Universal Music Group hit quite a few right notes during its first Capital Markets Day (CMD) presentation since going public in 2021, judging by Bulletin boardreview of a handful of stock analyst comments for Tuesday's event.
Reviews of the presentation from London's Abbey Road Studio, which included speeches from the CEO Lucian Grainge and other top executives, range from zealous to merely positive. JP Morgan analysts called UMG's presentation “one of the best capital markets days we've seen in 30 years and further enhanced our already high belief in UMG's story.” Barclays analysts did not believe there was enough new information to change investors' minds about the company. However, they wrote, “We found UMG's arguments to be persuasive and its financial goals to be achievable.”
In terms of targets, UMG said revenue will grow at a greater than 7% compound annual growth rate (CAGR) through 2028 — not including the impact of any mergers and acquisitions. As JP Morgan noted, UMG stuck with the “high single-digit growth” it gave in its last CMD presentation before going public in September 2021. In other words, UMG believes it can achieve the same high single-digit growth rate that initially attracted flow-hungry investors when the company was spun off from Vivendi three years ago. Had UMG downgraded to a lower revenue CAGR — say, mid-single digits — the post-presentation commentary wouldn't have been so kind.
The role of subscription music streaming is so vital to UMG's future that it created a narrative to explain how it can achieve 8% to 10% CAGR in subscription revenue. It's called Streaming 2.0, and it took center stage at CMD's presentation. In the initial phase of Streaming 1.0, services like Spotify and Apple Music kept prices flat while prioritizing subscriber acquisition over maximizing revenue per user (ARPU). They paid the same royalties regardless of the creator and quality of music. They built a global presence, but got most of their revenue from a relatively small number of Western markets.
Streaming 2.0 is about monetizing and getting more from existing subscribers while signing up customers in growing markets. Not every stream will be worth the same, and general “functional music” will be paid less. Streaming platforms will use customer segmentation to deliver high-quality experiences to customers who are willing to pay more. To this end, CFO Boyd Muir revealed that UMG is in “advanced talks” with Spotify about its planned “superfan” tier, which Spotify CEO Daniel Ek he said it could cost $17 or $18 per month. Tencent Music Entertainment already offers such a product, Super VIP, which costs five times more than a regular subscription.
With streaming growth slowing, it was important for UMG to demonstrate that it has a plan for the future of streaming. After all, subscription growth has a huge impact on investors' prospects. In July, UMG stock fell 24% in a day after UMG's second-quarter earnings revealed a sudden, sharper-than-expected slowdown in streaming revenue. Streaming 2.0 packages UMG's various tactics into a simple, understandable concept.
UMG also leaned heavily on direct-to-consumer (D2C) sales of merchandise, vinyl and other items, and Muir provided a new data point: the company's D2C sales are growing at a CAGR of 33% to total €548m (€612m dollars). , or about 5% of total revenue, from about 1,300 online stores. This gives UMG a huge amount of data on its artists' biggest fans. “The superfan/D2C opportunity is not just a high-growth complementary revenue opportunity,” Muir said. “It's also a significant competitive advantage that increases our reach to artists and enables us to do more for them than our competitors.”
The music industry has changed dramatically since UMG's last CMD presentation in 2021. TikTok has become the de facto way to discover new artists. Vinyl sales skyrocketed. Labels got better at selling directly to fans. Subscription services have finally raised their prices. Artificial intelligence has quickly become both public enemy No. 1 and the next big opportunity. Companies made a surprising number of investments in growth markets.
UMG's task was to show that it had a believable vision for the future. Considering everything the company has come up with, Grainge was able to do that when he told investors that “we're nowhere close to reaching the full potential of our business.”
However, investors will want to see results first. In a week where stock markets rallied after the Federal Reserve cut interest rates, UMG's share price fell 3.6%.
