Music’s Third-Quarter Earnings Preview: Seven Key Points to Watch

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This year, stakeholders and investors can follow a very specific narrative as they watch music companies’ earnings reports: The first quarter (January to March) showed the early, unexpected impact of the coronavirus pandemic, which shut down entire sectors of the industry in early March. The second quarter (April to June) illustrated how well some businesses were either scrambling or surviving, as the economy struggled to keep its footing. Third quarter earnings (July to September), which officially start Tuesday with Universal Music Group’s owner Vivendi’s financial statements and will span about six weeks, will be a referendum on how entities are navigating a pandemic that is here and not going anywhere for the immediate future.

The pandemic has affected companies in different ways. The concert industry’s pandemic mitigation will be on display from Live Nation, CTS Eventim and Madison Square Garden Entertainment. Spotify and SiriusXM will reveal how the subscription model has performed and whether or not online advertising bounced back from a horrid second quarter. iHeartMedia, Cumulus and Entercom will show if radio advertising improved from a second-quarter collapse. The three major labels’ record labels and publishers will provide insight into the global industry’s rebound.

On Monday (Oct. 19), Warner Music Group jumped the gun to give investors a preview of its earnings, releasing unaudited, partial quarterly results -- namely revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) -- for the fiscal year ended Sept. 30. At the same time, Warner announced a $250 million notes sale that will help fund two acquisitions of unnamed companies. Warner isn’t raising money because it’s in trouble. Its revenue will range from approximately $4,435 million to $4,485 million, compared to $4,475 million last year; adjusted EBITDA will be between roughly $825 million to $845 million, an improvement from $737 million a year earlier. Warner has about $550 million in cash, some of which will help fund the acquisitions.

Here are seven key points to look for this earnings season:

How much money is in drive-in shows and livestreams?

Following a near-dead second quarter, concert promoters mitigated pandemic-related venue closures with events in safer spaces. Live Nation and Madison Square Garden Entertainment saw their revenues drop 98% and 95.8% in the second quarter, respectively. Since tours were suspended in March, Live Nation and other promoters have produced one-off shows with limited revenue potential rather than lucrative tours. But their creative approaches make the best of a bad situation. Live Nation, with Live At Home, has joined an army of artists, promoters and venues offering well produced, paid livestreams. Ironically, Stevie Nicks’ new concert film, The 24 Karat Gold Tour, is being released through BMG and Trafalgar in theaters on Oct. 21 and 25 only -- replacing lifeless entertainment venues for struggling theaters with limited capacity.

Subscriber growth

The third quarter will reveal if subscription services are either pandemic-proof or susceptible to joblessness. Second-quarter subscriber numbers were strong across the board. Spotify’s subscriptions grew by 8 million to 138 million; advertising revenue that supports the free tier sank 21%. At SiriusXM, its satellite self-pay subscribers rose by 264,000 to 30.3 million and Pandora added 41,000 subscribers. SiriusXM is confident enough to have upped its year-end forecast from 500,000 to 700,000 net new subscribers in September. The earnings reports of Universal Music Group (earnings out Tuesday, October 20) and Warner Music Group (earnings release date has not been announced) need a strong performance from Spotify. Subscriber growth is the most important metric for investors who buy into the narrative that a market leader should focus on grabbing market share and investing in product development; Spotify succeeds on both counts.

The race for the home

In a market lacking clear competitive advantages, the largest technology companies in the world are exploiting their control over the home unit to build their streaming media services. As Will Page, former chief economist at Spotify, noted in a new Billboard article, “tech giants like Apple and Amazon seem to be looking at households,” not individuals, as the ultimate target. Both companies have direct billing relationships with hundreds of millions of households -- Apple through iTunes and its app store, Amazon through its unparalleled e-commerce business. Both companies also have music and video on-demand streaming platforms. Other than Google, no other company can offer a similar suite of services. Compared to a standalone offering like Spotify or Netflix, Apple’s Apple One, coming this fall, looks like a bargain: Apple Music, Apple+, Apple Arcade and iCloud for $14.95 and $19.95 for an individual and family plan (Apple News and Apple Fitness+ are added to the premium version for $10). Likewise, Amazon can count on its smart speaker and Prime businesses to gain music subscribers.

The return of radio advertising

A divisive 2020 election comes at a perfect time for a beleaguered U.S. radio market. The entire U.S. radio advertising market will be down 23% in 2020, an improvement from its 33.2% dip in the first half of the year, according to market research firm Magna. Second-quarter revenues of iHeartMedia, Cumulus and Entercom, the three largest U.S. radio companies, were down 46.6%, 47.8% and 53.8%, respectively. For its part, iHeartMedia has the benefit of a lighter, post-bankruptcy balance sheet and lower interest payments than three years ago; lenders have loosened its debt terms to help prevent a default.

Cash in the bank

Some companies’ rainy day funds turned into life rafts when they realized the pandemic’s enormous impact. In music, concerts and radio advertising have been hit the hardest. Companies have prepared accordingly: Live Nation added debt of $1.2 billion of long-term debt and $120 million in an existing credit facility; iHeartMedia drew down its credit facility by $120 million and extended its credit by $120 million. Things could be worse. AMC Theaters, owner of a nationwide movie theater chain, warned investors it could run out of cash by the end of 2020 or early 2021 in spite of raising between $355 million and $415 million of extra liquidity in August.

The return of physical sales

Even though the CD format regularly posts double-digital declines, it provides hundreds of millions of dollars to complement companies’ far larger digital revenues. Fortunately, as cities and states ease their restrictions, retail stores’ CD and vinyl LP sales have returned from closures that left curbside pickup and home delivery as the best options to serve customers. Sales have returned to their normal deficit in the U.S. Third quarter physical sales in the U.S. dropped 4.2% year-over-year, from 15.6 million to 14.9 million, according to MRC Data. Still, year-to-date sales through the week ended October 8 are down 15.1%. Global sales will roughly mirror the U.S. figures.

Amazon’s expanding empire

Since the beginning of the pandemic, Amazon deepened its hooks into consumers who wanted to avoid some of the rigors of shopping in public. Now, seven months after the first shelter-in-place orders in the U.S., Amazon trucks are ever-present reminders that the company has helped change shopping habits permanently. Amazon’s sales during last week’s two-day Prime Day reached almost $3.5 billion in 19 countries, about 60% more than its 2019 haul. Consumers bought millions of smart speakers that incorporate the Alexa technology used in Amazon’s products. The speakers are a stepping stone to Amazon’s music streaming services: Amazon Prime Music, Music Unlimited and Music Unlimited HD.

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Third-Quarter Earnings Calendar:

Tuesday, Oct. 20
Vivendi (Universal Music Group)

Thursday, Oct. 22

Wednesday, Oct. 28
Sony Corp. (Sony Music Entertainment)

Thursday, Oct. 29

Tuesday, Nov. 3
Ryman Hospitality

Thursday, Nov. 5
Live Nation
Liberty Media

Wednesday, Nov. 9

Tuesday, Nov. 10
Tencent Music Entertainment

Thursday, Nov. 12
Bertelsmann (BMG)

Thursday, Nov. 19
CTS Eventim

Not yet announced
Warner Music Group
Madison Square Garden Entertainment