EMI’s back in tune with earnings

Cuts pay off as profit jumps 33%, but revs sink

LONDON — Suffering a double-digit slump in revenues, U.K. music group EMI nonetheless boosted operating profits by nearly a third for the year ended March 31, as an extensive cost-cutting campaign began to impact the bottom line.

Company reported Tuesday that operating profits were up 33% to £254 million ($415 million), even as revenues sank by 11% to $3.5 billion. EMI also claimed it had the highest profit margin of any music group at 11.5%, up from 7.8% a year ago.

But the improvements weren’t enough to satisfy EMI’s investors, who took the company’s sinking revenues as a bad omen for the future of the business. EMI shares fell by nearly 10% on the London exchange to end at 122 pence ($2).

Chief exec Alain Levy rolled out a dramatic restructuring over the past year, slashing the artist roster by 25% and laying off almost 2,000 employees. In the process, the label group also cut its debt load by $327 million to $1.4 billion, its lowest in four years.

“The year was one of remarkable progress and achievement for EMI Group, all the more so in context of the global recorded music market declining by almost 9%,” chairman Eric Nicoli said. “These are the results of a company now being managed in a very different way from the past and a company that can work in tough market conditions.”

The margin improvement comes as EMI is said to be actively pursuing a number of possible business combinations to build scale amid dismal industry conditions — including revived discussions with one-time merger partners Warner Music and BMG. EMI expects the market to decline a further 5%-8% in the 2003-04 fiscal year.

The recorded music division under Levy and vice chairman David Munns focused on generating profitable sales rather than building market share at any cost. Company derived 53% of its revenue from recorded music sales, down from 55% in the previous year and 60% in 1998.

Against a backdrop of lower sales — $2.9 million, down 12.6% — EMI’s recorded music division substantially improved its operating margins, driving operating profit up 81% to $246 million, and for the first time in five years the U.S. recorded music biz generated a profit.

Company blamed the drop in sales on macroeconomic effects in some regions, music piracy and EMI’s protracted restructuring activities in continental Europe and at Virgin America. Company slashed 1,900 jobs, saving $164 million, streamlined the artist roster and pulled out of unprofitable operations and costly joint ventures.

Successful artists contributing to the financial year included Norah Jones, Pink, Enrique Iglesias, Pharrell Williams and White Stripes; new signings included Dirty Vegas, Busted, Ms Dynamite and Sean Paul among others.

“In recorded music our strategy is to build artists with long-term careers,” Nicoli said. Jones’ debut album, “Come Away With Me,” sold 13 million copies, while Cold Play’s second album, “A Rush of Blood to the Head,” racked up 6 million sales.

EMI said it is confident of generating U.S.-signed artists for worldwide exploitation but recognizes that “progress will be gradual in this very competitive market.” EMI’s market share fell from 10.4% to 10.1% in the U.S.

Company hopes that its big signing of Robbie Williams will crack the U.S., but album sales for “Escapology” have been slow, with only 200,000 sold so far out of 6 million worldwide.

Commenting on William’s progress in the U.S., Levy said: “We don’t wake up every morning sweating about Robbie Williams in the U.S. From a contractual point of view, nothing is riding on him cracking the U.S. We need to sell 3 million copies per album in order to break even. It would be better if it was 5 million in the U.S., but we’re not there. Every time he appears on TV we get a spike in our sales. It’s a long-term build, and we won’t know for two years whether we have a major act in the U.S. or whether he’s the biggest act outside the U.S.”

EMI Music Publishing, under Martin Bandier’s leadership, saw operating profit drop 4% to $169 million while sales fell marginally from $680 million to $655 million. New revenue areas, the home videogame market and its online karaoke business grew considerably.

(Justin Oppelaar in New York contributed to this report.)

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