Warner Music Group Corp. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended December 31, 2022. WMG operates Recorded Music and Music Publishing. The company changed its fiscal reporting calendar for FY2023; the comparable quarter ended December 31, 2021 covered 14 weeks (98 days), versus 13 weeks (92 days) in the current quarter. Management estimates the extra prior-year week added approximately $73 million of revenue, mainly Recorded Music streaming.
Financial performance
Amounts are in millions of U.S. dollars unless stated otherwise.
| Metric | Q1 FY2023 | Prior comparable quarter | Change |
|---|---|---|---|
| Revenue | $1,488 | $1,614 | Down $126 (8%) |
| Operating income | $265 | $239 | Up $26 (11%) |
| OIBDA (non-GAAP) | $349 | $320 | Up $29 (9%) |
| OIBDA margin | 23% | 20% | Up 3 percentage points |
| Net income | $124 | $188 | Down $64 (34%) |
| Net income attributable to WMG | $122 | $187 | Down $65 (35%) |
| Net income per share, Class A and B | $0.23 | $0.36 | Down $0.13 |
| Interest expense, net | $32 | $30 | Up $2 |
OIBDA margin excluding the $41 million divestiture gain was 21%, versus 20% a year earlier. Recorded Music revenue fell 11% to $1,239 million; Music Publishing revenue rose 9% to $250 million. Total digital revenue after intersegment eliminations decreased 5% to $952 million; total streaming revenue declined 4%. Recorded Music streaming fell 7%, while Music Publishing streaming grew 13%.
Cash flow, debt and liquidity
- Operating cash flow was $209 million, compared with $129 million. Management attributed the increase mainly to timing of A&R investments and other working-capital movements.
- Investing cash outflow was $10 million, versus $624 million, which included substantial prior-year acquisition spending. Current-quarter investing included $33 million for music-related assets and $21 million of capital expenditures, offset in part by $42 million of divestiture proceeds.
- Financing cash outflow was $70 million. It included $125 million of deferred acquisition consideration and $84 million of dividends, partly offset by $147 million of incremental term-loan proceeds.
- Cash and equivalents were $720 million at quarter-end, up from $584 million at September 30, 2022. Net debt, as defined by the company, was $3.226 billion, versus $3.148 billion.
- Long-term debt, net of discounts and financing costs, was $3.946 billion; principal debt was $3.990 billion. The company had no revolver borrowings and approximately $296 million of unused capacity after letters of credit under its $300 million facility.
- The company reported a 3.18x senior secured leverage ratio under its credit agreement and said it was in compliance with debt covenants. The weighted-average debt interest rate was 3.7%. Its nearest scheduled debt maturity is in 2028.
- Current assets of $2.340 billion were below current liabilities of $3.341 billion, largely including accrued royalties. Management said available cash, operating cash flows and borrowing capacity should support existing operations for the next 12 months.
Changes, outlook and risks
- Drivers of revenue decline: Reported revenue included $84 million of unfavorable foreign-exchange impact, in addition to the shorter current-quarter period. Recorded Music was affected by a lighter release schedule, lower physical sales, weaker artist services and expanded-rights revenue, and slower ad-supported streaming. Publishing growth came mainly from digital and performance revenue.
- Profit and unusual items: A $41 million pre-tax gain from selling certain sound recording rights lifted operating income and OIBDA. Other expense was $61 million, mainly reflecting foreign-currency losses on euro-denominated debt and unrealized hedging losses. These items contributed to net income falling despite higher operating income.
- Management outlook: The filing gives no specific revenue or earnings forecast. WMG intends to continue quarterly dividends, subject to board approval, financial conditions and debt restrictions. It expects financial-transformation initiative costs of approximately $185 million in total, including $80 million of capital expenditures, and annualized run-rate savings of approximately $35–$40 million. Management notes delays due to COVID-related disruption and the need for additional systems testing.
- Key risks and contingencies: Risks include reliance on digital music services, artist and release performance, competition, piracy and intellectual-property disputes, foreign-exchange movements, substantial leverage and refinancing needs, and geopolitical or pandemic-related disruption. WMG suspended its Russian operations in March 2022; it said these operations are not a material portion of the business, but escalation of the conflict could adversely affect results. The company is involved in ordinary-course claims and litigation; it does not currently expect pending matters to have a material adverse effect, while noting litigation uncertainty. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Assess underlying revenue and streaming trends after accounting for the 2021 extra week and current-quarter foreign-exchange headwinds.
- Separate recurring operating performance from the $41 million divestiture gain and from foreign-exchange and hedging effects.
- Track Recorded Music performance versus continued Music Publishing growth, including streaming and ad-supported revenue.
- Monitor debt, interest-rate exposure, the 3.18x covenant leverage measure, and the conditions that could reinstate revolver covenants or restrict dividends.
- Compare cash generation with acquisition-related payments, dividends and the expected transformation spending and savings.