Common Music Group‘s Q2 revenues, introduced final month, had been up by round 10% YoY – however that didn’t cease the market from responding negatively.
Wall Avenue analysts had been disenchanted 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 worth stays round 17% decrease than it did pre-Q2 earnings.
One one who isn’t fearful about UMG’s single-digit subscription income progress – nor the resultant share worth tumble – is Invoice Ackman.
Ackman’s Pershing Sq. Holdings, which owns roughly 10% of UMG’s fairness, not too long ago revealed 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 mentioned it believes music has “a protracted 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 revealed the opposite week, that the inventory market overreacted to UMG’s subscription streaming income progress.
The corporate added: “Much like how traders initially overreacted to considerations concerning the potential unfavorable impression from AI, solely to see UMG shares shortly get well because the market higher understood the AI threat, we imagine that as traders 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 worth is more likely to improve 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 concerning the present inventory market surroundings: “Fairness markets have exhibited an unlimited quantity of single-name inventory worth volatility for even the biggest corporations after they shock traders with even minimally below-expectation general outcomes or small misses on sure carefully 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 “count on[s] the {industry} to enhance monetization by means of new services and products” and pointed to “higher segmentation of shoppers” with the likes of “higher-priced tiers and elevated subscription costs”.
Spotify CEO Daniel Ek confirmed throughout the streaming firm’s earnings name final month that it’s engaged on a higher-priced “Deluxe” tier, which is able to price round $17/$18-per-month.
Common’s management workforce cited a stat on its Q2 earnings name that means one in 5 Spotify subscribers may very well be prepared 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 may improve to a super-premium tier at a meaningfully greater worth level for a compelling product configuration, one which affords enhanced options and unique entry to content material.”
It’s anticipated that Spotify’s ‘Deluxe’ tier may embody further product options corresponding to ‘superfan’ experiences and HiFi audio.
In the meantime, commenting on the potential for extra music subscription worth 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 saved at flat costs for practically a decade till some current will increase”.
It added: “Because the {industry} matures in developed markets, ad-supported customers who as we speak obtain free music might be charged a month-to-month subscription price, as is often the case within the video streaming {industry}.”
MBW requested earlier this month if Common and its rivals may 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 forex.
One other key spotlight from the quarter: adjusted EBITDA progress of 11.3% YoY to EUR €649 million (USD $699m).
Regardless of these sturdy general revenues, UMG missed analysts’ estimates for its subscription streaming revenues which, as talked about, had been up 6.9% YoY (at fixed forex). Some analysts had been searching for round 11% YoY progress.
Analysts from Guggenheim, Citi, Barclays, and Wells Fargo downgraded UMG’s inventory following the Q2 announcement.
UMG’s inventory worth 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 an announcement to PSH shareholders printed on the high of the corporate’s interim fiscal report, famous that, “every of PSH’s portfolio corporations has continued to make good enterprise progress throughout 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 worth 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 reviews of regulatory scrutiny from the US Securities and Alternate Fee (SEC), which was anticipated to require further particulars concerning the closed-end fund earlier than approving the IPO worth.
YOu can learn Pershing Sq.’s full H1 2024 investor replace on UMG beneath:
UMG’s shares skilled a pointy drop when the corporate reported outcomes final month. Whereas the corporate’s general income progress of 10% and working revenue progress of 11% had been each sturdy, subscription and streaming income progress, a key metric, decelerated throughout the quarter from its current double-digit progress charge 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 general financial surroundings. As evidenced by UMG’s friends’ outcomes nonetheless, music streaming remains to be rising at a wholesome charge.
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 a protracted runway of future progress, because it stays under-monetized relative to historical past and when in comparison with different types of media. We count on the {industry} to enhance monetization by means of new services and products, with higher segmentation of shoppers 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 worth 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 may 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 saved at flat costs for practically a decade till some current will increase. Because the {industry} matures in developed markets, ad-supported customers who as we speak obtain free music might be charged a month-to-month subscription price, as is often the case within the video streaming {industry}. Whereas every of the key 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.
Through 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 triggered a slowdown in promoting revenues from its largest companions. The decline was additionally brought on by 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 quickly whereas the businesses labored collectively on a extra holistic deal that can develop different elements of their relationship. Whereas streaming revenues are much less predictable as a result of they’re much extra vulnerable to financial situations, we imagine that over the long run they need to develop at the same or greater charge than subscription income progress.
UMG’s administration workforce led by Sir Lucian Grainge has a protracted 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 can lead to a larger share of streaming royalties for its artists. UMG can also 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 traders initially overreacted to considerations concerning the potential unfavorable impression from AI, solely to see UMG shares shortly get well because the market higher understood the AI threat, we imagine that as traders 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 worth is more likely to improve 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 traders 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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