MUMBAI: Warner Music Group Corp. (WMG) today announced its third-quarter financial results for the period ended June 30, 2011. WMG closed its sale to Access Industries, Inc. on July 20th.
“Our focus on disciplined A&R investments, revenue diversification and innovative digital strategies has helped us to grow our Recorded Music revenue and deliver healthy increases in three key segments of our Music Publishing revenue,” said Edgar Bronfman, Jr., Warner Music Group’s CEO. “We are approaching the point where the majority of our U.S. Recorded Music business will be digital while continuing to transform our approach to artist signings with more than 60% of the artists on our active global recorded music roster being signed to deals with a comprehensive suite of expanded rights.”
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Steven Macri, Warner Music Group’s Executive Vice President and CFO, said, “An improved revenue profile, growth in digital and our artist development and cost-management efforts all contributed to enhanced OIBDA margins in the quarter and continue to position us well for the long term.”
For the quarter, revenue grew 5.2% to $686 million from $652 million in the prior-year quarter. Revenue for the quarter reflected growth in digital downloads and growth in the company’s European concert promotion business. On a constant-currency basis, revenue declined 1.0%, reflecting the impact of foreign currency exchange rates.
Domestic revenue was down 8.3% while international revenue improved 16.2%, or 4.5% on a constant-currency basis. Revenue growth in France and Japan offset declines in the U.S., U.K. and other parts of Europe.
Digital revenue of $203 million grew 13.4% over the prior-year quarter, or 9.1% on a constant-currency basis. Digital revenue was down 7.7% sequentially from the second quarter of fiscal 2011, or 9.0% on a constant-currency basis, and represented 29.6% of total revenue for the quarter. The growth in digital revenue over the prior-year quarter primarily reflected strength in global digital downloads and streaming. The sequential decline in digital revenue reflects a seasonal dip following the holiday sales period.
Operating income was $10 million compared to an operating loss of $1 million in the prior-year quarter. Operating margin increased by 1.7 percentage points to 1.5% compared to the prior-year quarter. OIBDA increased 20.3% to $77 million from $64 million in the prior-year quarter and OIBDA margin expanded 1.4 percentage points to 11.2% (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 and, in the current quarter, the LimeWire Settlement and the Transaction Expenses.
Net loss was $46 million, or $0.30 per diluted share, compared with a net loss of $55 million, or $0.37 per diluted share, in the prior-year quarter. The Severance Charges had a $0.07 per diluted share impact in the quarter and a $0.06 per diluted share impact in the prior-year quarter. The LimeWire Settlement had a positive $0.08 per diluted share impact in the quarter while the Transaction Expenses had a negative $0.03 impact.
As of June 30, 2011, the company reported a cash balance of $290 million, total long-term debt of $1.952 billion and net debt (total long-term debt minus cash) of $1.662 billion.
Net cash used in operating activities was $11 million compared to net cash provided by operating activities of $49 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 negative $36 million compared to positive $29 million in the prior-year quarter. The decrease in Free Cash Flow was driven primarily by the differential in year-over-year timing of sales and collections in the Recorded Music business as well as higher cash used for investments, partially offset by lower capital expenditures. Unlevered After-Tax Cash Flow (defined as Free Cash Flow excluding cash interest paid) was $52 million, compared to $117 million in the prior-year quarter (see below for calculations and reconciliations of 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 increased 5.0% from the prior-year quarter to $545 million and declined 0.5% on a constant-currency basis, which reflects the impact of foreign-currency exchange rates. Domestic Recorded Music revenue fell 8.1% from the prior-year quarter to $227 million, while international Recorded Music revenue grew 16.9%, or 5.6% on a constant-currency basis, to $318 million. Revenue in the quarter reflected strength in France and Japan partially offset by declines in the U.S., U.K. and other parts of Europe.
Top sellers for the quarter included Bruno Mars, Superfly, Wiz Khalifa, Hugh Laurie and Cee Lo Green. Recorded Music revenue in the quarter also reflects growth in our European concert promotion business, as compared with the prior-year quarter.
Recorded Music digital revenue of $191 million grew 13.0% over the prior-year quarter, or 8.5% on a constant-currency basis, and represented 35.0% of total Recorded Music revenue, compared with 32.6% in the prior-year quarter. Domestic Recorded Music digital revenue grew 6.9% to $108 million, or 47.6% of total domestic Recorded Music revenue, compared with 40.9% in the prior-year quarter. International Recorded Music digital revenue grew 22.1%, or 10.7% on a constant-currency basis, to $83 million, and represented 26.1% of total international Recorded Music revenue, compared with 25.0% in the prior-year quarter. Growth in digital revenue was driven by strength in global digital downloads and streaming.
Recorded Music operating income improved to $40 million from $21 million in the prior-year quarter, resulting in an operating margin of 7.3%, up 3.3 percentage points from 4.0% in the prior-year quarter. Recorded Music OIBDA increased 29.2% to $84 million for the quarter, from $65 million in the prior-year quarter, and Recorded Music OIBDA margin expanded 2.9 percentage points from the prior-year quarter to 15.4%. The improvement in operating income and OIBDA reflects increased revenue, changes in our sales mix, proceeds from the LimeWire Settlement and lower Recorded Music Severance Charges.
Music Publishing
Music Publishing revenue was up 5.0% from the prior-year quarter, and declined 2.7% on a constant-currency basis, to $146 million. Domestic Music Publishing revenue dropped 9.3% from the prior-year quarter to $49 million, while international Music Publishing revenue grew 14.1%, or 1.0% on a constant-currency basis.
Digital revenue from Music Publishing grew to $15 million from $13 million, up 15.4% on both an as-reported and a constant-currency basis, and represented 10.3% of total Music Publishing revenue. Synchronization revenue improved by 25.0%, performance revenue improved by 18.0% and mechanical revenue declined by 24.0%. On a constant-currency basis, synchronization revenue grew 20.0%, performance revenue increased 7.3% and mechanical revenue fell 29.6%.
Synchronization revenue reflected the company’s focused effort to drive this business and is seeing increased inflows from streaming services. Digital revenue benefitted from the success of streaming services and the general expansion of digital services around the world. The improvement in performance revenue reflects the improved advertising market, the timing of cash flows and recent acquisitions. Mechanical revenue decline was attributable to the ongoing transition in the recorded music industry.
Music Publishing operating income increased to $2 million from $1 million in the prior-year quarter, resulting in an operating margin of 1.4%, up 0.7 percentage points from the prior-year quarter. Music Publishing OIBDA improved 22.2% to $22 million while Music Publishing OIBDA margin expanded 2.2 percentage points to 15.1%. Music Publishing operating income and OIBDA for the quarter included the Severance Charges.
