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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good evening, and welcome to Universal Music Group's First Quarter Earnings Call for the period ended March 31, 2022. My name is Katie, and I will be your conference operator today. Your speakers for today's call will be Sir Lucian Grainge, Chairman and CEO of Universal Music Group; and Boyd Muir, Executive Vice President, CFO and President of Operations. They will be joined during Q&A by Michael Nash, UMG's Executive Vice President, Digital Strategy. [Operator Instructions]
Please let me remind you that management's commentary and responses to questions on today's call may include forward-looking statements which, by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may vary in a material way. For a discussion of some of the factors that could cause actual results to differ from expected results, please see the Risk Factors section of UMG's 2021 Annual Report, which is available on its website at universalmusic.com. Management's commentary will also refer to non-IFRS measures on today's call. Reconciliations are available in the press release on the Investor Relations page of UMG's website. A supplemental historical revenue fact sheet is also available on the Investor Relations page of UMG's website. Thank you.
Sir Lucian, you may begin your conference.
Thank you, and apologies to everyone for a few minutes delay, there was some technical issue. Thank you all for joining us this morning, this evening. I'm happy to be with you to report on the start to get another steady year for Universal Music Group. I want to start off by cutting straight to the chase and then to walk you through how we built UMG to bring us to such an exciting moment in our history. Simply put, our revenue growth and trajectory remains robust. Revenue growth of 17% is coming from a broad array of sources. In recorded music, it's coming from subscription, ad-supported streaming, physical products and licensing. At music publishing, it's coming from digital revenue, performance income, synchronization from film and television and mechanical income, which comes from physical products. And when it comes to music merchandising, we are experiencing further return to a very strong touring growth as well as continuing growth driving our retail and direct-to-consumer merchandising operations. Our touring merchandise is coming from the likes of Billie Eilish, Imagine Dragons, Justin Bieber and Elton John. And on our direct-to-consumer and our own retail platforms, it's coming from the likes of Taylor Swift and Rolling Stones, is to give a couple of examples. These may varied revenue streams, each with their own unique characteristics in terms of size, margin, predictability, longevity and so on, are all critical to our success. For many years, we've been designing UMG and our strategic road map to generate revenue, recurring and stable revenue from a healthy mix of sources and through a variety of commercial and creative needs. It's a term you will all know, you will know well. It's what we call our portfolio approach. I've witnessed firsthand what can happen when an industry puts many -- all its eggs in 1 basket. If the vast majority of your revenue and profit comes from one source, as was the case with the CD back in the late '90s, when online piracy really is openly ahead. Or when the vast majority of downloads were sold in 1 online store, your entire business could be vulnerable. Our diversity of revenue sources makes UMG a healthier and stronger company. But just as importantly, it also serves as the magnet for artists. Our track record proves to artists that we are home -- that is a home that helps you reach as many fans as possible in many different ways, and a home that also delivers to you the greatest commercial return. So when I describe UMG as a portfolio company, I use that term in 4 fundamental ways. First, as an artist portfolio, we invest in artists at every stage of their career from brand new to mid-career, or so when they eventually become established with the business. Second, as a creative portfolio. Our recording artists and song writers produce music in almost every conceivable genre. At the Grammy's last month, for example, UMG artists won 26 awards across a wide range of genres including pop, Latin, country, gospel, jazz, K-Pop, and to top it all off, Album of the Year went to Jon Batiste, a jazz artist on our reverb label. Third, as a geographic portfolio. With operations in more than 60 countries, fueling creative ecosystems in local languages, local culture, we help shape that culture, not only regionally, but globally as well. I'll be sharing a lot more about our geographic portfolio in a few moments. And finally, as the revenue portfolio, as I've said, producing income streams across a range of existing products, experiences and media, while also serving as a catalyst to new opportunities for growth, such as Web3 and the broader gaming and metaverse space. It's what makes UMG the industry leader that it is. I'd like to focus your attention for a few minutes on the importance of our geographic portfolio, which is vast. As I've said, we have company operations in 60 countries, covering 200 markets, and we're growing. We are a truly global company, constantly making moves to expand our reach. Take China, for example, the fastest growing of the world's top 10 music markets. Last year, we became the first major music company to establish multiple frontline labels across China. With these small creative units in place, we're continuing the strategy that has proven effective in other markets, the transition from ones where the commercial opportunity was from importing international music to markets that are also exporting their own local talent. With an A in our presence on the ground, we developed local artists in a variety of genres with the goal of achieving success domestically across the wider region and beyond. And our efforts are already bearing fruit. Eason Chan, UMG's star from Hong Kong, has led the mandopop market all year with his latest single, and that is also the theme song to global hit gaming franchise arcade, League of Legends. Smashing charts on all major streaming platforms in China since its release, and we're thrilled to say it's now the biggest digital song in UMG China's history. We're taking a similar approach in India. After our recent launches in the U.K., Europe and Africa and across Asia, this quarter, UMG launched Def Jam India India. UMG has long been committed to supporting investing in the next global talent from the region. Having spearheaded the transition over the last 5 years towards original artist music and non-film music, we are proud to be leading the charge of the sound we call DesiPop. The best example is Badshah, an incredible 2021 signing for us. Badshah is this generation's most successful musical artists, with more than 15 billion streams worldwide and the only Indian artist ever to have achieved 15 different songs with more than 200 million video views each on YouTube. The next phase of his musical journey will bring Indian music culture to new audiences worldwide through collaborations with some of the most influential and popular artists around the world. Late last month, with the weight of our global company behind it, Badshah released his first international track, a collaboration with UMG's massive Latin artist Jose Balvin. The track had the biggest international audio streaming debut ever for an Indian artist last week, and the video has also -- already been watched more than 25 million times on YouTube. Beyond these new frontline label launches, we are expanding our global presence across key territories in a myriad of other ways. Korea is a good example. Since 2020, when Republic Records partnered with JYP Entertainment, one of the world's biggest K-pop labels, the presence of the Girl group twice has blossomed in the U.S. The partnership has now been expanded to include JYP's boyband, Stray Kids, who recently debuted #1 on the Billboard Album chart here in the U.S. as well as the girl group, ITZY. Republic also has been the U.S. home for TXT, one of Korea's most popular boy band since 2019, thanks to a partnership with HIVE. TXT will be releasing new music later this month. And speaking of HIVE, it has become a terrific partner to us. This also saw the further expansion of their relationship with HIVE's BTS was named by IFPI as the Top Selling Global Act for the second consecutive year in 2021. BTS and label mate Seventeen both hit the top 10 best sellers list in 2021. All through this year, the HIVE Alliance will be releasing new music from BTS, Seventeen and others, and it's also currently conducting open auditions in the U.S., with the interest of getting ready for its first-ever global K-pop girl group, part of the first of its kind joint venture between us both. In Japan, the world's second largest market, we've had both an incredible 2021 and an equally great first quarter of '22 with -- we believe UMG, now the #1 company in terms of market share. Three of our biggest sellers this quarter were from Japanese artists, King & Prince, Fujii Kaze and Ado. One of the most successful new Japanese artists to debut in recent years, Ado released a new album earlier this year, which spent 2 weeks at #1 on the Billboard chart in Japan. And Fujii Kaze's second album also hit #1 on the Billboard chart in Japan in March. Overall, we've seen substantial growth in our Japanese business and are confident that we have the right strategy in place to make continued success. Another point of access and expansion to UMG into high-growth international markets is our Virgin Music Label & Artist Services business. Juan Gabriel, one of the most recognized and acclaimed Mexican singer and songwriter in the history of Spanish language music, he sold more than 150 million albums and composed more than 1,800 songs. Virgin Music has entered into an exclusive worldwide agreement with Gabriel's estate making host to 2008 catalog and future possible releases. Further, through an extended exclusive global music publishing agreement, Universal Music Publishing will represent Gabriel's entire iconic catalog, uniting his musical advocacy under the Universal Music Group. And Virgin Music has also announced a multilayered global partnership with Mushroom, Australia's largest independent label group, to support and distribute Mushroom artists' releases worldwide outside of Australia and New Zealand. The vision and execution that allows us to amplify the careers of the most iconic artists in the world is not only true for couple of artists, perhaps like Juan Gabriel. The biggest artists of today are also leaning in and expanding their relationship with UMG in every region, and for this, we are particularly proud. Drake is a prime example. At our Capital Markets Day last year, we shared with you our new long-term worldwide partnership with Drake, which expanded from recorded music to music publishing, film, television and brands. And we couldn't be more excited about what lies ahead for our relationship. The same holds true for other artists who may have begun their relationship with us through a traditional label, publishing deal or even an artist distribution deal. Over time, as they see the results of what our global teams can deliver and the care with which we treat their art, the artist's first culture that is the driving force behind our joint success, they want to form deeper, broader and longer lasting relationships, covering other aspects of their careers. They also see the quality of our roster, which includes the most critically-acclaimed and commercially successful artists in the world. It's quality that is simply unmatched. It's no wonder that artists including Taylor Swift, U2, The Rolling Stones, Abba, Neil Diamond, Elton John, Aerosmith, Andrea Bocelli and J. Balvin are just a handful of the global stars that have all, over time, extended and broaden their relationship with us. And here's some exciting news about another one of these global stars. Just last week, we announced the expanded partnership we've entered into with The Weeknd, one of the most commercially successful and critically acclaimed recording artists and songwriters of the last decade. The Weeknd, had both 2020 and 2021's biggest selling global singles, the first artist in ISpi history to ever achieve that. Building on the relationship we had with Republic Records since 2012, the new expanded relationship formed in 2021, of course, encompasses future albums and singles, but it also makes our music publishing division the home to his songwriting catalog and all his future works. In addition, Bravado, our leading brand management and merchandise company, will continue to work closely with The Weeknd to expand and develop global merchandising, branding, e-commerce and retail licensing opportunities around these future projects and releases. As you can see, all of the portfolios I outlined here are interlinked. This is just a small sample of how we are expanding these portfolios to grow our revenue and bottom line from as many different sources as we are able. Finally, none of this activity would be possible without the thing we believe we do better than anyone else, long-term artist development and music promotion. I could not close the presentation like this, therefore, without talking about some of this quarter's successes about which we're obviously very proud. A song called Heat Waves by Glass Animals was the #1 song on Spotify's weekly global chart, the 10 of the 13 weeks in the first quarter. Heat Waves also reached #1 on the U.S. Billboard charts. That's always a pretty special feat in itself, but what's really special about this achievement is that it hit #1 after the longest accent in the history of that chart, that is 59 weeks on the chart before it finally reached the #1 slot. That's the UMG difference, artist development. Glass Animals' global breakthrough did not come overnight, but after almost a decade of UMG's working closely with the band because we believed in them from distribution via label services to a record deal directly with Polydor in the U.K. and sister company in the U.S., Republic Records, to being nominated at this year's Grammy's, UMG's relationship with the band has continued to evolve and expand. We recently announced the group in terms of music publishing deal with UMG as well, bringing their recording and publishing together for the very first time. A great opportunity for developing expansive projects and opportunities moving forward. And here's just a little more of the big things we're proud of. In the U.S. UMG had the #1 album for 11 of the 13 weeks in the first quarter the Encanto soundtrack for 9 weeks, Machine Gun Kelly and Stray Kids had one week each. And also at the #1 single for 10 of those 13 weeks, 5 weeks, each for We Don't Talk About Bruno from Encanto and Heat Waves by Glass Animals. In the U.K. Dave's Starlight hit #1, where we stayed at top of the Official Singles chart 4 straight weeks for record for a U.K. rap song. I could go on, but is then on reciting all of the artist success metrics from this quarter.
Let me conclude by saying that we remain incredibly optimistic about our continued growth. Clearly, there is much enthusiasm about the music industry revenues returning to the peak level of the late 90's. I believe the strength, stability, predictive and recurring nature and growth prospects of UMG today dwarfs of those previous heights. Fans are not only enjoying more music than ever before, they're also connecting artists in ways that were completely unimagined just a few years ago. This translates into expanded music monetization opportunities for UMG and for our artists. As we continue, we work hand-in-hand with our artists across multiple facets of their careers. We are building creative businesses with them for the long term. Within each of these businesses are multiple revenue streams with different margin profiles, and also the potential for further collaboration in new areas.
I hope what I talked about today gives you a sense of the breadth as well as the reasons for the future commercial growth opportunities that lie ahead for UMG. Geographic diversity, increased monetization of existing rights have expanded deepening relationships with the world's most iconic artists from the past to the present, a part of what makes us so optimistic that the future of UMG is incredibly bright. Thank you. I'll now turn over to Boyd, who can walk you through the results of Q1. Thank you, Boyd.
Thanks, Lucian. And as you said, we are indeed off to a strong start in 2022. The figures are laid out in the press release we just issued, but let me provide some additional color. I'd remind you that any growth rate we discussed today are in constant currency. Total revenue in the quarter grew 16.5% year-over-year to EUR 2.2 billion, with all 3 of our business segments, Recorded Music, Music Publishing and Merchandising contributing. Not only did all 3 segments contributed strong growth, but with the section of downloads, every major revenue stream throughout our business is growing within those segments. This broad-based growth profile further supports our confidence about the sustainability of the positive direction of our business. To break it out, recorded music grew 11%, with ad-supported streaming, subscription, physical and licensing and other revenue all growing well. Subscription and streaming together grew 15%. And as promised, we've broken each of these out for you in today's press release. We've broken out subscription and streaming separately. And not only that, you can find 2 years of quarterly historical figures for these categories on our Investor Relations website. Subscription revenue grew just over 13% and continues to be driven by strong subscriber growth in both developed and developing music markets across a broad array of platform partners. Ad-supported streaming grew 18% compared to the prior year quarter, and now accounts for just over 1/4 of total streaming -- subscription and streaming Revenue combined. Ad-supported streaming growth was driven by the continued strength of ad-based monetization, but also by new and enhanced deals in social media, including our new deal with Twitch. Physical revenue continued to grow, an up 9% over the prior year quarter. This was driven largely by a strong quarter in Japan with releases, as Lucian mentioned, from King & Prince, Fujii Kaze and Ado. But also, we still see continued strong sales of vinyl for Taylor Swift being a significant contributor. Another area of growth in recorded music was in our license and other revenues, which were up 10%, it was due to growth in synchronization revenues. Turning now to music publishing. Revenue grew 33% over the prior year quarter as all publishing revenue streams grew. However, let me highlight that part of this growth was due to a change in our revenue recognition accounting policy from a cash to an accruals basis. Before this change in accounting policy, revenues collected through societies were recognized when the collection society notified UMG of the usage by end consumer. Now, revenue is being recognized based on an estimate of when the usage occurs and the amount of consideration, which is probable to be collected. This has changed the timing of revenue recognition across quarters, with benefit in music publishing for the first quarter of 2022 compared to the prior year. While this change elevated our growth rate this quarter, we expect the impact for the full year to be minimal, with the benefit in the first half likely to be offset in the second half of the year. This quarter, we are breaking out our key publishing revenue streams, and again, these historicals are available on our Investor Relations website. Digital revenue, which is the largest revenue source, grew 45%, thanks to both the continued strength in streaming and subscription growth as well as I pointed out, to the accounting policy I just mentioned. Performance revenue grew 17%, largely due to the accounting change, and synchronization revenue grew 29% as advertising and film and TV revenue both improved. While our catalog acquisitions, such as Bob Dylan and Sting, among others, are starting to contribute to our music publishing growth, the vast majority of the growth we are seeing is organic. Moving on to merchandising. We saw a strong rebound as concerts have risen following the COVID stoppage, and thus concert merchandise revenues increased significantly. The total merchandise business grew 70%, with strength not just in 2 related sales, but also indeed to see a continued focus area for us, but also in retail. As I said last quarter, tour merchandise sales are a 7% to 10% gross margin business for us, below the gross margin of our other businesses, and increased merchandise revenues create a meaningful margin percentage impact. Now turning to EBITDA. Our adjusted EBITDA for the quarter was EUR 455 million, up 14% in constant currency. As our initial listing costs are now behind us, and our equity plan, which is up for a shareholder vote at our AGM next week, it is yet to be implemented. Therefore, there is minimal difference between EBITDA and adjusted EBITDA this quarter. In fact, only EUR 1 million. Adjusted EBITDA margin was 20.7% compared with 21.9% in the prior quarter. It's worth noting that there was a EUR 20 million benefit in the prior year quarter related to the release of historic royalty provisions and an exceptional recovery of artist-related provisions. This was the primary driver of the year-over-year decline in margin.
This exceptional item wasn't disclosed by Vivendi, as they don't report quarterly EBITDA. However, we felt it was important to bring this to your attention in the context of the quarterly comparison. If this benefit were excluded from the prior year figures, adjusted EBITDA would have grown 20% in constant currency, and adjusted EBITDA margin would be steady year-over-year.
In addition, the current year margin, as I mentioned before, was impacted by revenue mix, with Merchandising revenues growing faster than the College of Music and Music Publishing. Merchandising thus represents a larger share of our total revenue. We continue to encourage you not to look at one quarter in isolation. We continue to expect adjusted EBITDA margin expansion for the year as operating leverage shows up in our results as the year goes on and the revenues build.
We remain encouraged by the growth trajectory of the business and excited by the opportunities that lie ahead, not only through positive industry trends but also by our artists and business development initiatives.
Lucian, Michael and I would be happy to take your questions. So operator, perhaps you could open the line for Q&A.
[Operator Instructions] We take our first question from Michael Morris from Guggenheim Partners.
Couple of questions. One, just following the Netflix earnings last month, there's been a pretty broad investor concern about streaming maturity and running closer to a TAM limit for expansion. File accounts, it seems like you still have a lot of runway ahead of you, but I would be curious, your take on sort of the subscription streaming life cycle and whether you see indications of maturity there? And what kind of levers there are going forward to keep the top of funnel robust?
And the second one, just this morning, Spotify and Roblox announced a partnership that Spotify have a presence on Roblox, raising a question for me. As you think about some of those next-gen metaverse-type products or other Web3 opportunities, how much would you expect to work with a distribution partner like Spotify for your product? Or how much do you expect to be sort of kept in-house and directly negotiated with those platforms?
Thank you, Michael. We -- there was more growth, more subscribers added in the last year than any previous year in premium music subscription. Each platform obviously has a different offer. And Spotify, for example, has an ad-funded offer. And obviously, an exceptional premium business.
We see SVOD completely differently to music streaming. In music, you save your favorites, you've got the cost of access. We believe very strongly that it will continue to grow. The stickiness for music streaming is in library and playlists and repeated uses of exactly the same songs. You could play Billie Eilish 50 times in 4 of your accounts. Driving, socializing, gaming, you can't watch a television program 50 times in 48 hours.
SVOD is a complementary business in addition to other content offers, obviously, cable, [ meter ], et cetera, et cetera. Whereas music is an alternative product, meaning that we see completely different demand dynamics for churn and customer retention for the platforms, et cetera, et cetera.
So continued confidence. We work extremely closely with all of the DSPs for product differentiation. Some of them are interested in different things to each other, and we've made sure that we've created a marketplace where there's -- we enjoy the competition, as I said in my remarks. 10, 12 years ago, our digital business was basically with one customer. And as you'll see in everything that we're doing, to completely encourage different ways of monetizing our IP product for the artists in every single format imaginable.
And in terms of -- our relationship with the DSPs and the difference there is from that spot, we see -- feel strongly that it exists, and we feel confident about what we're doing.
Could add a little elaboration on both of those questions.
So with respect to the Netflix comparison, and we've seen some commentary on that, too, it's really important not to make too many similarities between SVOD and music subscription. They're very different businesses, as Lucian was saying. The analysis has shown that SVOD trends mostly related to the variable programming of those services. SVOD platforms focus on originals and exclusive content, and for content that most viewers will watch only once has led to a significant churn with SaaS subscriber growth for leading services as consumers jump from service to service to service chasing hit content, that's in the end -- that chase for hit content is a very, very different dynamic for what we see with music subscription.
And to provide a little quantification, SVOD sector sees up to 45% semiannual churn. According to surveys, would indicates half or more of that churn is directly related to the programming variance. So we don't see anything like that churn in music subscription because consumers don't hop from platform to platform, and I was saying, just to hear new music or exclusive music. They consume much of the same catalog of music they love over and over throughout their lives.
The value proposition of all music ever created on any device you choose at any time is very compelling to consumers. And once you've adopted a music service, this is going to say, create your playlists, save your favorites to the library, have constant access to essentially all the world's music, there's much less reason to churn. As a result, leading music subscription services into a low single-digit monthly churn.
So with respect to that piece of context, we believe user subscription market will continue to grow strongly in 2022, building on the growth we saw in 2021.
And then on the specific question with respect to the announcement today about Spotify and the Spotify Island on Roblox, we welcome Spotify's announcement and the expansion of their presence in networks. We look forward to working with all of our partners on their plans for Metaverse and Web3. To be clear, this is not an announcement by Spotify that their streaming service or our artists' music would be available on Roblox. We need to deeply engage the working with various partners on activations of music-based events in the metaverse, including with artists like Ariana Grande, Post Malone, J Balvin, and a number of other leading artists. And we are actively developing broader business opportunities with key partners, so our focus there is very much on direct partnership.
Other than that, we can't really comment on any individual partner's plans.
We take our next question from Lisa Yang from Goldman Sachs.
Just to follow up on the earlier question. I mean, you said rightly so that value proposition remains very compelling, yet prices haven't really increased for the last 10 years. Some of your competitors have been talking very positively about imminent price increases. I know you don't -- the coming price, but do you share a similar optimism that we could see price increase this year? And could you maybe just comment on how that flows through to your revenue, if there's any timing lag or anything like that?
And the second question is on advancing the catalog. I know you haven't disclosed any cash numbers until end of the year, but you've announced a couple of deals with The Weeknd, Sting, Elvis Presley. Could you comment on how the pipeline is trending so far year-to-date versus last year? Any color on the major renewals you expect for the rest of the year? And do you expect 2022 to be a more normalized level compared to the last 2 years? These are my 2 questions.
I just -- obviously, I need to to comment on price increases. We have to be aware that the DSP, the DSPs directly determine how they price. Any questions with regards to pricing, it's going to have to be directed at them. We can't comment.
I mean, the only thing I would add on price increases, just to repeat what I've said before, is that the guidance that we gave in the prospectus did not factor in any price increases. So just to clarify that point.
On capital allocation, you mentioned The Weeknd and Elvis Presley. Just to deal with Elvis Presley first, Elvis Presley is the -- is an administration deal with our Publishing company. It is not an acquisition, it is basically an operating deal. Similarly, with The Weeknd, although The Weeknd is a -- again, it's not an acquisition. This is a multi-faceted -- excuse me, a multifaceted, broad-based deal that brings publishing into our company for the first time and also expands the relationship on merchandise. So no acquisitions.
And I think it remains the same later in where where we seal the deals. We -- we turn down more deals that we enter into. We're very, very selective, very opportunistic, and we'll only do these deals where we believe that we can bring significant increased monetization to the asset that we were acquiring.
I could add there, Elvis, Weeknd, they're all completely different kind of deals. The only thing that they have in common is that they're famous. Our commercial profiles could not be more different than even that one, outright acquisitions. The Weeknd is about deepening and lengthening and extending the entire commercial relationship with them just beyond Recorded Music, which is the -- which is the aspect of their career that we've had for the last decade. And as it's just very succinctly put, Elvis is a licensing commercial -- commercial deal with a very different profile.
Our next question comes from Ben Black from Deutsche Bank.
Great. So pass one to Lucian, it'd be great to hear your perspective on the evolution of music distribution, sort of particularly in the context of TikTok potentially becoming a bigger player in the space. And with that backdrop, how do you see your relationship with TikTok actually evolving over the next couple of years?
And then perhaps one for Boyd, just a follow-up on the margins. How should we think about the cadence of your margin expansion over the next couple of years? As you mentioned, touring, the Merchandising is in the lower margin revenue stream, are coming back this year. So should we anticipate more modest margin expansion this year before we see sort of a meaningful step-up perhaps in 2023?
TikTok has evolved into something where we monetize now in ways that we didn't do when it appeared. And as I said before, the relationship between promotion and discovery in some ways has been fused as a result of short-form content. So we see it extremely positively. We see the monetization of what the platform provides is extremely positive. We discover artists as a result of it, we push partners into it. It's got a different audience to YouTube, for example.
But if you use YouTube as another example, the things that they're doing with their own product of shorts and how YouTube, the views they funnel, of billions of views to actually morph and to create a great premium subscription product in the form of YouTube Music. I hope that -- but we are at the beginning of seeing TikTok actually monetize music for artists and for the entire industry. Hopefully, we can be at the vanguard of moving forward.
I guess really to pick up the question on margins. I'll reiterate that the time in our prospectus, we gave guidance, which was that our adjusted EBITDA margin would expand to mid-20s. Over the mid-term, users from 2020 being the big bit of that, so that's still the view.
I would actually add though, on top of that, we're seeing revenue growth larger than we were -- than in our guidance. Our guidance was to have annual CAGR in the midterm above high single digits. So in this quarter, you see a revenue growth of 16.5%, and you're right to point out that some of that revenue growth is coming from lower-margin business. But in many ways, it's incremental to the guidance, the revenue guidance that we have. So although it's dilutive in terms of margin, it's certainly incremental in terms of margin.
I think that's a critical point, but we constantly pursue a strategy of creating multi-level, multi-revenue business opportunities with a variety of revenue streams. They've each got their different margin profiles. And we want to, and we expect to be in and adding value and creating value from every part of the 5P chain. Music in games and socializing, short and long-form content, and now what can become the virtual universe, the addressable market for what we're doing for all of this premium content. We create, we manage, we push the best of the best with the best. And each aspect of what we do within different cycles have different margin profiles.
The next question comes from Thomas Singlehurst from Citi.
It's Tom here from Citi. Congrats on the results.
I had a couple of questions. The first one, very simply, we're obviously streaming growth faster than subscription. I'm just sort of wondering how -- whether you would characterize the sort of increased weighting of ad-funded revenue streams as a risk or an opportunity? That was the first question.
And then secondly, on market share. I mean, obviously, the opportunity is super broad, with the holistic deals covering Publishing and Merchandising and other areas. But if we isolate Recorded Music, does this sort of focus on the really big artists and trying to do these holistic deals mean that, progressively, we should expect you guys to sort of lose share of that Recorded Music market? Or do you think you can do the holistic approach and also maintain share of Recorded Music?
Okay. Well, I mean, you should add to it. But competitively, like 100% of everything.
Approaching that question from a little bit different angle. In terms of the breakout of ad-supported streaming, as Boyd said, we're very excited to see the growth there. With ad-supported streaming, you have both the model that has been referred to as premium where you've got a free tier for subscription services that, that supported, that's primarily a customer acquisition vehicle.
But what's happened with the evolution of the business is that starting off with the landmark deal that we did with Facebook in 2017, we've unlocked the social category. We've done a lot of partnership development with social. And that puts us in a position where our revenue model is aligned with the business model of some of the largest, fastest-scaling platforms in the world. Advertising, obviously, is endemic to the model of YouTube, of Facebook.
So with respect to what we're seeing there in relationship to that breakout, we're excited about the growth. It's predicated on achieving a much more fundamental alignment of our revenue model with the business model of these platforms. As Boyd said, it's related to business development efforts to add additional partners, for example, with the Switch revenue contributing this quarter.
So yes, we view it very much as an opportunity. That's all about growth. It's about expanding our partnership portfolio, and it's about optimizing the alignment of our revenue model with the business model of our partners.
And we know that our music drives acquisition and retention. So many new categories, business spatial. And the -- as I said in my remarks earlier with regards to the Grammys, the breadth and the array of content, product, artist, genres cultures, we touch and hit everything.
The next question is from Christophe Cherblanc from Societe Generale.
Yes. I wanted to come back on the margin mix. Over the last few years, we saw margin expansion driven by Recorded Music and flattish Publishing margin. So at what stage would you expect the Publishing margin to expand again? Or should we expect that the mid-20s margin will be achieved by way above 25% margin for recorded music and lower than that for Publishing?
And the second one, a quick one is, after the AGM, you will have the capacity to buy back 10% of capital. What is the plan? Do you expect to use that authorization very fast or just to offset stock option-related dilution? What is the philosophy behind the buyback authorization?
Let me take margin first. Our margin expansion has been driven by operating leverage and how you actually see in our Publishing division, so the EBITDA margin has been expanding for our Publishing. And again, it's about operating leverage driving the margin expansion. So based on what we've said before, we see the similar pattern over the period that we project still a similar pattern in terms of adjusted EBITDA margin.
The second question, which is about share buyback. We have a resolution in front of the AGM next week, which is to give us authority to buy back up to 10% of the capital of the company. This is a very normal, typical thing for Dutch-listed companies to have this flexibility.
We have no specific plans at the moment for a share buyback program. We're very, very conscious of our capital allocation, and the Board is very focused on. And I would also point out that again, to bear in mind, we have a very significant dividend policy, which is to pay 50% of our net profits by way of a dividend. So the share buyback resolution that will be -- that's in front of the shareholders will just be some added flexibility for us to pivot appropriately if and when there's an opportunity.
The next question is from Adrien de Saint Hilaire from Bank of America.
Well done on some excellent Q1 numbers. So I've got a couple of questions, please.
First of all, Boyd, can you quantify the impact of the change in accounting in Publishing? I mean, usually, you would say, Publishing grows about 15%. So the gross differential, a function of that change in accounting? And what was the impact on EBITDA for Q1? That's the first question.
And then second question about the margin improvement for '22, I think you said you're confident in delivering margin improvement. I was just wondering how far away do you think you might be from the 100 bps that you have for the midterm? Or if you might be on target with 100 bps?
So first of all, on Publishing. Again, please don't look at Publishing -- please don't look at our business quarter by quarter. Don't put too much emphasis on it.
And Publishing in particular, we're not breaking it out because we actually see when you look at it on a full year basis, we think there's minimal impact in the full year. So again, I would encourage you to look at the full year. And if you're looking at the organic growth of the Publishing division, I think growth in the mid-teens is about appropriate in relation to that business.
With regard to the guidance, the guidance is as we had previously informed you, which is to get to the mid-20s EBIT -- adjusted EBITDA margin in the midterm, with 2020 has been the start here. So we still see that as appropriate.
The next question comes from Conor O'Shea from Kepler Chevreux.
Yes. My 2 questions. Firstly, on the Publishing and understanding what you said to avoid -- about not looking only at quarterly, but can you give us a sense what the contribution was from the catalog deals that you've made in the organic growth? And also why the performance -- the growth in performance royalties was slower than some of the other categories. I would have thought with the reopening of concerts and so on that, that might be one of the faster-growing element within Publishing.
And then just a second question, just a general point on on the margin pressure, you mentioned the mix effect. But can you maybe just give us a little bit of color on maybe some other elements of margin pressure? Maybe raw material prices in vinyl or just general salary increase pressure, particularly in the U.S. -- with U.S. headcount?
Conor, I think that might be trying to squeeze in a few questions above 2, but let me go through them.
On the publishing acquisition deals in terms of acquisition of the catalog. The impact to date is a bit negligible because really, what happens is that when you make these acquisitions, there's inevitably a time delay before the results start to attribute towards us. So again, there's a bit of a time delay.
And also, I'll give you an example of Neil Diamond. We previously administered the Neil Diamond catalog, therefore, the revenues were already in our business. And the EBITDA margin will move close. So it's negligible the impact on our results in Q1.
The comment on Publishing, largely, what grew the digital -- there is a significant impact from the accrual that we made again. So the performance is improving, it will continue to improve as live performances come back. So that's clearly encouraging for the coming months and years.
And with regard to the mix effect on the margin, the most significant mix to date that we're actually seeing is, in fact, is the lower margin revenue, and the most obvious example of that is Merchandising. And I think I've mentioned before, is when you look at Merchandising sales around touring, the margin is roughly 8%, maybe it's marginally higher than that. So it's much lower than our other other businesses. I think that's the most significant mix impact.
Again, clearly, there is inflation that everyone is having to manage at this point in time.
The next question is from Julien Roch from Barclays.
Yes. Two, I suppose, for Boyd.
The first one is the non-organic impact for the full year. As you said several times, you don't want us to look at the business on a quarterly basis. So impact of M&A, assuming no further deal in '22 because I believe this goes over -- of a label last year, so you have a small headwind there. And impact of FX, if you assume that spot stays the same for the rest of the year? That's my first question.
And then the second one, called me either persistent or stubborn, but boy, can you help us to right-size net content investment, excluding catalog acquisition? I understand you told us that it's hard to give a guidance, it can vary if you sign significant [ offers ]. We understand that and we understand that it can be volatile, but ex major signing, is net content investment on average. I'm not even asking for this year, but on average in the next couple of years, closer to 2% of revenue, 3% of revenue or 4% of revenue? And that is excluding catalog acquisition.
Let's deal with the content investments first.
Going back to what we said in our year-end release that you do actually -- because we broke out the difference between IP acquisition and content spend. Over the last 2 to 3 -- well, primarily in 2 years, you have seen an increase in the level of content investment, and that's separate from IP acquisition. So the content investment has increased over the last 2 to 3 years, predominantly driven by a number of superstar artists who have entered into multifaceted deals with us so that we actually represent them across multiple different revenue sources. So from Publishing to Recorded Music to Merchandising to agency, fulfillment, TV, et cetera, et cetera. So that's really what has driven the increase in that net content spend over this last period.
In terms of the -- and to give you a percentage, it's really -- I think it's something that is not appropriate for this particular aspect of the business. I do believe that in the future, that the level of content spend will return to levels that were experienced prior to the last 2 to 3 years. We're at the investment.
Again, these are -- just to remind everyone, these are advances that we are making against future earnings. And as future earnings increase, then we recover the net cost of the content spend and advances accordingly.
With regard to the non-organic, as you referred to the impact of acquisitions. And in terms of the total scale of UMG, the contribution from these acquisitions is going to be not material. And so I would encourage you not to focus on that. I've said before that the impact for this, although not material, would be incremental to the guidance that we've previously given.
I'd like to add, actually, that part of the question also leads to the pure A&R product of artist investment and artist selection and prioritization. We brought in over the last 15 years or so artists from catalogs like Queen, The Rolling Stones, Paul McCartney. Neil Diamond, we bought it probably about a decade or so ago.
So these are hugely successful brands and artists with catalogs that we were able to invest in the market into what we viewed as a growing market, and that's what we continue to do. We select the best with all our judgment and all our instincts, our data and our expertise, in investing in -- or leaning in further like with The Weeknd and Drake, for example, when our judgment is these artists will continue to make great music. And then we also lean in when we can be in a position where we can acquire, license, invest and partner brilliant artists with deep, deep catalog like Queen, and like McCartney and like the Rolling Stones did.
We are investing, and the numbers that you see are going into a growing market. As long as we continue to see growth in the market, we will continue to invest.
We take the next question from Richard Eary from UBS.
Congratulations on the results. Two questions, please. Mainly to Boyd, actually.
Boyd, just coming back to the margin question. I know you sort of talked about it a bit on the call. But if we factor in some one-offs of the gains that were in the first quarter last year, which you said was EUR 20 million from the provisions. And the change in mix this year is obviously, particularly in the first half of Publishing and Merchandising being stronger. Should the margin expansion this year be below trend as we go to that midterm margin or not? Or is there any reason why it shouldn't be below trend and we should get catch-up in the second half? So that's the first question.
The second question is just on the share-based plan, which is obviously going to be put forward to the AGM on the 12th of May. How should we think about share-based dilution from that plan? Or with the approval for the buyback, will you look to lock up any shares that are issued to offset that potential dilution? So we can think about, obviously number of shares as we go forward and whether there's any dilution from the share-based plans. That would be helpful.
Let's deal with the share-based plan first. As you mentioned, there's a resolution in front of the AGM and our shareholders next week, which is obviously a very important step in our evolution as a company. It's very, very important for the company to be aligned with the interest of the shareholders.
So that is the intention behind the scheme that we are devising. It will be -- in terms of the share purchases, it is not envisaged. It is not envisaged that we will be acquiring shares for the purpose of this -- for this plan. So there will be dilution, and again, if you look at the resolution, you can calculate what the dilution could be over the coming years. As I mentioned, there will be in that the performance metrics, which we're -- it is too early to communicate what those performance metrics are, but we'll keep you informed as we progress.
On the margin, again, I feel as though I'm repeating myself a little bit. But the -- we still envisage progressing towards the guidance that we gave at the time of the prospective. But I would also just point out to you that if the revenue growth is -- continues at levels of way beyond what we envisaged at the time of the guidance, and if those revenues are coming from lower-margin businesses like some touring Merchandise, as I mentioned, there will be an impact on the EBITDA margin. But I'm looking at those revenues as kind of incremental and additive in terms of profitability to the business.
And can I just add one, like, nuance in that. We look forward to the next few weeks of our release schedule. We have a Kendrick Lamar album coming out, a Post Malone album coming out. There's another album with some new tracks coming out by major, major global superstar. They've all got different relationships with us, and it comes back to the portfolio approach that we have.
All I can assure you is that we're in everything. We make profits out of everything. And with so many of these artists, they start as something and they evolve into something else. What you've seen with Drake, you sort of take with -- the list just goes on and on and on. So we take an incredibly long-term view in terms of our portfolio approach over the next 3, 5, 10 years about what our relationship is with these artists, brands, products. How we develop businesses together.
We take our final question from Matthew Walker from Crédit Suisse.
Obviously, I've got 2 questions.
The first is, you gave your opinion on SVOD and how music is not similar to SVOD. Could you maybe give your views on the economic sensitivity of music subscription and advertising? So obviously the consumer is facing a lot of inflation. Do you think that there will be significant spin down to ad-funded peers? Do you think it will end up with a sort of impact on the advertising revenue? Just any comments there would be interesting.
And then just going back to Richard's question on the potential dilution from the LTIP. Is your plan to lower the cash compensation and replace some of that with the LTIP? So that actually the impact on absolute EPS will not be that significant? If you could give your thoughts on that as well.
Let me address the first question with respect to expectations on subscription growth and the relationship to ad-funded.
So to reiterate something that I said earlier, we see ad-funded as being largely incremental to subscription growth, and we're working closely with partners that are significantly scaled to align our revenue model with the business model that's endemic to them around advertising. And as Lucian said earlier, we see a strong interrelationship between promotion and discovery and the development of audiences for premium subscription.
We also think the value proposition of all the music ever created on any device you choose anytime, anywhere is enormously compelling at the current price point. And we believe that you'll only see enhanced value for the volume of music in terms of the development of the services technology road maps, in terms of higher-quality music and all of that.
But just to talk specifically about where we are with subscription growth. We believe that we are still at an early stage in the evolution of adoption of subscription music. So the number of subscribers in the major developed markets grew 1 in 5 or grew from -- excuse me, 1 in 5 a couple of years ago to 1 in 4 last year. So that's significant growth, nearly 25% in the major developed markets. But 1 in 4 is, I think, to be an indication that there's ample room for growth moving forward.
We've seen -- saw a major influx of subscribers last year, as we commented in our previous earnings call. And obviously, in terms of the results that we've just announced, we saw a significant continuing increase of adoption of subscription in Q1. We believe that there's still a lot of potential in the developed markets specifically. Our consumer work suggests that 60% of the subscription growth opportunity over the next several years is in our top 10 developed markets, and we believe that there's a great opportunity with respect to emerging markets.
We've seen the expansion of regional local services specifically in emerging markets, and we've grown from having about 1/4 of our subscribers in 2018, customers of those regional local services to nearly 1/3 last year of our total subscriber base in terms of the individual subscriber numbers being customers of regional local services. That's an indication of opportunity in emerging markets.
So we're still at a point where we see a significant growth trajectory for subscription. We see great complementary opportunity for growth in the ad-funded space, and we believe that this is a largely complementary opportunity.
And we do an enormous amount of work with each platform to improve their product, to improve our artists and their product within the platform so that there's differentiation. And we've talked about spatial repeatedly. Spatial is just one example.
Okay. And then maybe I can just address the question on the equity plan. It is not intended that the equity plan will be additive to existing compensation. The intention is that it will replace a portion of cash compensation, and equally, of importance is to turn the compensation structure as of today is all cash and all short-term to having a better mix of cash and equity with the long-term lens and to align the company with the shareholder for the long term.
This now brings our Q&A session to an end, and now concludes the call for today. Thank you all for joining. Please disconnect your lines. Goodbye.