Warner Music Group Corp. (WMG) Q2 2022 Earnings Call Transcript

Warner Music Group Corp. (WMG -1.25%)
Q2 2022 Earnings Call
May 10, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to Warner Music Group's second-quarter earnings call for the period ended March 31, 2022. At the request of Warner Music Group, today's call is being recorded for replay purposes. [Operator instructions] 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 -- Head of Investor Relations

Good morning, everyone. Welcome to Warner Music Group's fiscal second-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 executive vice president and CFO, Eric Levin, who will take you through our results, and then we will answer your questions.

Before our prepared remarks, I'd like to refer you to the second slide of the earnings snapshot to remind you that this communication includes forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance. We plan to present certain non-GAAP results during this conference call 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 can 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 -- Chief Executive Officer

Thanks, Kareem. Good morning, everyone, and thanks for joining us. As we approach the two-year anniversary of our IPO, I'd like to reflect for a moment on the key pillars of our success. These are the fundamentals of our strategy, the principles we bear in mind when charting our course into the future.

First, of course, is the music. It's at the heart of everything we do. While taste, trends and tech are ever-changing, our artists and songwriters will always be our driving force. Second is our global growth.

About a decade ago, we set a goal to become a global music entertainment company through the expansion of our local expertise. Today, I'll share the progress we're making in growing our presence around the world. Third, we're a company that thrives at the intersection of art and technology. Innovation and data-driven insights are helping us actively create our future.

And fourth, our people and our commitment to making our company a place where the best individual talents can be long and build a career. But first, let's get into our Q2 results. I'm pleased to say that they reflect the strong health of our streaming revenue, continued growth in publishing and recovery from COVID in artist services and performance. Total revenue in the quarter was almost $1.4 billion.

This represents year-over-year growth of 10% and 13% on an as-reported and constant currency basis. Adjusted EBITDA was $282 million with a margin of 20.5%, compared to 21.4% in the prior-year quarter. This decline was driven by our revenue mix. As our lower-margin revenue streams recovered from COVID, they became bigger contributors to overall revenue.

We continue to expect that we'll achieve our long-term margin targets in the next several years as mix and growth rates normalize. In recorded music, our revenue was approximately $1.15 billion, an increase of 11.4% from the prior-year quarter, with streaming revenue growing 10%. Normalizing for the impact of the new digital deal that we discussed on our Q1 earnings call, recorded music total revenue and streaming revenue both grew by 15%. Artist services and physical continue to show impressive recovery with revenue growth of 25% and 8%, respectively.

Licensing revenue powered by Sync grew 23%. In publishing, we delivered revenue of $230 million, 23% more than the prior-year quarter, driven by growth across all revenue lines. Companywide streaming revenue from emerging platforms grew to $345 million on an annualized basis, up from $325 million in Q1. And now on to the music.

An important differentiator for the Warner Music Group is our focus on long-term artist development. These days, there's a misconception that all music majors are just following the same data and chasing artists who already have a significant presence in the market. That's not quite true for us. First and foremost, we seek out originality.

When we identify really great artists and songwriters, we collaborate with them to ensure that they have the opportunity to realize their full potential. Most of our biggest superstars were signed to one of our labels at the very beginning of their careers. This commitment to extraordinary talent is something that has distinguished us for decades. Legendary voices like Aretha Franklin and Fleetwood Mac have now been joined by visionary performers like Lizzo and Ed Sheeran.

The impact of our unique irreplaceable catalog in music will reverberate for generations. At this year's Grammys, Silk Sonic, the R&B Super duo of Bruno Mars and Anderson.Paak took home the highly coveted Record of the Year and Song of the Year awards, plus two more. Bruno has now won Record of the Year three times, a feat previously accomplished only by Paul Simon. Without question, he now ranks as one of the world's greatest entertainers.

We're always developing the next wave of culture shaping music that will create the sound track of tomorrow. For example, Gayle kicked off the year with No. 1 worldwide smash abcdefu and Jack Harlow's new single First Class debuted at No. 1 on the Billboard Hot 100 last month.

Dua Lipa and Megan Thee Stallion racked up over 40 million streams in just one week with their hit collaboration Sweet as Pie. Our publishing team also continues to excel with an impressive 90 songs charting on the Billboard Hot 100 over the course of Q2. Some of the biggest hits that our songwriters contributed to this quarter were Silk Sonic's Smoking Out the Window, Raul Alejandro's Desperados and Dave's Starlight. Warner Chappell had a superb showing at this year's Grammys.

In addition to Bruno and Anderson, who are also Warner Chappell's songwriters, we saw big wins for Chris Stapleton for Best Country Song and Ojivolta for Best Rap Song. Warner Chappell is winning highly competitive deals for talent around the world and across the music spectrum from Nigeria's [Inaudible] to Italy's Sick Luke to the U.S.'s Nicole [Inaudible]. In March, we signed two important deals with Patrick Moxie, the Founder of dance label Ultra. Warner Chappell now administers Ultra 6,000 copyrights throughout Europe, including songs from Drake, Rihanna and The Weeknd among many others.

And Warner recorded music also entered into a strategic alliance with Patrick's legendary Payday Records as well as his new label, Helix. At a time, when domestic music is on the rise in most countries, we're also one of the few companies with the resources and expertise to take a truly global approach to artist development. This strategy requires a mix of organic A&R investment, partnerships with the most credible local players and financially disciplined acquisitions of catalogs and labels. Across established and emerging markets, we create the conditions for success to travel at the speed of sound.

We saw a perfect example of our long-term strategy in action, when Anitta and Paulo Londra both signed to Warner Music Latin America, took No. 1 and No. 2 on Spotify's global chart. With her monster hit, Envolver, Anitta made history as the first Brazilian to hit the top spot, while Paulo has spent five consecutive weeks at the top of Billboard's Argentina 100.

According to IFPI's 2022 Global Music Report, MENA was the fastest-growing market in 2021, up 35% year over year. This quarter, we announced that we would be acquiring Qanawat Music, the region's largest independent distributor, which will expand our presence in this important territory. Qanawat is on the ground in Dubai, Cairo and Casablanca and offers services in more than 20 countries. Having only launched Warner Music Middle East in 2018, we moved quickly to become a leading player in this region.

India is another rapidly growing market where we focused our attention and have increased our market share meaningfully in the last 24 months. We've recently partnered with some of Bollywood's biggest talents. And last month, Warner Music India entered into a strategic partnership with Just Music, founded by renowned actor and producer, Jackky Bhagnani. This will give us access to marquee Bollywood releases while Just Music artists will benefit from our worldwide network.

In March, we partnered with Diljit Dosanjh, one of India's biggest film and music superstars. We're already working together to amplify his global career, including collaborations with Canadian rapper Tory Lanez and Tanzanian Star Diamond Platnumz. Across the globe, blockbuster albums from the likes of Red Hot Chili Peppers, Ed Sheeran and Kodak Black are showing incredible staying power. And we're excited about what's on the horizon with new music coming from stars like Lizzo, Ava Max and Cardi B, as well as our next generation of hit makers such as Pink Pantheress, Bella Poarch and Tiago PZK.

As the world grapples with war, inflation and other macroeconomic concerns, one thing is certain: music's ubiquity and the value have already proven to be resilient through any kind of disruption. Unlike the video streaming market, which churns as subscribers constantly search for new and different exclusive content, the music streaming market is sticky. Subscribers have access to all the music they could ever want on a single platform, and they become attached to the collections and playlists they have curated over time. And while films and TV series may come and go, devotion to one's favorite music and artist is more deep-seated and longer lasting.

As new platforms emerge, it becomes increasingly clear that whatever the mode of consumption, music is the common thread that runs throughout the entire entertainment economy. We're one of the few companies with the reach, skills and capabilities to connect the dots for artists and songwriters on a global basis. We protect and promote the value of music. We help creators navigate an incredibly complex landscape, and we deepen the connection between artists and fans.

As streaming continues to scale and social media provides increasingly meaningful revenue, there is now a lot of buzz about Web3. Since 2019, we've been strategically investing in tech companies that feature music prominently in their offerings. This has built our reputation as the planet's most innovative future-focused music company. These investments have fostered partnerships at the intersection of gaming, social and entertainment with brands such as Roblox, Fortnite and The Sandbox.

And we formed groundbreaking relationships with innovation leaders such as Genies, Block Party, OneOf and Dapper Labs. As a recent example, we've also partnered with blockchain gaming developers Splinterlands to give Warner Music artists the tools to develop arcade-style games such as the extremely popular DAP. The latest deal we signed was with proof of attendance protocol, POAP for short. This will enable us to mint shared memories as NFTs, giving collectors authenticated digital proof they were part of a specific experience or event.

Atlantic Records' rapper, Kevin Gates, recently tapped into the technology offering fans who attended his sold-out Red Rock's concert of POAP to commemorate the show. As I mentioned earlier, we thrive at the intersection of art and technology. We were very excited to announce that Mike Shinoda, co-founder of the Warner Records band Linkin' Park, has been enlisted as our first-ever community innovation advisor. Mike is a music tech visionary who will be a great source of wisdom and insight as our artists bring their creative visions to life on multiple new platforms.

I've talked before about our network of direct-to-consumer destinations, including Uproc, HipHopDX, Songkick and EMP. These companies all fall under the umbrella of our newly rebranded media and content arm WMX. Last week, at our first ever New Fronts event for brands and advertisers, WMX unveiled new culture driving original programming that will roll out across these outlets later this year. These programs include: Fresh Pair with Katty Customs, a sneaker culture show co-hosted and executive produced by Just Blaze; Iconic Records, a visual podcast that will explore the legacy of Notorious B.I.G.; and Limited, a merch design competition featuring hot artists and emerging creators.

WMX already ranks as a top five video company in the U.S., and this exciting roster of programming will bring advertisers new opportunities to reach young, engaged and influential audiences. The other two areas of incremental revenue I'd like to highlight today are, first, digital fitness. WMG was the music launch partner for Peloton's gaming-inspired fitness experience, Lanebreak. The first artist featured on Lanebreak were two Warner Legends, David Bowie and David Guetta.

Second, podcasting. Following the success of shows like People's Party with Talib Kweli, we're continuing to build our presence in this space. Last month, we announced the launch of Interval Presents, our in-house podcast network sitting at the crossroads of music, pop culture and social impact. We already have shows in the works from Oscar-winning actress Lupita Nyong'o, and Grammy-nominated singer Jason Derulo, among other major talents.

When we took the company public less than two years ago, many of these business models were only nascent. While we still have plenty of work to do, we've made great progress in a very short period. Our strategies are proving to be sound. The universe of possibilities continues to expand in every direction and will enhance the growth of an already robust music entertainment industry.

IFPI reported that the global recorded music industry grew by an impressive 18.5% in 2021. We're proud to say that we outperformed this benchmark by almost 2.5 percentage points, a testament to our impact on global culture and our ability to create communities of fans across every medium. During our last call, we talked about our DEI commitments, which we unveiled as part of our first ESG report. This quarter, we announced a new initiative designed to help us achieve those objectives, our DEI Institute, the first of its kind within the music industry.

It will help us tap into a wide array of external expertise as we educate our employees and implement action plans across our company. Before I hand it over to Eric, I would be remiss if I didn't talk about the situation in Ukraine. We pray that this conflict ends soon and that the people of Ukraine can live in peace. As it's done throughout history, music is playing an indispensable role in lifting spirits and giving hope during this terrible hardship.

We're committed to supporting relief efforts, both for the people in Ukraine and the refugee population. This includes contributions to the Red Cross, Polish Humanitarian Action and Project Hope. As we announced in early March, we suspended operations in Russia. We're very excited about all the great new music and fresh initiatives that will be introduced through the balance of the year.

We look forward to keeping you updated as we continue to build our momentum. And with that, I'll turn it over to Eric.

Eric Levin -- Chief Financial Officer

Thank you, Steve, and good morning, everyone. There is a lot to unpack within our Q2 results, but I will start with some high-level takeaways. Core streaming remains healthy -- remains incredibly healthy underpinned by strength in subscription streaming. All of our non-digital revenue lines continue to grow as well.

While publishing is firing on all cylinders posting impressive results yet again. Over the last several quarters, we've seen elevated levels of investments in A&R and M&A, which have obvious impacts on our cash flow. As expected, this has drawn attention from analysts, and shareholders who want to better understand how we view these investments, what the return thresholds are and how these investments will drive future growth. I will get into that in more detail shortly.

Moving on to our results. Total revenue increased by over 13% on a constant currency basis reflecting double-digit growth in both recorded music and music publishing. On an as-reported basis, total revenue grew 10%. Total streaming revenue increased 12%, driven by growth across both businesses, including revenue from emerging streaming platforms.

This strong operating performance translated to adjusted OIBDA growth of 7%, with margins of 19.9%, compared to 20.4% in the prior-year quarter. The decline in margin reflects the continued recovery in lower-margin artist services revenue, as well as the reduction in high-margin streaming revenue resulting from the impact of the new deal with one of our digital partners we discussed on our last earnings call. Adjusted EBITDA grew 5%, with margins declining from 21.4% to 20.5% due to the same factors that impacted adjusted OIBDA. As a reminder, adjusted EBITDA includes the pro forma impact of future cost savings and certain specified transactions.

You can find the calculations and reconciliations related to adjusted OIBDA and adjusted EBITDA in our press release. Recorded music revenue grew 11% driven by growth across all revenue lines. Streaming revenue increased 10% due to growth in traditional and emerging streaming platforms. As mentioned, our results reflect the impact of the new deal with one of our digital partners, which began at the start of fiscal 2022.

Adjusting for the impact of the new deal, which was $31 million in the quarter, our recorded music streaming revenue would have grown 15%. I want to provide a bit more granularity so that everyone understands the underlying trends within recorded music streaming. Normalizing for the impact of the new deal, subscription streaming revenue was robust in the high teens. Comparability in our ad-supported streaming growth was impacted by a true-up payment that benefited the prior-year quarter.

As a result, ad-supported streaming, which generally grows in line with subscription streaming, grew in the high single digits. We fully expect to see a normalization in our recorded music streaming growth rate commencing in Q1 2023 once we lap the anniversary of the new digital deal. Artist services and expanded rights revenue grew by 25%, reflecting an increase in merchandising revenue and touring activity. Physical revenue grew by 8%, primarily driven by an increased worldwide demand for vinyl.

Licensing revenue increased by 23%, mainly due to higher synchronization revenue. Adjusted OIBDA was $253 million, a 5% increase over prior-year quarter. Margin declined from 22.9% in the prior-year quarter to 22.1% due to revenue mix. Music publishing had another strong quarter as well, posting revenue of $230 million and a growth rate of 23%, reflecting increases across all revenue lines.

Digital delivered strong revenue growth of 26%, driven by streaming growth of 23%, with strength across traditional and emerging platforms, Digital benefit from the timing of new digital deals. Sync revenue increased over 28% due to higher commercial licensing activity in the quarter. Performance revenue increased by 9% as bars, restaurants, concerts and live events continue to recover from COVID disruption. And mechanical revenue increased 8%, benefiting from strong physical sales.

Music publishing adjusted OIBDA increased 33% to $61 million, while margin increased 2.5 percentage points to 26.5% from 24%. As I mentioned on our last call, we still expect to see elevated full-year capex in the range of $130 million to $135 million. In Q2, capex increased to $28 million as compared to $20 million in the prior-year quarter, mainly due to investments in IT infrastructure and expansion of our E&P facilities. Our financial transformation program remains on track and is expected to utilize run rate savings of $35 million to $40 million once fully implemented starting in fiscal year 2023.

Operating cash flow decreased 71% to $44 million from $150 million. The decline was largely driven by the timing of royalty payments and other movements within working capital. Free cash flow decreased 88% to $16 million from $130 million in the prior-year quarter. As of December 31, we had a cash balance of $385 million, total debt of $3.8 billion and net debt of $3.4 billion.

Since our IPO, we have continued to actively manage our capital structure, further reducing our weighted average cost of debt from 4% to 3.3% and extending maturities, with our nearest maturity date now in 2028. There is no question that the optimal use of our capital is to invest alongside the music industry's tailwinds. I'd like to clarify a few points around the financial characteristics of our A&R and M&A investments. The vast majority of our A&R advances to artists and songwriters are recoupable, with royalties -- from royalties, and we recoup the overwhelming majority of them.

It's just a matter of timing. Artist deals have become more expensive because music is worth more in the streaming era. We can pay more because we earn more. The overwhelming majority of our new artist deals provide us with substantial recording commitments and long-term rights.

When we make M&A investments, they are typically accretive on day one, incremental to growth and financed with debt. With our M&A investments, which are sometimes for once-in-a-lifetime rights and catalogs, we have the luxury of being an opportunistic strategic buyer that can maximize the value of acquired rights through our global infrastructure. Whether investing in A&R or M&A, we rigorously analyze every transaction and have a high degree of conviction that our broad portfolio of investments will drive profitable growth and shareholder value for years to come. As we look ahead, we feel great about the health of our business and how we are positioning ourselves to take advantage of the vast opportunities for growth that lie ahead.

Thank you for joining our call today, and we will now open the call for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Benjamin Black with Deutsche Bank. Your line is open.

Benjamin Black -- Deutsche Bank -- Analyst

Great. Thanks for the question. I have two. The first one is for Steve.

As you mentioned, a lot has happened into your IPO between COVID, inflation, interest rates and obviously the war. So has your long-term outlook changed at all? I know the entire market has come under pressure, but your stock has actually been hit a lot harder. So what do you think the market is missing? And then perhaps one for Eric on margins. How should we be thinking about the cadence of your margin expansion over the next couple of years? I understood that some of the lower-margin revenue streams are coming back this year, and you have the drag from a new DSP deal.

So should we anticipate sort of more modest margin trends this year before we see a more meaningful step-up in '23?

Steve Cooper -- Chief Executive Officer

All right. Thanks for your questions, Ben. I'll take the first one, which is really about the changes in the world since our IPO. I think everybody is seeing -- and is concerned about some of these situations that involve in the world today: War, inflation, rising interest rates.

That being said, music has, and I believe will continue to prove its resilience because it is fundamental to human nature, whether it be in good times or bad times. I would remind everyone that at the height of the pandemic, music consumption continued to increase and new use cases emerged virtually every day. So our long-term outlook remains unchanged. And if anything, we're even more optimistic.

As Eric mentioned, streaming continues to be strong, both in established and emerging markets and new opportunities are coming online all the time. Many of the emerging business models that we had talked about at the time of our IPO are now generating meaningful revenue and are growing faster than traditional revenue streams. I also believe that we're better positioned to capitalize on these opportunities because of our size and our innovative mindset. We remain committed to long-term artist development.

We were early to see opportunities in emerging markets, and we continue to seek out, find and seize those opportunities. We are clearly the market leader by way of innovation. We saw it with streaming. And now as we see the Web3 space, we've moved faster and in more agile ways than our competitors.

We've been the first to set precedent setting deals and we'll continue to do so. So I'm very confident despite all of the craziness and chaos in the world that music will continue to be a driving force in our lives and in business until the end of time. Hopefully, that answers your question number one, Ben.

Eric Levin -- Chief Financial Officer

Great. Ben, let me tackle your second question. I'll hit a few key points, and thank you for the question on margins. So first, what we're seeing is something that we fully expected.

Two is recorded music margins actually increased once you adjust for the DSP renewal. So on a fundamental operating basis, we're still seeing margin growth. But [Inaudible] yes, which is implicit in your question in these results, as artist services recovers it is a lower margin business. It will cause a slowing or a flattening in margin in the short term.

Once artist services recovers, we fully expect to resume our margin expansion trajectory consistent with our plans at the time of the IPO and heading toward mid-20s margin. So everything we're seeing is what we expected and, operating basis, we're still very comfortable with our commitment toward margin expansion.

Benjamin Black -- Deutsche Bank -- Analyst

Great. Thank you for that.

Eric Levin -- Chief Financial Officer

Thank you.

Operator

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

Ben Swinburne -- Morgan Stanley -- Analyst

Thank you. Good morning. I guess I was hoping, Steve or Eric or both, could give us some more color on the emerging streaming business that you mentioned grew on a run rate basis this quarter. What's happening at a high level with those deals in terms of fixed versus variable? And is there -- are there one or two areas, Steve, you would really highlight that you're particularly excited about as you look out over the next 12, 24 months? And then maybe for Eric, obviously, there's a lot of concern in the market about the economy than just sort of macro headwinds.

Could you just remind us, again, at a high level, how you think about your revenue base in terms of what might be exposed to the economic cycle versus just sort of underlying growth tied to subscriptions, etc.?

Eric Levin -- Chief Financial Officer

So I'll start on the emerging streaming fix versus variable question. So it is absolutely something that we've been working with our emerging streaming partners. Note that we literally have hundreds of licenses with many different categories of products and services. So it's not a onetime thing, but we are -- and one thing just to set the table, emerging streaming platforms are generally services or products that are multimedia.

Music is incorporated into the product, critically essential to their products, but it can be music paired with video, music paired with a game, music paired with graphics or some other social or fitness multimedia product. We have been encouraging and working with these partners for them to develop the systems and capabilities to report on music on a stream-by-stream, consumption-detailed basis that allows us to have truly variable deals. As they develop those capabilities, it is our intent to negotiate variable deals tied to revenue or consumption, whatever the right variable is, and we're moving toward that. In this quarter, there were no major renewals, smaller renewals, but not major renewals.

So we continue to work toward that end. What I will say is it will take some time. Different companies are making different degrees of progress on developing the systems capabilities to track music on a stream-by-stream, consumption basis. So it's not going to be a moment but a process that we're working with over time.

Hopefully, that answers your first question. What I will say is that we are incredibly excited about what we're seeing, and you see this focus of our partnerships on Web3-type capabilities, whether it's NFTs, avatars, games that can be installed within metaverses. We think there's an extraordinary amount of opportunity to be developed there. We want to develop long-term business models, not one-offs that come and go and can't be sustained.

So we're working on a series of projects and experiments with various partners that we've talked about. And a lot of our artists are interested in exploring this field. Steve mentioned several in his talking points like Kevin Gates, so we're very excited about this as a future and new avenue of growth, and we're really working very hard to be innovators in this space. On the macro economy side, what I would say is that music is a cornerstone of people's lives.

We think music is -- has the expectation -- we have the expectation it will be incredibly resilient even as macroeconomic challenges emerge. We think it's different than other forms of streaming, focusing on that for a second. In other forms of streaming, people generally have like video, multiple streaming services, each of which have different content and people can decide which one they value more than another streaming service. In audio, people generally have one streaming service they subscribe to, which is all the music aggregated in one place.

We think it's a very, if you will, fairly priced, if not even low-priced, high-value service that's central to people's lives. And so we think what we've been seeing and what we expect is that it will be incredibly resilient there. And so we think music and the innovation of new digital services represents a continued growth market for music as we look forward despite macroeconomic challenges, and we've been seeing that so far. That said, we continue to monitor everything that's happening in the world and in the economy, to look at areas where we continue to get more efficient, areas where we should be focusing resources to drive the best revenue growth and value creation.

And so we continue to be mindful and focused on a changing and complex world, but we're still extremely optimistic about the growth vectors of music going forward.

Ben Swinburne -- Morgan Stanley -- Analyst

Thank you.

Eric Levin -- Chief Financial Officer

Thanks, Ben.

Operator

Our next question comes from Kutgun Maral with RBC Capital Markets. Your line is open.

Kutgun Maral -- RBC Capital Markets -- Analyst

Good morning, and thanks for taking the question. I was hoping to dig into streaming revenue trends and your expectations for the back half of the year. Underlying growth at recorded music of 15% in Q2 was fairly healthy. I guess looking ahead, do you view the mid-teens growth rate as being sustainable? And is there a scope for a potential acceleration off of the 15%? Just for my end, looking at the different components it seems like subscription streaming revenue growth will presumably stay in the high teens range and that you just reported in Q2.

Ad-supported streaming growth should maybe normalize closer to that high teens increase at subscription as well as you shift away from that true-up payment comp from last year. And perhaps there are new deals with emerging streaming platforms as well after a relatively quiet few quarters, and maybe that could help bolster overall streaming growth. So I know that you don't provide guidance, but is this the right way to think about the trajectory for the back half of the year? Or are there any other puts and takes that -- puts and takes that we should be mindful of?

Eric Levin -- Chief Financial Officer

Thanks, Kutgun. I think that was a quite thoughtful kind of statement. Certainly, we don't give guidance. So what I would say is, this quarter, our fiscal Q2 subscription streaming continue to grow high teens, the fundamentals of that business, we see are incredibly healthy.

We see penetration growth opportunities in both developed and emerging markets around the world. Spotify has had success with their price increases. Their constant currency ARPU went up 3%, I believe, in this quarter. We continue to be encouraging of others to look at pricing as an opportunity to improve economic performance of streaming.

So we see streaming as being very strong, the emerging forms of streaming and what we're starting to see in Web 3.0 gives us a lot of enthusiasm as well going forward. On the ad-supported side, you're right, there was that true-up in the accounting of that this quarter that have caused it to have lower growth for this individual quarter, but the fundamentals of ad-supported streaming growth remain very healthy and we have seen and fully expect to continue to see ad-supported streaming growing in line with subscription streaming on a fundamental basis. So we feel very good about the streaming platforms, their growth and the opportunities going forward, absolutely.

Kutgun Maral -- RBC Capital Markets -- Analyst

That's great. Thank you so much.

Eric Levin -- Chief Financial Officer

Thank you.

Operator

Our next question comes from Andrew Uerkwitz with Jefferies. Your line is open.

Andrew Uerkwitz -- Jefferies -- Analyst

Yes. Hi. Just -- could you talk a little bit more about the catalog environment and the impact interest rates could have there? Are there a lot of catalogs out there? Are there a lot of sellers, are there a lot of buyers? Can you just talk about the competition there and the impact of interest rates -- rising interest rates could have on sale and price to those catalogs?

Eric Levin -- Chief Financial Officer

So, Andrew, I appreciate the question. So look, there have been, and I think COVID's impact on artists' ability to tour certainly -- and low interest rates create an environment where a lot of artists were interested in exploring the sale of their catalogs. As artists are able to tour again and additional revenue streams come back to artists, and as interest rates rise, which could cause potential buyers to just analyze the math with different discount rates and come up with lower values could cause things to change over time. Obviously, interest rates are projected to go up over time.

So we don't think there's a moment where either catalog values will change dramatically or artists' interest in selling will change dramatically. But over time, those changing dynamics could have changed the equation both for buyers and sellers. In the short term, we do expect more catalogs to come up for sale. We will do what we have always done, which is we analyze them on an opportunistic basis.

If it's a strategic fit and well priced, we will consider doing deals, but we don't feel any pressure to do deals. We have many ways to invest capital to drive growth, both organically through M&A, launching in new markets, acquiring labels and acquiring catalogs. There's many different tools that we have, and we will continue to evaluate the market and do deals where appropriate, and work to make sure we're investing our capital with financial discipline to find the best returns for our investment and to drive the best growth profile going forward.

Andrew Uerkwitz -- Jefferies -- Analyst

Got it. Thank you, guys. That's all I have.

Eric Levin -- Chief Financial Officer

Thanks, Andrew.

Operator

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

Michael Morris -- Guggenheim Partners -- Analyst

Hi. Thanks, guys. Good morning. A couple of questions.

One, Eric, you just touched on this, but I'm curious if you could expand on thoughts on the return of touring and the impact, or impacts that could have on the business. We know about the margin dynamic, but I'm thinking more like top line impact. First of all, do you think it's just kind of a return to sort of the prior environment? Or are there any reasons to think that sort of touring and in-person interactivity could be something bigger in sort of a post-COVID world? I'm also curious whether you think that the ability to have live performances can impact streaming and just kind of appetite for music, enthusiasm, etc. So that's the first question.

And then the second question along the line of the acquisitions. As you think about the geographic expansion that you've also been embarking on and supplementing with acquisitions, what are your thoughts on expanding the footprint further from here versus where you currently stand?

Eric Levin -- Chief Financial Officer

Sure. Just writing down, there's a lot of question, Michael. So the return of touring, certainly it will be interesting. There'll certainly be some dynamics that change around the tour.

So I would expect social to be a great promoter of tours around the world, artists and labels and partners using social applications to build buzz and momentum. I would expect labels and artists to be working together to create surrounding opportunities around tours, where in the past, it be tours with merch, now it will be tours with merch, and there may be Web3 applications to create micro communities that are giving NFTs and special opportunities. And those kinds of things, I think, are going to become one experimented with in the short term, what works, what the fans really love, what do they respond to, obviously, at some level, what monetizes. So I think we'll start to see experimentation in those areas, both around the release of new music but also around tours.

So I think there'll be new kind of dynamics that are explored and new norms that develop over time. For the Warner Music Group, obviously, our artist services business has a significant portion that's tied to touring. We have several concert promotion businesses in Europe, in France and Spain, for example. We have a tour merch business in the U.S.

And as touring comes back as we're seeing this quarter, those revenue streams start to come back, and that's a very healthy thing. Again, they are lower margin businesses, but they are positive to overall margin. Meaning not the margin percentage, but it's incremental dollars on revenue and OIBDA. So we're thrilled they're coming back.

It's an important part of the music equation, and it's healthy that artist services is recovering and show signs that obviously that the economy is starting to get back to something more normal post-COVID. On the M&A side, certainly, what we focus on when it comes to geographic expansion are the emerging markets. We have always been a company that focuses on return on investment. We have been cautious not to overinvest in emerging markets before streaming and legitimate revenue streams are able to really drive growth.

When those fundamentals are in place, or are starting to come into place, we start to focus on developing our capabilities in those markets. And we've done it time and time again over and over again in the past few years, in Turkey, in the Middle East, in Vietnam. Before that in China, and Indonesia and Brazil and Mexico. We're now looking at a series of areas that we're really excited about.

Steve mentioned MENA, Middle East, North Africa, which is the fastest-growing region in the world. I think it grew 35% or so last year. We recently acquired Qanawat, the largest music distributor throughout the Middle East. We launched an organic label, an owned and operated label in the Mid East roughly three years ago to get the start and build relationships.

We developed a partnership with Rotana, one of the largest labels throughout the Middle East. So our capabilities, our infrastructure our music that we're putting out and how we're monetizing in the Middle East is changing really rapidly. We're a significant player there. And we've got a similar mindset in Africa where we acquired Africori, where we developed a partnership with Chocolate City, one of the most significant labels in Nigeria and have been releasing great music.

And CK that came out of Africa had just had a global hit earlier this year. So those are two areas in the world that we're starting to see, monetize, and we're leaning into heavily. But obviously, there's other markets in Asia, Latin America that we're continuing to lean into as well. And we're very excited about the continued globalization of music.

We see it as one of the really meaningful growth vectors.

Michael Morris -- Guggenheim Partners -- Analyst

Great. Thank you, Eric.

Eric Levin -- Chief Financial Officer

Thank you.

Operator

Our next question comes from Matthew Thornton with Truist. Your line is open.

Matthew Thornton -- Truist Securities -- Analyst

Hey. Good morning, Steve and Eric. Maybe two quick ones, if I could. You touched on touring, but I was wondering maybe if you could touch a little bit on the E&P business.

Obviously, I would assume that it had some benefits during the lockdowns and pandemic. I'm curious how that's performing as we kind of have opened up and continue to open up any color there would be helpful. And then just secondly, Eric, you talked about cash conversion effectively a little bit early. I'm just kind of wondering if there's a number we should think about as you think about conversion from adjusted OIBDA to free cash flow, again, barring any deals.

Is there a way to think about what a normalized number looks like there? Any color would be great.

Eric Levin -- Chief Financial Officer

Sure. So E&P, you're absolutely right. So E&P was a major -- I hate to say beneficiary during COVID, but that doesn't sound like a phrase that should come out of someone's mouth easily. But E&P's business grew, maybe I'll say it that way, on an accelerated basis during COVID.

There were quarters we were discussing 30%-plus growth. It just had a significant pull forward as e-commerce businesses benefited from people's desire to stay home and not go in public spaces to shop or other activities. This year, we're seeing E&P much more of level off, if you will, and that's not because we don't think this is a long-term growth business. We do.

We believe very strongly in E&P. But some of the dynamics: One the pull forward of the prior year; but two, some of the supply chain disruptions in the world have created a challenge for E&P getting the products they've ordered on time, that they need, and that has caused a challenge. They have been incredible leaders in working through those challenges and getting those resolved. But that has been a challenge with many companies around the world.

E&P is not divorced from that. And quite frankly, the war in Ukraine has been a challenge as well. I think the climate in parts of Europe have been much more cautious, and there's just less of an environment for people to be shopping for, kind of, lifestyle goods. So E&P continues to do fine, but its growth trajectory has definitely in the short term leveled off.

But we're very excited about E&P in the longer term. We just have to get past this moment, which we will. And then on the cash side, what I would say is it's kind of two pieces. First and foremost, we're very focused on growing our business.

And as our revenue and OIBDA grow, our fundamental operating cash flow, we fully expect to grow with that. However, we have a waterfall of how we deploy our capital. The first part of our waterfall is evaluating ways to reinvest in music, to continue to drive future growth. If we find opportunities that meet our return thresholds, our first priority is to deploy our operating capital, our operating cash flow into driving future growth if it meets the high return threshold that we have.

Second, our second step in the waterfall is to return cash to shareholders. Third would be to pay down debt. We haven't done that in quite some time because we have found ample opportunity to invest in music to drive future growth. When we invest in driving -- in music to drive growth, it's generally in the form of advances.

Advances are recoupable. So even if our cash flow in an individual quarter is down because we are laying out advances, please remember that's just timing. As our music performs, we recoup those advances. And so it really comes full circle.

So we are opportunistic quarter by quarter based on the deals we see in the market. If there are deals that are accretive to growth and meet our return thresholds. We are more than happy to deploy our capital to accelerate future growth, especially because our advances are recouped in time as music performs. Hopefully, that helps, Matthew.

Operator

Our next question is from Jason Bazinet with Citi. Your line is open.

Jason Bazinet -- Citi -- Analyst

I guess over the last couple of months, the market seems to have moved from rev multiples and gross profit multiples and EBITDA multiples down to earnings and free cash. And through that lens, I just wanted to ask a quick question about cash from operations. It seemed like it was your cash generation is pretty muted, I guess, through the first half of the year. But it seems that working capital is almost always a drag in the first half and tends to reverse in the second half, not always.

But can you just -- maybe it's related to the topic you just talked about in advances, but can you just elaborate on that a bit? And is there anything different that you anticipate in this fiscal year versus the last few fiscal years where we've seen a reversal in the second half?

Eric Levin -- Chief Financial Officer

No. There's no -- again, the deployment of capital for advances is really opportunistic. It doesn't necessarily have -- it's the timing of deals. There's not really a seasonality to that.

There are parts of working capital that are seasonal. Bonuses are paid in the first half of the year, for example. So you see that as a drag in the first half of each year, and then the benefit or recovery in the second half of the year. The timing of when DSP deals are renewed is not seasonal.

It is just based on the timing of deals and when they're renewed. So a lot of it is just based on the timing of deals, which is hard to predict, but there are a few things like bonuses that are more of a drag in the first half of the year than the second half, Jason.

Jason Bazinet -- Citi -- Analyst

Thank you.

Eric Levin -- Chief Financial Officer

Thank you.

Operator

This concludes the question-and-answer session. I would now like to turn the call back over to Steve Cooper for closing remarks.

Steve Cooper -- Chief Executive Officer

Thanks again, everyone, for joining us today. We appreciate all of you taking the time. We hope you have a wonderful spring and summer, and we will talk again in a few months. Everybody stay well and stay safe.

Thank you again.

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

Kareem Chin -- Head of Investor Relations

Steve Cooper -- Chief Executive Officer

Eric Levin -- Chief Financial Officer

Benjamin Black -- Deutsche Bank -- Analyst

Ben Swinburne -- Morgan Stanley -- Analyst

Kutgun Maral -- RBC Capital Markets -- Analyst

Andrew Uerkwitz -- Jefferies -- Analyst

Michael Morris -- Guggenheim Partners -- Analyst

Matthew Thornton -- Truist Securities -- Analyst

Jason Bazinet -- Citi -- Analyst

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