Business context and reporting period
Warner Music Group Corp. filed this unaudited Form 10-Q for its second fiscal quarter ended March 31, 2020 (the company’s fiscal period ended March 27). Its two reportable segments are Recorded Music and Music Publishing. The company filed for a proposed IPO in February 2020; completion was uncertain and subject to regulatory review and market conditions.
Key financial metrics
| Metric | Three months ended March 31, 2020 | Six months ended March 31, 2020 |
|---|---|---|
| Revenue | $1.071 billion | $2.327 billion |
| Operating income (loss) | $(49) million | $116 million |
| Net income (loss) attributable to WMG | $(74) million | $46 million |
| OIBDA, a non-GAAP measure | $12 million | $248 million |
| Operating cash flow | Not presented for the quarter | $164 million |
Quarterly revenue was down 2% year over year; six-month revenue rose 1%. Quarterly net loss per share was $0.15, versus earnings per share of $0.13 a year earlier. Six-month diluted earnings per share were $0.09, versus $0.30. OIBDA margin was approximately 1% for the quarter and 11% for the six months.
At March 31, cash and equivalents were $484 million, compared with $619 million at September 30, 2019. Debt was $2.983 billion on the balance sheet (principal debt of $3.004 billion); reported net debt was $2.499 billion. Current assets were $1.583 billion and current liabilities $2.732 billion. The company had no revolving-credit borrowings outstanding and approximately $13 million of letters of credit. It reported a $285 million total deficit.
Material changes versus prior comparable periods
- Quarterly revenue declined $19 million, with Recorded Music down 3% and Music Publishing up 5%. Digital revenue grew: streaming growth helped lift total digital revenue after eliminations 6% to $699 million. Physical revenue fell 28% to $94 million, and artist services and expanded-rights revenue fell 14% to $115 million.
- For the six months, revenue increased $34 million. Digital revenue after eliminations rose 9% to $1.405 billion, while physical revenue declined 23% to $278 million.
- Quarterly SG&A increased 52% to $538 million, principally reflecting a $169 million charge for the Senior Management Free Cash Flow Plan. OIBDA fell 94% year over year. Excluding that Plan expense, management reported quarterly OIBDA margin of 17%, versus 18% a year earlier; this is a company-adjusted, non-GAAP comparison.
- Six-month OIBDA declined 39% to $248 million. SG&A rose 26% to $917 million, including Plan-related expense and a $10 million one-time depreciation charge for a building.
- Six-month operating cash flow increased to $164 million from $99 million, which management attributed primarily to working-capital timing, partly offset by higher cash taxes. Investing cash outflow was $51 million, versus $293 million, including the prior-year EMP acquisition. Financing used $245 million, primarily $244 million of dividends; cash declined $135 million over the six months.
Outlook, commentary, risks and unusual items
- COVID-19 adversely affected touring, merchandising, physical distribution and sales, and performance-related publishing revenue. Management also identified risks to licensing and synchronization revenue from delayed film and television production and reduced advertising. The duration and future financial impact were not reasonably estimable; no specific financial guidance was provided.
- Management said available cash, operating cash flows and revolving-credit availability were expected to support existing operations for the next 12 months. This outlook is subject to pandemic uncertainty and other business and financing risks.
- At quarter-end, management estimated potential total cash payments of approximately $400 million under the Senior Management Free Cash Flow Plan, with most expected in fiscal 2021. If the IPO occurred before December 31, 2020, amended terms would instead settle deferred interests in shares; otherwise, cash settlement could remain an option unless the Plan were further amended.
- On April 3, 2020, after quarter-end, the revolving facility was amended: commitments increased from $180 million to $300 million and maturity extended to April 2025, alongside changes to pricing, covenants and other terms. The company was in compliance with its debt covenants at March 31; its reported senior secured leverage ratio was 3.22x.
- The company’s financial transformation initiative was expected to cost approximately $120 million upfront, including $40–$50 million in capital expenditures, and to generate $35–$40 million of annualized run-rate savings when fully implemented. COVID-19 slightly delayed the initiative.
- Other notable items included a $33 million net-of-tax reduction to accumulated deficit from a share-based compensation accounting-policy change, and adoption of lease accounting that resulted in $351 million of operating lease liabilities at quarter-end. Management reported no interim goodwill impairment indicators and no material adverse effect expected from pending ordinary-course litigation, while noting litigation uncertainty.
Important facts for investors to verify
- How subsequent quarters quantify COVID-19 effects, especially on touring, physical sales, advertising, licensing and receivable collections.
- The amount, timing and cash-versus-share settlement of Plan obligations, and the effect of valuation changes on compensation expense.
- Whether the proposed IPO was completed and whether its terms changed Plan settlement or capital structure.
- Debt, liquidity, covenant headroom and availability under the amended revolving facility, including cash needs for dividends and transformation spending.
- Whether streaming growth continues to offset physical declines and whether reported margins improve when Plan-related and other unusual expenses are considered.