Warner Music Group Reports Results For Fourth Quarter And Full Year Ending September 30
Warner Music Group Corp. has released results of the fiscal fourth quarter and full year ending September 30, 2009. Among the results:
• Total revenue of $861 million for the fourth quarter of 2009 increased 1% from the prior-year quarter, or 5% on a constant-currency basis. Full-year 2009 revenue declined 9% to $3,176 million, and declined 3% on a constant-currency basis.
• Digital revenue was $184 million, or 21% of total revenue in the quarter, up 5% sequentially from $175 million in the third quarter of fiscal 2009 and up 10% from $167 million in the prior-year quarter. On a constant-currency basis, digital revenue grew 12% from the prior-year quarter and 3% sequentially. Full-year 2009 digital revenue rose 10% to $703 million, or 22% of total revenue, and grew 14% on a constant-currency basis.
• Operating income from continuing operations for the quarter declined 18% to $54 million compared to $66 million in the prior-year quarter. Fourth-quarter 2009 operating income included $14 million in severance charges (the “Severance Charges”) related to a realignment of certain operations in the fourth quarter of fiscal 2009. For the full-year 2009, operating income from continuing operations was $135 million, a 35% decline from $207 million in fiscal year 2008.
• Operating income before depreciation and amortization (OIBDA) for the quarter fell 10% to $120 million from $134 million in the prior-year quarter. Fourth-quarter 2009 OIBDA included the Severance Charges. OIBDA for fiscal year 2009 was $397 million, down 16% from $475 million in fiscal year 2008.
• For the quarter, loss from continuing operations was ($0.12) per diluted share compared to income from continuing operations of $0.04 per diluted share in the prior-year quarter. Fourth-quarter 2009 income included $0.09 per diluted share in Severance Charges. For the fiscal year, loss from continuing operations was ($0.67) per diluted share versus loss from continuing operations of ($0.24) in fiscal year 2008.
“WMG had a strong quarter, increasing revenue, growing our cash balance to $384 million and raising digital revenue to 24% of total Recorded Music revenue,” said Edgar Bronfman, Jr., Warner Music Group’s Chairman and CEO. “Over the fiscal year, even in the midst of difficult economic and industry trends, we grew our market share to 21% in the U.S. and continued progress on our key strategic goals: diversifying our revenue mix, improving our financial flexibility and maintaining our leadership in the industry’s digital transition.”
“Looking ahead to fiscal year 2010, the volatile global economy and ongoing recorded music industry transition are likely to continue to affect our results.” Steve Macri, Warner Music Group’s Executive Vice President and CFO added. “Given this backdrop, our conservative approach to managing our costs and our balance sheet gives us the flexibility to optimize results.”
For the quarter, revenue grew 0.8% to $861 million from $854 million in the prior-year quarter, and was up 4.7% on a constant-currency basis. This performance primarily reflected the company’s strong release schedule in the quarter, tempered by continued general economic pressures and the transition from physical sales to digital sales in the recorded music industry. International revenue rose 8.8%, or 17.8% on a constant-currency basis, while domestic revenue declined 7.4%. Revenue growth in Japan, France, Germany, the U.K., Italy and Spain was partially offset by weakness in the U.S. and Latin America. Digital revenue of $184 million grew 10.2% over the prior-year quarter, or 11.5% on a constant-currency basis. Digital revenue grew 5.1% sequentially from the third quarter of fiscal 2009, or 2.8% on a constant-currency basis, and represented 21.4% of total revenue for the quarter.
Operating income from continuing operations fell 18.2% to $54 million from $66 million in the prior-year quarter and operating margin from continuing operations was down 1.5 percentage points to 6.3%. OIBDA decreased 10.4% to $120 million from $134 million in the prior-year quarter and OIBDA margin declined 1.8 percentage points to 13.9% from 15.7%. Operating income from continuing operations and OIBDA for the current year’s quarter included the Severance Charges.
Loss from continuing operations was $18 million, or ($0.12) per diluted share, for the quarter, compared with income from continuing operations of $6 million, or $0.04 per diluted share, in the prior-year quarter. The current-year’s quarter included the Severance Charges, which amounted to $0.09 per diluted share.
The company reported a cash balance of $384 million as of September 30, 2009. As of September 30, 2009, the company reported total long-term debt of $1.94 billion and net debt (total long-term debt minus cash) of $1.56 billion. Net debt at September 30, 2008 was $1.85 billion.
For the quarter, net cash provided by operating activities was $36 million compared to $119 million in the prior-year quarter. The decline in operating cash flow was largely related to our anticipated back-end weighted release schedule, which resulted in negative working capital due to an increase in accounts receivable. Free Cash Flow (defined as cash flow from operations less capital expenditures and cash paid or received for investments) was $20 million, compared to $100 million in the comparable fiscal 2008 quarter. Unlevered After-Tax Cash Flow (defined as Free Cash Flow excluding cash interest paid) was $20 million, compared to $122 million in the comparable fiscal 2008 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 0.3% from the prior-year quarter to $709 million, and was up 3.7% on a constant-currency basis. The growth in constant-currency revenue primarily reflected strength in Europe and Asia, driven largely by local repertoire in Japan and both local and international repertoire in France, Germany, Italy, Spain and the U.K.
International Recorded Music revenue climbed 16.0% from the prior-year quarter to $398 million, and grew 24.4% on a constant-currency basis, while domestic Recorded Music revenue fell 14.6% from the prior-year quarter to $311 million.
A strong release schedule fueled growth in international physical revenue and global digital revenue. In contrast, contracting demand for physical product and soft economic conditions negatively impacted domestic physical revenue. Major sellers in the quarter included Michael Bublé, Jay-Z, Madonna, Muse and Paramore, as well as Japanese artists Ayaka, Kobukuro and Superfly.
Recorded Music digital revenue of $171 million grew 9.6% over the prior-year quarter, or 11.0% on a constant-currency basis, and represented 24.1% of total Recorded Music revenue, compared with 22.1% in the prior-year quarter. Domestic Recorded Music digital revenue amounted to $105 million, or 33.8% of total domestic Recorded Music revenue, compared with 27.2% in the prior-year quarter. Year-over-year digital revenue growth was primarily driven by continued growth in global online downloads.
Quarterly Recorded Music operating income from continuing operations fell 10.7% to $50 million, resulting in an operating margin from continuing operations of 7.1% compared to 7.9% in the prior-year quarter. Recorded Music OIBDA fell 4.0% to $96 million for the quarter. Recorded Music OIBDA margin contracted 0.6 percentage points from the prior-year quarter to 13.5%. Recorded Music operating income from continuing operations and OIBDA for the current-year’s quarter included the Severance Charges.
Music Publishing
Music Publishing revenue increased 3.8% from the prior-year quarter to $162 million, and was up 11.7% on a constant-currency basis. Music Publishing revenue grew 39.3% domestically and was down 16.0% internationally, or 5.6% on a constant-currency basis. Music Publishing results included the benefit of $25 million in revenue and $7 million in OIBDA from an agreement reached by the U.S. recorded music and music publishing industries, which will result in the payment of mechanical royalties accrued in prior years by record companies. Digital revenue from Music Publishing grew 45.5% to $16 million, and was also up 45.5% on a constant-currency basis, representing 9.9% of total Music Publishing revenue.
Mechanical revenue grew 26.5% while performance revenue declined 3.2% and synchronization revenue was down 32.3%. On a constant-currency basis, growth in mechanical revenue of 37.8%, performance revenue of 5.3%, and digital revenue of 45.5%, more than offset a 25.0% decline in synchronization revenue. Mechanical revenue was helped by the previously mentioned mechanical royalty agreement. Performance revenue on a constant-currency basis grew, but continued pressures in the global advertising business had a negative impact on synchronization revenue.
Music Publishing operating income from continuing operations of $42 million was up 16.7% from the prior-year quarter, resulting in an operating margin from continuing operations of 25.9%, up 2.8 percentage points from the prior-year quarter. Music Publishing OIBDA grew 9.3% to $59 million and Music Publishing OIBDA margin of 36.4% was up 1.9 percentage points from the prior-year quarter. Fourth-quarter 2009 Music Publishing margins benefited from the previously mentioned mechanical royalty agreement.
Full-Year Results
For the fiscal year, revenue declined 9.0% to $3,176 million from $3,491 million in the prior year, and was down 3.4% on a constant-currency basis. This performance primarily reflected general economic pressures and the transition from physical sales to digital sales in the recorded music industry. Domestic revenue declined 11.8% while international revenue decreased 6.6%, but grew 4.4% on a constant-currency basis due primarily to an increase in revenue from the company’s European concert promotion business. Digital revenue of $703 million grew 10.0% over the prior-year quarter, or 13.5% on a constant-currency basis, and represented 22.1% of total revenue.
Operating income from continuing operations fell 34.8% to $135 million from $207 million in the prior year and operating margin from continuing operations was down 1.7 percentage points to 4.3%. OIBDA decreased 16.4% to $397 million from $475 million in the prior year and OIBDA margin declined 1.1 percentage points to 12.5% from 13.6%. The decline in OIBDA margin reflected lower sales on a similar fixed-cost base and declines related to a recession in Japan, partially offset by company-wide cost-management efforts.
Loss from continuing operations was $100 million, or ($0.67) per diluted share, compared with a loss from continuing operations of $35 million, or ($0.24) per diluted share, in the prior fiscal year.
For the fiscal year, net cash provided by operating activities was $234 million compared to $304 million in the prior year. Free Cash Flow was $316 million, compared to $137 million in fiscal 2008. Unlevered After-Tax Cash Flow was $425 million, compared to $286 million in fiscal 2008 (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 9.4% to $2,624 million, and was down 4.3% on a constant-currency basis over the prior year. Domestic Recorded Music revenue declined 14.6% from the prior year to $1,178 million while international Recorded Music revenue was down 4.6%, but grew 6.2% on a constant-currency basis. Recorded Music sales were challenged by the continued decline in physical sales that is not currently being offset by growth in digital sales. Recorded Music revenue was split 45% domestic and 55% international. Digital Recorded Music revenue grew 9.5% over the prior year to $656 million, and grew 12.7% on a constant-currency basis, representing 25.0% of Recorded Music revenue for fiscal 2009, up from 20.7% in fiscal 2008. Domestic Recorded Music digital revenue amounted to $419 million, or 35.6% of total domestic Recorded Music revenue, up from $388 million or 28.1% of revenue in the prior year. Major sellers for the year included Enya, Green Day, Madonna, Nickelback and Seal.
Recorded Music operating income from continuing operations dropped 34.3% to $153 million for the year from $233 million last year and operating income margin from continuing operations contracted 2.2 percentage points to 5.8%. Recorded Music OIBDA fell 19.2% to $336 million for the year from $416 million last year and OIBDA margin declined 1.6 percentage points to 12.8%. The decline in Recorded Music OIBDA margin reflected lower sales on a similar fixed-cost base, partially offset by company-wide cost-management efforts.
Music Publishing
Music Publishing revenue declined 7.2% from the prior year to $578 million, but was up 0.7% on a constant-currency basis. Domestic Music Publishing revenue rose 5.8% over the prior year to $238 million while international revenue fell 14.6%, or 2.6% on a constant-currency basis. Music Publishing revenue was split 41% domestic and 59% international.
Digital revenue from Music Publishing grew 35.0% over the prior year, or 45.9% on a constant-currency basis, to $54 million and represented 9.3% of total Music Publishing revenue in fiscal 2009, up from 6.4% in fiscal 2008. Mechanical revenue declined 14.7%, performance revenue declined 7.0% and synchronization revenue was down 2.0%. On a constant-currency basis, a decline in mechanical revenue of 5.9% was offset by a 2.1% increase in synchronization revenue, a 1.8% rise in performance revenue and a 45.9% increase in digital revenue.
Music Publishing operating income grew 2.2% over the prior year to $93 million, yielding an operating margin of 16.1%, up 1.5 percentage points from fiscal year 2008. Music Publishing OIBDA was $161 million versus $162 million in the prior year and OIBDA margin grew 1.9 percentage points to 27.9% due primarily to sales mix.
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.
