Warner Music Group Corp. Reports Results For The Fiscal Third Quarter Ended June 30, 2010

* Total revenue of $652 million declined 16% from the prior-year quarter, and was down 15% on a constant-currency basis.

* Digital revenue was $179 million, or 27% of total revenue, up 2% from $175 million in the prior-year quarter and down 10% sequentially from the second quarter of fiscal 2010. On a constant-currency basis, digital revenue was up 1% from the prior-year quarter and fell 9% sequentially.

* Operating loss was $1 million compared to operating income of $25 million in the prior-year quarter. The current-quarter operating loss included $9 million of severance charges ($7 million in Recorded Music and $2 million in Corporate) compared to $3 million of severance charges in the prior-year quarter ($2 million in Recorded Music and $1 million in Corporate) (the “Severance Charges”).

* Operating income before depreciation and amortization (OIBDA) was down 29% to $64 million from $90 million in the prior-year quarter. OIBDA for the current- and prior-year quarters included the Severance Charges.

* Net loss was ($0.37) per diluted share compared to net loss of ($0.25) per diluted share in the prior-year quarter. Severance Charges had a $0.06 per diluted share impact in the current quarter and a $0.02 per diluted share impact in the prior-year quarter.

Warner Music Group Corp. announced its third-quarter financial results for the period ended June 30, 2010.

“We remain committed to bringing to market the highest-quality music when it is best-positioned to succeed artistically and commercially,” said Edgar Bronfman, Jr., Warner Music Group’s Chairman and CEO. “Despite our anticipated very light release schedule, this quarter we grew digital revenue to 41% of our U.S. Recorded Music revenue, maintained U.S. album market share at 21%, continued to sign and develop some of the industry’s most promising talent to expanded-rights agreements and invested further in the artist services business – all consistent with our strategy to build a diversified music company positioned for long-term success.”

“We remain focused on actively managing costs and generating significant free cash flow,” added Steven Macri, Warner Music Group’s Executive Vice President and CFO. “Our cost-management initiatives are largely designed to help mitigate the effects of the recorded music industry transition.”

For the quarter, revenue declined 15.7% to $652 million from $773 million in the prior-year quarter, and was down 15.3% on a constant-currency basis. This performance is due to a light release schedule. In addition, our 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 19.2%, or 18.7% on a constant-currency basis, while domestic revenue declined 10.9%. Revenue growth in the U.K. and Latin America 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 and lower revenue from tours promoted by the company’s European concert promotion business for the quarter.

Digital revenue of $179 million grew 2.3% over the prior-year quarter, or 1.1% on a constant-currency basis. Digital revenue was down 10.1% sequentially from the second quarter of fiscal 2010, or 8.7% on a constant-currency basis, and represented 27.5% of total revenue for the quarter. The sequential decline in digital revenue was primarily due to the timing of releases and the seasonal pattern of digital consumption.

Operating loss was $1 million compared to operating income of $25 million in the prior-year quarter. Operating margin was down 3.4 percentage points to (0.2%). OIBDA decreased 28.9% to $64 million from $90 million in the prior-year quarter and OIBDA margin contracted 1.8 percentage points to 9.8% (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 $55 million, or ($0.37) per diluted share, compared with net loss of $37 million, or ($0.25) per diluted share, in the prior-year quarter. Severance Charges had a $0.06 per diluted share impact in the current quarter and a $0.02 per diluted share impact in the prior-year quarter. Additionally, interest expense in the prior-year quarter included $18 million, or $0.12 per diluted share, of previously unamortized deferred financing fees related to the company’s senior secured credit facility. These fees were written off in the prior-year quarter when the company repaid the credit facility in full.

As of June 30, 2010, the company reported a cash balance of $400 million, total long-term debt of $1.94 billion and net debt (total long-term debt minus cash) of $1.54 billion.

Net cash provided by operating activities was $49 million compared to $11 million in the prior-year quarter. The increase was primarily related to the timing of sales and collections. Free Cash Flow (defined as cash flow from operations less capital expenditures and cash paid or received for investments) was $29 million compared to $11 million in the prior-year quarter. Unlevered After-Tax Cash Flow (defined as Free Cash Flow excluding cash interest paid) was $117 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).

There were cash interest payments of $88 million in the quarter, compared to $43 million in the prior-year quarter. 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. The company previously made quarterly interest payments under its senior secured credit facility, which was retired in May 2009. Additionally, WMG Holdings Corp.’s senior discount notes have now accreted to their full principal amount. As a result, the company has begun to pay interest semi-annually, resulting in the first cash interest payment on these notes of $12 million on June 15, 2010.

Below is the business segment discussion for the quarter.

Recorded Music
Revenue from the company’s Recorded Music business declined 17.9% from the prior-year quarter to $519 million on an as-reported and constant-currency basis. The decline in constant-currency revenue reflected weakness in the U.S., Japan and most of Europe, partially offset by strength in the U.K. and Latin America. Both local and international artists fueled growth in Recorded Music revenue in the U.K.

International Recorded Music revenue declined 21.8% from the prior-year quarter to $272 million on an as-reported and constant-currency basis, while domestic Recorded Music revenue fell 13.0% from the prior-year quarter to $247 million. The company’s Recorded Music business experienced strong growth in international digital download revenue. This performance was more than offset by a light release schedule and contracting demand for physical product. Revenue declines were also attributable to lower revenue from tours promoted by the company’s European concert promotion business for the quarter. Major sellers in the quarter included B.o.B, Michael Bublι, Jason Derulo, Plan B and the “Eclipse” soundtrack album.

Recorded Music digital revenue of $169 million grew 3.7% over the prior-year quarter, or 2.4% on a constant-currency basis, and represented 32.6% of total Recorded Music revenue, compared with 25.8% in the prior-year quarter. Domestic Recorded Music digital revenue amounted to $102 million, or 41.3% of total domestic Recorded Music revenue, compared with 37.0% in the prior-year quarter. Year-over-year digital revenue growth was driven by global strength in digital downloads, partially offset by the timing of our release schedule and declines in mobile revenue primarily related to lower ringtone demand.

Recorded Music operating income declined to $21 million from $39 million in the prior-year quarter, resulting in an operating margin of 4.0%, down 2.2 percentage points from 6.2% in the prior-year quarter. Recorded Music OIBDA fell 23.5% to $65 million for the quarter and Recorded Music OIBDA margin declined 0.9 percentage points from the prior-year quarter to 12.5%. Recorded Music operating income and OIBDA for the current- and prior-year quarters included the Severance Charges.

Music Publishing
Music Publishing revenue declined 6.1% from the prior-year quarter to $139 million, and was down 4.1% on a constant-currency basis. Domestic Music Publishing revenue was flat at $54 million, while international Music Publishing revenue declined 9.6% from the prior-year quarter and fell 6.6% on a constant-currency basis, to $85 million.

Digital revenue from Music Publishing fell to $13 million from $16 million, and was down 13.3% on a constant-currency basis, representing 9.4% of total Music Publishing revenue. Mechanical revenue increased 16.3%, while performance revenue declined 13.8% and synchronization revenue fell 17.2%. On a constant-currency basis, mechanical revenue grew 19.0%, performance revenue declined 10.7% and synchronization revenue fell 17.2%.

The increase in mechanical revenue was due to an increase in sales of physical recorded music product containing the works of Warner/Chappell songwriters and a shift to accrual-based accounting for a U.S. collection society. Declines in performance and synchronization revenue reflected the continued delay in benefits from the nascent recovery in the advertising market. Digital revenue fell primarily due to the timing of collections.

Music Publishing operating income declined to $1 million from $11 million in the prior-year quarter, resulting in an operating margin of 0.7%, down 6.7 percentage points from the prior-year quarter. Music Publishing OIBDA fell 35.7% to $18 million and Music Publishing OIBDA margin contracted 6.0 percentage points to 12.9%. The margin contraction was primarily the result of changes in revenue mix as mechanical revenue tends to have a lower margin than other types of Music Publishing revenue.

Source: MI2N