OREANDA-NEWS.  Warner Music Group Corp. today announced its second-quarter financial results for the period ended March 31, 2016.  

“These impressive results were driven by outstanding music from our artists and songwriters, the expansion in our global footprint, our leadership in the industry’s digital transformation and excellent execution globally,” said Stephen Cooper, Warner Music Group’s CEO.  “We are now the first major music company to report that streaming is the largest source of revenue in our recorded music business, surpassing our revenue from physical formats.  And this new milestone comes only four quarters after our streaming revenue first topped our download revenue.” 

“I am very happy with our growth trends,” added Eric Levin, Warner Music Group’s Executive Vice President and CFO.  “Strong revenue and cash flow have enabled us to pay down $75 million in debt so far this year.”

Revenue grew 10.0% (or 13.4% in constant currency).  Growth in Recorded Music digital revenue and artist services and expanded-rights revenue as well as growth in Music Publishing digital and synchronization revenue were partially offset by declines in Recorded Music physical revenue related to currency, declines in Recorded Music licensing revenue related to currency and the impact of a large initial distribution of PLG neighboring rights income in the prior-year quarter, and declines in Music Publishing mechanical revenue, which reflect a continuing shift to digital.  Music Publishing performance revenue was flat.  Revenue grew in the U.S., Europe and Asia, partially offset by currency-related declines in Latin America.  Digital revenue grew 21.2% (or 25.0% in constant currency), and represented 48.3% of total revenue, compared to 43.9% in the prior-year quarter.  

Operating income was $52 million compared to $44 million in the prior-year quarter.  OIBDA increased 5.0% to $127 million from $121 million in the prior-year quarter and OIBDA margin declined 0.9 percentage points to 17.0% from 17.9% in the prior-year quarter. The increase in operating income and OIBDA is largely the result of the increase in revenue while the decline in OIBDA margin is largely the result of the revenue mix.  Adjusted OIBDA rose 3.2% and Adjusted OIBDA margin declined 1.2 percentage points to 17.3% from 18.5%.  

Net income was $12 million compared to $19 million in the prior-year quarter.  The decline is attributable to an increase in OIBDA and a gain on the sale of real estate being more than offset by a loss on early extinguishment of debt, lower net currency-related gains versus the prior-year quarter on the company’s Euro-denominated debt and intercompany loans and higher tax expense versus the prior-year quarter.  The higher tax expense results from the use of a discrete tax rate method to calculate income tax expense as compared to the use of an annual effective tax rate method in the prior-year quarter, higher pre-tax income and losses in certain jurisdictions for which no tax benefit could be recorded.  

Adjusted operating income, Adjusted OIBDA and Adjusted net income exclude the impact of PLG-related expenses and expenses related to cost-savings initiatives.  See below for calculations and reconciliations of OIBDA, Adjusted operating income, Adjusted OIBDA and Adjusted net income.  

As of March 31, 2016, the company reported a cash balance of $316 million, total debt of $2.912 billion and net debt (total long-term debt, including the current portion, minus cash) of $2.596 billion.  There was no balance outstanding on the company’s revolver at the end of the quarter.

Cash provided by operating activities was $111 million compared to $107 million in the prior-year quarter.  The change is largely a result of improved OIBDA and the benefit of working capital management.  Free Cash Flow, defined below, was $134 million compared to $85 million in the prior-year quarter, reflecting the improvement in cash provided by operating activities and proceeds from the sale of real estate.  

Recorded Music revenue grew 10.1% (or 13.1% in constant currency).  Growth in digital revenue and artist services and expanded-rights revenue was partially offset by a decline in physical and licensing revenue.  The decline in physical revenue was related to currency and the decline in licensing revenue was related to currency and the impact of a large initial distribution of PLG neighboring rights income in the prior-year quarter.  Digital growth reflects a continuing shift to streaming revenue.  The improvement in artist services and expanded-rights revenue was due to the timing of concert tours.  Recorded Music revenue saw strength around the globe with Latin America the main exception predominantly driven by currency.  Major sellers included Coldplay, Twenty One Pilots, Ed Sheeran, Charlie Puth and Gesu No Kiwami Otome.  

Recorded Music operating income was $38 million up from $35 million in the prior-year quarter and operating margin was down 0.1 percentage point to 6.1% versus 6.2% in the prior-year quarter.  Adjusted operating margin declined 0.3 percentage points to 6.4% from 6.7% in the prior-year quarter.  OIBDA rose to $93 million from $91 million in the prior-year quarter and OIBDA margin declined 1.1 percentage points to 15.0%.  Adjusted OIBDA was $95 million versus $94 million in the prior-year quarter with Adjusted OIBDA margin down 1.4 percentage points to 15.3%.  The improvement in OIBDA was driven by revenue growth and the decline in OIBDA margin was driven by the revenue mix including the impact of a large initial distribution of PLG neighboring rights income in the prior-year quarter and higher concert promotion revenue in the current quarter.  

Music Publishing revenue rose 8.5% (or 13.4% in constant currency).  Growth in digital and synchronization revenue was partially offset by a decline in mechanical revenue.  Performance revenue was flat.  

Music Publishing operating income was $37 million compared with $33 million in the prior-year quarter and operating margin rose 0.9 percentage points to 29.1%.  The increase in operating income and operating margin was due to revenue growth.  Music Publishing OIBDA rose by $3 million or 5.9% to $54 million, while Music Publishing OIBDA margin declined 1.1 percentage points to 42.5% from 43.6%, due to the revenue mix.  

Financial details for the quarter can be found in the company’s current Form 10-Q, for the period ended March 31, 2016, filed today with the Securities and Exchange Commission.

About Warner Music Group
With its broad roster of new stars and legendary artists, Warner Music Group is home to a collection of the best-known record labels in the music industry including Asylum, Atlantic, Big Beat, Canvasback, East West, Elektra, Erato, FFRR, Fueled by Ramen, Nonesuch, Parlophone, Reprise, Rhino, Roadrunner, Sire, Warner Bros., Warner Classics and Warner Music Nashville, as well as Warner/Chappell Music, one of the world's leading music publishers, with a catalog of more than one million copyrights worldwide.