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Label News (more headlines) 12-15-2013

Warner Music Group Corp. Reports Results For Fiscal Fourth Quarter And Full Year Ended September 30, 2013

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Warner Music Group Corp. announced its fourth-quarter and full-year financial results for the period ended September 30, 2013.

"This was a year of significant accomplishment at Warner Music Group," said Stephen Cooper, Warner Music Group's CEO. "We intensified our focus on signing and developing extraordinary artists, we executed well on our digital strategy and we acquired and have been successfully integrating Parlophone Label Group."

"We also significantly improved our financial flexibility over the course of the fiscal year. Even as we increased our borrowings in order to finance the acquisition of Parlophone Label Group, we lowered our annual interest expense through debt repayments and refinancings of our debt," added Brian Roberts, Warner Music Group's Executive Vice President and CFO.

Total WMG Summary Results

Fourth-Quarter Results
For the quarter, revenue grew 4.5%, and 7.3% in constant currency, driven in part by the July 1, 2013 acquisition of Parlophone Label Group ("PLG"). Excluding PLG, revenue declined 3.6%, and 1.0% in constant currency, due to an anticipated light release schedule. Excluding PLG, growth in digital Recorded Music revenue, Artist Services and Expanded Rights revenue and Recorded Music licensing revenue was more than offset by declines in physical Recorded Music revenue and total Music Publishing revenue. Constant-currency revenue growth in the U.K., Spain and France and revenue growth in the U.S., driven in part by the PLG acquisition, was partially offset by declines in Japan and Germany. Digital revenue grew 17.4%, or 19.4% in constant currency, and digital revenue represented 37.0% of total revenue for the quarter, compared to 33.0% in the prior-year quarter. Growth in digital revenue reflects the acquisition of PLG, as well as revenue growth related to download and subscription/streaming services.

Adjusted operating margin contracted 4.5 percentage points to 2.2% from 6.7%. Adjusted OIBDA declined 15.3% and adjusted OIBDA margin contracted 2.9 percentage points to 12.3% from 15.2%. The decline in adjusted OIBDA margin was related to revenue declines in Japan, which is typically a higher-margin territory, as well as growth in lower-margin European concert promotion revenue and merchandising revenue. Operating income, adjusted operating income, OIBDA and adjusted OIBDA for the quarter included minimal severance charges (not including those associated with the PLG acquisition), compared to $14 million of severance charges in the prior-year quarter ($11 million in Recorded Music, $2 million in Music Publishing and $1 million in Corporate) (the "Quarterly Severance Charges").

Adjusted net income of $1 million reflects the impact of an income tax benefit related to deferred tax benefits for higher losses in foreign jurisdictions as well as a change in the U.K. tax rate.

Adjusted operating income, adjusted OIBDA and adjusted net income (loss) exclude the impact of items relating to the acquisition of PLG in the current year and the sale of EMI in the prior year. See below for calculations and reconciliations of OIBDA, adjusted operating income, adjusted OIBDA and adjusted net income (loss).

As of September 30, 2013, the company reported a cash balance of $155 million, total long-term debt of $2.867 billion and net debt (total long-term debt minus cash) of $2.712 billion.

Cash provided by operating activities was $12 million compared to $102 million in the prior-year quarter. The decline in cash provided by operating activities primarily reflects expenses related to the acquisition of PLG, including higher professional fees and integration costs, as well as an increase in cash paid for interest due to the timing of interest payments as a result of debt transactions during fiscal 2013. Free Cash Flow, defined below, was negative $720 million compared to $80 million in the prior-year quarter. The largest factor impacting the year-over-year change in Free Cash Flow for the quarter was the cash payment of approximately $765 million on July 1, 2013 associated with the acquisition of PLG.

Full-Year Results
For the fiscal year, revenue grew 3.3%, or 5.0% in constant currency. Growth in Recorded Music digital revenue, Recorded Music licensing revenue and Artist Services and Expanded Rights revenue, each helped in part by the acquisition of PLG, as well as growth in Music Publishing digital revenue, more than offset declines in Recorded Music physical revenue and Music Publishing mechanical, performance and synchronization revenue. Digital revenue grew 16.3%, or 17.0% in constant currency, and represented 37.5% of total revenue, compared to 33.3% in the prior fiscal year. Excluding the acquisition of PLG, revenue grew 1.2%, or 2.8% on a constant-currency basis.

Adjusted operating margin expanded 0.7 percentage points to 5.1% from 4.4% in the prior fiscal year. Adjusted OIBDA grew 10.1% to $404 million and adjusted OIBDA margin expanded 0.9 percentage points to 14.1% from 13.2% in the prior fiscal year. The improvement in adjusted OIBDA and adjusted OIBDA margin was related to the continued shift to higher-margin digital revenue as well as the focus on higher-margin Music Publishing deals, partially offset by increased product costs due to growth in Artist Services and Expanded Rights revenue. Operating income, adjusted operating income, OIBDA and adjusted OIBDA in the fiscal year included $11 million of severance charges ($9 million in Recorded Music, $1 million in Music Publishing and $1 million in Corporate, not including charges associated with the PLG acquisition) compared to $42 million of severance charges in the prior fiscal year ($35 million in Recorded Music, $4 million in Music Publishing and $3 million in Corporate) (the "Fiscal-Year Severance Charges").

Adjusted net loss reflects a loss on extinguishment of debt of $85 million related to the November 2012 refinancing of the company's Senior Secured Notes due 2016 and the June 2013 redemption of 10% of the company's Senior Secured Notes due 2021. This loss was partially offset by a decline in interest expense from $225 million to $203 million. The decline in interest expense is a result of the November 2012 refinancing and the May 2013 modification of the company's Term Loan Facility, both of which resulted in lower interest rates on portions of our outstanding debt, partially offset by the increase in aggregate outstanding debt as a result of the acquisition of PLG. Adjusted net loss also reflects the impact of an income tax benefit related to deferred tax benefits for higher losses in foreign jurisdictions as well as a change in the U.K. tax rate.

Cash provided by operating activities was $159 million compared to $209 million in the prior fiscal year. The decline in cash provided by operating activities primarily reflects expenses related to the acquisition of PLG, including higher professional fees and integration costs, as well as an increase in cash paid for interest due to the timing of interest payments as a result of debt transactions during fiscal 2013. Free Cash Flow was negative $649 million, compared to $151 million in the prior fiscal year. The largest factor impacting the year-over-year change in Free Cash Flow was the cash payment of approximately $765 million on July 1, 2013 associated with the acquisition of PLG.

Recorded Music
Recorded Music Summary Results

Fourth-Quarter Results
Recorded Music revenue grew 6.3%, or 9.7% in constant currency, due in part to the acquisition of PLG. Excluding PLG, revenue declined 3.5%, or 0.3% in constant currency, as a result of an anticipated light release schedule. Digital, licensing and Artist Services and Expanded Rights revenue all grew but were more than offset by a decline in physical revenue. Licensing revenue growth was largely driven by the acquisition of PLG and Artist Services and Expanded Rights revenue growth was driven by an increase in concert promotion and merchandising revenue, as well as the acquisition of PLG. Digital revenue grew 18.0%, or 19.6% in constant currency, and represented 40.7% of total Recorded Music revenue, compared to 36.6% in the prior-year quarter. Domestic Recorded Music digital revenue was $126 million, or 52.5% of total domestic Recorded Music revenue. Major sellers included Superfly, Bruno Mars, Avenged Sevenfold, Birdy and Blake Shelton.

Recorded Music adjusted operating margin contracted 3.9 percentage points to 2.0% from 5.9% in the prior-year quarter. Recorded Music Adjusted OIBDA was down 10.3% and Recorded Music Adjusted OIBDA margin declined 2.0 percentage points to 10.9% from 12.9% in the prior-year quarter due to revenue declines in Japan, which is typically a higher-margin territory, as well as growth in lower-margin European concert promotion revenue and merchandising revenue. Operating income, adjusted operating income, OIBDA and adjusted OIBDA reflect the impact of the Quarterly Severance Charges.

Full-Year Results
Recorded Music revenue grew 4.7%, or 6.7% in constant currency. Excluding PLG, Recorded Music revenue grew 2.1%, or 4.1% in constant currency. For the second consecutive fiscal year, growth in digital revenue more than offset the decline in physical revenue on a global basis. Artist Services and Expanded Rights revenue and Recorded Music licensing revenue also grew. Digital Recorded Music revenue grew 15.3%, or 15.9% in constant currency, and represented 41.7% of Recorded Music revenue for the fiscal year, up from 37.9% in the prior fiscal year. Domestic Recorded Music digital revenue amounted to $529 million, or 54.4% of total domestic Recorded Music revenue. Major sellers included Bruno Mars, Led Zeppelin, Michael Bublé, fun. and Ed Sheeran.

Recorded Music adjusted operating margin expanded 1.2 percentage points to 6.7% from 5.5% in the prior year. Recorded Music Adjusted OIBDA improved 17.3% to $339 million and Recorded Music Adjusted OIBDA margin expanded 1.5 percentage points to 14.2% as a result of the continued shift to higher-margin digital revenue, partially offset by increased product costs due to growth in Artist Services and Expanded Rights revenue. Operating income, adjusted operating income, OIBDA and adjusted OIBDA reflect the impact of the Fiscal-Year Severance Charges.

Music Publishing
Music Publishing Summary Results

Fourth-Quarter Results
Music Publishing revenue declined 4.5% on both an as reported and constant-currency basis. Digital revenue slipped 4.5%, but was flat in constant currency. Mechanical revenue declined 6.9%, or 10.0% in constant currency. Synchronization revenue declined 8.0% on both an as reported and constant-currency basis. Performance revenue declined 1.9%, or 3.8% in constant currency.

Music Publishing operating margin contracted 0.3 percentage points to 27.0% from 27.3% in the prior-year quarter. Music Publishing OIBDA declined 3.8% to $51 million while Music Publishing OIBDA margin expanded 0.3 percentage points to 40.5% from 40.2%. Operating income and OIBDA reflect the impact of the Quarterly Severance Charges.

Full-Year Results
Music Publishing revenue declined 2.9%, or 2.3% in constant currency. The decrease in Music Publishing revenue was driven by an 11.7%, or 11.0% in constant currency, decrease in mechanical revenue, due to the ongoing digital transition in the recorded music industry, an 11.7% decrease in synchronization revenue, on both an as reported and constant-currency basis, related to lower video game and commercial revenue and a 1.5% decline in performance revenue, or 1.0% in constant currency. These decreases were partially offset by an increase in digital revenue of 25.8% on both an as reported and constant-currency basis. Digital Music Publishing revenue represented 16.5% of total Music Publishing revenue in the fiscal year, compared to 12.7% in the prior fiscal year.

Music Publishing operating margin was 16.1%, up 0.8 percentage points from 15.3% in the prior fiscal year. Music Publishing OIBDA grew 1.4% to $148 million, while Music Publishing OIBDA margin was 29.4%, up 1.2 percentage points from 28.2% in the prior fiscal year. The increase in OIBDA and OIBDA margin is due to a shift towards higher-margin deals and lower SG&A expense. Operating income and OIBDA reflect the impact of the Fiscal-Year Severance Charges.

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