Warner Music off key in fourth quarter

This year's release lineup was thinner than last year

Warner Music disappointed Wall Street on Friday when it disclosed that revenue had slid in its fourth quarter, even as company touted its digital gains.

Revenue dropped 6% in the fourth quarter to $854 million. Company explained the drop by saying that this year’s release lineup was thinner than last year, when Madonna, James Blunt and a number of Atlantic Records artists all had new albums.

Analysts had expected nearly $900 million in revenue for the quarter, and investors dropped the stock 2%, to $24.80, on Friday.

For the full fiscal year, company’s profit came in at $60 million, further evidence to some analysts of the turnaround at the firm under new owners and topper Edgar Bronfman Jr.’s leadership. Company lost $169 million in the previous year.

Revenue inched up from $3.52 billion from $3.5 billion.

Execs acknowledged that the fourth quarter “was soft in terms of physical sales” but continued its mantra that digital revenues are growing faster than physical shares are shrinking.

Digital revenue at the company nearly doubled, to $102 million, for the quarter, though like other companies Warner Music’s digital revenue is a small part of overall coin–about 12% of overall revenue.

Company’s digital unit is considered one of the industry’s strongest; firm is especially solid in digital-albums, which are of course harder to pull off but more profitable.

WMG saw a profit gain of $12 million for the quarter, fueled by a $13 million settlement in diskery’s lawsuit against file-sharing service Kazaa.

Up-and-comers like Gnarls Barkley, Muse and Panic! At the Disco — along with established artists like the Red Hot Chili Peppers and Diddy — were responsible for much of the sales in the quarter.

In a call with analysts, Bronfman stressed that company had to be sure not to “over-provide for business that are not growing,” referring to physical sales. He said that when it came to digital sales, “there will be new leverage. There must be additional leverage.”

Company also emphasized revenue-sharing pact with YouTube but did not address any possible lawsuits against other social-networking sites; competitor Universal Music, has been more litigious, suing MySpace after earlier working out a deal with YouTube.

Analysts also questioned why company did not purchase BMG’s music-publishing biz, which Universal bought earlier in the year; execs said price and regulatory concerns were among stumbling blocks in failed bid, which it described as “aggressive.”

Quarter also saw release of Microsoft’s Zune player, which some music execs are privately rooting for, because Redmond firm is seen as more open to negotiation than Apple, particularly on issue of flexible pricing. “I believe and hope,” Bronfman said, “that here will be opportunities for more variable models.”