Warner Music Group Corp. — Form 10-Q Summary
Business and period: Warner Music Group operates Recorded Music and Music Publishing. This unaudited report covers the fiscal quarter and six months ended March 31, 2016; the company’s fiscal periods actually ended March 25, 2016 and March 27, 2015. Unless stated otherwise, amounts are in millions of dollars. The company is privately owned by Access Industries affiliates; there is no public market for its common stock.
Financial results and liquidity
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $745, up 10% year over year | $1,594, up 6% |
| Operating income | $52, versus $44 | $114, versus $67 |
| OIBDA | $127, versus $121; margin 17% versus 18% | $264, versus $223; margin 17% versus 15% |
| Net income (loss) attributable to WMG | $11, versus $18 | $38, versus a loss of $24 |
| Net interest expense | $43, versus $45 | $88, versus $91 |
| Operating cash flow | Not stated for the quarter | $172, versus $142 |
Revenue and margins: Quarterly Recorded Music revenue rose 10% to $621, led by digital and artist-services/expanded-rights growth; Music Publishing rose 9% to $127. For the six months, Recorded Music rose 6% to $1,358 and Publishing rose 3% to $243. Six-month digital revenue after intersegment eliminations increased 20% to $708 and represented 44% of consolidated revenue, versus 39%. Physical revenue fell 11% to $399. Six-month cost of revenue rose to 52% of revenue from 51%; SG&A declined to 33% from 36%.
Cash flow and balance sheet: Six-month investing cash flow was positive $5, including $42 of real-estate sale proceeds; financing cash flow was negative $100, primarily reflecting debt repayments. Cash was $316 at March 31, 2016, compared with $246 at September 30, 2015. Total debt was $2,912 and disclosed net debt was $2,596, down from $2,994 and $2,748, respectively. The company had no revolving-credit borrowings and reported $150 of commitments, less approximately $5 of letters of credit. Current assets were $874 and current liabilities $1,821. WMG Corp. equity was $221.
Debt and liquidity: Debt carried a 5.4% weighted-average interest rate; $1,280 of principal was variable-rate and $1,636 fixed-rate. The term loan matures in 2020; the revolver in 2019. The company reported compliance with debt covenants. Its stated leverage ratio was 4.96x against a 5.50x maximum when the revolver borrowing threshold applies. Management said existing liquidity sources should fund operations over the next fiscal year.
Material changes, outlook and notable items
- Revenue growth reflected streaming: six-month Recorded Music streaming revenue increased $152, partly offset by a $50 decline in downloads. Artist-services and expanded-rights revenue rose $31 for the six months, including strong touring activity in France. Management noted these revenue streams have varying margins and depend partly on touring schedules.
- Six-month OIBDA improved, supported by higher Recorded Music revenue and lower variable marketing and general and administrative costs. Publishing OIBDA declined $9 to $59, attributed to higher proportionate artist costs and Happy Birthday settlement and restructuring costs.
- A $19 gain on real-estate sale boosted reported operating results; sale proceeds were $42. The six-month results also included $25 of Sirius XM settlement revenue. A separate Pandora settlement allocation had not yet been determined, so WMG said it would record its share once reasonably determinable.
- WMG redeemed $50 of its 13.75% senior notes and purchased and retired approximately $25 of 6.75% notes; it recorded a loss on debt extinguishment. The report’s cash-flow statement lists $24 for repayment of the 6.75% notes, while the debt note describes approximately $25 purchased.
- No numerical full-year revenue or earnings guidance was provided. Management cited ongoing opportunities in digital distribution and streaming, but emphasized risks including industry competition and piracy, hit-driven releases and artist retention, digital-service pricing dependence, foreign exchange, and substantial leverage and debt-service needs.
- Download-pricing class litigation remains unresolved; mediation did not resolve the matter, and WMG said a reasonably possible loss range could not be estimated. Accruals for other pending matters were described as not material. A 10% hypothetical U.S. dollar depreciation would reduce the fair value of outstanding currency forwards by $8, with expected offsets from hedged exposures.
- Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether streaming growth continues to offset falling physical sales and downloads, and how evolving revenue mix affects margins.
- Recurring operating performance excluding the real-estate gain and settlement-related revenue, and the durability of cost savings.
- Debt-service capacity, covenant headroom, variable-rate exposure and the availability of cash held across subsidiaries.
- The eventual allocation and recognition of Pandora settlement proceeds, and developments in the unresolved download-pricing litigation.
- Publishing segment performance, including the impact and recurrence of settlement and restructuring costs.