Warner Music Group Corp. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended December 31, 2020 (the company’s fiscal period ended December 25, 2020). Comparisons are with the three months ended December 31, 2019. Amounts are in U.S. dollars.
Business context and financial performance
Warner Music Group operates Recorded Music and Music Publishing businesses. Revenue growth was led by digital streaming, while COVID-19 continued to weigh on touring, physical sales, and certain publishing revenue streams.
| Metric | Q1 FY2021 | Prior period | Change / note |
|---|---|---|---|
| Revenue | $1.335 billion | $1.256 billion | Up 6%; includes $30 million favorable foreign-exchange impact |
| Operating income | $196 million | $165 million | Up 19% |
| OIBDA | $267 million | $236 million | Up 13%; margin 20%, versus 19% |
| Net income attributable to WMG | $98 million | $120 million | Down 18% |
| Operating cash flow | $169 million | $78 million | Higher by $91 million |
| Cash and equivalents | $566 million | $553 million at September 30, 2020 | — |
| Long-term debt, net of financing costs | $3.387 billion | $3.104 billion at September 30, 2020 | Net debt was $2.821 billion, up from $2.551 billion |
Recorded Music revenue rose 7% to $1.161 billion; Music Publishing revenue rose 1% to $175 million. Digital revenue across the businesses increased 17% to $825 million and represented 62% of consolidated revenue, compared with 56%. Streaming revenue in Recorded Music rose 17% to $692 million. Physical Recorded Music revenue fell 5% to $174 million, and artist services and expanded-rights revenue fell 4% to $180 million.
Cash flow, debt and liquidity
- Investing cash outflow was $343 million, including $324 million for music publishing rights and recorded-music catalogs and $18 million of capital expenditures.
- Financing cash inflow was $178 million, including $244 million of proceeds from issuing additional 3.000% Senior Secured Notes due 2031; dividends paid were $62 million.
- The $300 million revolving facility had no borrowings outstanding; approximately $10 million of letters of credit were outstanding. Management said available cash, operating cash generation, and borrowing capacity should fund existing operations for the next 12 months.
- On January 20, 2021, the Senior Term Loan Facility maturity was extended from November 2023 to January 2028, and certain negative covenants were removed. Management stated that, following the amendment, the nearest scheduled note maturity is in 2026.
- The company reported covenant compliance at December 31, 2020. Its reported secured leverage ratio was 3.15x. This credit-agreement measure uses adjusted definitions and should not be treated as a GAAP measure.
Material changes, outlook and risks
- Net income declined despite improved operating income and OIBDA. Other expense was $31 million, primarily reflecting foreign-currency losses on Euro-denominated debt, partly offset by an unrealized investment gain. Income-tax expense increased to $35 million from $5 million; the prior-year quarter included a $33 million tax benefit from releasing a valuation allowance.
- COVID-19 disruption reduced touring activity and affected physical distribution, performance royalties, and synchronization revenue. Management noted growth in some digital uses, including fitness and interactive gaming; direct COVID-related costs recorded to OIBDA were not material.
- The company acquired approximately $318 million of music-related assets during the quarter. The additional notes, together with cash on hand, funded an acquisition for aggregate cash consideration of $338 million.
- Management gave no specific revenue or earnings guidance in the provided filing text. It expects its financial-transformation initiative to be completed in the next fiscal year, after a slight COVID-related delay; anticipated annualized run-rate savings are approximately $35 million to $40 million once fully implemented.
- Key disclosed risks include pandemic effects, dependence on streaming platforms and artist releases, competition, foreign-exchange exposure, intellectual-property and piracy risks, substantial leverage, and restrictions under debt agreements. The company said pending legal matters were not expected to have a material adverse effect based on information then available, while noting litigation uncertainty. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether digital and streaming growth can continue to offset weakness in touring, physical sales, and COVID-affected publishing revenue.
- The returns and future cash contribution from catalog and publishing-rights acquisitions, and the impact of acquisition spending on leverage and liquidity.
- The company’s ability to service debt and maintain covenant compliance; review the January 2021 term-loan amendment and remaining debt maturities.
- Whether the $35 million to $40 million expected annualized transformation savings are realized, and the related remaining costs and timing.
- The causes and potential volatility of foreign-exchange losses, especially on Euro-denominated debt, and the effectiveness of hedges.
- The sustainability of quarterly dividends, which remain subject to board discretion, liquidity, and debt and legal restrictions.