WMG reports growth a year after Parlophone acquisition

PRESS RELEASE:

Warner Music Group Corp. today announced its first-quarter results for the period ended December 31, 2014.

"Some strong new releases, as well as outstanding execution by our operators around the world during the holiday season, made for an excellent start to our fiscal year," said Stephen Cooper, Warner Music Group’s CEO. "Our extraordinary roster of songwriters and artists, combined with our first-class management team and our sustained investment in new opportunities, means that we are well-positioned to build on this success as the industry evolves."

“We are pleased with our top line performance as well as our improved free cash flow,” added Eric Levin, Warner Music Group’s Executive Vice President and CFO. “We remain keenly focused on growth and managing our expenses.”

TOTAL WMG FINDINGS

Revenue grew 1.7% (or 6.6% in constant currency), driven by strong holiday sales. On a constant-currency basis, physical revenue grew in Recorded Music and digital revenue grew in Recorded Music and Music Publishing. This growth was partially offset by a slight decline in Artist Services and Expanded-Rights revenue and declines across performance, mechanical and synchronization revenue in Music Publishing. Recorded Music licensing revenue was flat. Constant-currency revenue growth was widespread across geographies with growth in the U.S., the UK, Continental Europe, Latin America and China partially offset by declines in Japan. Digital revenue grew 6.9% (or 14.3% in constant currency), and digital revenue represented 35.6% of total revenue, compared to 33.9% in the prior-year quarter. Growth in digital revenue was predominantly driven by streaming, although download revenue was also up modestly.

Operating income was $23 million compared to $15 million in the prior-year quarter. OIBDA increased 10% to $102 million from $93 million in the prior-year quarter and OIBDA margin rose to 12.3% from 11.4% in the prior-year quarter. The increase in operating income, OIBDA and OIBDA margin is largely the result of the increase in revenue driven by strong holiday sales and lower PLG-related expenses. Adjusted OIBDA declined 3.3% and Adjusted OIBDA margin declined 0.7 percentage points to 14.0% from 14.7%. The decline in Adjusted OIBDA reflects higher investment in marketing as well as changes in revenue mix. Adjusted operating margin declined 0.7 percentage points to 4.5% from 5.2% driven by the same factors that impacted Adjusted OIBDA.

Net loss was $41 million compared to $36 million in the prior-year quarter. Net loss was higher as a result of increased income tax expense due to losses in some countries for which no tax benefit could be realized.

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

As of December 31, 2014, the company reported a cash balance of $145 million, total debt of $3.018 billion and net debt (total long-term debt, including the current portion, 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 $35 million compared to cash used in operating activities of $52 million in the prior-year quarter. The change is largely a result of lower cash interest payments and of working capital improvements, some of which are timing related, partially offset by the final purchase price payment related to the PLG acquisition. Free Cash Flow, defined below, was negative $2 million compared to negative $78 million in the prior-year quarter, reflecting the improvements in cash provided by operating activities partially offset by an increase in expenses related to moving the company’s corporate headquarters.

RECORDED MUSIC

Recorded Music revenue grew 3.3% (or 8.3% in constant currency), driven by strong holiday sales. Strength in physical and digital revenue was partially offset by a decline in licensing and Artist Services and Expanded-Rights revenue. Physical revenue growth was driven by releases from Pink Floyd and Johnny Hallyday, artists who traditionally have a higher proportion of physical sales, as well as the continued success of Ed Sheeran. Digital growth reflects a continuing industry transition characterized by strength in streaming revenue. The decline in Artist Services and Expanded-Rights revenue was due to the timing of European concert tours. Recorded Music saw strength around the globe with Japan the most significant exception. Domestic Recorded Music digital revenue was $132 million or 54.8% of total domestic Recorded Music revenue. Major sellers included Ed Sheeran, Pink Floyd, Johnny Hallyday, David Guetta and Slipknot.

Recorded Music operating income was $52 million up from $35 million in the prior-year quarter and operating margin was up 2.2 percentage points to 7.3% versus 5.1% in the prior-year quarter. Adjusted operating margin declined 0.9 percentage points to 8.1% from 9.0% in the prior-year quarter. OIBDA rose to $111 million from $93 million in the prior-year quarter and OIBDA margin rose 2.0 percentage points to 15.5%. Adjusted OIBDA was $117 million versus $120 million in the prior-year quarter with Adjusted OIBDA margin down 1.0 percentage point to 16.4%. The declines in Adjusted OIBDA and Adjusted OIBDA margin were driven by higher investment in marketing as well as changes in revenue mix partially offset by lower PLG-related expenses.

MUSIC PUBLISHING

Music Publishing revenue declined 7.0% or 3.3% in constant currency. Declines in performance, mechanical and synchronization revenue were partially offset by strength in digital revenue. Digital revenue grew 14.3%. Performance revenue was down 11.8%, driven by timing of collection society distributions and mechanical revenue declined 14.8%, driven by the ongoing industry shift from physical to digital sales. Synchronization revenue was down 3.8%.

Music Publishing operating margin declined 1.6 percentage points to 0.0% from 1.6% in the prior-year quarter, as a result of the revenue decline. Music Publishing OIBDA declined by $2 million or 10.5% to $17 million, while Music Publishing OIBDA margin declined 0.5 percentage points to 14.3% from 14.8% also as a result of the revenue decline.

Financial details for the quarter can be found in the company’s current Form 10-Q, for the period ended December 31, 2014, filed today with the Securities and Exchange Commission.