Universal Music Group Shares Plunge After Disappointing Q2 Results

Universal Music Group NV‘s UMGNF shares dropped 23% on Thursday following the announcement of disappointing results in its streaming and subscription segments.

Subscription Revenue Growth Slows Down Significantly

In the second quarter, UMG’s subscription revenue growth slowed to 6.9% year-over-year, excluding foreign exchange (FX) effects, a notable drop from the 12.5% growth in the first quarter. This fell short of Bloomberg’s consensus estimate of 11% growth.

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The streaming revenue also saw a significant decline, falling 3.9% ex-FX, a stark contrast to the 10.3% growth recorded in Q1, Yahoo Finance reported.

UMG attributed this downturn to a “deceleration in growth at key advertising-based platform partners as well as shortfalls on certain platforms related to the timing of deal renewals.”

The company’s recent struggles with social media platforms have also been a contributing factor.

In May, UMG ended its partnership with Meta Platforms Inc. META, which had been licensing premium music videos for Facebook. Management acknowledged that the offering was “less popular with Facebook’s user base than other music products.”

Licensing Disputes And Market Adjustments Hit UMG Hard

Additionally, UMG’s high-profile dispute with TikTok over a new licensing agreement resulted in a month’s worth of lost revenue before the issue was resolved. Citi analyst Thomas Singlehurst downgraded UMG’s shares from Buy to Neutral, citing the stock volatility’s potential to “weigh on sentiment” in the near term.

UMG’s vice president and CFO, Boyd Muir, discussed the subscription growth slowdown during the earnings call, attributing it partly to the timing of price increases from its partners, including Spotify Technology SA SPOT, Amazon.com Inc‘s Amazon Music, and Apple Inc‘s Apple Music. These price hikes have historically boosted UMG’s subscription revenue but have coincided with a slowdown in subscriber growth on some platforms.

“The other factor impacting our subscription revenue growth this quarter is the slowdown in subscriber growth at certain platforms, which is occurring while the overall subscription marketplace continues to experience significant growth in subscribers globally,” Muir explained.

He noted that while Spotify, YouTube, and many regional and local platforms have maintained healthy growth in subscribers, other large partners have struggled to drive global adoption, resulting in fewer new subscriber additions.

Despite these challenges, Muir emphasized that UMG is “engaged with all of our key partners” in discussions about product innovation. He highlighted Spotify’s comments about its upcoming “super premium” offering, which Spotify believes consumers are eagerly anticipating.

“Our research and analysis indicate that as many as 20% of the current subscriber base could upgrade to a super-premium tier at a meaningfully higher price point for a compelling product configuration, one which offers enhanced features and exclusive access to content,” Muir added.

Merchandising And Total Revenue Show Bright Spots

On a positive note, UMG reported strong growth in its merchandising division, with revenue jumping 44% in Q2, driven by artists like Taylor Swift.

Other top sellers in the first half of 2024 included Morgan Wallen, Noah Kahan, Billie Eilish, and Ariana Grande. Total revenue rose for the 12th consecutive quarter to 2.93 billion euros ($3.18 billion), representing roughly 9% year-over-year growth, surpassing consensus estimates.

Adjusted EBITDA also increased more than 11% from the prior-year period (excluding FX) to 649 million euros, or $705 million.

Price Action: Shares of UMG were down 3.3% to $23.21 at the time of publication Friday, according to Benzinga Pro.

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