than it did pre-Q2 earnings.
One one who isn’t apprehensive about UMG’s single-digit subscription income progress – nor the resultant share value tumble – is Invoice Ackman.
Ackman’s Pershing Sq. Holdings, which owns roughly 10% of UMG’s fairness, just lately printed its interim monetary report for the primary half of 2024. In it, the corporate expressed confidence in UMG’s long-term prospects.
“We imagine that UMG’s underperformance [in Q2] will show to be short-term in nature and doesn’t impression our view of UMG’s medium and long-term progress prospects,” the corporate wrote in its fiscal replace.
It additionally stated it believes music has “an extended runway of future progress, because it stays under-monetized relative to historical past and when in comparison with different types of media”.
Pershing Sq. additionally suggests within the report, which was printed the opposite week, that the inventory market overreacted to UMG’s subscription streaming income progress.
The corporate added: “Much like how buyers initially overreacted to considerations in regards to the potential adverse impression from AI, solely to see UMG shares rapidly get well because the market higher understood the AI danger, we imagine that as buyers higher perceive UMG’s path to greater income progress and regain confidence within the long-term well being of the {industry}, the corporate’s share value is prone to enhance considerably from its present ranges.”
Pershing Sq. boss Invoice Ackman, in his letter to PSH shareholders printed on the high of the report, had this to say in regards to the present inventory market atmosphere: “Fairness markets have exhibited an unlimited quantity of single-name inventory value volatility for even the biggest firms after they shock buyers with even minimally below-expectation total outcomes or small misses on sure intently adopted enterprise metrics, with Common Music Group being one such instance in our portfolio.”
Elsewhere within the interim report, Pershing Sq. informed its shareholders that it “anticipate[s] the {industry} to enhance monetization by way of new services” and pointed to “higher segmentation of consumers” with the likes of “higher-priced tiers and elevated subscription costs”.
Spotify CEO Daniel Ek confirmed through the streaming firm’s earnings name final month that it’s engaged on a higher-priced “Deluxe” tier, which can price round $17/$18-per-month.
Common’s management workforce cited a stat on its Q2 earnings name that implies one in 5 Spotify subscribers might be keen to pay for a pricier ‘Tremendous Premium’ tier.
UMG’s CFO and President of Operations Boyd Muir informed analysts: “Our analysis and evaluation point out that as many as 20% of the present subscriber base might improve to a super-premium tier at a meaningfully greater value level for a compelling product configuration, one which presents enhanced options and unique entry to content material.”
It’s anticipated that Spotify’s ‘Deluxe’ tier might embody further product options resembling ‘superfan’ experiences and HiFi audio.
In the meantime, commenting on the potential for added music subscription value will increase, Pershing Sq. argued in its report that “there’s ample room to extend pricing within the coming years as music subscriptions have been stored at flat costs for almost a decade till some latest will increase”.
It added: “Because the {industry} matures in developed markets, ad-supported customers who right now obtain free music will be charged a month-to-month subscription price, as is usually the case within the video streaming {industry}.”
MBW requested earlier this month if Common and its rivals might quickly flip the screw on Spotify’s free ad-supported tier.
Within the second quarter of 2024 (the three months to finish of June), UMG beat analyst expectations, posting USD $3.15 billion (EUR €2.932bn) throughout all of its divisions (together with recorded music, publishing and extra), which was up 9.6% YoY at fixed foreign money.
One other key spotlight from the quarter: adjusted EBITDA progress of 11.3% YoY to EUR €649 million (USD $699m).
Regardless of these sturdy total revenues, UMG missed analysts’ estimates for its subscription streaming revenues which, as talked about, have been up 6.9% YoY (at fixed foreign money). Some analysts have been in search of round 11% YoY progress.
Analysts from Guggenheim, Citi, Barclays, and Wells Fargo downgraded UMG’s inventory following the Q2 announcement.
UMG’s inventory value fell simply over 23% on the Amsterdam Euronext the day after the corporate’s outcomes got here out (July 25).
Pershing Sq. holds some 10.25% of UMG and is the third largest shareholder behind Tencent-led consortium Concerto Companions (which holds round 20%) and former Vivendi President Vincent Bolloré (who holds 18%).
Rupert Morley, Chairman of the Pershing Sq. Board, in a press release to PSH shareholders printed on the high of the corporate’s interim fiscal report, famous that, “every of PSH’s portfolio firms has continued to make good enterprise progress through the first half of the yr and their intrinsic values stay sound”.
Morley famous, nonetheless, that “Subsequent underperformance in [PSH’s] NAV relative to the S&P 500 Index was pushed primarily by a vital decline within the inventory value of PSH’s largest holding, Common Music Group”.
Pershing Sq. Holdings’ interim fiscal report and replace on UMG adopted the information that Invoice Ackman’s Pershing Sq. Capital Administration pulled the plug on the preliminary public providing (IPO) of its new US-based closed-end funding administration fund.
The withdrawal adopted stories of regulatory scrutiny from the US Securities and Change Fee (SEC), which was anticipated to require further particulars in regards to the closed-end fund earlier than approving the IPO value.
YOu can learn Pershing Sq.’s full H1 2024 investor replace on UMG under:
UMG’s shares skilled a pointy drop when the corporate reported outcomes final month. Whereas the corporate’s total income progress of 10% and working revenue progress of 11% have been each sturdy, subscription and streaming income progress, a key metric, decelerated through the quarter from its latest double-digit progress price to mid-single digit progress. We imagine the quarter’s disappointing subscription and streaming progress is because of sure idiosyncratic elements distinctive to UMG mixed with some weakening within the total financial atmosphere. As evidenced by UMG’s friends’ outcomes nonetheless, music streaming remains to be rising at a wholesome price.
We imagine that UMG’s underperformance this quarter will show to be short-term in nature and doesn’t impression our view of UMG’s medium and long-term progress prospects. We proceed to imagine that music has an extended runway of future progress, because it stays under-monetized relative to historical past and when in comparison with different types of media. We anticipate the {industry} to enhance monetization by way of new services, with higher segmentation of consumers together with higher-priced tiers and elevated subscription costs.
UMG’s subscription income progress of seven% slowed from 13% final quarter, as the corporate started to lap final yr’s value will increase. Slower progress at sure digital service suppliers (“DSPs”) offset sturdy progress at Spotify and YouTube. Whereas quarterly efficiency can fluctuate, we imagine that every of UMG’s core DSPs has a wholesome enterprise and that UMG can additional drive streaming and subscription progress by working with its DSP companions to enhance their choices. The corporate is now working with Spotify in launching a premium providing for superfans which UMG estimates might finally be adopted by as a lot as 20% of Spotify’s subscriber base.
We imagine there’s ample room to extend pricing within the coming years as music subscriptions have been stored at flat costs for almost a decade till some latest will increase. Because the {industry} matures in developed markets, ad-supported customers who right now obtain free music will be charged a month-to-month subscription price, as is usually the case within the video streaming {industry}. Whereas every of the most important DSPs elevated costs for particular person subscriptions from $9.99 to $10.99, solely Spotify and Deezer have raised costs to $11.99 and solely in sure geographies and for sure plans.
In the course of the quarter, UMG’s streaming revenues (revenues from ad-supported music) declined by 4%, a pointy deceleration from double-digit progress final quarter, as financial uncertainty brought about a slowdown in promoting revenues from its largest companions. The decline was additionally attributable to the absence of revenues from TikTok whereas a brand new deal was being negotiated which didn’t begin till the start of Could. UMG’s revenues from Meta additionally decreased briefly whereas the businesses labored collectively on a extra holistic deal that may develop different facets of their relationship. Whereas streaming revenues are much less predictable as a result of they’re much extra vulnerable to financial circumstances, we imagine that over the long run they need to develop at an analogous or greater price than subscription income progress.
UMG’s administration workforce led by Sir Lucian Grainge has an extended track-record of rising and shaping the music market by working with its companions in innovating inventive options to drive progress. For instance, UMG’s efforts led to the industry-wide adoption of “artist-centric” initiatives that may lead to a larger share of streaming royalties for its artists. UMG can be main the {industry} by working with companions to launch new merchandise to harness AI’s progress alternatives whereas additionally making certain regulatory and authorized safety for its artists.
Much like how buyers initially overreacted to considerations in regards to the potential adverse impression from AI, solely to see UMG shares rapidly get well because the market higher understood the AI danger, we imagine that as buyers higher perceive UMG’s path to greater income progress and regain confidence within the long-term well being of the {industry}, the corporate’s share value is prone to enhance considerably from its present ranges. To that finish, the corporate is internet hosting a Capital Markets Day in September which is the best discussion board for administration to supply buyers with extra particulars on its enterprise and the long-term progress alternative. Given UMG’s sturdy market place and lengthy runway for sustained earnings progress, we imagine that the corporate’s present valuation represents a deep low cost to its intrinsic worth.
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