Warner Music Group Corp. Reports Results For Fiscal Fourth Quarter And Full Year Ended September 30, 2014

Warner Music Group Corp. (“WMG”) announced its fourth-quarter and full-year financial results for the period ended September 30, 2014.”We are proud of everything we accomplished this year,” said Stephen Cooper, Warner Music Group’s CEO. “We had great success with artists at all stages of their careers, breaking amazing new talent as well as taking our established roster to new heights. At the same time we expanded our digital footprint, announced several groundbreaking partnerships and pushed into emerging markets, ensuring we are well positioned to capitalize on future growth opportunities as the industry evolves and streaming services achieve scale.”

“We improved our financial flexibility this year by lowering interest cost with our April refinancing and we continue to look for new and innovative opportunities to generate revenue and cost savings,” added Eric Levin, Warner Music Group’s Executive Vice President and CFO.

Fourth-Quarter Results

For the quarter, total revenue grew 0.9% or 0.1% in constant currency. Domestic total revenue rose 2.1% and international total revenue declined 0.4% or 1.6% on a constant-currency basis. Prior to intersegment eliminations, domestic and international total revenue represented 38.1% and 61.9% of total revenue, respectively, compared to 37.5% and 62.5% of total revenue, respectively, in the prior-year quarter. Recorded Music revenue grew in digital, licensing and artist services and expanded-rights and Music Publishing revenue grew in digital, synchronization and performance, which offset continued softness in Recorded Music physical revenue and Music Publishing mechanical revenue. Recorded Music revenue growth in the U.S., UK, Germany and Italy was partially offset by revenue declines in markets including Japan and France. Digital revenue grew 6.4% or 9.9% in constant currency, and digital revenue represented 39.0% of total revenue for the quarter, compared to 37.0% in the prior-year quarter. Growth in digital revenue is driven by the growth in streaming services.

For the quarter, operating income was $24 million compared to operating loss of $41 million in the prior-year quarter. OIBDA increased to $107 million from $36 million in the prior-year quarter and OIBDA margin rose to 13.9% from 4.7% in the prior-year quarter. The increase in operating income, OIBDA and OIBDA margin is largely the result of lower costs related to the Parlophone Label Group (PLG) acquisition in the current-year quarter. Adjusted OIBDA, which excludes PLG-related costs, was $123 million versus $99 million in the prior-year quarter and adjusted OIBDA margin was 16.0% compared to 13.0% in the prior-year quarter. The increase in adjusted OIBDA margin was in part related to a reduction in PLG operating overhead in fiscal 2014 as cost savings and synergies were realized. Adjusted operating margin rose 2.3 percentage points to 5.2% from 2.9%.

Net loss was $24 million compared to $57 million in the prior-year quarter and adjusted net loss was $8 million compared to adjusted net income of $6 million in the prior-year quarter. Adjusted operating income, adjusted OIBDA and adjusted net income (loss) exclude the impact of items relating to the PLG acquisition. See below for calculations and reconciliations of OIBDA, adjusted operating income, adjusted OIBDA and adjusted net income (loss).

As of September 30, 2014, the company reported a cash and equivalents balance of $157 million, total long-term debt of $3.030 billion and net debt (total debt minus cash) of $2.873 billion. There was no balance outstanding on the company’s revolver at the end of the quarter.

Cash provided by operating activities was $89 million compared to $12 million in the prior-year quarter. The increase in cash provided by operating activities primarily reflects an increase related to the timing of digital advances in the quarter. Free Cash Flow, defined below, was $26 million compared to negative $720 million in the prior-year quarter. The largest factor impacting the year-over-year change in Free Cash Flow was the PLG acquisition, which was completed in the prior-year quarter. Capital expenditures rose to $30 million versus $11 million in the prior-year quarter, primarily as a result of costs incurred in the current quarter associated with moving the company’s headquarters.

Full-Year Results

For the fiscal year, total revenue grew 5.4% or 5.2% in constant currency. Growth was driven by the addition of PLG, increases in Recorded Music digital and licensing revenue and artist services and expanded-rights revenue as well as Music Publishing digital, performance and synchronization revenue. These gains more than offset declines in Recorded Music physical revenue and Music Publishing mechanical revenue. Excluding PLG, total revenue declined 3.7% or 3.8% on a constant-currency basis. Domestic total revenue declined 1.7% and international total revenue rose 9.9% or 9.4% on a constant-currency basis. Prior to intersegment eliminations, domestic and international total revenue represented 37.5% and 62.5% of total revenue, respectively, compared to 40.1% and 59.9% of total revenue, respectively, in the prior-year quarter primarily due to the acquisition of PLG. Digital revenue grew 11.2% or 10.9% in constant currency, and represented 39.5% of total revenue, compared to 37.5% in the prior year.

For the fiscal year, operating income was $19 million versus $75 million in the prior year. Operating margin was 0.6% versus 2.6% in the prior year. Adjusted operating margin declined 0.7 percentage points to 4.6% from 5.3% in the prior year. OIBDA was $340 million, up 2.1% from $333 million in the prior year and OIBDA margin declined 0.4 percentage points to 11.2% from 11.6% in the prior year. Adjusted OIBDA grew 12.2% to $459 million and adjusted OIBDA margin expanded 1.0 percentage point to 15.2% from 14.2% in the prior year. The improvement in adjusted OIBDA and adjusted OIBDA margin was related to the acquisition of PLG and related cost synergies.

Net loss was $303 million compared to $194 million in the prior year. Adjusted net loss was $184 million excluding a loss on extinguishment of debt of $141 million related to the April 2014 refinancing of the company’s Senior Notes due 2018 compared with the $85 million loss on the extinguishment of debt realized in the prior fiscal year. Net debt (total debt minus cash) at the end of the fiscal year was $2.873 billion versus $2.712 billion at the end of the prior year but, due to a lower blended interest rate in the fiscal year, the company’s interest expense remained flat at $203 million.

Cash provided by operating activities was $130 million compared to $159 million in the prior year. Free Cash Flow was negative $25 million, compared to negative $649 million in the prior year. The largest factor impacting the year-over-year change in Free Cash Flow was the PLG acquisition, which was completed in the prior year. This was partially offset by higher capital expenditures of $76 million for the fiscal year, up from $34 million in the prior year. The largest drivers of the increase in capital expenditures were the company’s headquarters move, the consolidation of the company’s offices in the UK and other PLG-related costs, as well as increased investments in IT infrastructure and systems.

Recorded Music Summary Results

Fourth-Quarter Results

Recorded Music revenue was flat or down 0.8% in constant currency. Digital, licensing and artist services and expanded-rights revenue all grew but were offset by a decline in physical revenue. Licensing revenue growth was driven by activity within the PLG roster and Artist services and expanded-rights revenue was up modestly. Digital revenue grew 5.0%, or 4.2% in constant currency, driven by strength in streaming revenue, and represented 42.7% of total Recorded Music revenue, compared to 40.7% in the prior-year quarter. Domestic Recorded Music digital revenue was $129 million or 52.4% of total domestic Recorded Music revenue. Major sellers in the current-year quarter included Ed Sheeran, Mariya Takeuchi, Blake Shelton, Kyary Pamyu Pamyu and Coldplay.

Operating income was $4 million up from a loss of $49 million in the prior-year quarter and operating margin was 0.6% versus negative 7.6% in the prior-year quarter. Adjusted operating margin rose 0.3 percentage points to 3.1% from 2.8% in the prior-year quarter. OIBDA rose to $64 million versus $8 million in the prior-year quarter, with OIBDA margin up 8.7 percentage points to 9.9% versus 1.2% in the prior-year quarter. Recorded Music adjusted OIBDA rose 6.7% and adjusted OIBDA margin rose 0.8 percentage points to 12.4% from 11.6% in the prior-year quarter due to the timing of the PLG integration and realization of cost savings.

Full-Year Results

Recorded Music revenue grew 5.7% or 5.6% in constant currency. Excluding PLG, Recorded Music revenue declined 5.3%, on an as-reported and constant-currency basis, due in part to ongoing declines in physical and digital download revenue, which were partially offset by an acceleration in the growth of streaming revenue. Artist services and expanded-rights revenue grew, aided by strong concert promotion activity in Europe due to the timing of tours. Recorded Music licensing revenue also was up. Recorded Music digital revenue grew 10.6% or 10.4% in constant currency, and represented 43.7% of total Recorded Music revenue for the fiscal year, up from 41.7% in the prior year. Domestic Recorded Music digital revenue amounted to $540 million, or 57.0% of total domestic Recorded Music revenue versus 54.4% in the prior year. Major sellers included Coldplay, Ed Sheeran, Bruno Mars and Jason Derulo.

Recorded Music operating income was $31 million versus $92 million in the prior year and operating margin was 1.2% versus 3.9% in the prior year. Recorded Music adjusted operating margin declined 1.4 percentage points to 5.5% from 6.9% in the prior year. Recorded Music OIBDA declined 1.1% and OIBDA margin declined 0.7 percentage points to 10.6%. Recorded Music adjusted OIBDA improved 9.3% to $376 million and Recorded Music adjusted OIBDA margin expanded 0.5 percentage points to 14.9% due to PLG related synergies.

Music Publishing Summary Results

Fourth-Quarter Results

Music Publishing revenue rose 3.2% or 2.4% in constant currency. Digital revenue grew 23.8% due to growth in streaming revenue. Mechanical revenue declined 22.2% due to the continued transition from physical to digital sales. Synchronization revenue rose 4.3% and Performance revenue rose 9.8%.

Music Publishing operating margin rose 10.7 percentage points to 37.7% from 27.0% in the prior-year quarter. Music Publishing OIBDA rose 33.3% to $68 million from $51 million in the prior-year quarter while Music Publishing OIBDA margin rose 11.8 percentage points to 52.3% from 40.5% in the prior-year quarter driven in part by the reversal of a previously accrued earn-out payment in the current-year quarter.

Full-Year Results

Music Publishing revenue rose 2.8% or 2.2% in constant currency. The increase in Music Publishing revenue was driven by a 16.9% increase, on an as-reported and constant-currency basis, in digital revenue, a 4.6% increase, or 4.0% in constant currency, in performance revenue, and a 4.1% increase or 3.0% in constant currency, in synchronization revenue. This growth was partially offset by a 10.6% decline or 11.4% in constant currency, in mechanical revenue. Music Publishing digital revenue represented 18.8% of total Music Publishing revenue in the current fiscal year, up from 16.5% in the prior fiscal year.

Music Publishing operating margin was 18.2%, up 2.1 percentage points from 16.1% in the prior year. Music Publishing OIBDA grew 12.2% to $166 million, while Music Publishing OIBDA margin was 32.1%, up 2.7 percentage points from 29.4% in the prior year, driven in part by the one-time benefit in the current year from the reversal of a previously accrued earn-out payment.

Source: Warner Music