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Warner Music Group’s 2017 Results: Revenue Shows Strong Growth, but Losses Soar

Warner Music Group today announced its fourth-quarter and full-year financial results for the period ended September 30, 2017. The quick takeaways include:

Total revenue for the full year grew 10.2% (or 11.5% in constant currency), digital revenue grew 24.7% (or 26% in constant currency), net income was $149 million versus $30 million in the prior year (2016 was the first year it showed profit after Len Blavatnik’s Access Industries acquired the company) and OIBDA for the full year was $473 million versus $507 million in the prior year. For the quarter ending Sept. 30, total revenue grew 9% (7.6% in constant currency), digital revenue grew 19.8% (or 18.6% in constant currency),

However, net loss was $38 million versus $3 million in the prior-year quarter, OIBDA for the quarter was $60 million versus $123 million in the prior-year quarter.

“We’ve been outperforming the industry in an environment where the music business is returning to health,” said CEO Steve Cooper on the earnings call Tuesday morning. He singled out Ed Sheeran, Bruno Mars, newer artists Dua Lipa, Cardi B, Lil Uzi Vert, Lil Pump, Danny Ocean and Twice as top-performing talent, and the company’s earnings report also cited Migos, Linkin Park. Twenty One Pilots, Clean Bandit and the “Hamilton” cast album. Cooper said he expects the next quarter to be strong thanks to strong showings from Kelly Clarkson, Sia, Liam Gallagher and several international acts.

He put the losses down to “increased A&R investment, [talent acquisition] and a step-up in deferred compensation,” but said “however, the underlying factors continue to reflect ongoing success.” He said the company spent $1.3 billion on A&R worldwide, and said “we’re not simply investing more but investing wisely,” citing the acquisition of the Dutch dance-music label Spinnin’ and Warner’s indie-distribution business ADA’s expanded deal with BMG. He said the company will continue to spend aggressively on A&R.

CFO Eric Levin pointed to the company’s forthcoming office move in Los Angeles and a recent relocation of back-office functions to Nashville as one-time expenses that contributed to the loss. The earnings report also cited “higher variable compensation expense and higher other expense associated with losses on the company’s Euro-denominated debt due to changes in exchange rates and investment losses resulting from the write-down of certain digital investments, which were partially offset by a tax benefit due to pretax losses” as additional causes for the decline.

Cooper noted that the music business as a whole was up 3% in 2015 and 6% 2016, and said that 2017 was on track to show the strongest year-over-year- growth in 20 years. He also stated that digital is now music’s biggest revenue source, accounting for 44% of the total. “However,” he cautioned, “growth shouldn’t be taken for granted.”

Cooper singled out new recorded-music CEO Max Lousada’s strengthening of the company by his hiring of Aaron Bay-Schuck and Tom Corson to helm Warner Bros. and Rani Hancock as president of Sire and Mark Mitchell as the new head of Parlophone in the U.K.

He said Warner/Chappell music publishing is “punching above its weight” by outperforming its larger competitors thanks to hit songs from Kendrick Lamar, Skepta, Justin Tranter, Julia Michaels and Mark Torrea.

Getting more granular, the fourth quarter, which saw revenue up 9%, growth was partially offset by declines in recorded music physical revenue and music publishing synchronization revenue; recorded music licensing revenue and music publishing mechanical revenue were flat.  Digital revenue grew 19.8% (18.6% in constant currency), and represented 53.5% of total revenue, compared to 48.8% in the prior-year quarter.

Operating loss was $1 million compared to operating income of $55 million in the prior-year quarter.  OIBDA was $60 million, down from $123 million in the prior-year quarter and OIBDA margin declined 8.1 percentage points to 6.5% from 14.6% in the prior-year quarter.

 

On the publishing side, for the fourth quarter revenue rose 4.1% (2.7% in constant currency); growth in digital and performance revenue was partially offset by a decline in synchronization revenue.  Mechanical revenue was flat. Operating income was $36 million compared with $38 million in the prior-year quarter and operating margin declined 2.4 percentage points to 23.5%. The decline in operating income and operating margin was due to timing of legal settlements, the company said.

However, for the year publishing revenue rose 9.2% (10.6% in constant currency), and digital revenue rose 32.6% (35.5% in constant currency). Growth in digital, performance and synchronization revenue was partially offset by declines in mechanical revenue. Digital revenue represented 32.7% of total publishing revenue versus 26.9% in the prior year.

 

 

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