Warner Music Group Corp. — FY 2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019, filed November 27, 2019. Although the request identifies 2019 Q4, this is an annual filing; fourth-quarter figures are noted separately below. Amounts are in U.S. dollars, millions, unless stated otherwise.
Business context
Warner Music Group operates Recorded Music, including artist development, distribution and licensing, and Music Publishing, which licenses musical compositions. Recorded Music accounted for 86% of revenue and Music Publishing 14%. Affiliates of Access Industries own all common stock; the company has no established public trading market.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $4,475 | $4,005 |
| Operating income | $356 | $217 |
| Net income attributable to WMG | $256 | $307 |
| Operating cash flow | $400 | $425 |
| Investing cash flow | $(376) | $405 |
| Financing cash flow | $88 | $(955) |
| Cash and equivalents at year-end | $619 | $514 |
| Total debt, net of deferred financing costs | $2,974 | $2,819 |
- Revenue rose 12%; operating income rose 64%. Operating margin was about 8%, and net income attributable to WMG was about 6% of revenue. OIBDA, the company’s non-GAAP operating measure, was $625, or 14% of revenue, versus $478, or 12%, in FY 2018. Covenant-defined Consolidated EBITDA was $737; it is a distinct measure and should not be confused with OIBDA.
- Digital revenue increased 16% to $2,343; streaming revenue in Recorded Music rose to $2,129. Physical revenue fell 11% to $559. Artist services and expanded-rights revenue rose 62% to $629, including EMP acquisition revenue.
- Recorded Music revenue grew 14% to $3,840. Music Publishing revenue fell 2% to $643, principally reflecting lower performance and mechanical revenue, including lost administration rights and lower market share.
- Net debt was approximately $2,355. Current assets were $1,691 and current liabilities $2,819; the filing does not present a conventional liquidity ratio as a key measure. The revolving facility had no borrowings and $167 of availability after letters of credit.
- Q4 revenue was $1,124 versus $1,039 a year earlier; operating income was $29 versus $16, and net income attributable to WMG was $90 versus a loss of $14. Q4 included a $77 income-tax benefit.
Changes, outlook and notable items
- FY 2019 revenue growth included $240 from EMP, acquired October 10, 2018, and $28 from adopting ASC 606. ASC 606 also increased FY 2019 net income by $12; operating cash flow was unchanged by adoption. The company recorded a $139 net-of-tax reduction to opening accumulated deficit.
- FY 2018 earnings benefited from a $382 net gain on the sale of Spotify shares; FY 2019 net income therefore declined despite stronger operating income. FY 2019 also included a $59 tax benefit from releasing part of a U.S. deferred-tax valuation allowance.
- Management said existing cash and operating cash flows should fund operations, debt service and expected capital spending for the next 12 months. No specific revenue or earnings guidance was provided. A finance and IT transformation planned over two years is expected to require $30–$40 of capital spending, about two-thirds in FY 2020.
- Debt maturities begin in 2023; the nearest stated maturity is the revolving facility in January 2023 and the term loan in November 2023. The company reported covenant compliance at year-end and a 3.35x secured leverage ratio under its credit agreement. It had $1,326 of variable-rate principal debt and $1,672 of fixed-rate principal debt; interest expense was $142.
- Risks include dependence on streaming and a small number of digital services—Apple and Spotify together represented approximately 27% of FY 2019 revenue—competition for artists, piracy, foreign-exchange exposure, copyright and royalty-rate changes, and substantial leverage. Management also disclosed delays and inventory issues after switching U.S. physical-distribution suppliers.
- Other items to note: FY 2019 cash dividends paid were $93.75; a further $206.25 dividend declared in September was paid October 4, 2019. The company expects to adopt lease accounting that will add about $360 of right-of-use assets and lease liabilities. No material litigation accrual was reported; the potential excess loss range could not be estimated.
Important facts for investors to verify
- Separate recurring operating growth from EMP’s contribution and ASC 606’s timing effects; review comparable results on a consistent accounting basis.
- Assess the durability and margins of streaming and artist-services growth against declining physical, download and Music Publishing performance/mechanical revenue.
- Review cash conversion, royalty advances and the significant royalty-payable balance, along with planned transformation spending and dividends.
- Confirm debt terms, refinancing and covenant capacity, variable-rate exposure, and the effect of future cash distributions on deleveraging.
- Evaluate customer concentration, Access-related governance and transactions, and the absence of a public market for WMG common stock.