TW sings blues on Warner Music slump

NEW YORK — Time Warner Inc. is warning Wall Street analysts that Warner Music Group’s fourth-quarter earnings will fall as much as 40% from a year earlier, Wall Streeters said Tuesday, indicating that problems at the music division are getting worse.

The warnings have halted Time Warner’s spectacular stock market rally, which had taken TW stock to a new high of $61.31 a share in recent weeks, and sent the stock down $1.43 in the past couple of days to a close Tuesday of $58.56.

Investors’ reaction would be worse, analysts say, but for the continued strength in the cable systems and cable programming parts of the company.

And while Warner Bros. hasn’t performed well at the box office this year, its earnings growth has been sustained by television operations.

Against that backdrop, music’s problems are “seen as a minor issue right now,” said Cowen & Co. analyst Harold Vogel.

Still, the falloff in earnings at the music group has been severe.

The expected fourth-quarter earnings fall would cap a year in which WMG’s earnings before interest, taxes, depreciation and amortization (or cash flow) have fallen every quarter. For the first nine months of 1997, cash flow for the music group fell 17% to $376 million.

Several Wall Street analysts have revised downward their fourth-quarter estimates for the music division in recent days, citing delays by several major artists in finalizing new albums. Analysts now predict a decline in cash flow of between 30% and 43% from last year’s cash flow of $290 million.

A Warner Music Group spokesman declined comment, but sources close to Time Warner did not disagree with the analysts’ earnings revision.

Such a decline in the quarter would mean full-year cash flow fell as much as 27% to $544 million.

No new product

The reason for the latest falloff is simply that “they don’t have any new product to put out,” said Sanford Bernstein analyst Tom Wolzien, as scheduled album releases have slipped into next year.

While the troubles over the past couple of years have involved industry-wide issues such as a weak retail environment, Wolzien said other music majors like Polygram and EMI were doing better and would likely report higher earnings for the fourth quarter.

“Warner Music, I think you can assume, is continuing to lose market share,” Wolzien said. He added that not only would the fourth-quarter cash flow fall more than 30% but the first quarter of 1998 “should be pretty ugly” because new releases still won’t be out in that period.

Merrill Lynch analyst Jessica Reif said in a note to her clients late last week that she had increased her estimated decline in profitability at the music group from 25% to 35% to reflect the “continued poor performance of (direct market company) Columbia House and the core business as well as the incremental weakness created by the economic crises in Asia and Latin America.”

Surprise potential

Reif added that “there is potential for music to surprise on the upside in 1998,” partly because some of the albums delayed into next year are from major artists like Madonna. Reif noted the U.S. retail market is also showing signs of improvement.

The slump in music will hurt Time Warner’s quarterly cash flow, bringing its growth rate down to 5% to $1.46 billion, Reif estimated.

Excluding music, she said the quarter’s cash flow growth is 15%. And that is all that matters for investors, most analysts say.

“To be fair, (music) is the only unit that is weak,” Wolzien said. Cable programming at the Turner networks is expected to increase cash flow 15%-20%, while cable systems are expected to increase cash flow 12%-13%, Reif estimated.

Warner Bros. has had a disappointing year at the box office but that hasn’t shown up in its earnings so far, which have been up about 10% for the year to date. Analysts expect a similar increase in the fourth quarter, driven by television and video revenues.

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