Warner Music Group’s Q3 earnings: Net loss was $43m

PRESS RELEASE:

• Total revenue declined 10% or 1% on a constant-currency basis
• Recorded Music revenue declined 10% or 1% on a constant-currency basis
• Digital revenue declined 3% or increased 4% on a constant-currency basis
• OIBDA was $100 million versus $66 million in the prior-year quarter
• Net loss was $43 million versus $184 million in the prior-year quarter

Warner Music Group Corp. today announced its third-quarter results for the period ended June 30, 2015.

"I’m pleased with our relative performance this quarter, given that Q3 was our strongest quarter in fiscal 2014," said Stephen Cooper, Warner Music Group’s CEO. “Our successes this quarter are due to ongoing growth in streaming revenue, a strong flow of outstanding music from our artists and songwriters, and first-class execution by our operators around the world.”

“Currency factored prominently in our results. It is encouraging that, given the strength of the prior-year quarter, total revenue was essentially flat year over year on a constant-currency basis,” added Eric Levin, Warner Music Group’s Executive Vice President and CFO. “I’m proud of our OIBDA and margin performance. We will continue to take a balanced, global approach to delivering revenue, free cash flow and OIBDA growth.”

Revenue declined 9.9% (or 0.7% in constant currency), mainly driven by exchange rates and timing of release activity. The prior-year quarter was the company’s strongest quarter of fiscal 2014 from a revenue perspective. All revenue streams declined, due in part to currency fluctuations, with the exception of Recorded Music licensing revenue, which rose 3.2% (or 16.1% in constant currency). Asia and Latin America saw solid revenue growth with China a notable contributor. This growth was offset by revenue declines in the U.S. and several European markets. The decline in physical revenue was driven by the continuing transition to digital and comparison to the prior-year quarter which had strong physical revenue. Digital revenue declined 3.1% (or was up 3.6% in constant currency), and represented 44.2% of total revenue, compared to 41.1% in the prior-year quarter. The digital revenue decline reflects the impact of exchange rates and continued declines in download revenue which were offset in part by continued growth in streaming revenue.

Operating income was $23 million compared to an operating loss of $15 million in the prior-year quarter. OIBDA increased 51.5% to $100 million from $66 million in the prior-year quarter and OIBDA margin rose to 14.1% from 8.4% in the prior-year quarter. Adjusted OIBDA declined 5.5% and Adjusted OIBDA margin increased 0.7 percentage points to 14.5% from 13.8%. The increase in operating income and OIBDA is largely the result of lower PLG-related expenses, the decline in expenses related to the company’s headquarters move and the benefit of ongoing cost-containment initiatives. The decline in Adjusted OIBDA is largely the result of the revenue decline.

Net loss was $43 million compared to $184 million in the prior-year quarter. This improvement was primarily due to higher operating income, lower interest expense and a loss related to the extinguishment of debt in the prior-year quarter, which more than offset currency-exchange losses on our Euro-denominated debt and higher income tax expense.

Adjusted operating income, Adjusted OIBDA and Adjusted net loss exclude the impact of PLG-related expenses, expenses related to the company’s headquarters move and expenses related to ongoing cost-containment initiatives. See below for calculations and reconciliations of OIBDA, Adjusted operating income, Adjusted OIBDA and Adjusted net loss.

As of June 30, 2015, the company reported a cash balance of $168 million, total long-term debt of $2.996 billion and net debt (total long-term debt, including the current portion, minus cash) of $2.828 billion. There was no balance outstanding on the company’s revolver at the end of the quarter.

Cash used by operating activities was $24 million compared to $38 million in the prior-year quarter. This was largely driven by the timing of working capital and cash interest payments. Free Cash Flow, defined below, was negative $44 million compared to negative $55 million in the prior-year quarter, reflecting lower cash used by operating activities and lower capital expenditures which more than offset higher cash paid for investments.

Recorded Music revenue declined 9.8% (or 0.7% in constant currency), mainly driven by exchange rates and timing of release activity. All revenue streams declined, other than licensing which rose 3.2% (or 16.1% in constant currency) driven by increased synchronization activity as well as the inclusion for the first time of broadcast fee income for PLG repertoire across certain European territories. Asia and Latin America saw solid revenue growth with China a notable contributor. This growth was offset by revenue declines in the U.S. and several European markets. The decline in physical revenue was driven by the continuing transition to digital and comparison to the prior-year quarter which had strong physical revenue. The digital revenue decline reflects the impact of exchange rates. The decline in Artist Services and Expanded-Rights revenue resulted from an increase in U.S. expanded-rights revenue which was more than offset by a decrease in international artist services revenue due to the timing of European concert tours. Domestic Recorded Music digital revenue was $143 million or 59.3% of total domestic Recorded Music revenue. Major sellers included the Furious 7 Soundtrack, Ed Sheeran, Muse, Josh Groban, Superfly and David Guetta.

Recorded Music operating income was $43 million, up from $11 million in the prior-year quarter, and operating margin was 7.3%, up from 1.7% in the prior-year quarter. Adjusted operating margin increased 0.9 percentage points to 7.6% from 6.7% in the prior-year quarter. OIBDA rose to $100 million from $71 million in the prior-year quarter and OIBDA margin rose 6.1 percentage points to 16.9%. Adjusted OIBDA was $102 million versus $104 million in the prior-year quarter with Adjusted OIBDA margin up 1.3 percentage points to 17.2%. The decline in Adjusted OIBDA was largely driven by the as-reported revenue decline. The increase in Adjusted OIBDA margin was driven by revenue mix and ongoing cost-containment initiatives.

Music Publishing revenue declined 10.2% (or 0.8% in constant currency). Mechanical revenue declined 19.4% (or 10.7% in constant currency) driven by the continuing transition to digital. Digital revenue also declined, down 14.8% (or 11.5% in constant currency) in large part due to timing, which includes some one-time payments in the prior-year quarter. Performance revenue declined 5.8% (or was up 6.5% in constant currency) driven by timing of collections and synchronization revenue declined 8% (or was flat in constant currency).

Music Publishing operating income declined $3 million or 50.0% to $3 million and operating margin declined 2.0 percentage points to 2.4% from 4.4% in the prior-year quarter, as a result of revenue decline and the timing of artist and repertoire costs. Music Publishing OIBDA declined by $4 million or 16.7% to $20 million, while Music Publishing OIBDA margin declined 1.2 percentage points to 16.3% from 17.5% as a result of the same factors which drove operating income.