Warner Music Group Corp. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2021; the company notes that these periods actually ended March 26. Comparisons are with the corresponding 2020 periods. Amounts are in U.S. dollars.
Business context and results
WMG operates Recorded Music and Music Publishing businesses. Its revenue mix is increasingly digital, primarily through streaming. COVID-19 continued to constrain touring, public performances and some physical and licensing activity.
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $1.250 billion, up 17% | $2.585 billion, up 11% |
| Operating income | $151 million; prior-year loss of $49 million | $347 million, up from $116 million |
| Net income attributable to WMG | $117 million; prior-year loss of $74 million | $215 million, up from $46 million |
| OIBDA, a company-defined non-GAAP measure | $228 million; prior-year $12 million | $495 million, up 100% |
| OIBDA margin | 18%, versus 1% | 19%, versus 11% |
| Interest expense, net | $32 million | $63 million |
Quarterly revenue growth was led by Recorded Music, up 17% to $1.059 billion, and Music Publishing, up 16% to $192 million. Digital revenue across both segments was $860 million, up 23%, and represented 69% of consolidated revenue, versus 65% a year earlier. Streaming revenue growth was the main driver; favorable foreign exchange contributed $37 million to quarterly revenue growth. For the six-month period, favorable foreign exchange contributed $67 million.
Quarterly OIBDA improvement reflected revenue growth and lower stock-based compensation and related expenses, partly offset by higher cost of revenue. The comparison is materially affected by unusually high prior-year stock-based compensation: SG&A fell $120 million in the quarter, including a $151 million reduction in those compensation-related expenses. Excluding those expenses, management reported quarterly OIBDA margin of 20%, versus 17%.
Cash flow, debt and liquidity
- Six-month cash flow: Operating cash flow was $319 million, versus $164 million. Investing used $404 million, including $327 million for music-related assets, $39 million for investments and acquisitions, and $38 million of capital expenditures. Financing provided $114 million, including $244 million of debt proceeds and $125 million of dividends.
- Cash and debt at March 31: Cash and equivalents were $588 million. Long-term debt, net of financing costs and discounts, was $3.354 billion; WMG reported net debt of $2.766 billion. The revolving facility had no loans outstanding, with $300 million of commitments less approximately $10 million of letters of credit.
- Liquidity: Management said cash, operating cash flows and available revolving credit should support existing operations for the next 12 months. The company reported compliance with debt covenants at March 31 and a 2.98x senior secured indebtedness-to-Adjusted-EBITDA ratio under its credit agreement definition.
- Debt actions: In January, the term-loan maturity was extended from 2023 to 2028 and certain negative covenants were removed. Subsequent to quarter-end, WMG borrowed $325 million under an increase supplement and redeemed all $325 million principal of 5.5% notes for approximately $343 million plus accrued interest. Management reported a 3.4% weighted-average interest rate after these actions, versus 3.7% at quarter-end.
Material changes, outlook and risks
- Recorded Music digital growth and vinyl demand more than offset pressure on touring-related activity and some licensing revenue. Music Publishing growth came from digital and synchronization, while performance revenue remained affected by COVID-19 and mechanical revenue continued to shift toward streaming.
- Quarterly other income included foreign-currency gains on euro-denominated debt and mark-to-market gains on equity investments. The company reported $18 million of quarterly unrealized equity-investment gains; such items can make reported earnings volatile.
- WMG gave no specific revenue or earnings guidance. It expects its finance transformation initiative, delayed somewhat by COVID-19, to be delivered in fiscal 2022. Estimated upfront costs are approximately $130 million, including $40–$50 million of capital expenditures; expected annualized run-rate savings are $35–$40 million beginning in fiscal 2023.
- Management cited continued uncertainty from COVID-19, including restrictions affecting touring, physical distribution and public performance. Other disclosed risks include dependence on streaming platforms, artist and release performance, competition, piracy, foreign exchange, intellectual-property disputes, acquisitions and substantial leverage. Management said pending legal matters were not expected to have a material adverse effect based on information then available, while noting litigation uncertainty.
- The company intends to pay quarterly dividends, but declarations remain discretionary and may be limited by debt covenants and other conditions. It paid $0.12 per share during the quarter. Access retained control through the dual-class share structure.
Important facts for investors to verify
- Whether streaming growth and the higher digital share of revenue continue, and how much future growth depends on a limited number of digital services.
- How quickly touring, performance, licensing and other COVID-affected revenue streams recover, and whether physical-product demand remains strong.
- Underlying margin and earnings trends after separating stock-based compensation effects, currency movements and investment/debt mark-to-market gains or losses.
- Post-quarter debt refinancing details, including the resulting debt balance, interest costs, maturity profile and covenant headroom.
- Acquisition returns and the funding needs for music-catalog investments, dividends and the finance transformation program.