Warner Music Group Corp. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2015; the company’s fiscal periods ended March 27, 2015. All amounts are U.S. dollars in millions unless stated otherwise. WMG is privately held by affiliates of Access Industries; its common stock has no public market.
Business context
WMG operates Recorded Music and Music Publishing businesses. Recorded Music includes artist development, marketing, distribution, licensing and artist services; Music Publishing exploits song composition rights. Management identifies OIBDA, a non-GAAP measure, as its primary operating performance measure.
Financial performance and position
| Metric | Three months ended Mar. 31, 2015 | Three months ended Mar. 31, 2014 | Six months ended Mar. 31, 2015 | Six months ended Mar. 31, 2014 |
|---|---|---|---|---|
| Revenue | $677 | $653 | $1,506 | $1,468 |
| OIBDA | $121 | $74 | $223 | $167 |
| Operating income | $44 | $(5) | $67 | $10 |
| Net income (loss) attributable to WMG | $18 | $(60) | $(24) | $(97) |
| Interest expense, net | $45 | $54 | $91 | $109 |
| Operating cash flow | — | — | $142 | $79 |
- Second-quarter revenue rose 4% as reported; excluding unfavorable currency effects, it increased 13%. Six-month revenue rose 3% as reported and 9% at constant currency.
- Second-quarter OIBDA margin was 18%, versus 11% a year earlier; six-month margin was 15%, versus 11%. GAAP operating margin was about 6.5% for the quarter and 4.4% for the six months.
- Recorded Music revenue increased 5% for the quarter and 4% for the six months. Music Publishing revenue declined 4% and 6%, respectively, as reported; currency was a significant drag.
- Digital revenue grew 1% for the quarter as reported (10% excluding currency) and 4% for the six months (9% excluding currency). Streaming gains were partly offset by download declines. In the quarter, recorded-music streaming revenue grew $25 million while downloads fell $22 million.
- At March 31, cash and equivalents were $218, total debt was $2,995, and net debt was $2,777. Debt declined from $3,030 at September 30, 2014; cash rose from $157. The company reported $257 of WMG equity, down from $371, primarily reflecting net loss and $90 of foreign-currency translation losses.
- Current assets were $799 and current liabilities $1,815. The $150 revolving facility had no borrowings outstanding at period-end; $5 of letters of credit were outstanding. The company reported a 5.6% weighted-average debt interest rate and a 5.13x covenant leverage ratio; it was in compliance with debt covenants.
- Six-month investing cash outflow was $59, including $39 of capital expenditures, $9 for music publishing rights and $11 for business acquisitions. Financing cash outflow was $9. Cash increased by $61 to $218.
Material changes and management commentary
- Quarterly operating results improved substantially, driven by stronger releases and carryover sales, increased licensing, lower restructuring and integration costs, and lower SG&A. Highlighted releases included Kid Rock, Led Zeppelin and Ed Sheeran. Management attributed some publishing weakness to currency and ongoing shifts from physical formats to digital.
- Recorded Music quarterly revenue increased $29 million; licensing rose $23 million and physical revenue rose $12 million, while artist services and expanded-rights revenue fell $7 million. Publishing revenue decreased $5 million.
- For the six months, management reported approximately $70 million of cost savings and synergies achieved from the Parlophone Label Group (PLG) actions. The restructuring plan is expected to total about $75 million; $74 million had been incurred and $70 million paid by March 31. The remaining work was expected to be completed by fiscal year-end 2015. Additional PLG integration and nonrecurring costs were estimated at $85 million; material integration costs were expected to be incurred by fiscal year-end.
- Management stated existing liquidity sources should fund operations, debt service, working capital and capital expenditures over the next fiscal year. It expects digital businesses to be a significant growth source, but said the timing of industry recovery is uncertain. Artist-services and expanded-rights revenue was about 9% of six-month total revenue and can vary with touring schedules and mix.
Risks, contingencies and unusual items
- Key risks include industry transition from physical sales to digital and streaming, pricing and margin pressure, piracy, dependence on a limited number of digital services, competition, hit-driven release variability, foreign-exchange exposure, and substantial leverage and debt-service needs. A significant portion of operating cash was held outside U.S. operating companies.
- The company disclosed a continuing digital-download pricing class action; it could not estimate a reasonably possible loss or range. Separate artist royalty-calculation class actions settled for $11.5 million before fees and administration costs; the settlement became effective February 25, 2015, and implementation was ongoing. The related reserve was described as not material.
- Foreign-currency translation loss was $90 million for the six months, including $80.8 million of translation adjustments on long-term intercompany investments. Currency movements also affected reported revenue and debt-related results.
- WMG reported no indicators requiring an interim goodwill impairment test. Management said disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
- No specific full-year revenue or earnings guidance was provided in the filing. Management cautioned that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether revenue and OIBDA growth persists after separating currency effects, release timing, licensing distributions and lower prior-year PLG-related costs.
- Whether streaming growth continues to offset download and physical-market pressures, and how the changing mix affects margins.
- Whether PLG cost savings are realized as expected, and whether remaining restructuring and integration costs stay within disclosed estimates and timing.
- Debt covenant headroom and cash availability, including the location and accessibility of cash held outside U.S. operating companies; the reported leverage ratio relies on defined adjustments and projected savings.
- Developments in the digital-pricing litigation and execution of the artist royalty settlement, as well as any material change in other legal exposures.