MUMBAI: Warner Music Group Corp. (NYSE: WMG) announced its second-quarter financial results for the period ended March 31, 2011.
“Our focus on disciplined A&R investments, successful revenue diversification and innovative digital strategies has helped us to grow both our Recorded Music and Music Publishing revenue,” said Edgar Bronfman, Jr., Warner Music Group’s Chairman and CEO. “We are excited to see our digital revenue approach the 50% milestone for U.S. Recorded Music and to see 60% of our active global artist roster signed to expanded-rights deals.”
“Our artist development efforts balanced against ongoing cost-management efforts enabled us to support our OIBDA margins in the quarter, and position us well for the long term,” added Steven Macri, Warner Music Group’s Executive Vice President and CFO.
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For the quarter, revenue grew 2.4% to $682 million from $666 million in the prior-year quarter, and was up 1.6% on a constant-currency basis. The increase in revenue reflected growth in both the company’s Recorded Music and Music Publishing businesses.
Domestic revenue was up 2.6% while international revenue improved 1.9%, or 0.3% on a constant-currency basis. Revenue growth in France, the U.S., Canada and certain Asia-Pacific countries offset declines in Japan, the U.K. and other parts of Europe.
Digital revenue of $220 million grew 8.9% over the prior-year quarter, or 7.8% on a constant-currency basis. Digital revenue was up 17.6% sequentially from the first quarter of fiscal 2011, or 17.0% on a constant-currency basis, and represented 32.3% of total revenue for the second quarter. The growth in digital revenue over the prior-year quarter primarily reflected strength in global digital downloads and streaming, partially offset by continued declines in global mobile revenue.
Operating income was $16 million compared to operating income of $24 million in the prior-year quarter. Operating margin was down 1.3 percentage points to 2.3% compared to the prior-year quarter. OIBDA decreased 5.7% to $82 million from $87 million in the prior-year quarter and OIBDA margin contracted 1.1 percentage points to 12.0% (see below for calculations and reconciliations of OIBDA and OIBDA margin). Operating income and OIBDA for the current- and prior-year quarters included the Severance Charges.
Net loss was $38 million, or $0.25 per diluted share, compared with a net loss of $25 million, or $0.17 per diluted share, in the prior-year quarter. The Severance Charges had a $0.05 per diluted share impact in the current quarter and a $0.04 per diluted share impact in the prior-year quarter.
As of March 31, 2011, the company reported a cash balance of $319 million, total long-term debt of $1.95 billion and net debt (total long-term debt minus cash) of $1.63 billion.
Net cash provided by operating activities was $106 million compared to $93 million in the prior-year quarter. Free Cash Flow (defined as cash flow from operations less capital expenditures and cash paid or received for investments) was $46 million compared to $54 million in the prior-year quarter. The decrease in Free Cash Flow was primarily related to the previously disclosed acquisition of Southside Independent Music Publishing and higher capital expenditures, partially offset by the higher net cash provided by operating activities. Unlevered After-Tax Cash Flow (defined as Free Cash Flow excluding cash interest paid) was $46 million, compared to $54 million in the prior-year quarter (see below for calculations and reconciliations of Free Cash Flow and Unlevered After-Tax Cash Flow). As all interest is paid semi-annually in the first and third quarters of the fiscal year, there is no difference in the second quarter between Free Cash Flow and Unlevered After-Tax Cash Flow.
Below is the business segment discussion for the quarter.
Recorded Music
Revenue from the company’s Recorded Music business grew 2.2% from the prior-year quarter to $550 million, or 1.1% on a constant-currency basis. The increase reflected strength in France, Canada, Italy and certain Asia-Pacific countries, partially offset by declines in Japan, the U.K. and other parts of Europe.
Domestic Recorded Music revenue grew 0.4% from the prior-year quarter to $254 million, while international Recorded Music revenue was up 3.9%, or 1.7% on a constant-currency basis, to $296 million. The company’s Recorded Music business experienced growth in international physical revenue, U.S. licensing revenue and global digital and other revenue, which more than offset contracting demand for physical product in the U.S. The top sellers in the quarter included Bruno Mars, R.E.M., Wiz Khalifa, Cee Lo Green and Lupe Fiasco.
Recorded Music digital revenue of $205 million grew 6.8% over the prior-year quarter, or 5.7% on a constant-currency basis, and represented 37.3% of total Recorded Music revenue, compared with 35.7% in the prior-year quarter. Domestic Recorded Music digital revenue grew 1.7% to $122 million, or 48.0% of total domestic Recorded Music revenue, compared with 47.4% in the prior-year quarter. International Recorded Music digital revenue grew 15.3%, or 12.2% on a constant-currency basis, to $83 million, and represented 28.0% of total international Recorded Music revenue, compared with 25.3% in the prior-year quarter. Growth in digital revenue was driven by strength in global digital downloads and streaming, partially offset by declines in global mobile revenue.
Recorded Music operating income improved to $10 million from $6 million in the prior-year quarter, resulting in an operating margin of 1.8%, up 0.7 percentage points from 1.1% in the prior-year quarter. Recorded Music OIBDA rose 10.2% to $54 million for the quarter and Recorded Music OIBDA margin expanded 0.7 percentage points from the prior-year quarter to 9.8%. The increase in operating income and OIBDA was a result of higher revenue and ongoing cost-management efforts. Recorded Music operating income and OIBDA for the current- and prior-year quarters included the Severance Charges.
Music Publishing
Music Publishing revenue was up 2.2% from the prior-year quarter on both an as-reported and constant-currency basis to $137 million. Domestic Music Publishing revenue rose 13.0% from the prior-year quarter to $61 million, while international Music Publishing revenue fell 5.0% on both an as-reported and constant-currency basis.
Digital revenue from Music Publishing grew to $17 million from $13 million, up 30.8% on both an as-reported and a constant-currency basis, and represented 12.4% of total Music Publishing revenue. Synchronization revenue improved 29.2%, while performance revenue declined 9.1% and mechanical revenue decreased 15.0%. On a constant-currency basis, synchronization revenue grew 34.8%, performance revenue declined 7.4% and mechanical revenue fell 12.8%.
Synchronization revenue is beginning to reflect the company’s focused effort to revitalize this segment of the Music Publishing business and digital revenue is benefitting from the success of streaming services and the general expansion of digital services around the world. The decline in performance revenue primarily reflected a comparison against the prior-year quarter which included $8 million of revenue from a low margin studio administration deal which the company elected not to renew. This is the final quarter for which the prior-year quarter will reflect revenue from that deal. The mechanical revenue decline reflected the ongoing transition in the recorded music industry.
Music Publishing operating income declined to $31 million from $43 million in the prior-year quarter, resulting in an operating margin of 22.6%, down 9.5 percentage points from the prior-year quarter. Music Publishing OIBDA fell 18.0% to $50 million while Music Publishing OIBDA margin contracted 9.0 percentage points to 36.5%, a level which is consistent with the margin in past years. The margin contraction compared to the prior-year quarter was primarily the result of a previously disclosed prior-year adjustment in royalty reserves. Additionally, Music Publishing operating income and OIBDA for the current-year quarter included the Severance Charges.
