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Universal Music’s Midyear Earnings Were Just OK on Paper, But Pretty Good for During the Pandemic

Rarely can a company’s financial performance be deemed successful with seemingly mediocre financial results, but Universal Music Group is having a decent 2020 so far. 

Rarely can a company’s financial performance be deemed successful with seemingly mediocre financial results, but Universal Music Group is having a decent 2020 all things considered. Its segments either did great or poorly, with little in between: Recorded music streaming revenue dropped 4.5% from Q1 to Q2, digital downloads cratered 26.3% and, with no artists touring since mid-March, merchandise revenues fell 27.2% from Q1 and 80.8% from Q2 2019. Including Q1 revenues that were little affected by the pandemic, Universal’s revenue grew 6.2% to €3.5 billion ($4.1 billion at current conversion rates) in the first half of the year.

The first wave of music’s Q2 earnings reports — from Spotify, SiriusXM and UMG, all last week — reinforce the importance of the subscription streaming model in today’s music business, and its necessity during a pandemic-created economic recession. In spite of sharp declines in physical product and merchandise sales, and although advertising-supported services suffered from brands’ cutbacks on spending, UMG’s total revenue declined only 4.5% from Q1 to Q2 and 3.8% from Q2 2019. The recorded music division’s streaming revenue fell 6.5% from Q1 to Q2 and 3.6% from Q2 2019. For the first half of 2020, total revenue was up 6.2% year over year.


Universal’s bottom line helps show why record labels and publishers have not laid off workers during the pandemic: while first-half revenues grew 6.2%, earnings before interest, taxes and amortization (EBITA) rose 18% from €481 million to €567 million ($566 million to $667 million). Half-year cash flow from operations improved 20.7%, from €372 million in 2019 to €449 million in 2020 ($438 million to $528 million) before adjustments for acquisitions, net payments to artists and other capital expenditures. Which is to say UMG is in good financial health. Parent company Vivendi has €3.7 billion ($4.4 billion) of available credit and €2.13 billion ($2.5 billion) of cash and cash equivalents, more than enough for a diversified, profitable company.

Looking forward, streaming revenue should fare better in Q3 than Q2: Subscription revenue will most likely be stable — judging from Spotify’s expectation of continued subscriber growth in Q3 — and advertising revenue will continue the rebound from the dismal April at Spotify and Pandora.

Universal’s Q2 results didn’t break out subscription and advertising revenue, although three earnings releases last week provide clues. We know Spotify grew subscription revenue 2% and advertising revenue dropped 11.5% from Q1 to Q2, Pandora’s advertising revenue fell 17% from Q1 to Q2, and YouTube’s Q2 revenue — on all videos, including music — dropped about 6% from Q1. Asked about the subscription-advertising revenue breakdown, the company pointed to IFPI’s global data for 2019: 75% of streaming revenue came from subscriptions and 25% from ad-supported audio and video services.


Publishing also carried Universal in the first half of the year, accounting for 52.7% of the company’s revenue growth. Part of the gain came from a €15-million, one-time gain related to a royalties claim that led publishing royalties’ growth from €271 million to €302 million, making it the only division to post a gain from Q1 to Q2. Even without the one-time gain, publishing revenues would have grown 6%.

Universal Music Earnings Analysis: Label Still

Here are six other questions answered in the Vivendi earnings report and call:

What was Vivendi’s profit on its sale of a 10% stake to Tencent for €3 billion?

Vivendi recorded a capital gain of €2.4 billion ($2.8 billion) on the €3 billion sale ($3.5 billion) sale.

What did Vivendi do with the €3 billion it received from Tencent’s purchase of a 10% stake in Universal in March?

Half of the proceeds were returned to shareholders through share buybacks.

Tencent — along with other investors — has the right to acquire an additional 10% stake in Universal. What’s the status of that potential deal?

Vivendi CEO Arnaud de Puyfontaine said, “We have been approached by many different interests and the process is currently happening.”


Could Universal move up its IPO date?

It is open to the idea. Warner’s successful IPO — following a COVID-19-led market downturn — and current $18.1 billion enterprise is evidence investors view streaming services like Spotify as gold mines. (Access Industries acquired Warner in 2011 at a $3.3 billion valuation.) Tencent’s investment of a 10% stake in March valued Universal at $33 billion. Could Universal do better? “We are welcoming the good results on the Warner Music IPO,” de Puyfontaine said. He reiterated Universal’s plan for an IPO “no later than early 2023” but added it “could consider an earlier IPO” depending on unnamed “different factors.”

What is Universal doing with its roughly 4% stake in Spotify? Warner Music Group, Sony Music and Merlin all sold their shares soon after Spotify’s 2018 IPO.

Universal will hold its Spotify shares — worth approximately $1.9 billion at the July 31 closing price — for the foreseeable future. And judging from de Puyfontaine’s comments, Universal treats the equity stake like a strategic investment; all major rights holders received Spotify shares as part of previous licensing agreements. “We do consider that the long-term relationship is in the best interest of both our shareholders and our artists,” said de Puyfontaine.

Do Universal and Spotify really have that close a relationship?

It’s certainly being painted as a mutual admiration society the way executives talk about the other company. As Spotify said multiple times during its July 29 earnings call, Universal is the first label group to take Spotify’s marketing tools for a spin en masse. The relationship between Spotify and Universal “is based on working together,” said de Puyfontaine, continuing that he expects “the agreement will help bring innovation” and give UMG’s music “the “highest possible proportion” of listeners