Warner Music Group Corp. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020 (the company’s fiscal year ended September 25, 2020). The filing also reports the quarter ended September 30, 2020. Amounts below are in U.S. dollars unless noted.
Business context and reporting period
Warner Music Group operates Recorded Music, including artist development, distribution and licensing, and Music Publishing, which licenses musical compositions. Recorded Music contributed 85% of fiscal 2020 revenue and Music Publishing 15%. The company completed its IPO in June 2020; all IPO shares were sold by existing stockholders, so WMG received no proceeds. Access retained approximately 99% of voting power and 83% of economic ownership.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $4.463 billion | $4.475 billion |
| Operating income (loss) | ($229) million | $356 million |
| Net income (loss) | ($470) million | $258 million |
| Net income (loss) attributable to WMG | ($475) million | $256 million |
| Operating cash flow | $463 million | $400 million |
| Investing cash flow | ($219) million | ($376) million |
| Financing cash flow | ($316) million | $88 million |
| Cash and equivalents at year-end | $553 million | $619 million |
| Total debt, net of financing costs | $3.104 billion | $2.974 billion |
Reported OIBDA was $32 million, down from $625 million; its margin fell to 1% from 14%. Management said OIBDA margin was 16% in FY2020 excluding non-cash stock-based compensation and specified one-time IPO and management-agreement costs. Separately, covenant-defined Adjusted EBITDA was $837 million versus $737 million, with a 3.05x senior secured leverage ratio. These non-GAAP measures have different definitions and should not be treated as interchangeable.
Net debt was $2.551 billion at year-end, compared with $2.355 billion a year earlier. The $300 million revolving facility had no borrowings outstanding; approximately $290 million was available after letters of credit. Management said available cash, operating cash flow and borrowing capacity should support existing operations and requirements over the next 12 months.
FY2020 fourth quarter: Revenue was $1.126 billion versus $1.124 billion in the prior-year quarter. Net income was $1 million versus $91 million; net loss attributable to WMG was $1 million versus income of $90 million.
Material changes versus the prior comparable period
- Digital revenue after intersegment eliminations increased 11% to $2.903 billion and represented 65% of consolidated revenue, versus 58% in FY2019. Recorded Music streaming revenue rose 13% to $2.403 billion.
- Recorded Music revenue declined 1% to $3.810 billion: digital growth was offset by declines in physical sales, artist services and expanded-rights, and licensing. COVID-19 disrupted touring and tour merchandise, retail and physical supply chains, and licensing activity.
- Music Publishing revenue rose 2% to $657 million, as digital growth more than offset lower performance and mechanical revenue, partly affected by pandemic disruption and distribution timing.
- Net loss reflected a $608 million non-cash stock-based compensation charge, $89 million of one-time management-agreement termination and IPO-related costs, and $34 million of debt-extinguishment losses. The Management Free Cash Flow Plan was modified after the IPO; future awards are equity-settled rather than cash-settled.
- Operating cash flow increased $63 million, primarily due to working-capital timing, partly offset by higher taxes paid and cash A&R investment. Cash declined by $66 million during the year.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. WMG expects its financial transformation initiative to be completed over the next year, with approximately $120 million of upfront costs and projected annualized run-rate savings of $35 million to $40 million once fully implemented. The schedule was slightly delayed by COVID-19.
- Management expects COVID-19 to continue adversely affecting physical sales, touring and merchandise, release schedules, and licensing and publishing uses tied to live events, advertising, film and television. The duration and financial impact could not be reasonably estimated.
- In June and August 2020, WMG issued new secured notes and used proceeds to redeem or repay higher-cost debt. The nearest term-loan maturity was 2023; the revolver matures in 2025. Year-end debt included $820 million of variable-rate principal and $2.308 billion of fixed-rate principal.
- After year-end, on November 2, 2020, Acquisition Corp. issued an additional $250 million of 3.000% secured notes; proceeds and about $90 million of cash on hand funded two acquisitions for total cash consideration of $338 million.
- Key risks include reliance on streaming platforms and a small number of distributors (Spotify and Apple represented 17% and 14% of FY2020 revenue, respectively), artist and release concentration, piracy and intellectual-property protection, foreign exchange, regulated royalty rates, substantial leverage, and Access’s concentrated voting control.
- Pending litigation and regulatory proceedings arose in the ordinary course; recorded accruals were not material, but the company could not estimate reasonably possible losses beyond accruals. WMG reported no goodwill or indefinite-lived intangible impairment in FY2020.
Important facts for investors to verify
- Reconcile reported GAAP operating loss and OIBDA with the much higher covenant-defined Adjusted EBITDA; review the adjustments, particularly stock compensation, transaction costs and projected savings.
- Assess whether continued streaming growth can offset pressure in touring, physical sales, licensing and publishing performance revenue as pandemic effects evolve.
- Review debt service, refinancing and covenant flexibility, including the additional post-year-end notes and acquisitions, against cash generation and dividend payments.
- Track the transformation initiative’s remaining costs, delivery timetable and realized savings; projected savings are not assured.
- Consider customer concentration and Access’s control, including related-party arrangements and the absence of IPO proceeds to the company.