Invoice Ackman unworried by Common Music Group subscription income blip

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 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, lately 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 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 revealed 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 unfavorable impression from AI, solely to see UMG shares shortly get well because the market higher understood the AI danger, we imagine that as traders higher perceive UMG’s path to
increased 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 atmosphere: “Fairness markets have exhibited an unlimited quantity of single-name inventory worth volatility for even the most important corporations after they shock traders with even minimally below-expectation general 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. instructed its shareholders that it “anticipate[s] the {industry} to enhance monetization by way of new services and products” 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 is able to price round $17/$18-per-month.

Common’s management crew cited a stat on its Q2 earnings name that means 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 instructed 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 increased worth level for a compelling product configuration, one which gives enhanced options and unique entry to content material.”

It’s anticipated that Spotify’s ‘Deluxe’ tier might embrace extra 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 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 at this time
obtain free music may be charged a month-to-month subscription charge, as is often 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 forex.

One other key spotlight from the quarter: adjusted EBITDA development of 11.3% YoY to EUR €649 million (USD $699m).

Regardless of these robust general revenues, UMG missed analysts’ estimates for its subscription streaming revenues which, as talked about, have been up 6.9% YoY (at fixed forex). Some analysts have been searching 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 a press release 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 through 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
important 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 stories of regulatory scrutiny from the US Securities and Alternate 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 beneath:

UMG’s shares skilled a pointy drop when the corporate reported outcomes final month. Whereas the corporate’s general income
development of 10% and working revenue development of 11% have been each robust, subscription and streaming income development, a key
metric, decelerated through the quarter from its latest double-digit development fee to mid-single digit development.

We imagine the quarter’s disappointing subscription and streaming development is because of sure idiosyncratic components distinctive to
UMG mixed with some weakening within the general financial atmosphere. As evidenced by UMG’s friends’ outcomes nevertheless,
music streaming remains to be rising at a wholesome fee.

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 anticipate the {industry} to enhance monetization by way of new services and products, with higher
segmentation of consumers 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 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 at this time
obtain free music may be charged a month-to-month subscription charge, as is often the case within the video streaming {industry}. Whereas
every of the foremost 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 induced 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 briefly 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 an identical or increased fee than subscription income development.

UMG’s administration crew led by Sir Lucian Grainge has a protracted track-record of rising and shaping the music market by
working with its companions in innovating artistic options to drive development. For instance, UMG’s efforts led to the industry-wide
adoption of “artist-centric” initiatives that can lead to a higher 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
making certain regulatory and authorized safety for its artists.

Much like how traders initially overreacted to considerations in regards to the potential unfavorable impression from AI, solely to see UMG shares
shortly get well because the market higher understood the AI danger, we imagine that as traders higher perceive UMG’s path to
increased 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.

 Music Enterprise Worldwide