Warner Music Group Corp. — Form 10-Q Summary
Business context and reporting period
Warner Music Group operates Recorded Music and Music Publishing businesses, including artist services and merchandise. This filing covers the fiscal second quarter and first six months ended March 31, 2019; the company’s fiscal periods actually ended March 29. Comparisons are with the corresponding 2018 periods. The company is privately held by Access Industries affiliates, and its common stock has no public market.
Financial results and liquidity
| Metric (US$ millions, except percentages) | Three months ended March 31, 2019 | Six months ended March 31, 2019 |
|---|---|---|
| Revenue | $1,090; +13% | $2,293; +14% |
| Operating income | $122; versus $83 | $269; versus $173 |
| OIBDA | $191; versus $152 | $406; versus $307 |
| Net income attributable to WMG | $67; versus a $3 loss | $153; versus $1 |
| Operating cash flow | Not separately reported for quarter | $99; versus $136 |
Quarterly operating margin was approximately 11% and OIBDA margin approximately 18%, compared with approximately 9% and 16%, respectively, a year earlier. OIBDA is a non-GAAP measure. For the six months, cash used in investing was $293 million, including EMP acquisition spending and capital expenditures; financing provided $151 million. Cash declined $44 million to $470 million.
At March 31, debt was $2.990 billion carrying value ($3.022 billion principal) and reported net debt was $2.520 billion. The weighted-average debt rate was 4.7%. The company had $470 million cash and no revolving-credit borrowings; $180 million of revolving commitments were available, less approximately $16 million of outstanding letters of credit. Current assets of $1.524 billion were below current liabilities of $2.518 billion, and total equity was negative $120 million.
Material changes versus prior comparable periods
- Growth was concentrated in Recorded Music: quarterly revenue rose 18% to $933 million, while Music Publishing fell 9% to $158 million. For six months, Recorded Music grew 17% to $1.974 billion and Publishing grew 2% to $323 million.
- Digital revenue increased 22% in the quarter and 19% for six months. Recorded Music streaming revenue rose to $537 million in the quarter and $1.039 billion for six months; download revenue continued to decline. Quarterly artist-services and expanded-rights revenue rose 81%, partly reflecting EMP.
- EMP, acquired in October 2018, contributed $51 million of quarterly and $127 million of six-month revenue. The preliminary purchase-price allocation included $109 million goodwill.
- ASC 606 adoption from October 1, 2018 changed revenue timing, particularly in Music Publishing and international Recorded Music broadcast rights. It increased reported revenue by $10 million in the quarter and $30 million for six months; it reduced six-month opening accumulated deficit by $139 million, net of tax. Prior-year results were not restated.
- Quarterly net income also benefited from $29 million of other income, including investment mark-to-market and foreign-exchange gains. Six-month other income was $57 million, including a $30 million unrealized investment gain and foreign-exchange/hedging gains.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management said existing cash, operating cash flows and revolving-credit availability should fund operations and requirements over the next 12 months, while noting cash needs may include acquisitions, investment, debt repayment and dividends.
- Management cited continued streaming growth and digital distribution as opportunities. Risks include dependence on a limited number of digital services, artist and release performance, piracy, competition, foreign exchange, regulated royalty rates, intellectual-property disputes and substantial leverage. The company reported compliance with debt covenants at March 31.
- After quarter-end, the company issued additional €195 million 3.625% secured notes on April 30, 2019, intending to use proceeds partly to redeem its remaining 5.625% notes due 2022. A conditional redemption notice was issued April 16, with settlement scheduled for May 16.
- The company and Sirius XM agreed on March 28 to a license for WMG’s pre-1972 recordings covering 2018–2022. Other pending litigation accruals were not material; the company said it could not estimate potential losses beyond amounts accrued.
- WMG’s controlling affiliate, Access Industries, acquired the building that houses WMG’s Los Angeles headquarters; the existing lease was unchanged and rent is approximately $10 million annually.
Important facts for investors to verify
- How much reported growth reflects underlying performance versus EMP, ASC 606 timing effects, foreign exchange and release/touring schedules.
- Whether streaming growth offsets continued declines in physical sales and downloads, and whether Music Publishing can reverse its quarterly revenue and margin declines.
- The sustainability and cash conversion of earnings: six-month operating cash flow fell despite higher OIBDA, partly amid receivables and royalty-advance movements.
- Debt repayment and refinancing plans, post-quarter note issuance/redemption completion, covenant headroom and dividend capacity under debt restrictions.
- The eventual EMP purchase accounting, investment valuation gains, tax effects including GILTI, and developments in litigation or other contingencies.