Warner Music Group Corp. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended December 31, 2015; the company’s fiscal period ended December 25, 2015, and dates are presented for convenience. Unaudited results. Warner Music Group operates Recorded Music and Music Publishing businesses. It is privately held by Access Industries affiliates; the filing says there is no public market for its common stock.
Financial performance
| Metric | Q1 FY2016 | Prior-year quarter |
|---|---|---|
| Revenue | $849 million | $829 million |
| Operating income | $62 million | $23 million |
| OIBDA | $137 million; 16% of revenue | $102 million; 12% of revenue |
| Net income (loss) attributable to WMG | $27 million | $(42) million |
| Net interest expense | $45 million | $46 million |
| Operating cash flow | $61 million | $35 million |
| Capital expenditures | $10 million | $24 million |
Reported revenue rose 2%; excluding unfavorable foreign-exchange effects, it increased 11%. Digital revenue grew 18% to $348 million after intersegment eliminations and represented 41% of consolidated revenue, versus 36% a year earlier. Recorded Music revenue increased 3% to $737 million; Music Publishing revenue decreased 3% to $116 million, but increased 6% excluding currency effects. Cost of revenue was 53% of revenue versus 54%; SG&A was 33% versus 36%.
Cash, debt and liquidity
At December 31, 2015, cash and equivalents were $278 million, total debt was $2.986 billion, and net debt was $2.708 billion. Debt declined $8 million from September 30, 2015; the weighted-average debt interest rate was 5.6%. Current assets were $922 million and current liabilities $1.887 billion. The $150 million revolving facility had no borrowings outstanding, with approximately $5 million of letters of credit outstanding.
Operating cash flow was $61 million; investing activities used $18 million and financing activities used $6 million. Cash increased $32 million to $278 million. Management said existing liquidity was expected to support current operations over the next fiscal year. The company reported covenant compliance; its stated leverage ratio was 5.15x against a 5.50x maximum when revolver borrowings exceed $30 million.
Changes, outlook and notable items
- Recorded Music growth reflected streaming, strong releases, licensing and artist-services revenue. Streaming revenue increased $80 million, partly offset by a $33 million decline in downloads; physical revenue fell $45 million.
- Recorded Music OIBDA rose 37% to $152 million. Music Publishing OIBDA fell to $5 million from $17 million, with higher artist costs and Happy Birthday settlement and restructuring costs contributing to the decline. The filing does not state the dollar amount of those costs.
- Q1 included $24 million of revenue from the Sirius XM pre-1972 recordings settlement. The company had received a $33 million allocation; the balance was to be recognized ratably over the next eight quarters. The company expects to share its allocation with artists.
- A Pandora settlement for $90 million in aggregate had been reached in October 2015. The company’s allocation was not yet determined, and it said it would record its proceeds once the allocation could be reasonably determined.
- The $3 million income-tax benefit included a $10 million deferred tax benefit from statutory rate changes in the U.K. and Italy. Other income included foreign-exchange gains on euro-denominated debt and gains on derivatives.
- On January 15, 2016, Holdings gave notice to redeem $50 million of its 13.75% notes at 106.875% of principal plus accrued interest, scheduled for February 16, 2016; $100 million would remain outstanding.
- No specific financial guidance was provided. Management cited digital distribution and streaming as growth opportunities, while identifying industry decline, piracy, competition, foreign exchange, artist-release variability, litigation and substantial leverage among key risks.
Investor facts to verify
- Whether digital and streaming growth can offset declining physical sales and download revenue, particularly outside the U.S. and after currency effects.
- The sustainability of improved OIBDA and cash flow, including the impact of the Sirius XM settlement and lower marketing and product costs.
- The amount and timing of WMG’s Pandora settlement allocation, and whether further artist-sharing obligations affect proceeds.
- Debt service and refinancing capacity, covenant headroom, and completion and cost of the announced partial note redemption.
- Potential exposure from digital-download pricing litigation: the company could not estimate a reasonably possible loss or range of loss.
- Access Industries ownership and the absence of a public market for WMG common stock; investors should also review the filing’s risk factors and debt restrictions.