MUMBAI: Warner Music Group – Digital Revenue Represented 40% of U.S. Recorded Music Revenue in the Quarter; Cash Balance Grew to $439 Million as of September 30, 2010
·Total revenue of $752 million declined 13% from the prior-year quarter,and was down 12% on a constant-currency basis Full-year 2010 revenue declined 7% to $2,984 million, and declined 9% on a constant-currency basis.
·Digital revenue was $197 million, or 26% of total revenue, up 7% from $184 million in the prior-year quarter on both an as-reported and constant-currency basis Digital revenue grew 10% sequentially from the third quarter of fiscal 2010, or 9% on a constant-currency basis. Full-year 2010 digital revenue rose 8% to $759 million, or 25% of totalrevenue, and grew 6% on a constant-currency basis.
·Operating income was $20 million compared to operating income of $54 million in the prior-year quarter Operating income included $34 million of severance charges ($31 million in Recorded Music, $2 million in Music Publishing and $1 million in Corporate) compared to $14 million of severance charges in the prior-year quarter ($13 million in Recorded Music and $1 million in Corporate) (the “Quarterly Severance Charges”)
·For the full-year 2010, operating income was $90 million compared to operating income of $135 million in fiscal year 2009 Operating income included $54 million of severance charges ($46 million in Recorded Music, $2 million in Music Publishing and $6 million in Corporate) compared to $23 million of severance charges in the prior fiscal year ($18 million in Recorded Music, $2 million in Music Publishing and $3 million in Corporate) (the “Fiscal-Year Severance Charges”).
·Operating income before depreciation and amortization (OIBDA) was down 29% to $85 million from $120 million in the prior-year quarter OIBDA for the current- and prior-year quarters included the Quarterly Severance Charges OIBDA for fiscal year 2010 was $348 million, down
·12% from $397 million in fiscal year 2009 OIBDA for the current and prior fiscal years included the Fiscal-Year Severance Charges.
·Net loss was $0.31 per diluted share compared to net loss of $0.12 per diluted share in the prior-year quarter Severance charges had a $0.23 per diluted share impact in the current quarter and a $0.09 per diluted share impact in the prior-year quarter For the fiscal year, net loss was $0.96 per diluted share as compared to a net loss of $0.67 in fiscal year 2009 Severance charges had a $0.36 per diluted share impact in the current fiscal year and a $0.15 per diluted share impact in the prior fiscal year.
Warner Music Group Corp. has announced its fourth-quarter and full-year financial results for the period ended September 30, 2010.
“Our work to diversify revenue, and conservatively manage our costs, continues to help minimize the industry’s ongoing recorded music pressures,” said Edgar Bronfman, Jr., Warner Music Group’s Chairman and CEO. “We generated strong yields on our artist investments, including our highest U.S. quarterly total album share in 14 years. Our digital and non-traditional revenue grew to a combined nearly 40% of total revenue in the quarter.”
“Our successful cost-management efforts enabled us to sustain OIBDA margins essentially in line with the prior year, even with increased severance charges,” added Steven Macri, Warner Music Group’s Executive Vice President and CFO. “We have a strong cash position and we expect to continue generating cash in excess of our operating and investing needs going forward.”
Fourth-Quarter Results:
For the quarter, revenue declined 13.3% to $752 million from $867 million in the prior-year quarter, and was down 11.8% on a constant-currency basis. The company’s revenue results continue to reflect the transition from physical to digital in the recorded music industry where increases in digital revenue have not yet fully offset the declines in physical revenue.
International revenue fell 10.0%, or 7.4% on a constant-currency basis, while domestic revenue declined 17.2%. Revenue growth in the U.K. and Italy was offset by weakness in the U.S., Japan and the rest of Europe. The overall increase in digital revenue, primarily as a result of continued global download growth, was more than offset by contracting demand for physical product.
Digital revenue of $197 million grew 7.1% over the prior-year quarter on both an as-reported and constant-currency basis. Digital revenue was up 10.1% sequentially from the third quarter of fiscal 2010, or 9.4% on a constant-currency basis, and represented 26.2% of total revenue for the quarter. The growth in digital revenue reflected global growth in downloads due to a stronger release schedule, partially offset by continued declines in the domestic mobile business, primarily related to lower ringtone demand.
Operating income was $20 million compared to operating income of $54 million in the prior-year quarter. Operating margin was down 3.6 percentage points to 2.7%. OIBDA decreased 29.2% to $85 million from $120 million in the prior-year quarter and OIBDA margin contracted 2.5 percentage points to 11.3% (see below for calculations and reconciliations of OIBDA and OIBDA margin). Operating income and OIBDA for the current- and prior-year quarters include the Quarterly Severance Charges, which were the primary factors contributing to their declines.
Net loss was $46 million, or $0.31 per diluted share, compared with net loss of $18 million, or $0.12 per diluted share, in the prior-year quarter. Severance charges had a $0.23 per diluted share impact in the current quarter and a $0.09 per diluted share impact in the prior-year quarter.
As of September 30, 2010, the company reported a cash balance of $439 million, total long-term debt of $1.95 billion and net debt (total long-term debt minus cash) of $1.51 billion.
Net cash provided by operating activities was $50 million compared to $36 million in the prior-year quarter. The increase was primarily related to the timing of collections and effective working capital management. Free Cash Flow (defined as cash flow from operations less capital expenditures and cash paid or received for investments) was $25 million compared to $20 million in the prior-year quarter. Unlevered After-Tax Cash Flow (defined as Free Cash Flow excluding cash interest paid) was $25 million, compared to $20 million in the prior-year quarter (see below for calculations and reconciliations of Free Cash Flow and Unlevered After-Tax Cash Flow). There were no cash interest payments in the fourth quarters of fiscal 2010 and fiscal 2009. Following the company’s May 2009 refinancing, all of the company’s cash interest payments are made semi-annually in the first and third quarters of the fiscal year.
Below is the business segment discussion for the quarter.
Recorded Music
Revenue from the company’s Recorded Music business declined 13.3% from the prior-year quarter to $619 million, and 12.2% on a constant-currency basis. The decline reflected weakness in the U.S., Japan and most of Europe, partially offset by strength from both local and international artists in the U.K., Italy and Germany.
International Recorded Music revenue declined 11.9% from the prior-year quarter, and 9.9% on a constant-currency basis, to $356 million, while domestic Recorded Music revenue fell 15.2% from the prior-year quarter to $263 million. The company’s Recorded Music business experienced growth in digital download revenue, which was particularly strong internationally. Non-traditional Recorded Music revenue also grew, helped by the company’s European concert promotion business, particularly in Italy. This performance was more than offset by contracting demand for physical product. The top sellers in the quarter included Linkin Park, Phil Collins and The Zac Brown Band, in addition to two Japanese artists — Kobukuro and Superfly.
Recorded Music digital revenue of $183 million grew 7.0% over the prior-year quarter on both an as-reported and constant-currency basis, and represented 29.6% of total Recorded Music revenue, compared with 23.9% in the prior-year quarter. Domestic Recorded Music digital revenue amounted to $104 million, or 39.5% of total domestic Recorded Music revenue, compared with 33.5% in the prior-year quarter. Year-over-year digital revenue growth was driven by global strength in digital downloads, partially offset by declines in domestic mobile revenue, primarily related to lower ringtone demand.
Recorded Music operating income declined to $7 million from $49 million in the prior-year quarter, resulting in an operating margin of 1.1%, down 5.8 percentage points from 6.9% in the prior-year quarter. Recorded Music OIBDA fell 45.3% to $52 million for the quarter and Recorded Music OIBDA margin declined 4.9 percentage points from the prior-year quarter to 8.4%. Operating income and OIBDA for the current- and prior-year quarters included the Quarterly Severance Charges, which were the primary factors contributing to their declines.
Music Publishing
Music Publishing revenue declined 12.9% from the prior-year quarter to $142 million, and was down 10.1% on a constant-currency basis. International Music Publishing revenue decreased 1.2% on an as-reported basis, and grew 5.1% on a constant-currency basis, to $83 million, while domestic Music Publishing revenue declined 25.3% from the prior-year quarter to $59 million.
Synchronization revenue grew 38.1% and digital revenue grew 12.5% on both an as-reported and constant-currency basis. Performance revenue declined 13.3%, and was down 8.8% on a constant-currency basis, while mechanical revenue fell 35.5%, or 33.3% on a constant-currency basis.
Music Publishing results included the benefit of $5 million in revenue and $2 million in OIBDA in the current quarter, and $25 million in revenue and $7 million in OIBDA in the prior-year quarter, from an agreement reached by the U.S. recorded music and music publishing industries, related to the payment of mechanical royalties accrued in prior years by record companies. The decline in the size of this accrual significantly impacted the year-over-year comparison for domestic mechanical revenue results.
The increase in synchronization revenue reflected an improvement in the advertising business, while digital revenue grew primarily due to a growing digital business and timing of collections. The decline in performance revenue was due to the timing of cash collections and the company’s decision not to renew certain low-margin administration deals.
Music Publishing operating income declined to $38 million from $43 million in the prior-year quarter, resulting in an operating margin of 26.8%, up 0.4 percentage points from the prior-year quarter. Music Publishing OIBDA fell 6.7% to $56 million while Music Publishing OIBDA margin expanded 2.6 percentage points to 39.4%. The margin expansion was primarily the result of changes in revenue mix, with mechanical revenue representing a larger percentage of total Music Publishing revenue in the prior-year quarter. Mechanical revenue tends to have a lower margin than other types of Music Publishing revenue. Operating income and OIBDA for the current quarter included the Quarterly Severance Charges.
Full-Year Results
For the fiscal year, revenue declined 6.7% to $2,984 million from $3,198 million in the prior year, and was down 8.6% on a constant-currency basis. This performance primarily reflected the continuing transition from physical sales to digital sales in the recorded music industry. Domestic revenue declined 11.2% while international revenue decreased 3.0%, or 6.4% on a constant-currency basis. Digital revenue of $759 million grew 8.0% over the prior-year, or 6.2% on a constant-currency basis, and represented 25.4% of total revenue.
Operating income fell 33.3% to $90 million from $135 million in the prior year and operating margin was down 1.2 percentage points to 3.0%. OIBDA decreased 12.3% to $348 million from $397 million in the prior year and OIBDA margin declined 0.7 percentage points to 11.7%. Operating income and OIBDA for the current and prior fiscal year included the Fiscal-Year Severance Charges, which were the primary factors contributing to their declines.
Net loss was $143 million, or $0.96 per diluted share, compared with a net loss of $100 million, or $0.67 per diluted share, in the prior fiscal year. Severance charges had a $0.36 per diluted share impact in the current fiscal year and a $0.15 per diluted share impact in the prior fiscal year.
Net cash provided by operating activities was $150 million compared to $237 million in the prior year. Free Cash Flow was $65 million, compared to $319 million in fiscal 2009. The primary factors impacting the comparison in Free Cash Flow results between fiscal year 2010 and fiscal year 2009 were $123 million in cash received in fiscal 2009 for the previously disclosed sale of a minority stake in Front Line Management and $60 million in incremental cash interest expense in fiscal year 2010. Unlevered After-Tax Cash Flow was $234 million, compared to $428 million in fiscal 2009 (see below for calculations and reconciliations of Free Cash Flow and Unlevered After-Tax Cash Flow). Below is the business segment discussion for the fiscal year.
Recorded Music
Recorded Music revenue declined 7.1% to $2,455 million, and was down 9.2% on a constant-currency basis. Domestic Recorded Music revenue declined 11.2% from the prior year to $1,043 million while international Recorded Music revenue was down 3.8%, or 7.7% on a constant-currency basis. Recorded Music revenue was challenged by the continued decline in physical sales that is not currently being offset by growth in digital sales. Recorded Music revenue was 42% domestic and 58% international. Digital Recorded Music revenue grew 8.7% over the prior year to $713 million, and grew 6.7% on a constant-currency basis, representing 29.0% of Recorded Music revenue for fiscal 2010, up from 24.8% in fiscal 2009. Domestic Recorded Music digital revenue amounted to $421 million, or 40.4% of total domestic Recorded Music revenue, up from $419 million or 35.7% in the prior year. Major sellers for the year included Michael Bubl?©, Jay-Z, Linkin Park, Muse and the “New Moon” soundtrack album.
Recorded Music operating income dropped 31.5% to $102 million from $149 million in the prior year and operating income margin contracted 1.5 percentage points to 4.2%. Recorded Music OIBDA fell 16.0% to $279 million for the fiscal year from $332 million in the last fiscal year and OIBDA margin declined 1.2 percentage points to 11.4%. Operating income and OIBDA for the current and prior fiscal year included the Fiscal-Year Severance Charges, which were the primary factors contributing to their declines.
Music Publishing
Music Publishing revenue declined 4.5% from the prior year to $556 million, and was down 5.3% on a constant-currency basis. Domestic Music Publishing revenue fell 11.6% over the prior year to $214 million while international revenue grew 0.6%, but fell 0.9% on a constant-currency basis. Music Publishing revenue was 38% domestic and 62% international.
Digital revenue grew 9.3% and synchronization revenue grew 5.2%, while mechanical revenue declined 7.8% and performance revenue declined 8.4%. On a constant-currency basis, an increase of 7.3% in digital revenue and 3.0% in synchronization revenue was offset by a 9.2% decline in mechanical revenue and an 8.4% decline in performance revenue. Digital revenue represented 10.6% of total Music Publishing revenue in fiscal 2010, up from 9.3% in fiscal 2009.
Music Publishing results included the benefit related to the payment of mechanical royalties accrued in prior years by record companies, as described in the fourth-quarter results above.
Music Publishing operating income fell 11.3% to $86 million, yielding an operating margin of 15.5%, down 1.2 percentage points from fiscal 2009. Music Publishing OIBDA was $157 million, down 4.8% from $165 million in the prior year and OIBDA margin was 28.2% compared to 28.4% in fiscal 2009. Operating income and OIBDA for the current and prior fiscal years included the Fiscal-Year Severance Charges.
Financial details for the quarter and fiscal year can be found in the company’s current Form 10-K, filed today with the Securities and Exchange Commission.