Universal Music Group (UMG) reported third-quarter revenue up 11.7% year on year at constant currency, with subscription income beating analyst expectations and its shares rising sharply the following day.
Revenue for the three months to the end of September, published on Thursday, October 29, came to €3.394 billion ($3.90 billion). Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) rose 9.0% year on year to €729 million ($838.7 million).
Subscription income and share price#
Subscription revenue was the figure investors watched most closely. Excluding the contribution of Downtown, UMG’s subscription income grew 9.5% year on year in the quarter, ahead of the 8.2% growth analysts had expected in a pre-results note from ING.
UMG’s shares rose as much as 15% at one point on Friday, October 30, before closing up 7.9% at €17.09 on Euronext Amsterdam. That remains well below the €30.40-per-share proposal from Bill Ackman’s Pershing Square, which UMG’s board rejected in May.
Analysts at JPMorgan said in a note: “UMG may need to deliver another couple of quarters to convince investors, but Q3 was much improved.”
Grainge, the UMG leader, told analysts: “We are building from a position of strength. The industry is healthy and growing… That makes us more ambitious, not more comfortable.”
Royalties and the “artist-centric” model#
The term “supercharged” came from BNP Paribas analyst Will Packer rather than from UMG. He asked whether a “supercharged version of the artist-centric model” could emerge, in which digital service providers (DSPs), such as Spotify, pay “elevated royalties” for music made by human artists and, by implication, lower royalties for music made entirely by AI.
UMG Chief Digital Officer Michael Nash responded: “I liked your characterization of supercharged artist-centric, because our entire focus is on ensuring that our artists are properly compensated for the value that they bring to the platforms.” He added: “We have got to evolve our partnerships so the models more fairly reflect that value.”
Grainge replied: “The answer is obviously yes. Real artists drive the value of the platforms… they deserve to be more highly compensated for how critical they are.”
In his prepared remarks, Grainge said: “The uniform application of pro-rata payments [at DSPs] makes the problem worse. By treating AI slop as the same as the greatest songs in the world by some of the greatest artists, it incentivizes industrial-scale content production and dilutes the compensation earned by real talent.”
He added: “[The] structure of our DSP agreements has to change, so the compensation better reflects the value different content creates.”
Nash also cited what UMG calls its “80/80” rule: “80% of the subscriber acquisition and 80% of the subscriber retention [on music DSPs] is based on fans’ engagement on the platforms with real artists, career artists, classic catalog, emerging new talent.”
Downtown’s contribution and margins#
Downtown contributed €195 million ($224.3 million) of UMG’s €3.394 billion total revenue in the period. Grainge said: “Downtown is the most important acquisition UMG has made since EMI. This was a timely, strategic move, and we are only just beginning to realize the full benefits.” He added: “The numbers are already proving why we made this deal, and we continue to capture upside in terms of additional capabilities, revenues, and synergies.”
- Downtown Adjusted EBITDA in Q3: €13 million, a 6.7% margin
- UMG Recorded Music division, excluding Downtown: 26.2% margin
- UMG headline Adjusted EBITDA margin: 21.5%, down from 22.0% a year earlier
- Headline margin excluding Downtown: 22.4%, up 40 basis points year on year
UMG chief financial officer (CFO) Matt Ellis said the integration of Downtown “is well underway, and it is contributing to our business as we expected it would when we agreed the deal.” He added: “We have already delivered the initial synergies target on a run-rate basis, and the team sees additional opportunities.”
Fast-growing, lower-margin independent services weigh on the group’s headline profitability metrics, as the gap between the reported and ex-Downtown margins shows.
Cost reductions and label changes#
In mid-October, UMG pushed through a further round of changes across its labels, with several senior executives leaving, including Def Jam Chairman and CEO Tunji Balogun and Polydor Label Group President Ben Mortimer.
Two weeks later, on the Q3 call, Grainge said the €250 million cost-cutting program behind those moves, first announced in February 2024, was complete: “That program is now complete. You can see the results in our cost structure.”
Looking ahead, Grainge said: “Looking ahead, our continued transformation will allow us to expand our margins by leveraging technology to redesign processes and bring together non-creative functions currently spread across labels and regions.” He added: “We will continue to reduce costs, operate more efficiently, and improve margins. That is a clear financial objective.”
