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Warner Posts Solid Third Quarter Results, Digital Revenue up 12.5%

Warner Music Group Corp. today announced its third-quarter financial results for the period ended June 30, 2019, with total revenue up 10.4% (13.4% in constant currency) and digital revenue up 12.5% (15.5% in constant currency). However, while recorded music revenue was up 13.8%, publishing’s was down 7.5%; the company pointed to the adoption of the ASC 606 revenue recognition standard as skewing those numbers.

“Our third-quarter results are proof of our continued momentum,” said Steve Cooper, Warner Music Group’s CEO. “To say that streaming is responsible for the recovery of our business is an oversimplification. The sheer volume music on services is actually making it harder for artists to be noticed. Yet we cut through the noise. Without the talent and creativity of our artists and songwriters, and all of the investment and expertise that we put behind them, there would be no growth.”

“We had strong growth in revenue, OIBDA and cash flow,” added Eric Levin, Warner Music Group’s Executive Vice President and CFO. “We expect fiscal 2019 to be another great year.”

During the earnings call, Cooper acknowledged that the company has not renewed its deal with a certain streaming service (Spotify) but did not express concern, and allowed that, in light of UMG’s announcement late Monday night that its parent company, Vivendi, is in talks to sell 10% of the music division to Chinese giant Tencent, “status quo is the way to go,” although Cooper did not rule out the possibility of a similar move in the future.

According to the announcement, revenue grew 10.4% (or 13.4% in constant currency).  Growth in Recorded Music digital, licensing and artist services and expanded-rights revenue and growth in Music Publishing digital and synchronization revenue were partially offset by a decline in Recorded Music physical revenue and Music Publishing performance and mechanical revenue.  Revenue growth included a net 4 percentage point benefit from M&A, primarily related to the acquisition of the German merchandise company EMP.

Revenue grew in all regions.  Digital revenue grew 12.5% (or 15.5% in constant currency), and represented 61.2% of total revenue, compared to 60.1% in the prior-year quarter.

Recorded Music revenue grew $111 million or 13.8% (or 16.9% in constant currency).  This included a $59 million increase related to the acquisition of EMP and a $7 million increase due to the adoption of the ASC 606 revenue recognition standard, which were partially offset by a $21 million decrease related to concert promotion divestitures.  Growth in digital, licensing and artist services and expanded-rights revenue was partially offset by a decline in physical revenue.   The increase in artist services and expanded-rights revenue was largely attributable to the acquisition of EMP and higher international touring, domestic merchandising and advertising revenue.   Recorded Music revenue grew in all regions.  Major sellers included Ed Sheeran, A Boogie Wit da Hoodie, The Yellow Monkey, Nipsey Hussle and Cardi B.

Recorded Music operating income was $85 million, up 26.9% from $67 million in the prior-year quarter, and operating margin was up 0.9 percentage points to 9.3% versus 8.4% in the prior-year quarter.  OIBDA increased 13.9% to $131 million from $115 million in the prior-year quarter and OIBDA margin was constant at 14.3%.

However, music publishing revenue declined $12 million or 7.5% (or 4.5% in constant currency). The adoption of ASC 606 had an $8 million negative impact.  Revenue grew in digital due to the ongoing shift to streaming and in synchronization due to higher activity.  Revenue declined in performance and mechanical driven by lower market share and loss of administration rights in certain catalogs.

A rep for the company said that due to the combination of constant currency and the timing of ASC 606, the numbers actually shake out to a 1% gain, although either way the results are lukewarm.

Music Publishing operating income was $18 million compared with $5 million in the prior-year quarter.  Operating margin improved to 12.2% from 3.1%.

Operating income was $58 million compared to $28 million in the prior-year quarter.  OIBDA was $124 million, up 25.3% from $99 million in the prior-year quarter and OIBDA margin increased 1.4 percentage points to 11.7% from 10.3% in the prior-year quarter.

The company’s net income was $14 million compared to $321 million in the prior-year quarter and adjusted net income was $24 million compared to $332 million in the prior-year quarter.  The decline was due to a gain on the sale of Spotify shares in the prior-year quarter and net losses related to changes in exchange rates on the Company’s Euro-denominated debt and losses on the value of investments in the quarter.

Adjusted operating income, Adjusted OIBDA and Adjusted net income exclude restructuring and related costs and certain costs related to the Company’s Los Angeles office consolidation in the quarter,  and the relocation of the Company’s U.S. shared service center to Nashville in the prior-year quarter.

As of June 30, 2019, the Company reported a cash balance of $541 million, total debt of $3.006 billion and net debt (defined as total long-term debt, net of deferred financing costs, minus cash and equivalents) of $2.465 billion.

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