Warner Music Group Corp. — Q3 FY2021 Form 10-Q
Reporting period: Third quarter and nine months ended June 30, 2021; the company notes these periods correspond to fiscal periods ended June 25. Financial amounts are in U.S. dollars, millions, unless stated otherwise.
Business context
Warner Music operates Recorded Music and Music Publishing businesses. Recorded Music includes digital, physical, licensing, and artist-services revenue; Music Publishing earns revenue from the use of musical compositions. Streaming and digital distribution are major revenue drivers.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1,340 | $1,010 | $3,925 | $3,337 |
| Operating income (loss) | $162 | ($433) | $509 | ($317) |
| Net income (loss) attributable to WMG | $61 | ($520) | $276 | ($474) |
| OIBDA, a non-GAAP measure | $241 | ($371) | $736 | ($123) |
| OIBDA margin | 18% | (37)% | 19% | (4)% |
Q3 operating margin was approximately 12% and net margin approximately 5%. Revenue rose 33% in Q3 and 18% year to date; favorable foreign exchange contributed $49 million and $116 million, respectively. Q3 Recorded Music revenue increased 34% to $1,152 million, and Music Publishing revenue increased 27% to $189 million. Digital growth, vinyl demand, and improving licensing activity supported results. Streaming revenue rose 33% in Q3 to $781 million.
For the nine months, operating cash flow was $410 million, versus $287 million; investing cash flow was ($566) million, including $459 million spent on music rights and catalogs; financing cash flow was $35 million. Cash declined to $442 million from $553 million at September 30, 2020. Capital expenditures were $58 million.
At June 30, 2021, reported net debt was $2,925 million, based on $3,367 million of debt net of financing adjustments and $442 million of cash. Principal debt was $3,398 million. The company had no revolving-credit borrowings and approximately $290 million of undrawn capacity after letters of credit. The current ratio was approximately 0.60, with current liabilities exceeding current assets by about $1,168 million.
Material changes versus prior period
- The company moved from a substantial year-ago loss to profitability. Comparability is heavily affected by prior-year non-cash stock-based compensation and related costs: $440 million in Q3 2020 versus $14 million in Q3 2021, and $600 million versus $36 million for the nine-month periods. Prior-year management-agreement termination and IPO-related charges also affected comparisons.
- Q3 SG&A fell to $437 million from $869 million; management attributed much of the decline to those prior-year unusual expenses. Excluding specified compensation and prior-year charges, Q3 OIBDA margin improved to 19% from 15%.
- Music-rights acquisitions materially increased investment spending and amortizable intangible assets. Net intangible assets subject to amortization rose to $2,061 million from $1,653 million at September 2020.
- Debt rose on a net carrying basis to $3,367 million from $3,104 million. The company borrowed $325 million under its term loan facility and redeemed $325 million of 5.5% notes, recording a $12 million extinguishment loss. The term loan maturity was extended to 2028.
Outlook, risks and unusual items
- Management said available cash, operating cash flow, and revolving-credit availability should support existing operations and debt service for the next 12 months. No specific revenue or earnings guidance was provided.
- The financial-transformation initiative is expected to require about $140 million in upfront costs, including $45–$55 million of capital expenditures; delivery was delayed slightly but expected in fiscal 2022. Annualized savings of approximately $35–$40 million are expected from fiscal 2023.
- COVID-19 continued to weigh on touring, live events, artist services, and performance royalties, although reopening supported physical sales and licensing. The duration and effects of the pandemic, including new variants and renewed restrictions, remain uncertain.
- Other cited risks include dependence on digital music platforms, artist and release performance, piracy, intellectual-property litigation, foreign exchange, substantial leverage, and restrictions under debt agreements. The company reported covenant compliance at June 30; certain revolving-credit covenants had been suspended after its leverage ratio fell below the specified threshold.
- The company paid $187 million in dividends during the nine months and stated future dividends remain subject to board discretion, liquidity, debt covenants, and other factors. Pending ordinary-course legal matters were not expected to have a material adverse effect based on information then available, but outcomes are uncertain.
Important facts for investors to verify
- How much reported earnings growth reflects recurring operating improvement versus the unusually high prior-year stock-compensation and IPO-related expense base.
- Whether streaming growth, post-reopening physical and licensing recovery, and touring-related revenue can be sustained, and how much growth is attributable to foreign exchange or acquisitions.
- Cash conversion and liquidity after music-catalog acquisitions, dividends, and continued royalty-advance investment; also verify debt maturities, interest-rate exposure, and covenant capacity.
- Progress, cost, timing, and realized savings from the financial-transformation initiative, alongside the continuing effects of COVID-19 and live-event recovery.
- Access Industries’ control: the filing describes it as holding approximately 99% of combined voting power following the IPO and subsequent share transactions.