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Inside the Earnings: UMG Is Firing on Full Cylinders Headed Towards 2023 IPO

Lucian Grainge and Taylor Swift
Todd Williamson/JanuaryImages

Lucian Grainge and Taylor Swift during Billboard Women In Music 2019, presented by YouTube Music, on Dec. 12, 2019 in Los Angeles.

The leading label's recorded music, publishing and merchandising all had exceptional years in 2019.

Universal Music Group is firing on all cylinders as its revenue exploded last year to €7.16 billion ($8.04 billion), an 18.9% increase (15.6% on a constant currency basis) over the previous year when revenue totaled €6.023 billion ($7.15 billion). While streaming continues to be the main driver of revenue growth all three operations of UMG -- recorded music, music publishing and merchandising -- had exceptional years, contributing to overall growth.

Recorded music grew 16.7% to €5.634 billion ($6.33 billion) from €4.83 billion ($5.73 billion) in 2018; music publishing grew 11.8% to €1.05 billion ($1.18 billion) from the prior year total of €902 million ($1.07 billion); and merchandising and other revenue grew a whopping 79.1% to €489 million ($529.2 million) from €273 million ($324 million). That means that recorded music accounted for about 78.7% of UMG revenue, while Universal Music Publishing Group tallied 14.7% of revenue; and merchandising and Bravado and label merch sales totaled 6.8% of revenue.

KEY TAKEAWAYS:

1) Universal Music's revenue growth is outpacing the industry’s growth but even better, as profit margins are outpacing its own revenue growth

2) The company’s strong 2019 EBITDA performance reduces company's valuation from a stratospheric 31 times multiple to 24 times

3) Recorded music performance last year was so strong across the board that even in declining formats like downloads and physical the company defies industry trends 

The company's profitability enjoyed even more growth, with operating income growing to €1.17 billion ($1.31 billion), -- up 23.5% from €946 million ($1.2 billion) -- which means that operating margin is 16.3% of revenue. When depreciation and amortization are added back in, earnings before interest, taxes, depreciation and amortization (EBITDA) totaled €1.26 billion ($1.4 billion), up 28.4%, and accounted for 17.6% of revenue.

While UMG's cash flow fell 16% last year to 704 million euros from the prior year's 838 million euros, that had more to do with using cash for catalog acquisitions and buying the 75% of Ingrooves the company didn't already own, giving the company additional music assets which should increase cash flow on a going forward basis.

The company's strong performance, as well as Wall Street analyst projections for the overall music industry, has encouraged Vivendi to try and cash in on some of the value it has created through its ownership of UMG. In 2018, Vivendi announced it would sell up to 50% of UMG and last year announced a deal to sell 10% to a consortium of investors led by Tencent for €3 billion, giving UMG a €30 billion valuation.

Using 2018's €979 billion EBITDA, that makes for a 30.6 times EBITDA multiple, which some financial executives view as pricy even with UMG's strong performance and glowing industry forecasts from Wall Street analysts. In fact, some have observed that it's taken a long time to sell even 10% of the company to private investors, which may be why Vivendi is now saying it will instead go public and do an initial public offering. They may also be using the lure of a possible public offering as an inducement to bring in potential, but so far hesitant, strategic investors that also gives them an eventual cash-out option.

This year's performance changes the UMG valuation model, as its €1.247 billion ($1.4 billion) in EBITDA now comes to almost a 24 times EBITDA multiple.

If the last two years of UMG'S EBITDA is averaged, that comes out to a nearly 27 times EBITDA multiple. For the last three years (2019, 2018, 2017), that averages €1.022 billion and gets the pricing level back to a nearly 30 times EBITDA valuation for the company. Music buyers look at many financial barometers when trying to price potential acquisitions, but one of the most common is looking at a three year average EBITDA multiple, with a fourth year going forward projected EBITDA sometimes thrown into the mix.

Getting back to the company's financials, recorded music had the largest revenue growth, increasing by slightly more than €800 million, although about one-eighth of that was due to the acquisition of Ingrooves. UMG's March 15, 2019, Ingrooves acquisition allowed the company to claim, Billboard estimates, an additional €95 million, by counting all of that company's revenue from that date through the year-end. Previously, UMG only claimed a portion of Ingrooves revenue, although its unclear what method it used to count that revenue. (UMG might have counted only 25% of Ingrooves revenue for the equity portion of the operation it previously owned before buying the rest of the indie distributor or used agency accounting and only counted revenue it received through the fees it received for the services it supplied to Ingrooves and/or dividends from the company.)

Even without the additional Ingrooves revenue, the overall UMG company would have still posted a 17.3% increase, making it the first double digit percentage revenue increase UMG has enjoyed since it acquired EMI. Big sellers including Billie Eilish, Post Malone, Taylor Swift, Ariana Grande and the Japanese band King & Prince all contributed to that, as well as continued sales of the soundtrack from A Star Is Born, The Beatles 50th anniversary release of Abbey Road and multiple albums from Queen.

Within recorded music, streaming grew 28.1% to €3.325 billion ($3.73 million) from €2.596 billion ($3.08 billion), while physical grew 6.5% to €1.01 billion ($1.14 billion) from €949 million ($1.126 billion); and licensing and other income streams grew to €870 million ($977 million), up 8.2% from the €804 million ($954.3 million) in the prior year. Downloads was the only format showing a decline and even though was at a slower pace than the rest of the industry, falling 10.5% to €428 million ($480.6 million) from €479 million ($568.6 million). As a percentage of revenue that breaks out to streaming 59%, downloads 7.6%, physical 17.9% and licensing 15.4%.

While the company doesn't yet break out the particulars of its expense structure -- something that it will have to do if it does a stock offering, the company noted that it paid out €2.264 billion ($2.53 billion) in royalties to artists and repertoire owners (likely artists that own their own their recorded masters and distributed labels like Cash Money Records). That marks a 23.5% increase over 2018 when such payouts totaled €2.04 billion ($2.42 billion). It comprised 40% of revenue in 2019, down from the prior year when it was 42.2% of revenue.

Moving over to publishing, the Universal Music Publishing Group continues to grow like gangbusters, breaking the billion-euro mark (last year it broke the billion-dollar mark), with €1.05 billion revenue ($1.18 billion), up 11.8% from the prior year's €941 billion ($1.12 billion) total. That marks the second year in a row of double digit revenue growth as in 2018 UMPG grew 10.2% from €854 million ($961 million).

While recorded music had the biggest revenue gain, merch operations posted the largest percentage gain with 79% growth in revenue. The company’s financial notes cited increased touring activity and growth in retail and direct-to-consumer revenues, in a conference call with analysts, management also said most of the growth came due to Bravado's acquisition of Epic Rights in January 2019. 

 

Looking ahead, UMG said its upcoming release schedule includes music from 5 Seconds Of Summer, Alejandro Fernandez, Bon Jovi, DaBaby, Demi Lovato, Gregory Porter, Justin Bieber, J Balvin, Karol G, The Killers, Niall Horan, Pearl Jam, Sam Smith and Tame Impala.

This story uses the exchange rates cited in the Vivendi notes to its financials, which was €1 for $1.123 for 2019 and $1.187 for 2018.


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