Warner Music Group Corp. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended June 30, 2014. All dollar amounts are in U.S. dollars and millions unless stated otherwise. Comparisons are with the corresponding 2013 periods. Warner Music Group is a privately held, Access Industries-controlled music company with Recorded Music and Music Publishing segments.
Financial performance
| Metric | Three months ended June 30, 2014 | Nine months ended June 30, 2014 | Comparable 2013 |
|---|---|---|---|
| Revenue | $788; up 19% | $2,256; up 7% | $663 and $2,107 |
| Operating income (loss) | $(15) | $(5) | $8 and $116 |
| OIBDA | $66; 8% margin | $233; 10% margin | $69 (10% margin) and $297 (14% margin) |
| Net loss attributable to WMG | $(185) | $(282) | $(63) and $(141) |
| Operating cash flow | Not separately reported | $41 | $147 for nine months |
- Quarterly revenue growth reflected a strong release schedule, including Coldplay’s Ghost Stories, The Black Keys and Ed Sheeran, as well as $102 of Parlophone Label Group (PLG) revenue. Excluding PLG, quarterly revenue rose 4%.
- Nine-month revenue included $248 from PLG; excluding PLG, revenue declined 5%, primarily due to a lighter release schedule and falling physical sales.
- Digital revenue after intersegment eliminations rose 26% in the quarter to $324 and 13% for the nine months to $895. Streaming gains were partly offset by declining download revenue. Artist services and expanded-rights revenue increased 35% in the quarter and 34% year to date.
- Despite higher revenue, OIBDA declined, particularly year to date, as restructuring and acquisition-related costs, overhead and other expenses outweighed revenue growth. Amortization increased following the PLG acquisition.
Financial position, debt and liquidity
- At June 30, cash and equivalents were $142, total debt was $3,046 (principal debt $3,052), and net debt was $2,904. At September 30, 2013, cash was $155, debt $2,867 and net debt $2,712.
- Total assets were $6,116; current assets $844 and current liabilities $1,946. Total equity was $460, including $442 attributable to WMG. The accumulated deficit increased to $623.
- Nine-month operating cash flow of $41 was down from $147. Investing used $92, including $46 of capital expenditures, $20 for music publishing rights and $26 for acquisitions. Financing provided $43, including net proceeds from the debt refinancing.
- In April, the company issued $275 of 5.625% secured notes and $660 of 6.75% senior notes due 2022, and used proceeds to retire $765 of 11.5% notes due 2018. The refinancing generated a $141 extinguishment loss, including tender/call premiums and write-off of unamortized debt costs. Weighted-average debt interest rate was 5.6%, versus 8.1% a year earlier.
- No revolving loans were outstanding at quarter end; the facility had $150 of commitments, subject to approximately $11 of letters of credit. Its maturity was extended to April 2019. Management reported covenant compliance and a 4.99x leverage ratio; a 5.75x maximum applies in specified circumstances when revolver borrowings exceed $30.
Outlook, commentary and notable items
- Management said existing cash sources and revolver availability should be sufficient for operations, debt service, working capital and capital expenditures over the next fiscal year. The filing provides no specific revenue or earnings guidance.
- PLG restructuring charges are estimated at approximately $86 in total, with completion expected by fiscal 2015. Separate PLG integration and other nonrecurring costs are estimated at $77. Management expects approximately $70 in cost savings and synergies; about $30 had been realized, with remaining benefits expected over the following 15 months. Achievement is not assured.
- Management views digital distribution and artist services/expanded-rights as growth opportunities, while noting continuing physical-market declines, changing consumer mix and variable margins. It also cited dependence on digital platforms, competition, piracy, hit-driven demand, foreign exchange, acquisition integration and substantial leverage as risks.
- Gold Typhoon acquisition, announced in April, closed July 22, 2014, after quarter end. PLG’s purchase-price working-capital adjustment remained undetermined; any later adjustment would be reflected in earnings because the measurement period had closed.
- Five putative artist royalty suits were preliminarily settled, with $11.5 available for class compensation, subject to final court approval. A separate digital-download pricing class action remained in discovery; the company said potential loss could not be estimated.
- Disclosure controls were assessed as effective; the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of revenue and future growth is attributable to PLG, and whether the acquisition’s expected savings are realized against restructuring and integration costs.
- Whether streaming and artist-services growth can offset physical and download declines while improving margins and cash generation.
- Debt-service capacity, liquidity at operating subsidiaries, covenant headroom and exposure to variable-rate debt and refinancing needs.
- Final outcome and financial impact of the artist royalty settlement, digital-download litigation and PLG working-capital adjustment.
- Post-quarter effects of the Gold Typhoon acquisition and the company’s ability to sustain operating cash flow.