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 disillusioned that UMG’s subscription streaming revenues ‘solely’ grew 6.9% YoY within the quarter. A number of downgraded their rankings of the corporate’s inventory, and UMG’s share worth stays round 17% decrease than it did pre-Q2 earnings.
One one that isn’t anxious about UMG’s single-digit subscription income development – nor the ensuing share worth tumble – is Invoice Ackman.
Ackman’s Pershing Sq. Holdings, which owns roughly 10% of UMG’s fairness, not too long ago 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 development prospects,” the corporate wrote in its fiscal replace.
It additionally mentioned it believes music has “a protracted runway of future development, 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 development.
The corporate added: “Much like how traders initially overreacted to considerations in regards to the potential detrimental impression from AI, solely to see UMG shares rapidly recuperate because the market higher understood the AI danger, we imagine that as traders higher perceive UMG’s path to greater income development and regain confidence within the long-term well being of the {industry}, the corporate’s share worth is prone to enhance considerably from its present ranges.”
Pershing Sq. boss Invoice Ackman, in his letter to PSH shareholders printed on the prime of the report, had this to say in regards to the present inventory market surroundings: “Fairness markets have exhibited an infinite quantity of single-name inventory worth volatility for even the most important corporations once they shock traders with even minimally below-expectation total 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. advised 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 can price round $17/$18-per-month.
Common’s management staff cited a stat on its Q2 earnings name that implies one in 5 Spotify subscribers could possibly be keen to pay for a pricier ‘Tremendous Premium’ tier.
UMG’s CFO and President of Operations Boyd Muir advised 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 presents enhanced options and unique entry to content material.”
It’s anticipated that Spotify’s ‘Deluxe’ tier may embody extra product options equivalent to ‘superfan’ experiences and HiFi audio.
In the meantime, commenting on the potential for added music subscription worth will increase, Pershing Sq. argued in its report that “there may be 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 in the present day obtain free music might be charged a month-to-month subscription payment, as is usually 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 foreign money.
One other key spotlight from the quarter: adjusted EBITDA development of 11.3% YoY to EUR €649 million (USD $699m).
Regardless of these robust total revenues, UMG missed analysts’ estimates for its subscription streaming revenues which, as talked about, had been up 6.9% YoY (at fixed foreign money). Some analysts had been on the lookout for round 11% YoY development.
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 prime 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, nevertheless, 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 experiences of regulatory scrutiny from the US Securities and Trade Fee (SEC), which was anticipated to require extra particulars in regards to the closed-end fund earlier than approving the IPO worth.
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 development of 10% and working earnings development of 11% had been each robust, subscription and streaming income development, a key metric, decelerated throughout the quarter from its latest double-digit development price to mid-single digit development. We imagine the quarter’s disappointing subscription and streaming development is because of sure idiosyncratic elements distinctive to UMG mixed with some weakening within the total financial surroundings. As evidenced by UMG’s friends’ outcomes nevertheless, 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 development prospects. We proceed to imagine that music has a protracted runway of future development, 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 development of seven% slowed from 13% final quarter, as the corporate started to lap final yr’s worth will increase. Slower development at sure digital service suppliers (“DSPs”) offset robust development 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 development 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 in the end be adopted by as a lot as 20% of Spotify’s subscriber base.
We imagine there may be 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 in the present day obtain free music might be charged a month-to-month subscription payment, as is usually the case within the video streaming {industry}. Whereas every of the main 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 development final quarter, as financial uncertainty prompted 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 quickly whereas the businesses labored collectively on a extra holistic deal that may 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 an identical or greater price than subscription income development.
UMG’s administration staff 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 development. For instance, UMG’s efforts led to the industry-wide adoption of “artist-centric” initiatives that may end in a better 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 development alternatives whereas additionally guaranteeing regulatory and authorized safety for its artists.
Much like how traders initially overreacted to considerations in regards to the potential detrimental impression from AI, solely to see UMG shares rapidly recuperate because the market higher understood the AI danger, we imagine that as traders higher perceive UMG’s path to greater income development and regain confidence within the long-term well being of the {industry}, the corporate’s share worth 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 perfect discussion board for administration to offer traders with extra particulars on its enterprise and the long-term development alternative. Given UMG’s robust market place and lengthy runway for sustained earnings development, we imagine that the corporate’s present valuation represents a deep low cost to its intrinsic worth.
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