Warner Music Group Corp. (WMG) CEO Steve Cooper on Q3 2021 Results - Earnings Call Transcript

Warner Music Group Corp. (NASDAQ:WMG) Q3 2021 Earnings Conference Call August 3, 2021 8:30 AM ET

Company Participants

Kareem Chin - Investor Relations

Steve Cooper - Chief Executive Officer

Eric Levin - Chief Financial Officer

Conference Call Participants

Matthew Thornton - Truist Securities

Michael Morris - Guggenheim

Meghan Durkin - Credit Suisse

Ben Swinburne - Morgan Stanley

Tim Nollen - Macquarie

Kannan Venkateshwar - Barclays

Operator

Welcome to Warner Music Group's Third Quarter Earnings Call for the period ended June 30, 2021. At the request of Warner Music Group today's call is being recorded for replay purposes; and if you object, you may disconnect at any time.

Now, I would like to turn today's call over to your host, Mr. Kareem Chin, Head of Investor Relations. You may begin.

Kareem Chin

Good morning, everyone. Welcome to Warner Music Group's fiscal third quarter earnings conference call. Please note that our earnings press release, earnings snapshot, and the Form 10-Q we filed this morning will be available on our website. On today's call, we have our CEO, Steve Cooper; and our CFO, Eric Levin, who will take you through our results, and then, we will answer your questions.

Before our prepared remarks, I would like to refer you to the second slide of the earnings snapshot to remind you that this communication involves forward-looking statements that reflect the current views of Warner Music Group about future events, financial performance -- and financial performance. We plan to present certain non-GAAP results during this conference call and in our earnings snapshot slides and have provided schedules reconciling these results to our GAAP results in our earnings press release. All of these materials are posted on our website. Also, please note that all revenue figures and comparisons discussed today will be presented in constant currency unless otherwise noted. All forward-looking statements are made as of today, and we disclaim any duty to update such statements.

Our expectations, beliefs, and projections are expressed in good faith, and we believe there is a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs, and projections will result or be achieved. Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from our expectations. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our filings with the SEC.

And with that, I'll turn it over to Steve.

Steve Cooper

Thanks, Kareem. Good morning, everyone and thanks so much for joining us. Just over a year ago, we took our company public. We were confident that our business would remain resilient during the pandemic. Thankfully our confidence was well founded. Today, we're really fortunate that in looking back over our third quarter, we can celebrate the extraordinary achievements of our global team, our artists, our songwriters and our partners during this really crazy time.

Entertainment consumption habits have been changing swiftly during COVID and the growth in new business models have been accelerating. We continued to keep pace through our constant evolution, and as a result, we've grown stronger than ever. After we review our quarterly results, I'll focus some additional remarks on three areas, first, how we're driving our core business by investing in new and established artists and songwriters; second, how we continue to innovate to deliver long-term growth; and lastly, how we're playing the game differently through our unique portfolio of media brands. Our continued momentum led to impressive results this last quarter. Total company revenue growth was 27%. While some of the year-over-year comparisons are distorted by COVID, these results reflect the strength of our release schedule and the recovery in certain of our COVID affected revenues. Digital revenue grew 23% and now represents roughly 70% of total revenue. Adjusted EBITDA grew by approximately 49%, while our margin improved to over 21%. Recorded music delivered revenue growth of approximately 28% marked by growth across digital, physical, licensing and artist services. Streaming revenue within recorded music grew 27%. This increase was driven by successful new releases and strong carryover performances, a rebound in ad supported revenue and the continued strong growth in revenue from emerging platforms.

Physical revenue also saw a major resurgence, growing 136%. This reflects the increasing popularity of vinyl across the globe. Licensing revenue showed a significant rebound returning to growth of approximately 28%. Artist services was up slightly as double-digit growth at our e-tailing company, EMP was mostly offset by the continued disruption in live concerts and tour related march [ph]. As always, the central story is the fantastic new music we've been releasing. Here are some highlights. We're happy to have new music from global superstars like Ed Sheeran and Coldplay. Ed debuted his new single Bad Habits on TikTok shattering the platforms record for a live music performance with over 5.5 million unique views. Meanwhile, Coldplay debuted their new single Higher Power with a special broadcast from outer space, thanks to the cooperation of the International Space Station.

Dance music icon, David Guetta continued an incredible year scoring multiple top 10 hits around the world. In June, we announced the signing of a new career-spanning partnership with David, that includes both his legendary recorded music catalog and future releases. Performers at his level can choose any route to release their music, and our new partnership is a great endorsement of the value we offer to creative community at all stages of their careers.

Warner Record signed Bella Poarch, one of TikTok's global stars. The video from her first single, Build a Bitch had the biggest debut ever on YouTube for a new artist, with over 200 million views and counting. Other highlights included Nashville's Gabby Barrett becoming the first female solo artist in five years to go number one on Billboard's country charts with her first two singles. Russ Millions and Atlantic Records Tion Wayne taking over the world with their single body soaring to number one in multiple countries and the rolling out of major international hits from JJ Lin, Aya Nakamura and Master KG. And there is more fantastic music to come this year from Ed, David, Lizzo, Coldplay, Silk Sonic and Justin Quiles to name a few.

In publishing, we delivered revenue growth of 21%. This impressive showing was due to 20% and 55% increases in digital and sync respectively. We're seeing a return for normal sync with TV and film production recovering nicely. However, performance revenue remain nearly flat year-over-year due to the ongoing restrictions for bars, restaurants, clubs and concerts. In Q3, Warner Chappell had a share in 37 number one songs across the US Billboard streaming and radio charts, that's up from 23 last quarter. And according to Billboard's Publisher's Quarterly, we increased our share in both US radio airplay and hot 100 songs. Notable songwriters signings included four-time Grammy winner, Anderson.Paak, multi-platinum record producer, Vinylz, R&B hit maker Sean Garrett and legendary Mexican star, Marco Antonio Solis.

In April, Warner Chappell's creative and commercial momentum was recognized with the prestigious ASCAP Pop Publisher of the Year Award. We're achieving all of this success by making smart investments in our artists and songwriters. One of our primary goals is to grow our core business through a constant flow of amazing new music, driven by financially disciplined A&R and M&A strategies. We continue to have size, agility and focus working for us. Our agreement to purchase 12Tone Music announced in July is just the latest example, of an immediately accretive investment. 12Tone's roster includes recordings by Anderson.Paak, Christian music superstar Rauw Alejandro, breakthrough electronic artist ILLENIUM, music legend, Dolly Parton and hit Asian collective 88rising.

Turning now to innovation. We're continuously transforming to become a tech enabled digital first company in order to deliver long-term growth. As I've said many times before, the music ecosphere is so much more than albums, singles and videos. We want to be everywhere the fans are. So we're focusing on quickly adapting to new trends and staying ahead of the change cure. While subscription streaming has a long runway ahead of it, we're also positioning ourselves at the center of the converging world of social gaming, digital fitness and music. We continue to build our portfolios relationships with best-in-class partners like Roblox, Wave and Dapper Labs. Recently, we deepened our engagement in the gaming space with Bella Poarch becoming the first Filipino artists to be featured in the Fortnite dance emote and Bebe Rexha returning to The Sims for an in-game music festival. As part of our ongoing efforts to expand our presence in China, we launched dance label Whet Records.

Last month, Whet signed six artists, one of whom was Ha Jiang, a virtual idol, who exists only online. These digital stars are phenomenon in countries such as China and Japan with huge social media followings. With Ha Jiang, Warner is leading the virtual idol crossover into the music business. As a result of our digital first strategy, our revenue from emerging platforms, such as Facebook, TikTok and Peloton is now running at roughly $235 million on an annualized basis and that's just from recorded Music. Look for more announcements to come in the near future about new investments, partnerships and collaborations. We've also spoken in the past about differentiating ourselves in the market by building an influential network of consumer destinations. Each brand has music in its DNA and command its own independent audience of loyal fans. Our strategy to turbocharge growth included bringing together our owned media channels under a newly formed digital advertising and creative content unit. These coordinated channels, which include UPROXX, Songkick, IMGN, HipHopDX, and Cover Nation have all seen accelerated growth over the past year.

It's a powerful thing for us to control our own network of media brands. This is something unique to the Warner Music Group. These assets manually drive digital ad revenue, they give us a real edge in terms of understanding fan behavior, quickly catching new trends and identifying cultural shifts.

Last month, we were pleased to welcome Nancy Dubuc, the CEO of VICE Media Group to our Board of Directors. Nancy was also named Chairperson of the Audit Committee and a member of the Executive Committee. A dynamic leader, she has wide-ranging experience in visual programming and digital entertainment and is already proving to be an excellent addition. At the same time, Thomas H. Lee announced that he was stepping down from the company's board of directors after more than 17 years. In light of his many contributions, Thomas has been given the title of Director Emeritus. On behalf of everyone at WMG, I'd like to thank Tom and say how grateful we are that we will continue to benefit from his expertise.

Last month, we also issued the first Annual Report for the Warner Music Group/Blavatnik Family Foundation Social Justice Fund. So far the fund has chosen nine amazing organizations to support including the black cultural archives, Howard University and Meek Mill's REFORM Alliance. It's important to note that this fund is just one aspect of our long-term dedication to improving diversity, equity and inclusion within our company, our industry and our society. Although, we are making progress, we also understand this is an effort that requires sustained commitment. As part of this, we recently hired Samantha Sims, our first VP of ESG. Sam joins us from PVH, the parent company of Calvin Klein. She will work closely with our global management team, including key leaders, such as our global heads of people and DEI to help build program that will drive meaningful and sustainable change. We look forward to updating you on our progress.

Let me wrap up by saying that our first year as a public -- publicly traded company, despite home confinement has been one of the most satisfying in my career. Our amazingly creative artists and songwriters backed by our outstanding team have accomplished so much during a very trying time. Above all, I'm really excited by what's to come. There is so much great music innovation and growth on the horizon, and all of this has been supported by our shareholders for which we are all deeply appreciative. So stay tuned, as we continue to lead the way into the music future.

And with that, I'll turn it over to Eric.

Eric Levin

Thank you, Steve, and good morning, everyone. We are extremely proud of our third quarter results, which were marked by strong growth across all components of streaming, recovery in several areas that had been negatively impacted by COVID and adjusted EBITDA growth that meaningfully outpaced our revenue growth, highlighting the strong operating leverage in our business. While some of the companies or some of the comparisons to the prior year quarter are distorted given the impact that COVID had on certain areas of our business, I will do my best to contextualize them.

Our total revenue was up approximately 27% on a constant currency basis, and up almost 33% on an as reported basis compared to prior year quarter. These results are underpinned by growth across all of our revenue lines, with the exception of performance in music publishing. Adjusted OIBDA increased by over 58% to $263 million with margin improving from 16.4% to 19.6%. This improvement was driven by revenue mix and strong operating performance. Adjusted EBITDA increased almost 50% to $282 million, with margin improving from 18.7% to 21%. This increase was largely due to the same factors that drove adjusted OIBDA performance pushing our adjusted EBITDA to over $1 billion on an LTM basis. Please refer to our press release for calculations and reconciliations related to adjusted OIBDA and adjusted EBITDA. In recorded music, revenue increased approximately 28% over the prior year quarter. Digital revenue grew by almost 24%, driven by a 27% growth in streaming revenue. Our streaming revenue was propelled by growth from traditional platforms, as well as emerging platforms, resulting in robust growth across all of its components.

Subscription streaming, which is by far the largest contributor showed accelerated growth this quarter. Ad supported streaming, which was impacted by COVID in the prior year quarter continued its strong recovery with growth more than doubling that of subscription streaming. And our revenue from emerging streaming platforms continues to grow at an extraordinary pace and is now running at approximately $235 million on an annualized basis and that's for recorded music alone. Physical had an impressive recovery with revenue growth of over 136%. This was driven by a resurgence in global demand for vinyl and increasing retail sales, as businesses reopen, as well as comparisons against the prior year quarter that was severely impacted by COVID. While the increased demand for vinyl has been welcomed, we continue to believe that physical will be in secular decline on a normalized basis.

Licensing revenue returned to growth of almost 28% due to higher synchronization revenue broadcast fees, as businesses began to recover from COVID. Artist services revenue was slightly up, as double digit growth at EMP was partially offset by lower revenue associated with concert promotion and tour related merchandising. Recorded music adjusted OIBDA grew by more than 52% over the prior year quarter to $254 million driven by revenue mix, strong operating performance and the impact from recent acquisitions. Adjusted OIBDA margin increased 2.6 percentage points to 22%. Music Publishing revenue increased by over 21%, driven by growth in digital, sync and mechanical revenue. Digital revenue increased by over 20%, reflecting the continuing shift to streaming and timing of new digital deals with digital service providers.

Synchronization revenue increased by almost 55%, due to growth in motion picture and commercial income. Mechanical revenue increased 30%, as businesses began to recover from COVID related disruption, while performance revenue was down 4%, due to the ongoing effects of the restrictions for bars, restaurants, concerts and live events. Music Publishing adjusted OIBDA grew by over 29% from $34 million to $44 million, with margin improving from 22.8% to 23.3%; this was due to revenue mix and restructuring in the prior year quarter. Operating cash flow decreased from $123 million in the prior year quarter to $91 million. The decline was driven by strong operating performance more than offset by continued investment in A&R and timing of working capital. On a year-to-date basis, operating cash flow was up 43% from $287 million to $410 million. Free cash flow decreased to negative $71 million from $87 million in the prior year quarter, largely due to an increase in investment activity, as well as lower operating cash flow.

CapEx of $20 million was flat compared to the prior year quarter and includes costs associated with our financial transformation program. The total investment associated with our financial transformation program is expected to be about $20 million in fiscal '21 with annualized run rate savings of approximately $35 million to $40 million once fully implemented in 2023. For fiscal '21, we continue to expect total CapEx to be in the range of $90 million to $100 million. Cash taxes were $37 million in the quarter. And as of June 30, we had a cash balance of $442 million and net debt of around $2.9 billion. Over the last year, we have actively managed our capital structure, reducing our weighted average cost of debt from 4% to 3.4% and extending maturities, with our nearest maturity date now in 2026.

In July, we received the credit rating upgrade from S&P to BB plus in recognition of the continued health and stability in our business. We are incredibly proud of our third quarter results, and all of our progress and growth during our first year, as a publicly traded company. We look forward to bringing you some new amazing music in the coming months.

And thank you for joining the call today, and we will open the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Matthew Thornton with Truist Securities. Your line is open.

Matthew Thornton

Hey, good morning, Steve, good morning, Eric. Thanks for taking the question. Maybe two quick ones, if I could, I guess. First, I guess around some of the recent price increases at Spotify, obviously it's still early. I think they are really the only DSPs that -- that's taken that initiative. I'm curious kind of what your sensing out there in terms of feedback either from -- from other DSP receptivity, from consumer receptivity and whether this can kind of continue looking forward. I guess, that's the first question.

And then, just the second question, again the DSP, they're starting to talk a little more about the opportunity to really accelerate live both virtual and in-person as well as merchandising just by driving better awareness, conversion and consumption of these revenue buckets. And I'm curious, if you're looking at that, if you're embracing that, if you think again, there is the opportunity here by partnering with DSP to really drive an inflection and growth in some of those revenue streams. Any thoughts there? Thanks, guys.

Eric Levin

So I'll respond to -- I can respond to most of that, Matthew. So Spotify has increased rates, and I think they've said that their rates are -- rate increases are performing well with consumers, and they kind of met their expectations for the quarter. We have no reason to believe that to be anything, but completely true. ARPUs will continue overall to decline, as the mix of emerge -- as roll out of subscribers in emerging markets, which are lower rates, will decrease the overall pool. Within developed markets, the ability to start to see rates increase, we think is a meaningful opportunity. So we are really pleased that Spotify is taking the initiative and starting to take really positive steps there.

Regarding other DSPs, what we can say is that we've been vocal over the years that there is real price upside opportunity, and we think the steps that Spotify is taking is very indicative of that. And we would be highly supportive of other DSPs, evaluating their subscriber base and looking at taking similar steps that are appropriate for their platform. So we think there are opportunities there, but we don't speak for other DSPs, and I wouldn't want to speak for them in that area.

With regard to live and merch, the first thing, I would say is that one of the kind of consumer platforms that we have acquired and been running successfully for several years is what [ph] called Songkick. Songkick provides listings of where artists are performing live, and in the COVID affected world, where they are performing live online. They are a significant input provider and data provider for that -- for Spotify, as well as other services. And so we really believe in live and live online.

We've also recently announced the partnership with Wave, which is a leader in that space, and we have been doing a series of online concerts part of our relationship with Roblox's been a series of concerts, whether it's Royal Blood performed at the Bloxy Awards or Why Don't We or Ava Max performing on there [ph] and we've done, that's just the start. We've done a whole series of events. We've also talked about the Ed Sheeran launch event on TikTok, which was a live streamed event.

So we think there's a lot of opportunity there, certainly to reach audience and build awareness and promote artists and music. The monetization of those platforms is very, very early, and there will be a lot of experimentation, but we are an active player in that equation, and see there is real [ph] opportunity that we're really leaning into, and we'll see how it develops both from a monetization and commercial standpoint. But we do see it as an active meaningful part of the future for music going forward.

Matthew Thornton

Very helpful. Thanks, Eric.

Eric Levin

Thanks, Matthew so much.

Operator

Our next question comes from Michael Morris with Guggenheim. Your line is open.

Michael Morris

Thank you. Good morning. I have two topics, one on the subscription streaming revenue strengthened, one on artists relationships. First, I'm hoping maybe you could unpack the strength in the subscription streaming side a bit more between what was maybe share gains, given the strength of your portfolio and what was just health of that business overall. And if you think about what's driving strength in -- in the business overall, I'd love to hear, if you have any insights on particular platforms, particular geographies anything that -- that stands out to you there.

And on the artists relationship side, Steve, you referenced this partnership with David Guetta, as very long-term partnership. And my question, yes, I really love to just hear some more detail, and the context is, I think there is concern in the marketplace that eventually technology disintermediates the label value and we've talked about that a lot, you guys have addressed that. But having an established artists strike a long-term partnership with you clearly show some two way commitment. And so, I'd love to just hear what's in it for each of you, as you -- you establish something long term like that? Thanks guys.

Eric Levin

Sure.

Steve Cooper

So I can start.

Eric Levin

No, go ahead Steve. I can tackle the first…

Steve Cooper

No, no, why don't you do subscription strength first, then, I'll deal with artists relations.

Eric Levin

Super. So thanks for the question, Michael. So first, I would say that the subscription revenue growth or I would say the streaming revenue growth is really multilayered. It is driven by subscription growth both in developed and emerging market, supplemented by the price increases that have started to roll through. We've actually seen a modest acceleration in the subscription growth side. Ad supported revenue has -- grew, as we said twice at the rate of subscription streaming indicating that ad supported, which was affected in the early days of COVID has really fully rebounded. And the emerging forms of streaming continued their solid growth, as new deals are signed and the existing platforms continue to grow. Now, talking about share gain versus market growth, what I would say is a lot of this is driven first and foremost, we have said from the beginning of the year that our release schedule was back half loaded. Steve indicated in his comments, some of those artist, whether it's Ed Sheeran, Silk Sonic, the Bruno Mars, Anderson.Paak partnership, Cardi B, Coldplay, but also artists all over the world, whether it's Aya Nakamura in France or Capo Plaza in Italy, it's not just the superstars, it is the global superstars, but it's also stars from all over the world, as well as breaking artists like Tion Wayne and others. So it's a broad reach that is really helping drive our business forward.

The market is recovering from COVID in areas that have been affected and the areas that were unaffected like subscription streaming continue their strong momentum. So it's really Michael, kind of a broad reach of release schedule having an impact, but also the market overall performing well. And you put the two together, it creates a nice environment for growth. Steve, I'll hand it to you.

Steve Cooper

Great. Thanks, Eric. So Michael, on the -- on the artists relation side, the benefit that artists see by way of continuing to partner with -- with a record label is that despite the tools that are available in the digital world, the ability to effectively utilize those tools and amplify an artists career, their music, their social presence through an organization that has a global and local footprint literally around the globe can't be underestimated. There are tens of thousands of tracks that are uploaded every day to streaming services around the world, literally tens of thousands of tracks. And the number probably now is somewhere between half a million to three quarters of the million tracks a week that are being upload. The value a label brings to an artist is the ability to help them cut through the noise of a 0.5 million or three quarters of the million tracks and separate their music and their career from literally all of this noise. And when you look out really, really well established tremendous global superstars, all of whom have had the opportunity to pivot away from labels, utilize the digital tools available and go solo so to speak by way of moving their career long.

Virtually none of them -- none of them have taken that decision to pivot away from the labels because at the end of the day it is -- it is not that easy to separate the really great music and the great artists without an organization, such as ours behind that. It is really, really hard work. And so when enter into these partnerships or we have these long-term arrangements with our artists, they are arrangements that are mutually beneficial, where -- where the artist sees the value that we bring, and we see a genius and greatness in these artists, so that it allows with an enormous amount of enthusiasm and our own creativity to get behind these artists and they see the value that we bring to them in their careers. So it's a mutually symbiotic relationship, Michael.

Michael Morris

Great. Thank you, both. Appreciate it.

Eric Levin

Thanks, Michael.

Operator

Our next question comes from Meghan with Credit Suisse. Your line is open.

Meghan Durkin

Hi, good morning, guys. I wanted to talk about the emerging platform revenue line. You've given us the number for Recorded Music, how much would including Music Publishing increase this run rate. And then, Facebook, I think announced that they're going to be spending $1 billion on creators. I wanted to know what you think music is going to be as a percentage of that spend? Thanks.

Eric Levin

Okay. Well, I'll take the first one, Meghan. Well, nice speaking, Meghan. So obviously we don't release the publishing number. I think you can look at relative proportions Recorded Music and publishing digital revenue and get a general feel. So it -- Recorded Music is call a five-ish times what the size of revenue of digital revenue than publishing plus or minus ballpark that are logically return to what the emerging streaming platforms be in publishing. What I would say is, we -- on publishing, we don't release the number, but we are just as active in developing relationships with these platforms and helping support their growth, but also being a partner and helping lead the way in helping innovative platforms get launched, find traction and hopefully generate long-term sustainable business models and -- and licenses with both recorded music and publishing. Steve, do you want to discuss the Facebook side.

Steve Cooper

Sure. Hi, Meghan. So you're right, Facebook -- Facebook has announced that they are going to be focusing our investments in creators. This is a response to what they see other platforms, YouTube and TikTok doing. While I won't venture a guess at any specific number, what I would point out is, when you look at the platforms that Facebook wants to compete against. When you look at other changes that they have initiated recently by way of example, Instagram Reels, what they're doing is responding to different use cases for short form video, most of which, not all, but most of which include the utilization of music. And what we would expect to see is that whatever the specifics are, by way of how they channel that billion dollars to creators, those creators in the main -- will utilize in some way shape or form music, and they will continue to amplify the use cases, and the growth of the new music ecosphere [ph]. So -- so I would expect that we along with the creators, songwriters, music publishers and other labels will be in -- in many ways beneficiaries of that additional spend maybe.

Meghan Durkin

Okay. And congrats guys on Megan Thee Stallion, the other Megan getting the Sports Illustrated cover that was critical.

Steve Cooper

Thank you, Meghan.

Operator

Our next question comes from Ben Swinburne with Morgan Stanley. Your line is open.

Ben Swinburne

Thanks. Good morning. Eric if I look at the first nine months of the year, at least on an OIBDA basis, margins are up, I think a couple of hundred basis points year-on-year, you guys are tracking into this -- nicely to this 20% plus number. Could you [ph] just talk about your confidence in margin expansion looking out over the next several years, you guys see anything that -- that the rails, at least the -- the trend line. And -- and if you want to -- if you want to talk numbers, feel free, but I think you probably won't? And then Steve, just on the M&A front. You guys continue to sort of acquire not just labels, but also technology assets and other thing. Could you remind us of sort of how you're thinking about deploying cash flow, as we move into '22 and '23 because your leverage is coming down, and I don't think the company is looking to delever. So just sort of remind us where your -- what your M&A strategy and what your focus is [ph]? Thank you.

Eric Levin

Sure. I'll take the first one first, so on margins and good to hear from you, Ben. So yes, look, when we went public, which is just 13 months ago, we said, three years, four years out kind of 2023, 2024, 2025 timeframe, we expect a low to mid -- it's really, we said low 20s. As we are now a year out, we're already low 20s margin and there are couple of factors. One is executing on the plans that we had laid out, continuing to work on cost containment, whether it's through our technology innovation and automation and efficiency programs. We also have our financial transformation, which will be going live in the next year with the bulk of the savings commencing in fiscal '23, continuing to gain leverage on scale, as we continue to grow our revenue and gross margin faster than we're growing our underlying cost base. Overtime, we would say the shift from physical to streaming, although, this quarter the physical result was obviously up substantially. So for this quarter that doesn't quite hold. So we continue to believe that on a long-term basis, continuing to improve our margins above where they are now into the mid 20s is reasonable and where we're heading. However, we will say in the short term, as we recover from COVID and specifically when concert touring and comes back, our concert promotion businesses and our tour merch businesses, which are the two businesses that haven't recovered yet are some of our lower margin businesses.

So as those recover, we could expect to see some moderation in the growth in margins in the short-term, but long-term, all the fundamentals are in place for continued growth of margin from here forward. And we continue to focus on that as a key business driver both in terms of efficiency in our business and scale. Thanks, Ben. Steve, I hand it to you on the M&A question.

Steve Cooper

Thanks, Eric. So Ben, first of all on our M&A strategy and our pre-cash flow deployment. First of all, as a broad envelope, we are very, very disciplined with respect to our investment strategy, which includes M&A, you know, but -- whenever we do, I need to [ph]. When we look at A&R, when we do M&A, our financial discipline and thoughtful financial metrics always guide our decisions, and you can see this frankly materialize, when you look at our -- our conversion from OIBDA, EBITDA to cash flow. It becomes evident that we remain very disciplined. Relative to our specific strategies, we plan on continuing to invest both organically and through M&A in our core business and expanding our global footprint. We continue to invest in both our own technological capabilities, as well as into third party technological capabilities. And -- and in those third party investments, we not only through commercial relationships brought [ph] these investments, work with them to define, how we -- how we move our music maybe to broadly diversified revenue streams and that will continue to also be a priority for us. So core music business, diversified revenue streams and future proofing us by both internally and externally, investments in new technology.

When it comes to our free cash flow, you're right, we have no intention at the moment to pay down debt. With the full support of our Board, we look first at reinvesting in our business both with respect to organic, as well as M&A opportunities. Secondly, to repatriate to our shareholders excess cash through dividends and presumably over time through modest dividend growth. And if and when we run out of opportunities to invest or to repatriate to shareholders, we will then look to debt -- debt reduction but I don't see that in the near future.

Ben Swinburne

Thank you, both.

Eric Levin

Thanks, Ben.

Operator

Our next question comes from Tim Nollen with Macquarie. Your line is open.

Tim Nollen

Oh, thanks very much. I'd like to pick up on this discussion about the new technologies and opportunities. Last earnings call, we spoke for the first time about Wave and about Genies and about Dapper Labs and now you're introducing this concept of this virtual idol. And I'm just curious, no pun intended, but how real is that. How much of a Chinese specific opportunity is it? How well positioned are you to benefit from any growth there? And could that be something that -- that takes hold outside of -- outside of China or Asia? Thanks.

Steve Cooper

Well, Tim, I think that -- that it's already taken hold or -- or it is certainly -- it's certainly approaching taken a hold, not only in China, Japan, other Asian countries, but globally. When -- when you look at -- when you look at social gaming and these metaverses, we are already talking about dealing in the virtual world, where people have their own avatars, they -- they have their own communities in these virtual worlds, and -- and these virtual worlds reflect, who people believe [ph] they are or they want to be between the real world. Creating virtual only beings is not an illogical next step. And while this has been predominantly the domain of certain Asian countries, the -- the wonderful thing about it is, you can create these characters, and you can create a tremendous fan base relative to these characters. I'll give you something that's a bit analogous, even though it's not quite all in the digital format.

When you watch a Marvel movie, you're talking about characters that don't exist in real life, and you're talking about computer generated imaging that doesn't exist in real life. But yet when you look at the success of these -- of these characters, you look at the success of Marvel, you look at the success of many of the sound tracks, which in many cases we provide, and you look at the fan base for these characters being able to do this in a virtual world is really not a massive step, Tim, and it's a step, where we're determined to lead the crossovers of these virtual beings into the world of music. So, I don't think it's a flash in the pan. I think it's here to stay. And not only do I think it's here to stay, I think it's here to grow.

Hopefully, that answers your questions.

Tim Nollen

That's great. Thanks very much.

Operator

Thank you. Our next question comes from Kannan Venkateshwar with Barclays. Your line is open.

Kannan Venkateshwar

Thank you. I apologize, if this has been asked already. I joined a little bit late. But on the M&A side, I guess, a slightly different aspect of what's going on in the industry is just the catalog acquisitions and Spotify seems to be a function of where rates are [ph]. But is there an opportunity for you guys to potentially look at monetizing that could drive a higher multiple because today you don't seem to get the credit for that side of the business compared to what some of these transactions are doing in the marketplace. So, is there an opportunity for you guys to think about that business slightly differently? Thanks.

Steve Cooper

So Eric, let me take the first part, then, you can take the second part, I'm sorry. I didn't catch your name.

Kannan Venkateshwar

This is Kannan from Barclays.

Steve Cooper

Okay. I'm on a cellphone. So it's still difficult anyway. So -- so let me give you kind of a top view, and then, Eric will give you a -- from the financial perspective. From kind of an overview, when you -- when you look at some of these multiples to us, it looks like a movement in capital from fixed income to what people believe there is a sexier [ph] form of fixed income. And many of these financial players are buying assets with no organization or no capability to activate those assets. We also agree with your observation, it may be a function of rate. But what we don't see is us turning into asset managers and moving away from being a proactive music entertainment company, and we're looking to the long-term, and our long-term growth. And while, it's always possible, you know, if our shareholders and Board desired to pack in certain assets and continue to manage them. But frankly, we do that already.

And you're right, while we don't trade at a 30 or 35 time multiple. When you think about buying assets at that multiple and not having an organization to not only activate, but turbocharge the cash flow attributable to those assets from our perspective, that just seems not like a business that we're inclined to be in at the moment.

Eric, do you want to add to that?

Eric Levin

Yes. I would just supplement that with a few quick thing. One is, we have been active this year in acquiring music rights both in the recorded and the publishing side. We announced earlier this year that we acquired for $338 million [ph] assets, with a run rate or OIBDA of $37 million. And we've done other deals throughout the year as well. But we are always financially disciplined. We are not looking to compete at the highest price for the sake of competing. We look at assets that are accretive to our business. And as Steve said, we are always looking for assets, where we can drive incremental value, whether the opportunities are in reenergizing and re-releasing masters catalog, looking to improve sync opportunities. So when we put all together, we think we've found an effective array of assets to acquire this year that we've been able to put to work, as Steve said and generate even higher revenue and returns. And we'll continue to look for opportunities in the market that meet our criteria. But we'll always apply our same financial discipline to it, Kannan.

Kannan Venkateshwar

Thank you, both.

Eric Levin

Thank you.

Operator

Thank you. And this concludes the question-answer session. I would now like to turn the call back over to Steve Cooper for closing remarks.

Steve Cooper

Again, I want to thank everybody for taking the time to join us today. And please look for our future announcements, as -- as I mentioned during the during the -- during the presentation part of the call. And please everyone continue to enjoy the summer, but stay safe because it really remains a crazy, crazy world.

So thanks, again, speak to you soon. Bye-bye.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.