Warner Music Group Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2020 (the company’s fiscal periods ended June 26, 2020). Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context and reporting period
Warner Music Group operates Recorded Music and Music Publishing businesses. It completed an IPO on June 5, 2020, selling 77 million shares at $25 per share; selling stockholders—not the company—received the proceeds. Access Industries retained approximately 99% of voting power and 83% of economic ownership after the underwriters’ additional-share option was completed in July.
Financial performance and liquidity
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Nine months ended June 30, 2020 | Nine months ended June 30, 2019 |
|---|---|---|---|---|
| Revenue | $1,010 | $1,058 | $3,337 | $3,351 |
| Operating income (loss) | $(433) | $58 | $(317) | $327 |
| OIBDA | $(371) | $124 | $(123) | $530 |
| Net income (loss) attributable to WMG | $(520) | $13 | $(474) | $166 |
Quarterly revenue declined 5%. Digital revenue grew 11% to $720 million after eliminations, representing 71% of consolidated revenue; Recorded Music fell 6% to $861 million, while Music Publishing rose 1% to $149 million. For the nine-month period, revenue was nearly flat; digital revenue grew 10% to $2.125 billion, or 64% of consolidated revenue.
Reported quarterly OIBDA margin was negative 37%, versus positive 12% a year earlier; nine-month OIBDA margin was negative 4%, versus positive 16%. Management attributed the sharp deterioration primarily to non-cash stock-based compensation, IPO-related costs and the Access management agreement termination fee. Excluding stock-based compensation, those fees and IPO costs, management reported quarterly OIBDA margin of 15% versus 13% and nine-month margin of 17% in both periods. These are non-GAAP measures and do not remove all unusual or recurring costs.
Operating cash flow was $287 million for the nine months, compared with $249 million. Investing cash use was $87 million, versus $340 million, mainly reflecting lower acquisition spending. Financing cash use was $288 million, including $281 million of dividends paid. Cash and equivalents were $532 million at June 30, down from $619 million at September 30, 2019.
Reported long-term debt was $3.000 billion, versus $2.974 billion at September 30, 2019; management stated net debt of $2.468 billion, compared with $2.355 billion. The company had no revolving-credit borrowings and reported a $300 million facility, with approximately $13 million of letters of credit outstanding. The filing reports covenant compliance and a 3.11x senior secured leverage ratio under the credit agreement’s defined calculation. Current assets were $1.582 billion and current liabilities $2.525 billion.
Material changes versus the prior comparable period
- Quarterly Recorded Music declines in physical sales, artist services and expanded-rights, and licensing outweighed digital growth. Streaming revenue increased $49 million; digital revenue was not materially affected by COVID-19 during the quarter.
- COVID-19-related tour cancellations and postponements, lower merchandising, physical distribution disruption and reduced advertising and production activity weighed on revenue. Publishing digital revenue growth partly offset lower performance and synchronization revenue.
- Quarterly SG&A rose to $869 million from $372 million, including a $437 million non-cash stock-compensation charge following a change in the Senior Management Free Cash Flow Plan, plus $86 million of IPO-related and management-agreement termination costs. The filing also reports $593 million of non-cash plan compensation for the nine months.
- The IPO-related plan modification converted awards from liability-classified to equity-classified; the final mark-to-market charge used the $25 IPO price. The IPO generated no cash proceeds for WMG.
- The company issued new secured notes in June—$535 million of 3.875% notes due 2030 and €325 million of 2.750% notes due 2028—to refinance existing notes. It redeemed the 4.125% and 4.875% notes and subsequently completed the tender/redemption of the 5.000% notes. It expected fourth-quarter debt-extinguishment losses of approximately $23 million and $7 million, respectively, for these transactions.
Outlook, risks and unusual items
- Management said available cash, operating cash flow and revolving-credit availability should fund operations, debt service, working capital and capital expenditures for the next 12 months. It gave no specific revenue or earnings guidance.
- The company expects its financial transformation initiative to take approximately two years, with upfront costs of about $120 million, including $40–$50 million of capital expenditures. Expected annualized run-rate savings are $35–$40 million once fully implemented; timing has been slightly delayed by COVID-19.
- Management stated the pandemic’s duration and future financial impact cannot be reasonably estimated. Risks include continued weakness in live events, merchandising, physical sales, licensing and publishing performance, as well as advertising reductions, delayed releases, receivable collection uncertainty and possible effects on consumer spending.
- Other key risks include substantial leverage and debt restrictions, reliance on streaming platforms, changing release schedules and artist popularity, foreign-exchange movements, intellectual-property disputes, and Access’s control and potential conflicts of interest. The company said pending ordinary-course legal matters were not expected to have a material adverse effect, while noting litigation uncertainty.
- Other notable items: the company recorded a $33 million tax benefit from releasing a valuation allowance on foreign tax credits during the first quarter, and a $10 million one-time depreciation charge during the nine-month period. The quarterly tax expense was $51 million despite the pre-tax loss, primarily due to nondeductible plan, transaction and executive-compensation items.
Most important facts for investors to verify
- How much of the reported loss reflects the one-time IPO-related stock-compensation remeasurement and transaction costs, and what compensation expense remains after the plan modification.
- Whether digital and streaming growth can continue to offset pandemic-related weakness in live events, physical product, licensing and publishing performance revenue.
- The post-refinancing debt principal, interest burden, maturity profile and available liquidity; distinguish the June 30 balance-sheet debt presentation from the June refinancing and subsequent redemptions.
- Whether operating cash generation can support debt service, transformation spending and the intended quarterly dividend of $0.12 per share, which remains subject to board discretion and restrictions.
- Access’s voting control, related-party relationships, and the implications of the dual-class share structure and future share sales.