The Best One Yet - “Warner Music is Venture Capital for musicians” — Uber’s profit shocker. Ericsson/Nokia 5G awkwardness. Warner Music’s IPO.

Episode Date: February 10, 2020

Warner Music filed to IPO because streaming saved the music industry. Uber shares surged 10% before the weekend on word it’s actually planning to become profitable by the end of this year (*depends how you define “profits”). And Europe’s telecom giants Ericsson and Nokia woke up to word the US government may want to acquire them because we’re desperate for a 5G internet network.Learn more about your ad choices. Visit podcastchoices.com/adchoices Hosted on Acast. See acast.com/privacy for more information.

This is Nick. This is Jack. And this is Snacks Daily. Welcome back. It's Monday, February 10. Nick, my weekend highlight running two and a half miles in under two and a half hours. Are you doing the half marathon thing? Yeah, I got a half marathon coming up.

You got to crawl before you can walk in that. I'm training for just surfing. I'm just surviving that one. Yeah, your goal is just to not die. Survival. Now, Snackers, I hope you had a great weekend. We're kicking it off with the best one yet because you can own Ed Shearin's vocal course. You can get Lizzo's pipes.

You can have Neil Young. Perform at your Bar Mitzv. certain on the last one. The third one's definitely not true. He's got it like a busy schedule. But the first two could be true, thanks to Warner Music, which is filing to IPO. This is our first story, and it's all about the comeback of the music industry. Our second story, Scandinavian telecon companies, Erickson and Nokia, woke up to quite a surprise on Friday morning. Turns out the U.S. government basically wants to buy them. When Nick says basically, they hinted they might be interested in buying it.

And when we say hinted, we mean they kind of just implied it subtly, but we thought this was a good story. No, this is a big story. It comes down to the five. 5G network, the future of the internet, and not letting China own our pipes. Third and final story, Jack? Uber stock jumped 10% before the weekend. Remember that whole like no profits? We're not into profits thing? That's kind of an issue for Uber, but they actually want profits.

Turns out depends how you define profits. And it depends if you use the word adjusted. And it depends. Is a teddy bear a profit? No one really knows. Before we jump into all of that, Snackers, Valentine's Day. It's hitting on Friday. February 14th.

searching fast. Cupid is shooting you with arrows. You know what that means. The arrows hurt. You got to get those banded down. The arrows have hearts on the end instead of feathers. There's nothing adorable. That guy is really aggressive when you think about it. It's kind of a freaky character. Now, flowers are out, but bouquets are in. Get this. You better start planning now. Snackers, we discovered that Oreo came out with an Oreo bouquet. We discovered that Walmart is doing a Reese's bouquet. Very nice. There's a donut bouquet, and it's not done by Duncan because you know they don't do donuts. And in case you're one of those people who's like, a more. a savory than a sweets person? There is a beef jerky bouquet. But finally, we have news from my former employer, Olive Garden. They're coming out with a breadstick bouquet. This breadstick bouquet, they tested it out last year. Now they're going full force with this thing. It's a breadstick bouquet, sprinkled with saturated fat. If you think about it, it's actually a beautiful metaphor, because I believe the breadsticks are endless and so is love, right? It comes with the side of

chocolates. This is really an Olive Garden fact. They thought ahead, because once you whip open the Bread, you're going to get garlic bread. Olive Garden, not a good date for Valentine's Day, but Olive Garden breadstick bouquet, good gift for Valentine's. Snackers, we always try to keep you prepared. It's what Jack and I are here to do. Let's hit our three stories. You're tuned into snacks daily.

We spoke to the lawyers and we got to get something legal out the way. The snacks are about to hear ain't food. It's air candy. They don't reflect the views of the robberhood family. It's all informational just so. You know, we're not recommending any securities. It's not a research report or investment advice. Offer or sale of a security.

Right. Snacks is digestible. Business news for you. Robberhood Financial, LLC, member FINRA slash SIPC. For our first story, Warner Music just filed to IPO. This is a record label that has been privately owned. Oh yeah. But they just filed paperwork with U.S. regulators so that they can list their shares so that you and I can buy them publicly.

So Jack and I throw on some Fleetwood Mac jumped into the S-1 IPO filing paperwork. Page two? Page two is basically their like holiday greeting card. You got Lizzo, Wootenclan, Madonna, Ed Sheeran, Metallica, Janelle, Neil Young, Boubley. Kind of looks like now that's what I call music 111. No joke, this thing looks like an album collaboration. Michael Bublay, disproportionate amount of space on that album. Way too much FaceTime for Michael Boubley.

Mike, you're a great snacks listener, but you're not that great. Now, Warner Music is the third largest of the big three record labels. First, you got Universal Music. There were $33 billion. Then you got Sony music, which is part of the Japanese tech conglomerate Sony. And then you got Warner. But together, these three are like the Tammany Hall of Music. You do not want to mess with these three records.

They like know who your family members are. They have a giant roster of lawyers. They definitely have a roster of fixers who will break your leg if you mess with that. Don't mess with Madonna. These are the bosses of the industry. And they've got 80% of the music industry. Now, the way you know Warner Music, is probably through one of their record labels,

which is a tiny logo on the music that you buy. Right, they got Atlantic, Warner, Parlophone. They're marketing the artist to get in your ears. And 86% of their revenue is from the recorded music of artists who have signed with this record label. Let's take Lizzo. She's got to be managed. She's got merchandise.

She's got tours, VIP stuff. All that brings in revenues. She needs somebody to negotiate her contract with Spotify. Negotiate the contract with Apple Music. All of that is handled by Warner Music, and they take a big cut. This record label business model is kind of like venture capitalists with startups, but it's the music labels betting on artists. They find musicians early, just like VCs find startups early.

Beber on YouTube. They invest a lot of money in those artists. Get Bieber some nice new hair. And they hope that the artists become big stars that make everybody a ton of money. Bieber becomes Bieber. But to understand Warner Music, you got to understand the music industry, which is kind of like a comeback artist. The music industry is mid-comeback a la Jonas Brothers right now. They were everywhere 10 years ago.

Then we couldn't find Nick Jonas anyway. The Jonas's went on like a 10-year break. Boom. So did the music industry in terms of their profitability. And by the way, Jonas', they're now back. So is music. Let's go back to 2000 when Warner was part of Time Warner and we hit peak CD. The year 2000 was the golden era for the music industry.

Oh my God. Everyone's family had like a piece of furniture in the house dedicated to holding CDs. We bought a 2001 Dodge Durango that year that had a six disc changer. I think they used to market the cars by saying one-fifth of this car is CDs. Think about it. You spent like $20 for a disc that only had 10 songs on it. And you didn't care about nine and a half enough. Really rough situation for listeners. Great situation for the music industry.

And that's when Warner decided to go public in 2005 at a 2.6 valuation. But that was at the beginning of their 15-year decline. And you know why the music industry. Decline. Piracy. It was probably, let's say you were probably involved with this. Whoever's listening. If you're not part of the solution, you're part of the problem, you were probably Napstering. It was Napster first, then LimeWire, then Kazah, then a whole bunch of other dark corners of the internet where you could get music for free. It was like this gray area. Everyone was talking about like they had a cousin whose friend said the FBI showed up on their door because they downloaded too much spice girls. Let's be candid here. People were stealing music. It was actually not a good thing.

It was so easy, though, to steal music that you almost couldn't blame anyone for. So that declined. brought us to 2013 when the publicly traded Warner Music ended up being taken private for $3.3 billion. Warner was pretty much damaged goods. Oh yeah. The music industry was still in tough shape. But things have improved. Warner now makes $4.5 billion in annual revenue. Its profits jumped 42% from last year, and it had its best quarter in 16 years.

Jack, what's the takeaway for our buddies over at Warner Music? Streaming has saved the music industry. Snacker, streaming is now 80% of the music industry sales. And Apple and Spotify represent 27% of Warner's revenues. And streaming has created like a kumbaya moment when it comes to listening to music. It's good for us, good for Warner. For $10 a month we're all paying, you get like access to everything. How much better is that than the old days when we paid $20 for one CD?

You'd like lock your door because you were using lime wire. Now we pay $10 a month for everything. Plus there's more hardware out there. You got Sonos, Alexa, smart speakers everywhere. People listen to music on radio. people are watching on YouTube and watching ads in between where music can make money. All that is good for Warner Music and why it's grown, but keep this key piece of context in mind. We are still below the music industry revenue peak that occurred in 2000 with CDs.

Peak CD. For our second story, Uber stock just jumped 10% after announcing it'll be profitable by the end of this year. Profitable with a giant asterisk. The asterisk, we're talking, it's going to hit you in the face. I won an Oscar this year if you put enough asterisks there. I think you could do this. Now, remember Snackers, Uber is the unicorn of our generation, but it's going to have an adjusted profit by fourth quarter.

More on that below, we know what you're thinking. What about that word? Now, before we adjust, let's just say Uber lost a billion dollars in the fourth quarter of 2019. They act like it just, you know, fell out of a pocket. But they did upgrade our expectations of when profitability will come. Before they were saying they would become profitable sometime in 2020. Now they're saying they'll become profitable this year before the end of 2020. Jack, I think there were like a bunch of Uber employees who were kind of like, uh, what's happening?

Now, the stock rose 10%. And the CEO, Dara Costa Shahi, he acknowledged that like, we need to change our ways at Uber. This quote pretty much sums up the whole thing. Here's what Dara said. We recognize that the era of growth at all costs is over. Right, because they've been growing wicked fast. Yeah. But they've been taking on billions of losses to make that happen.

serious costs. For example, they've started cutting costs in the last year, like firing a thousand people, like selling the food delivery business in India that wasn't making money. Or like the CFO sending ground an email asking people to not, you know, use so many resources, which became the email known as hashtag find the money. That's right. The CFO is like encouraging people to find ways to save money. But Snackers, here's what Jack and I find fascinating about Uber. It's uniquely a case study in both growth and mature business models. It's rides business, the business you probably use Uber the most for. A classic Uber. It's a relatively mature business. It's been around for over 10 years. Eats delivery business, though, is kind of like a newer growth business. It's like

two startups in one at different life stages. And the metrics show that one is mature and one is like a Benjamin Button situation. So look at Rods. It only grew by 20% last year. That's pretty good. Yeah, but it's, you know, chill. But Uber eats food delivery grew by 73%. Now let's look at the financials. Uber's rides business enjoyed a quote unquote profit of 742 million. and its each business lost $461 million. But I gotta pause you right there. You said rides had a profit of $7.442. I threw in the little air quotes on that one.

742 million. Not strong enough, though. That was a heavily adjusted profit calculation. That is Uber's words. These profits are adjusted profits. So, Jack, what's the takeaway for our buddies over at Uber? The word of the day for Uber is adjusted. Snackers.

Jack and I check this out when we jumped in snack style. the word adjusted was mentioned 88 times in its earnings report. And adjusted, if you hear it in a financial sense, it probably just means what we're about to tell you is heavily sugarcoat. Hey, here's a little life hack, everyone. Throw the word adjusted on something, and you can say pretty much anything. My adjusted net worth is a trillion dollars. You just have to multiply my actual net worth by a trillion dollars. It's minor adjustment there. My bench press is three times my body weight. You just have to adjust by having someone else do it for me. Uber's adjusted EBITDA excludes 12 different types of costs.

And that EBITDA, the earnings before its interest, tax, depreciation, amortization, that is like a measurement of profit technically. It's a pretty standard, like, already adjusted profit measure. You've taken out the taxes, the depreciation, the amortization. But then Uber removed nine more costs in order to like find some sort of calculation that shows profitability. They took out references to stock-based compensation, legal settlements, mergers and acquisition costs.

Now, it's hard to imagine a time when Uber operates without the costs of lawsuits, without the costs of paying employees in Uber stock, and without merging and acquiring other companies. They're basically saying, we're profitable if you don't pay attention to a lot of really critical things about our business. If you do pay attention to those critical things, Uber lost $8.4 billion last year. If you ignore those 12 costs, it only lost 2.7, but we're not ready to ignore them yet. That's why adjusted is the word slash life hack of the day. For our third and final story, Huawei could destroy the American economy.

Yes. Yes, it could. So the U.S. is thinking about buying one of Huawei's competitors. Call the investment bankers, make them bring their star-spangled banners. This is an unusual story. We're talking about a potential acquisition by the U.S. government. Jack and I saw this on Friday. We were blown away. It's the crazy news from last week.

straight from Bill Barr, the Attorney General of the United States. Not Bill Bear, which would be a hilarious name. Bill Barr. That's his nickname. Now, the problem that Bill Barr recognizes is that 5G telecommunications are crucial for the future of the American economy. And that's because 5G is like the futuristic network that's going to be powering the Internet of things, among other things. It's going to let your fridge talk to your smartphone, which is going to talk to your car, which is going to talk to your self-driving podcast studio. Which is going to go to Whole Foods, pick up the pineapple juice, and a

robot and bring it back to your fridge. 5G is also just going to be the basic communication of the future, like phone calls, texts, emails, all wireless internet. But it's going to be way faster than today. So whatever you see on the top left corner of your iPhone right now,

it's going to be going to be going to be going to be LTE. That's going to say 5G, it's going to power everything. The word buffering is not even going to be known by the next generation of humans. That's the first part of the problem. That was a long one that we just described. Now here's part of the solution kind of? It's this company Huawei.

Huawei, yeah. I mean, they're the top provider of 5G telecommunications. And they happen to be controlled by the Chinese government. Now, therein lies the problem. Connect the dots here, people. If the U.S. 5G network is controlled by Huawei, then China can shut down our wireless internet or spy instead on everything that we text each other. Now, obviously, that's an extreme example.

However, when you're dealing with infrastructure, that's the foundation of a country in all e-commerce and business. it's kind of a big deal. So to make sure that China can't shut down our internet or spy on everything that happens on wireless communications, the Trump administration is proposing last week fighting fire with fire. Right. Huawei is the leader because its 5G network is cheaper because it's subsidized by China's government. If China subsidizes Huawei to make 5G cheaper, we should subsidize our own 5G tech company. That's what the Trump administration is thinking. And that means you kind of got to look at two tech companies that are out there doing 5G. and they happen to be hanging out in like the same neighborhood. That's right.

There's only three companies. There's Huawei, which we already mentioned. And then there's Nokia and Erickson. Remember those phones they're based in Finland and Sweden? That's it. It's only three companies building 5G. The United States wants states and towns and allies to have a lower cost option to choose a 5G network of the future. That doesn't have to be Huawei.

Right. Because today you got an ally, a special relationship ally like the United Kingdom, defying the Trump administration's requests and going to be. with Huawei as their 5G provider because it's lower cost and it's tough for a prime minister to pick a higher cost option. So Jack, what's the takeaway for our buddies who are doing 5G? The U.S. can't build a 5G company so we're thinking about buying one. Snackers, if we need 5G so badly so you can endlessly stream Netflix, why doesn't Silicon Valley just build one? Why don't we just build someone's got someone just give, throw the word delightful on an app and it's a 5G network.

You can raise a bunch of money with that. There's three companies. Why don't we build the fourth That's doing 5G. The reason is it's a little bit more complicated to build an entire infrastructure running a country than it is an iPhone. Right. We're talking about an eye network of poles, wires, gigantic routers, satellite dishes, big things. Satellites going around planet Earth. It would take too long and cost too much money. Or instead, you could buy Erickson or Nokia straight up.

That is the crazy idea. Nick and I have never covered a story on snacks about the government of the United States, potentially buying a company. Now, the other side option here is instead, the U.S. government subsidizes and helps another large U.S. company make that acquisition of Nokia or Erickson instead. Right. I don't think, like, the DMV should be in charge of a 5G network. Maybe we should let Verizon or AT&T or another tech company or the private equity industry.

One of them could acquire Erickson or Nokia with support from the U.S. government. Snackers, what this also reveals is how bad the United States is at long-term plans. Look at this brutal situation we have. We need 5G like tomorrow and we're thinking about buying a company because we haven't even invested in one. Jack, can you whip up the takeaways for us to start the week? Warner Music is preparing to IPO. Nick, what's the ticker symbol? You think, I know what you're thinking there. Sing. Note. Lizzo?

Play. More Lizzo. Repeat. We think you know the answer. Whatever it is. If you own the stock after the IPO, you can own a part of musicians stardom. Music pirating, crush the industry, music streaming, saved it. Our second story, Uber is the unicorn of our generation, and it aspires for adjusted profitability. Adjusted, Jack, I have an adjusted six-pack and an adjusted marathon runner. Third and final story, the U.S. government wants affordable 5G that is not Huawei. So we're thinking about buying one of the Scandinavian 5Gs instead. Time for our snack fact of the day. This one sent in by Garcia Hernandez in lovely Hickory, North Carolina. I've been there. They have great barbecue. I'm not sure if it's the sticky or the

vinegary kind. They're definitely the vinegary kind of everything. And that is a wooden furniture making country. Yeah. I was in North Carolina is one of those states where like you got furniture and then you've got like a biotech firm right down the street. It's really wild. Now Garcia tells us that Nike, the company based in Oregon, uh, it actually has quite a bit of meaning behind the name. Yeah. So the name originally is the Greek goddess of victory. That's what Nike. That's who Nike is. She's fantastic. Actually, the, Roman goddess of victory is called Victoria. The Greek goddess of victory? Nike.

But the Nike team, pre-Nike, wasn't sure if they were going to call it that. They had some other names in mind. They thought about Peregrine, like the Peregrine Falcon, which is actually the fastest animal on the planet. They thought about Bengal, like the tiger, which isn't that fast. No, but it's big and scary. Yeah, it just freaks us out. And then Dimension 6, which I can't understand.

We don't really know that background on that one. Glad they didn't go with Dimensions. Snackers, tweet us in your SNAT Fax at Robin Hood Snacks. We'd love to get you on that on the pod. And thank you for potting with us. We'll be back tomorrow. I can't wait. The Robin Hood Snacks podcast you just heard reflects the opinions of only the hosts who are

associated persons of Robin Hood Financial LLC and does not reflect the views of Robin Hood Markets, Inc, or any of its subsidiaries or affiliates. The podcast is for informational purposes only and is not intended to serve as a recommendation to buy or sell any security and is not an offer or sale of a security. The podcast is also not a research report and is not a research report and is not intended to serve as the basis of any investment decision. Robin Hood Financial LLC, member FINRA, SIPC.