A turnaround at Universal Music Group overcame a downturn at the film studio and helped Universal’s parent, Seagram Co. Ltd., double its net profit in the March quarter to $27 million on 8% higher revenues of $2.8 billion.
Most of the improvement in Seagram’s bottom line was a result of higher earnings from its beverages group, however, as well as a 26% reduction in corporate expenses, to $23 million. A Seagram spokesman said the lower corporate expenses reflect the drop in the cost of a re-engineering consulting program, which is beginning to have benefits in higher earnings throughout the company.
While beverages increased cash flow — earnings before interest, taxes, depreciation and amortization — 11% to $193 million, the entertainment group managed only a 5% increase in cash flow, to $114 million. Analysts said the result was broadly in line with expectations, and Seagram’s stock rose 50¢ to $38.25.
The studio’s cash flow dropped 20% to $87 million despite an 11% increase in revenues, to $991 million. Universal’s big hit in the quarter, “Liar Liar,” had little positive impact in the quarter — not only did it open just 10 days before the end of the period, but the studio wrote off all the pic’s advertising expenses in the quarter. The earnings downturn also reflected the weak performances of “Dante’s Peak” and “Fierce Creatures” in the quarter, a Seagram spokeswoman said.
The June quarter, which completes Seagram’s fiscal year, won’t be much better. Universal will have to write off the disastrous “McHale’s Navy,” offsetting much of the earnings on “Liar Liar.” And while “The Lost World” opens May 23 and is expected to be a huge hit, Seagram CFO Robert Matschullat warned Wall Street analysts during a conference call Wednesday that the pic would have its biggest earnings impact in the first quarter of fiscal 1998.
That is partly because the studio will write off the pic’s advertising costs immediately, as it did with “Liar Liar,” Matschullat said, according to analysts who were on the call, confirmed subsequently by a Seagram spokesman.
The tough approach to writing off advertising expenses immediately is a departure from traditional Hollywood accounting, Schroder Wertheim & Co. analyst David Londoner said Wednesday. Existing accounting rules allow studios to write off the advertising expenses over the life of a pic — as long as 15 years.
Seagram’s approach is a “particularly conservative way of doing it. It back-ends the profit instead of front-ending it, the way a number of other companies do,” Londoner added. A task force of industry execs, including Londoner, has been reviewing the accounting rules, and recommended a restriction to 10 years in the period of time that advertising expenses could be expensed.
The studio’s earnings dip was offset by a turnaround at the music group, which had positive cash flow of $10 million in the quarter compared with a loss of $13 million a year ago.
Revenues from the music group soared 61% to $367 million in the quarter. Profits typically run in the 12% to 15% of revenues range. (The previous management’s best tally for a quarter was $350 million.)
Universal has been pumping money into the music group in the past two years for the expanding of existing labels, for adding infrastructure, for acquisitions and for new artist signings. The expansion mode runs counter to the current industry practice of downsizing music operations in the wake of sluggish retail sales.
The investment in the music group is paying off in higher market share and increased revenues and profits.
Last year, Universal acquired 50% of Interscope Records, a deal which continues to pay enormous dividends in successful album releases spanning all music genres.
Universal Music Distribution, which distributes the albums released from the conglom’s labels, checked in this week with a 20% market share with three albums — Heavy D, Mary J. Blige and George Strait — from three different labels debuting in the Top 10 of the nation’s sales chart (see story, page 3).
This week’s sales chart, though a 7-day snapshot, is also testament to the resurgence and diversity of the Universal Music Group, as it can lay claim to seven of the top 13 albums on the chart. UMG has typically held upper chart berths throughout the year.
Success at the label level was mirrored by growth of the distrib, which went from a single-digit market share at the beginning of 1996 to double digits by late September.
UMD closed the year with a 15% market share for albums, ranking it just 2.9% behind WEA, the industry leader. The tally was similar to its market share for the quarter, which hovered around 13.5%.
Also lifting the entertainment group’s profit was the theme park division, which lifted cash flow 42% to $17 million. “Higher attendance and per capita spending at our theme parks were driven by the opening of two new attractions,” Seagram CEO Edgar Bronfman Jr. said in a statement.