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Warner Music Group Corp. Reports Results For Fiscal Second Quarter Ended March 31, 2014
* Revenue declined 3% on a constant-currency basis
* Digital revenue increased 6% on a constant-currency basis
* Cash balance improved to $149 million for the quarter ended March 31, 2014 from $129 million for the quarter ended December 31, 2013
* Net loss was $59 million versus net income of $4 million in the prior-year quarter
Warner Music Group Corp. announced its second-quarter financial results for the period ended March 31, 2014.
"We have begun to see the strength in our release schedule for the remainder of the fiscal year," said Stephen Cooper, Warner Music Group's CEO. "Through our A&R, marketing and promotional efforts, we continue to discover and develop new artists and further the careers of established artists."
"We were very pleased to complete another successful refinancing last month, which will generate cash interest savings of approximately $30 million per year," added Brian Roberts, Warner Music Group's Executive Vice President and CFO. "We remain strongly committed to delivering solid free cash flow in the quarters to come."
Total WMG Summary Results
For the quarter, revenue declined 3.3% (or 2.7% in constant currency). Excluding the July 1, 2013 acquisition of Parlophone Label Group ("PLG"), revenue declined 13.9% (or 13.4% in constant currency), due to a lighter release schedule than in the prior-year quarter. Including PLG, the growth in artist services and expanded rights revenue, digital revenue and Recorded Music licensing revenue was more than offset by declines in Recorded Music physical revenue and Music Publishing mechanical and performance revenue. Constant-currency revenue growth in the U.K., Italy, France and other parts of Europe, driven in part by the PLG acquisition, was more than offset by declines in the U.S., Canada, Japan and other parts of Asia. Digital revenue grew 5.0% (or 5.7% in constant currency), and digital revenue represented 45.2% of total revenue, compared to 41.6% in the prior-year quarter. Growth in digital revenue reflects the acquisition of PLG as well as growth in streaming revenue, partially offset by declines in download revenue largely resulting from the release schedule. Excluding PLG, digital revenue declined 5.3% (or 4.7% in constant currency).
Adjusted operating margin declined 4.6 percentage points to 4.3% from 8.9%. Adjusted OIBDA declined 10.1% to $107 million and Adjusted OIBDA margin contracted 1.2 percentage points to 16.4% from 17.6%. The decline in Adjusted OIBDA and Adjusted OIBDA margin is a result of the release schedule. Excluding PLG, Adjusted OIBDA declined 21.8% to $93 million and Adjusted OIBDA margin declined 1.6 percentage points to 16.0%.
Adjusted net loss was $26 million compared to adjusted net income of $7 million in the prior-year quarter.
Adjusted operating income, Adjusted OIBDA and Adjusted net income (loss) exclude the impact of expenses relating to the integration of PLG. See below for calculations and reconciliations of OIBDA, Adjusted operating income, Adjusted OIBDA and Adjusted net income (loss).
As of March 31, 2014, the company reported a cash balance of $149 million, total long-term debt of $2.869 billion and net debt (total long-term debt, including the current portion, minus cash) of $2.720 billion. There was no balance outstanding on the revolver as of March 31, 2014.
Cash provided by operating activities was $131 million compared to $135 million in the prior-year quarter. The decline in cash provided by operating activities primarily reflects the decline in OIBDA due in part to the impact of expenses relating to the integration of PLG. Free Cash Flow, defined below, was $82 million compared to $121 million in the prior-year quarter, which reflects an increase in capital expenditures, partially related to the PLG integration, and an increase in cash paid for investments.
Recorded Music Summary Results
Recorded Music revenue declined 3.4% (or 2.7% in constant currency). Excluding PLG, revenue declined 16.4% (or 15.8% in constant currency) due to the release schedule. Including PLG, artist services and expanded-rights revenue, digital revenue and licensing revenue all grew, but were more than offset by a decline in physical revenue. Artist services and expanded rights revenue growth was primarily driven by an increase in concert promotion revenue in Italy and France. Licensing revenue growth was driven by the acquisition of PLG. Digital revenue growth of 4.2% (or 5.0% in constant currency) was driven by the acquisition of PLG as well as growth in streaming revenue. Digital revenue represented 51.0% of total Recorded Music revenue, compared to 47.3% in the prior-year quarter. Domestic Recorded Music digital revenue was $139 million, or 63.5% of total domestic Recorded Music revenue. Excluding PLG, digital revenue declined 6.9% (or 6.2% in constant currency). Major sellers included Bruno Mars, Jason Derulo, Macklemore & Ryan Lewis, Kylie Minogue and Passenger.
Recorded Music Adjusted operating margin contracted 5.5 percentage points to 2.6% from 8.1% in the prior-year quarter. Recorded Music Adjusted OIBDA was down 16.3% to $72 million while Recorded Music Adjusted OIBDA margin declined 2.0 percentage points to 13.5% from 15.5%. Excluding PLG, Recorded Music Adjusted OIBDA declined 32.6% to $58 million and Recorded Music Adjusted OIBDA margin declined 3.0 percentage points to 12.5% due to the release schedule and an increase in product costs associated with growth in artist services and expanded rights revenue.
Music Publishing Summary Results
Music Publishing revenue declined 3.9% on both an as-reported and constant-currency basis. Digital revenue grew 9.5%, on both an as-reported and constant-currency basis, due to growth in streaming revenue. Synchronization revenue was flat (or down 3.6% in constant currency), reflecting the timing of deals. Performance revenue was down $1 million, or 2.1% (4.1% in constant currency), driven by the timing of collection society distributions. Mechanical revenue fell 18.5%, on both an as-reported and constant-currency basis, due to the continued transition from physical to digital sales.
Music Publishing operating margin improved 1.2 percentage points to 30.3% from 29.1% in the prior-year quarter. Music Publishing OIBDA grew 3.8% to $55 million, while Music Publishing OIBDA margin expanded 3.4 percentage points to 45.1% from 41.7% due to a one-time benefit to royalty costs.