Warner Music(WMG) - 2020 Q4 - Annual Report

PART I This section provides an overview of Warner Music Group's business, industry, competitive strengths, and growth strategies Business Overview Warner Music Group is a leading global music entertainment company, focusing on talent development, digital innovation, and strategic market positioning - Warner Music Group Corp. (WMG) completed its Initial Public Offering (IPO) on June 5, 2020, listing Class A common stock on NASDAQ under 'WMG'. The offering was entirely secondary shares sold by Access Industries and related selling stockholders, meaning WMG did not receive any proceeds[23] - Following the IPO, Access Industries and its affiliates hold approximately 99% of total combined voting power and 83% of the economic interest, making WMG a 'controlled company' under NASDAQ standards[24] - WMG was the first major music entertainment company to report streaming as its largest source of recorded music revenue in 2016, demonstrating its early adaptation to digital trends[29][59] - The global recorded music industry generated $20.2 billion in 2019, with digital (primarily streaming) accounting for 64% ($12.9 billion) and growing by 18% (streaming by 24%)[42] - Global paid music streaming subscribers reached 341 million by the end of 2019, an increase of 34% from 2018, but still representing less than 11% of global smartphone users, indicating significant growth potential[45] - The music publishing industry generated $5.6 billion in global revenue in 2019, with digital being the largest and fastest-growing component (42%), followed by performance (30%)[52][54] - Key regulatory developments, such as the Music Modernization Act (MMA) in the U.S. and the EU Copyright Directive, are expected to increase revenues for the music entertainment industry by improving licensing and ensuring fair remuneration for rightsholders[56][58] - WMG's global recorded music market share increased approximately 6% from 2011 to 2019, growing from 15.1% to 16.0%[63] - WMG's growth strategies include attracting and developing talent, focusing on growth markets for streaming penetration (e.g., China, Brazil), expanding global presence with local music investments, embracing commercial innovation with new digital partners, and pursuing strategic acquisitions[69][70][71][72][73] - As of September 30, 2020, WMG employed approximately 5,500 persons worldwide[114][131] Fiscal Year 2020 Revenue Breakdown by Business Segment | Segment | Revenue (Fiscal 2020) | % of Total Revenues | | :---------------- | :-------------------- | :------------------ | | Recorded Music | $3.810 billion | 85% | | Music Publishing | $657 million | 15% | Global Market Share in 2019 | Company | Recorded Music Market Share | Music Publishing Market Share | | :------------------------ | :-------------------------- | :---------------------------- | | Universal Music Group | ~32% | ~21% | | Sony Music Entertainment | ~21% | ~25% (Sony/ATV) | | Warner Music Group Corp. | ~16% | ~12% | Introduction WMG was formed in 2003 as a holding company, operating through its subsidiary WMG Acquisition Corp - Warner Music Group Corp. (WMG) was formed on November 21, 2003, and operates as a holding company with its business conducted through subsidiaries, primarily WMG Acquisition Corp., one of the world's major music entertainment companies[19][20] Acquisition of Warner Music Group by Access Industries Access Industries acquired WMG in 2011, leading to its delisting from the NYSE, though SEC reports continued voluntarily - Access Industries, Inc. acquired Warner Music Group on July 20, 2011, leading to the delisting of WMG's common stock from the NYSE[21] - Despite delisting, WMG continued to voluntarily file current and periodic reports with the SEC due to covenants in its outstanding indebtedness instruments[22] Initial Public Offering WMG completed its IPO in June 2020, with Access Industries retaining significant control and WMG receiving no proceeds - WMG completed an IPO on June 5, 2020, selling 77,000,000 shares of Class A common stock at $25 per share on NASDAQ (ticker: WMG)[23] - The IPO consisted entirely of secondary shares sold by Access Industries and related selling stockholders; WMG did not receive any proceeds[23] - Post-IPO, Access and its affiliates retained approximately 99% of total combined voting power and 83% economic interest, classifying WMG as a 'controlled company'[24] Our Company WMG is a leading music entertainment company with iconic labels and a global publishing business, focused on talent and digital innovation - WMG is a leading music entertainment company with iconic record labels (Atlantic, Warner, Elektra, Parlophone) and a global music publishing business, Warner Chappell Music, representing over 80,000 songwriters and composers[25] - WMG's strategy focuses on identifying, signing, developing, and marketing extraordinary talent to cut through the noise of digital platforms, emphasizing that music, not technology, drives the business[28] - WMG has championed new business models, being the first major music company to strike deals with Apple, YouTube, and Tencent Music Entertainment Group, and the first to report streaming as its largest recorded music revenue source in 2016[29] Fiscal Year 2020 Revenue by Business Segment | Business Segment | Revenue (Fiscal 2020) | | :--------------- | :-------------------- | | Recorded Music | $3.810 billion | | Music Publishing | $657 million | Our History WMG's history spans centuries, with its modern form emerging in 1967 and strategic growth accelerating since Access's 2011 acquisition - WMG's history dates back to 1811 (Chappell & Co.) and 1896 (Parlophone), with its modern form taking shape in 1967 with the acquisition of Atlantic Records by Warner-Seven Arts[30][31] - The company's music publishing division, Warner Chappell Music, was created in 1987 through the purchase of Chappell & Co[32] - Since Access acquired WMG in 2011, the company has focused on revenue growth, increasing operating margins and cash flow, and expanding through organic A&R and strategic acquisitions like Parlophone Label Group (2013) and direct-to-audience businesses (EMP, Songkick, UPROXX)[34][35] Industry Overview The global music entertainment industry is experiencing vibrant growth, driven by digital consumption trends in both recorded music and music publishing - The music entertainment industry is large, global, and vibrant, with recorded music and music publishing sectors growing due to digital consumption trends[36] Consumer Trends and Demographics Global music listening is increasing across demographics, with younger audiences leading smartphone music consumption and older groups showing significant streaming growth - Global consumers spent an average of 18 hours listening to music each week in 2019, with younger demographics (teens, millennials) showing higher smartphone music listening and weekly listening hours[37][39] - Older demographic groups are also increasing music engagement, with 54% of 35-64 year-olds using streaming services in 2019, the highest growth rate across all age groups[40] - Music has a significant cultural footprint, with 7 of the top 10 most followed Twitter accounts belonging to musicians and the majority of YouTube's most-watched videos being music-related[41] Recorded Music The global recorded music industry is experiencing significant growth, primarily driven by streaming, with substantial future potential in emerging markets and technological innovation - The global recorded music industry grew at a 9% CAGR from 2015 to 2019[43] - Streaming is still in early stages of global adoption, with 341 million paid subscribers globally in 2019 (less than 11% of smartphone users), indicating substantial growth potential, especially in emerging markets like China and Brazil[45][46][47] - Opportunities for improved streaming pricing exist, with services like Spotify and Amazon Music HD experimenting with premium offerings[48] - Technological innovation, including smart speakers and short-form video content on platforms like TikTok, is deepening listener engagement and driving music consumption, creating new pathways for artists to gain exposure[49][50][51] Global Recorded Music Industry Revenue (2019) | Category | Revenue (2019) | % of Total | | :--------------- | :------------- | :--------- | | Total | $20.2 billion | 100% | | Digital | $12.9 billion | 64% | | - Streaming | $11.4 billion | 56% | | Physical | ~ $4.4 billion | ~22% | | Performance Rights | ~ $2.6 billion | ~13% | | Synchronization | ~ $0.4 billion | ~2% | Music Publishing The music publishing industry generated $5.6 billion in global revenue in 2019, with digital as the largest and fastest-growing component, supported by positive regulatory trends - The music publishing industry generated $5.6 billion in global revenue in 2019, an approximate 2% increase from 2018, with digital being the largest and fastest-growing component[52][54] - Positive regulatory trends, such as the Music Modernization Act (MMA) in the U.S. and the European Union Copyright Directive, are expected to increase revenues for the music entertainment industry by improving licensing and ensuring fair remuneration for rightsholders[55][56][57][58] Global Music Publishing Industry Revenue (2019) | Category | Revenue (2019) | % of Total | | :-------------- | :------------- | :--------- | | Total | $5.6 billion | 100% | | Digital | ~ $2.35 billion | ~42% | | Performance | ~ $1.68 billion | ~30% | | Synchronization | ~ $1.06 billion | ~19% | | Mechanical | ~ $0.45 billion | ~8% | Our Competitive Strengths WMG leverages its top industry position, global presence, A&R capabilities, strong financial profile, and strategic acquisitions to capitalize on music market growth - WMG is well-positioned to benefit from global music market growth driven by streaming, with its recorded music streaming revenue growing at a 37% CAGR from fiscal 2015-2019, outpacing the market[59] - The company has an established presence in growing international markets, including China, with local A&R focus and a global marketing/distribution infrastructure in over 70 countries[61] - WMG holds a top industry position as one of three major music entertainment companies, with over $4 billion in annual revenues and a global recorded music market share of approximately 16% in 2019[63][122] - WMG possesses 'star-making, culture-defining' A&R capabilities, with a decades-long history of identifying and nurturing successful recording artists and songwriters across diverse genres[64][65] - The company exhibits a strong financial profile with robust growth (6% CAGR in as-reported revenues from FY2018-2020), operating leverage, and free cash flow generation, achieving an Adjusted EBITDA margin of approximately 19% in fiscal 2020[66] - WMG benefits from an experienced leadership team and the strategic direction, M&A, and capital markets expertise provided by its controlling investor, Access Industries[67] - The company has expertise in strategic acquisitions and investments, completing over 15 since 2011, including PLG, EMP, Sodatone, UPROXX, Spinnin' Records, and Songkick, to expand capabilities and diversify revenue streams[68] Our Growth Strategies WMG's growth strategies focus on attracting and developing talent, expanding into growth markets, embracing digital innovation, and pursuing strategic acquisitions - WMG aims to attract, develop, and retain established and emerging recording artists and songwriters, increasing new music flow and leveraging technology like Sodatone for A&R capabilities[69] - The company focuses on growth markets to capitalize on incremental streaming penetration, targeting both developed markets with lower paid subscription rates (e.g., U.S., Germany) and less mature markets with large populations (e.g., China, Brazil)[70] - WMG plans to expand its global presence by investing in local music in nascent markets, opening regional offices (e.g., Middle East and North Africa), and partnering with local players (e.g., Chocolate City in Nigeria)[71] - The company embraces commercial innovation by partnering with new digital distributors (e.g., Apple, YouTube, Tencent Music) and investing in emerging music technologies, including AI, AR, VR, and high-resolution audio, through initiatives like WMG Boost[72] - WMG intends to pursue strategic acquisitions to enhance its asset portfolio and drive long-term growth, focusing on both Recorded Music (e.g., UPROXX) and Music Publishing (acquiring catalogs for cost savings and increased monetization)[73] Recorded Music The Recorded Music business encompasses the entire value chain from artist discovery and development to global marketing, distribution, sales, and licensing - Recorded Music business involves discovering, developing, marketing, promoting, distributing, selling, and licensing music by recording artists, covering the entire value chain[74] - Major U.S. labels include Atlantic Records, Warner Records, and Elektra Music Group (Elektra, Fueled by Ramen, Roadrunner). Rhino Entertainment specializes in catalog marketing[75] - International operations span over 70 countries through subsidiaries, affiliates, and licensees, marketing both U.S. and local repertoire[76] - Distribution includes WEA Corp. (retailers, wholesale) and Alternative Distribution Alliance (ADA) for independent labels, alongside international centers[77] - Music is distributed digitally via streaming services (Amazon, Apple, Spotify, Tencent Music, YouTube) and download services, and physically through online and traditional retailers[78] - WMG diversifies revenue through 'expanded-rights deals' with artists, participating in touring, merchandising, and sponsorships, enhancing artist services capabilities[79] - In fiscal year 2020, revenue from Apple and Spotify accounted for approximately 34% of total revenues[94] A&R WMG's A&R capabilities, supported by an experienced global team, are crucial for identifying and nurturing commercially successful artists and maximizing catalog value - WMG has a long history of identifying and contracting commercially successful recording artists across all genres and geographies, attributed to its experienced global A&R team and strong relationships in the artistic community[80][81] - The company efficiently sustains sales of its catalog releases with lower marketing spend compared to new releases, and maximizes catalog value through Rhino Entertainment via re-releases, compilations, and new material from legacy artists[82][83] Recording Artists' Contracts Recording contracts define the commercial relationship, granting WMG rights to artists' music in exchange for royalties and advances, with a trend towards expanded-rights deals - Recording contracts define the commercial relationship, granting WMG rights to use artists' music in exchange for royalties based on sales and usage[84] - WMG provides up-front payments (advances) to artists, recoupable from future royalties, and typically covers recording/production costs, also recoupable[84] - Contracts for new artists usually cover an initial EP/album with options for subsequent albums, with increasing royalty rates and advances. Established artists receive greater advances/royalties for fewer albums[84][86] - Most contracts grant WMG ownership for the duration of copyright, though some established artists' contracts provide exclusive licenses for fixed periods[87] - WMG is transitioning to expanded-rights deals, sharing in touring, merchandising, sponsorship, and other ancillary revenues, diversifying income streams[87] Marketing and Promotion WMG employs a comprehensive, data-driven marketing and promotion strategy to maximize success for both new and catalog releases - WMG employs a comprehensive, coordinated marketing and promotion approach to maximize success for new and catalog releases, balancing expenditure with sales potential[88][89] - Marketing plans are budget-based and dynamically adjusted using sales reports, streaming data, and radio airplay[89] Manufacturing, Packaging and Physical Distribution WMG utilizes a global network of suppliers and distributors for manufacturing, packaging, and physical distribution, ensuring adequate capacity for its business needs - WMG utilizes various suppliers and distributors for manufacturing, packaging, and physical distribution globally, ensuring sufficient capacity for business needs[90] Sales and Digital Distribution WMG generates revenue from new and catalog music across digital and physical formats, leveraging partnerships with major digital services and benefiting from higher digital contribution margins - Revenues are generated from new releases and catalog music in digital (streaming, downloads), CD, and vinyl formats[91] - WMG partners with a broad range of digital music services (Amazon, Apple, Deezer, Spotify, Tencent Music, YouTube) and sells physical products through online and traditional retailers[92] - Digital formats generally yield a higher contribution margin due to lower per-unit costs compared to physical sales[92] - License agreements with digital music services typically last one to three years, with Apple and Spotify accounting for approximately 34% of total revenues in fiscal 2020[94] - The business has become less seasonal due to the emergence of digital formats, with revenue now driven more by release timing[95] Music Publishing Music Publishing is an intellectual property business focused on monetizing musical compositions, with Warner Chappell Music controlling over one million compositions globally - Music Publishing is an intellectual property business focused on generating revenue from the use of musical compositions, distinct from recorded music which focuses on sound recordings[96] - Warner Chappell Music, WMG's global music publishing arm, owns or controls rights to over one million musical compositions from more than 80,000 songwriters and composers across diverse genres[97] Music Publishing Royalties Music publishers receive royalties from various sources, including public performance, digital, mechanical, and synchronization licenses, with rates often subject to regulation - Music publishers receive royalties from public performance, digital, mechanical, synchronization, and other licenses[99] - In the U.S., mechanical royalty rates are set by the U.S. Copyright Act, and performance royalty rates are determined by negotiations with performing rights organizations (e.g., ASCAP, BMI)[99] - Outside the U.S., mechanical and performance royalty collection and allocation are often regulated by governmental or quasi-governmental authorities[99] - Synchronization licenses are generally negotiated individually, with publishers paying a contractual percentage to songwriters/co-publishers[99] - Mechanical royalties in the U.S. are 9.1 cents per song per unit for physical formats and permanent digital downloads, with different rates for interactive streaming[101] Composers' and Lyricists' Contracts Warner Chappell Music acquires copyrights or administration rights from songwriters, typically granting exclusive global use, though U.S. copyright law allows for termination rights - Warner Chappell Music acquires copyrights or administration rights from songwriters/composers, with grantors typically retaining a percentage of collected revenues[104] - Contracts usually grant WMG exclusive use rights, often globally, and administration rights for all musical compositions created during the exclusive term[104] - U.S. copyright law allows authors or their estates to terminate copyright assignments/licenses after a set period, which could lead to a potential loss of catalog[105] Our Recording Artist and Songwriter Value Proposition WMG offers a comprehensive value proposition to artists and songwriters, including talent development, global marketing, diverse revenue opportunities, and robust intellectual property protection - WMG aims to attract exceptional talent and help them build long, lucrative careers by differentiating its core capabilities and expanding comprehensive services[106] - In a digital world with vast music volume, WMG's proven ability to identify and develop talent is essential for artists and songwriters to stand out[107] - WMG offers multiple pathways for talent, investing in new music annually while maintaining commitment to each artist, fostering longevity and lasting impact[109][110] - Creative partnership involves A&R executives championing and challenging talent, providing a network of collaborators, and investing in time and space for experimentation[111] - WMG provides extensive marketing and promotional firepower across digital services, social media, radio, film, TV, and retail, adapting quickly to consumption changes and leveraging data for commercial decisions[112] - With approximately 5,500 employees globally, WMG offers both global reach and local expertise, building local fan bases and delivering worldwide fame through a global priority system[114] - Beyond traditional revenue streams, WMG helps artists capitalize on an expanding universe of opportunities, including merchandise, e-commerce, VIP ticketing, fan clubs in Recorded Music, and performance, digital, mechanical, synchronization, and sheet music in Music Publishing[115][116] - WMG launched a film and television unit in 2017 and acquired video production capabilities to offer greater storytelling for artists[117] - Centralized technology and data insights have improved royalty reporting transparency and strengthened defense against piracy and illegitimate uses of copyrights[118] Competition WMG competes favorably in the highly competitive and rapidly changing music industry, relying on artistic talent and effective marketing against major and independent players - WMG competes in Recorded Music and Music Publishing based on marketing and artist/songwriter signings, believing it competes favorably[119] - The recorded music industry is highly competitive and rapidly changing, relying on artistic talent and the ability to develop and market new artists[122] Global Market Share in 2019 (Recorded Music) | Company | Global Market Share (2019) | | :---------------------- | :------------------------- | | Universal Music Group | ~32% | | Sony Music Entertainment| ~21% | | Warner Music Group Corp.| ~16% | | Other (Independent) | ~32% | Global Market Share in 2019 (Music Publishing) | Company | Global Market Share (2019) | | :---------------------- | :------------------------- | | Sony/ATV | ~25% | | Universal Music Publishing| ~21% | | Warner Music Group Corp.| ~12% | | Other (Independent) | ~42% | Intellectual Property WMG's business relies heavily on copyright protection for sound recordings and musical compositions, actively lobbying for stronger IP rights and protecting its valuable trademarks - WMG's business relies on maintaining rights in sound recordings and musical compositions through copyright protection[124] - Copyright protection in the U.S. for 'works made for hire' (post-1978) generally lasts 95 years from publication or 120 years from creation; for other works, it's life of author plus 70 years. The MMA extended federal copyright to pre-1972 sound recordings[124] - In the EU, copyright for musical compositions lasts life of author plus 70 years, and for sound recordings, 70 years from release (if still in copyright on Nov 1, 2013)[125] - WMG actively lobbies for increased copyright protection and supports industry efforts to combat unauthorized reproduction and distribution[127] - WMG considers its trademarks (e.g., Asylum, Atlantic, Warner Chappell, WEA) valuable assets and endeavors to register them globally, actively monitoring and protecting against infringement[128] - WMG uses certain trademarks (WARNER, WARNER MUSIC, WARNER RECORDS, 'W' logo) under a perpetual, royalty-free license, which can be terminated under limited circumstances[128] Joint Ventures WMG engages in joint venture arrangements to distribute, market, promote, license, and sell recordings and other rights, such as Frank Sinatra Enterprises - WMG engages in joint venture arrangements to distribute, market, promote, license, and sell recordings and other rights, such as Frank Sinatra Enterprises[130] Employees As of September 30, 2020, WMG employed approximately 5,500 persons worldwide, with no U.S. employees subject to collective bargaining agreements - As of September 30, 2020, WMG employed approximately 5,500 persons worldwide, with none in the U.S. subject to collective bargaining agreements[131] Corporate Information Warner Music Group Corp. is a Delaware corporation with its principal executive offices located in New York, NY - Warner Music Group Corp. is a Delaware corporation with principal executive offices at 1633 Broadway, New York, NY 10019[132] Available Information WMG's SEC filings are available free of charge on its investor relations website and the SEC's website - WMG's SEC filings (10-K, 10-Q, 8-K) are available free of charge on its investor relations website (investors.wmg.com) and the SEC's website (www.sec.gov)[133](index=133&type=chunk) Risk Factors This section details significant operational, intellectual property, financial leverage, and governance risks impacting WMG's business - The COVID-19 pandemic has adversely impacted WMG's physical revenue streams, concert promotion, tour merchandise sales, and licensing/synchronization revenues due to disruptions in supply chains, closures, and production delays[137][138][139][140] - WMG operates in highly competitive markets, facing risks from other music companies, artists self-distributing, and technology companies entering the market, which could lead to reduced profits if WMG fails to sign successful talent or match competitor pricing[143][144] - Failure to identify, sign, and retain recording artists and songwriters, or the absence of superstar releases, could adversely affect WMG's prospects and financial results[145] - International operations (57% of FY2020 revenues) expose WMG to risks like limited intellectual property protection, capital repatriation restrictions, currency fluctuations, and varying regulatory environments[146][147][150] - A significant portion of WMG's revenues is subject to rate regulation by government entities or third-party collecting societies, which may limit profitability[154][156] - Digital piracy, including 'stream-ripping' (used by 23% of internet users in 2019), continues to adversely impact WMG's business by reducing legitimate music revenues[178] - WMG's substantial leverage ($3.104 billion total consolidated indebtedness as of Sept 30, 2020) could limit its ability to raise capital, react to market changes, and meet debt obligations, placing it at a competitive disadvantage[187][188] - Access Industries controls approximately 99% of WMG's total combined voting power due to the dual-class stock structure, concentrating control and potentially leading to conflicts of interest with other stockholders[213][223] Risks Related to Our Operations Operational risks include the COVID-19 pandemic's impact, intense competition, dependence on talent, international challenges, regulatory rate limitations, and acquisition integration issues - The COVID-19 pandemic has caused significant declines in physical revenue streams, disrupted live concert tours and merchandise sales, and delayed new music releases and film/TV productions, negatively affecting licensing and synchronization revenues[138][139][140] - The music industry is highly competitive, with WMG competing against other major and independent companies, as well as artists who self-distribute and other entertainment forms. Failure to adapt to technological developments or enforce intellectual property rights could harm the business[143][144] - WMG's financial results are highly dependent on its ability to identify, sign, and retain successful recording artists and songwriters, and the presence of superstar releases[145] - Operating in over 70 foreign countries exposes WMG to risks such as limited legal protection of IP, restrictions on capital repatriation, currency fluctuations, and diverse regulatory environments[146][147][148][149][150] - A significant portion of WMG's revenues (mechanical and performance royalties) is subject to rate regulation by government entities or collecting societies, which may limit profitability[154][156] - Impairment in the carrying value of goodwill ($1.831 billion) or other intangible and long-lived assets ($1.653 billion definite-lived, $154 million indefinite-lived as of Sept 30, 2020) could negatively affect operating results and equity[157][158] - Acquisitions and joint ventures carry inherent risks, including integration difficulties, potential loss of talent, and lack of full control over operations[159][160][161][162] - Outsourcing finance and accounting functions increases dependence on third parties, posing risks if service providers fail to perform satisfactorily[163] - Restructuring activities, including a financial transformation initiative to upgrade IT and finance infrastructure, involve material costs and may not generate expected savings or be successful[164][165] - Legislation limiting 'personal services' contract terms (e.g., California Labor Code Section 2855) could impair WMG's ability to retain key artists[166][167] - Recharacterizing recording artists and songwriters as employees instead of independent contractors could lead to significant employment and withholding liabilities[168] - Slower growth or leveling off of streaming adoption and revenues could adversely affect WMG's prospects and results, as streaming is a crucial growth area[170] - WMG is highly dependent on a limited number of digital music services (Apple and Spotify accounted for ~31% of total revenues in FY2020) for online distribution and marketing, giving these services significant influence over pricing and playlist curation[171][172] Risks Related to Intellectual Property and Data Security Risks include failure to protect IP, potential termination of trademark licenses, digital piracy, security breaches, evolving data privacy laws, and artist recapture rights - Failure to obtain, maintain, protect, and enforce intellectual property rights (trademarks, copyrights) could substantially harm WMG's business, reputation, and financial condition, with litigation being costly and time-consuming[175][177] - WMG in-licenses major trademarks (WARNER, WARNER MUSIC, WARNER RECORDS, 'W' logo) under a perpetual, royalty-free agreement, which could be terminated under certain circumstances, leading to rebranding efforts and business disruption[176] - Digital piracy, including 'stream-ripping,' continues to adversely impact WMG's revenues, and failure to combat it effectively could harm financial performance[178] - Security breaches (cyber-attacks) affecting customer, employee, vendor, or artist information, or WMG's music, could damage reputation, incur substantial costs, and lead to litigation[179][180] - Evolving data privacy laws and regulations globally (e.g., GDPR, CCPA) may increase compliance costs, limit activities, and expose WMG to potential liability and fines[182][183][184] - A potential loss of catalog exists if recording artists exercise their right to recapture U.S. rights in their recordings under the U.S. Copyright Act, particularly if works are determined not to be 'works made for hire'[185] Risks Related to Our Leverage WMG's substantial leverage poses risks to debt servicing, financial flexibility, and future capital raising, with restrictive covenants potentially limiting operations - As of September 30, 2020, WMG had $3.104 billion in total consolidated indebtedness, making it highly leveraged[187] - High leverage could make it difficult to service debt, increase vulnerability to economic conditions, require substantial cash flow for debt service, limit future capital raising, and restrict operational flexibility[188] - WMG and its subsidiaries may incur substantial additional indebtedness in the future, intensifying existing risks[189][205][207] - Debt agreements contain restrictive covenants limiting WMG's ability to incur more debt, pay dividends, make investments, sell assets, and engage in certain transactions, with non-compliance potentially leading to acceleration of indebtedness[190][198][199][201][202][203] - As a holding company, WMG depends on its subsidiaries to transfer funds to meet obligations, which can be restricted by earnings, tax considerations, and debt covenants[193][194][195] - Insufficient cash flows to fund debt service may force WMG to reduce investments, capital expenditures, or dividends, or sell assets, which may not be successful[204][210] - A downgrade, suspension, or withdrawal of WMG's credit rating could negatively impact the liquidity or market value of its indebtedness and increase its cost of capital[211] Risks Related to Our Controlling Stockholder Access Industries' significant voting control over WMG creates potential conflicts of interest and limits other stockholders' influence on corporate decisions - Access Industries controls approximately 99% of WMG's total combined voting power, enabling it to control director elections, corporate structure, management, and significant corporate transactions without other stockholders' consent[213][215][216][219] - Access has consent rights over certain corporate and business actions until it holds less than 10% of outstanding common stock, maintaining significant control[213][214] - Conflicts of interest may arise as Access invests in and maintains business relationships with companies that may compete with WMG, and its directors/officers may have affiliations creating conflicts[218][219] - WMG's amended and restated certificate of incorporation allows Access and its affiliates to pursue corporate opportunities without obligation to offer them to WMG, even if WMG might reasonably pursue them[220] - If Access sells a controlling interest in WMG privately, other stockholders may not realize a change of control premium, and WMG could fall under the control of an unknown third party[221] Risks Related to Our Common Stock The dual-class stock structure concentrates voting power with Access, potentially harming Class A stock value and liquidity, while future sales and anti-takeover provisions could impact market price - The dual-class structure (Class A: 1 vote/share, Class B: 20 votes/share) concentrates voting control with Access (99% of total combined voting power), limiting other stockholders' influence on corporate matters[223] - The difference in voting rights may harm the value and liquidity of Class A Common Stock and could lead to lower or more volatile market prices, or exclusion from certain stock indices[225][226] - Future sales of substantial amounts of Class A Common Stock by existing stockholders (especially after lock-up expiration) could cause the stock price to decline and make future equity sales more difficult[228][231][232] - The market price of Class A Common Stock may be volatile due to various factors, including industry conditions, economic factors, operating results fluctuations, and actions by large stockholders[233][235] - WMG's operating results and cash flows can fluctuate significantly due to the amount and quality of music releases, timing of release schedules, and advance payments to artists, impacting stock price[236] - Lack of research coverage or unfavorable research by securities analysts could cause WMG's stock price and trading volume to decline[237] - Existing debt securities ($3.104 billion as of Sept 30, 2020) and future debt/equity offerings rank senior to common stock, potentially adversely affecting Class A Common Stock's market price and diluting existing holdings[238][239] - Anti-takeover provisions in WMG's corporate documents and Delaware law could discourage, delay, or prevent a change of control, potentially limiting stockholders from realizing a premium[240][241][242] - As a 'controlled company' under NASDAQ rules, WMG qualifies for exemptions from certain corporate governance requirements, which could make its Class A Common Stock less attractive to some investors[243][244] - Provisions in WMG's certificate of incorporation limit directors' personal liability for fiduciary duty breaches, potentially discouraging lawsuits against directors[245][247] Unresolved Staff Comments There are no unresolved staff comments from the SEC Properties Warner Music Group's principal executive offices and worldwide headquarters are located in New York, NY, under a long-term lease expiring in 2029. The company also maintains a Los Angeles, CA headquarters and owns or leases other facilities globally, all considered adequate for current needs - WMG's principal executive offices and worldwide headquarters are at 1633 Broadway, New York, NY, under a lease ending July 31, 2029, with an option to extend[250] - The Los Angeles, CA headquarters is located at 777 S. Santa Fe Avenue, under a 12-year, 9-month lease expiring April 30, 2030, with a 10-year extension option[250] - WMG owns other property and leases facilities globally, which are considered adequate for current business needs[250] Legal Proceedings Warner Music Group is involved in various litigation and regulatory proceedings in the normal course of business. While accruals are established for probable and estimable losses, the amount of current accruals is not material. The outcome of ongoing proceedings and potential future litigation remains uncertain, and could adversely impact the company's brand value, incur defense costs, and divert management resources - WMG is involved in various litigation and regulatory proceedings as part of its normal business operations[251] - Accruals are established for probable and estimable losses in consultation with legal counsel, but the current amount of accrual is not material[251] - The outcome of litigation is uncertain due to factors like ongoing discovery, uncertain damage theories, incomplete factual records, and unpredictable opposing parties[251] - Litigation, regardless of outcome, could adversely impact WMG's brand value, incur defense costs, and divert management resources, potentially materially affecting results of operations[251] Mine Safety Disclosures This item is not applicable to Warner Music Group Corp PART II This part covers market information for common equity, selected financial data, management's discussion, and financial statements Market for Common Equity and Stockholder Matters This section details WMG's common stock market information, shareholder records, dividend policy, and stock performance post-IPO - WMG's Class A Common Stock began trading on NASDAQ under 'WMG' on June 3, 2020; Class B Common Stock is not publicly listed[255] - As of November 19, 2020, there were approximately 10 stockholders of record for both Class A and Class B Common Stock[256] - WMG's dividend policy, amended post-IPO, intends to pay quarterly cash dividends to both Class A and Class B Common Stockholders. The first dividend of $0.12 per share was paid in September 2020[258] - Dividend declarations are at the discretion of the board of directors, contingent on financial condition, earnings, liquidity, debt levels, contractual restrictions, and Delaware law[258] Stock Performance (June 3, 2020 - September 25, 2020) | Date | Warner Music Group Corp. | S&P 500 Index | NASDAQ Composite Index | | :---------- | :----------------------- | :------------ | :--------------------- | | 6/3/2020 | $100 | $100 | $100 | | 6/26/2020 | $101 | $96 | $101 | | 7/31/2020 | $100 | $105 | $112 | | 8/28/2020 | $98 | $112 | $124 | | 9/25/2020 | $90 | $106 | $115 | Market Information for Common Stock WMG's Class A Common Stock began trading on NASDAQ in June 2020, while Class B Common Stock is not publicly traded - Warner Music Group's Class A Common Stock began trading on the Nasdaq stock market under the symbol 'WMG' on June 3, 2020[255] - The Company's Class B Common Stock is not listed on any stock exchange nor traded on any public market[255] Holders of Record As of November 19, 2020, there were approximately 10 stockholders of record for both Class A and Class B Common Stock - As of November 19, 2020, there were approximately 10 stockholders of record for both Class A and Class B Common Stock[256] Dividend Policy WMG's dividend policy, amended post-IPO, aims to pay quarterly cash dividends, subject to financial performance and contractual restrictions - WMG's ability to pay dividends is restricted by covenants in its notes and credit agreements[257] - The company amended its dividend policy post-IPO to pay quarterly cash dividends to Class A and Class B Common Stockholders, with the first dividend of $0.12 per share paid in September 2020[258] - Dividend declarations are discretionary, depending on financial condition, earnings, liquidity, debt levels, contractual restrictions, and Delaware law[258] Stock Performance Graph The stock performance graph illustrates the cumulative total return of WMG's Class A Common Stock against market indices from June to September 2020 - The graph illustrates the performance of WMG's Class A Common Stock against the S&P 500 and Nasdaq Composite indices from its trading commencement on June 3, 2020, through September 30, 2020[260] Cumulative Total Return Comparison (June 3, 2020 - September 25, 2020) | Date | Warner Music Group Corp. | S&P 500 Index | NASDAQ Composite Index | | :---------- | :----------------------- | :------------ | :--------------------- | | 6/3/2020 | $100 | $100 | $100 | | 6/26/2020 | $101 | $96 | $101 | | 7/31/2020 | $100 | $105 | $112 | | 8/28/2020 | $98 | $112 | $124 | | 9/25/2020 | $90 | $106 | $115 | Securities Authorized for Issuance Under Equity Compensation Plans Information regarding securities authorized for issuance under equity compensation plans is incorporated by reference to Item 12 - Information regarding securities authorized for issuance under equity compensation plans is incorporated by reference to Item 12[264] Selected Financial Data This section provides a summary of Warner Music Group's selected financial data for the fiscal years ended September 30, 2016, through September 30, 2020. It includes key figures from the consolidated statements of operations, balance sheets, and cash flows, highlighting trends in revenues, net income/loss, debt, and cash generation. The data shows a shift to a net loss in FY2020, primarily due to non-cash stock-based compensation and IPO-related expenses, despite consistent revenue levels - Net loss attributable to Warner Music Group Corp. for fiscal year 2020 includes a $34 million loss on extinguishment of debt, $608 million non-cash stock-based compensation expense, and $89 million for management agreement termination and IPO-related expenses[267] Consolidated Statements of Operations Data (in millions, except per share data) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :----------------------------------------- | :------ | :---- | :---- | :---- | :---- | | Revenues | $4,463 | $4,475 | $4,005 | $3,576 | $3,246 | | Interest expense, net | $(127) | $(142) | $(138) | $(149) | $(173) | | Net (loss) income | $(470) | $258 | $312 | $149 | $30 | | Net (loss) income attributable to WMG Corp.| $(475) | $256 | $307 | $143 | $25 | | Class A – Basic and Diluted EPS | $(0.82) | $— | $— | $— | $— | | Class B – Basic and Diluted EPS | $(0.95) | $0.51 | $0.61 | $0.29 | $0.05 | Consolidated Balance Sheet Data (at period end, in millions) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :-------------------------- | :------ | :---- | :---- | :---- | :---- | | Cash and equivalents | $553 | $619 | $514 | $647 | $359 | | Total assets | $6,410 | $6,017 | $5,344 | $5,718 | $5,335 | | Total debt | $3,104 | $2,974 | $2,819 | $2,811 | $2,778 | | Total (deficit) equity | $(45) | $(269) | $(320) | $308 | $210 | Consolidated Statements of Cash Flows Data (in millions) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :------------------------------ | :---- | :---- | :---- | :---- | :---- | | Operating activities | $463 | $400 | $425 | $535 | $342 | | Investing activities | $(219) | $(376) | $405 | $(126) | $(8) | | Financing activities | $(316) | $88 | $(955) | $(128) | $(216) | | Depreciation and amortization | $261 | $269 | $261 | $251 | $293 | | Capital expenditures | $(85) | $(104) | $(74) | $(44) | $(42) | Management's Discussion and Analysis This section provides a detailed analysis of WMG's financial condition and results of operations for the fiscal years 2018-2020. It covers consolidated and segment-specific performance, highlighting the impact of the COVID-19 pandemic, the IPO, and accounting changes. Key financial metrics like revenues, OIBDA, and net income are discussed, along with their drivers. The section also details the company's financial condition, liquidity, debt capital structure, and critical accounting policies, emphasizing the shift to digital revenue and the effects of strategic initiatives and external factors - WMG's total revenues decreased slightly by $12 million (0%) to $4,463 million in FY2020 from $4,475 million in FY2019, primarily due to COVID-19 impacts on physical sales and artist services, offset by digital growth[298] - Total digital revenues increased by $293 million (11%) to $2,903 million in FY2020, representing 65% of consolidated revenues, driven by continued streaming growth[299] - Recorded Music revenues decreased by $30 million (1%) to $3,810 million in FY2020, with digital revenue increasing by $225 million, but offset by decreases in physical, artist services, and licensing revenues due to COVID-19[300][301] - Music Publishing revenues increased by $14 million (2%) to $657 million in FY2020, mainly driven by a $66 million (24%) increase in digital revenue, partially offset by decreases in performance and mechanical revenues due to COVID-19[302][303] - Consolidated OIBDA decreased significantly by $593 million (95%) to $32 million in FY2020, primarily due to higher selling, general, and administrative expenses, including $559 million in non-cash stock-based compensation and $89 million in IPO-related costs[336] - Net loss for FY2020 was $470 million, a decrease of $728 million from a net income of $258 million in FY2019, largely due to the aforementioned non-cash expenses and IPO costs[354] - Cash provided by operating activities increased by $63 million to $463 million in FY2020, driven by timing of working capital, partially offset by higher taxes and A&R investments[402] - Total consolidated indebtedness, net of deferred financing costs, was $3.104 billion as of September 30, 2020, with a weighted-average interest rate of 3.7%[399][673] - WMG paid an aggregate of $344 million in cash dividends to stockholders in FY2020, compared to $94 million in FY2019 and $925 million in FY2018 (which included Spotify share sale proceeds)[454] Introduction WMG, formed in 2003, completed its IPO in June 2020, with Access Industries retaining significant control, and uses OIBDA and constant currency revenue as key performance measures - Warner Music Group Corp. (WMG) was formed on November 21, 2003, and operates primarily through its subsidiary WMG Acquisition Corp., a major music entertainment company[270] - WMG completed its IPO on June 5, 2020, with 77,000,000 shares of Class A Common Stock sold by Access Industries, making WMG a 'controlled company' due to Access's continued significant voting power[271][272] - Management's Discussion and Analysis (MD&A) uses OIBDA (Operating Income Before Depreciation and Amortization) and constant currency revenue as key performance measures[274][275] Business Overview WMG is a leading music entertainment company with iconic record labels and a global music publishing business, representing over 80,000 songwriters - WMG is a leading music entertainment company with iconic record labels (Atlantic, Warner, Elektra, Parlophone) and a global music publishing business (Warner Chappell Music), representing over 80,000 songwriters[276] Recorded Music Operations Recorded Music operations encompass artist discovery, marketing, global distribution, and diversified revenue streams through expanded-rights deals and digital monetization - Recorded Music involves discovering artists, marketing, promotion, distribution, sale, and licensing of music, covering the entire value chain[277] - Key U.S. labels include Atlantic, Warner, Elektra Music Group (Elektra, Fueled by Ramen, Roadrunner), and Rhino Entertainment for catalog marketing[278] - International operations span over 70 countries, marketing both domestic and international repertoire[279] - Distribution includes WEA Corp. and Alternative Distribution Alliance (ADA) for independent labels[280] - Music is distributed digitally via streaming services (Amazon, Apple, Spotify, Tencent Music, YouTube) and download services, and physically through online and traditional retailers[281] - WMG integrates digital content marketing into A&R and distribution, collaborating with online partners to monetize assets and create new revenue streams[282][283] - Diversified revenues include 'expanded-rights deals' with artists for touring, merchandising, and sponsorships, enhancing artist services capabilities[284] Recorded Music Revenue Sources | Source | Description | | :---------------- | 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