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Warner Music Group Corp. Reports Results for Fiscal Second Quarter Ended March 31, 2016

NEW YORK, NY--(Marketwired - May 6, 2016) -

  • Total revenue grew 10.0%, up 13.4% on a constant-currency basis
  • Digital revenue grew 21.2%, up 25.0% on a constant-currency basis
  • OIBDA was $127 million versus $121 million in the prior-year quarter
  • Net income was $12 million versus $19 million in the prior-year quarter

Warner Music Group Corp. today announced its second-quarter financial results for the period ended March 31, 2016. 

"These impressive results were driven by outstanding music from our artists and songwriters, the expansion in our global footprint, our leadership in the industry's digital transformation and excellent execution globally," said Stephen Cooper, Warner Music Group's CEO. "We are now the first major music company to report that streaming is the largest source of revenue in our recorded music business, surpassing our revenue from physical formats. And this new milestone comes only four quarters after our streaming revenue first topped our download revenue."

"I am very happy with our growth trends," added Eric Levin, Warner Music Group's Executive Vice President and CFO. "Strong revenue and cash flow have enabled us to pay down $75 million in debt so far this year."

Total WMG

                 
Total WMG Summary Results                
(dollars in millions)                
  For the Three Months Ended March 31, 2016   For the Three Months Ended March 31, 2015   % Change  
  (unaudited)   (unaudited)      
Revenue $ 745   $ 677   10 %
Digital revenue   360     297   21 %
Operating income   52     44   18 %
Adjusted operating income(1)   54     48   13 %
OIBDA(1)   127     121   5 %
Adjusted OIBDA(1)   129     125   3 %
Net income   12     19   -37 %
Adjusted net income (1)   14     23   -39 %
Net cash provided by operating activities   111     107   4 %
                 
                 
(1) See "Supplemental Disclosures Regarding Non-GAAP Financial Measures" at the end of this release for details regarding these measures.  
   

Revenue grew 10.0% (or 13.4% in constant currency). Growth in Recorded Music digital revenue and artist services and expanded-rights revenue as well as growth in Music Publishing digital and synchronization revenue were partially offset by declines in Recorded Music physical revenue related to currency, declines in Recorded Music licensing revenue related to currency and the impact of a large initial distribution of PLG neighboring rights income in the prior-year quarter, and declines in Music Publishing mechanical revenue, which reflect a continuing shift to digital. Music Publishing performance revenue was flat. Revenue grew in the U.S., Europe and Asia, partially offset by currency-related declines in Latin America. Digital revenue grew 21.2% (or 25.0% in constant currency), and represented 48.3% of total revenue, compared to 43.9% in the prior-year quarter. 

Operating income was $52 million compared to $44 million in the prior-year quarter. OIBDA increased 5.0% to $127 million from $121 million in the prior-year quarter and OIBDA margin declined 0.9 percentage points to 17.0% from 17.9% in the prior-year quarter. The increase in operating income and OIBDA is largely the result of the increase in revenue while the decline in OIBDA margin is largely the result of the revenue mix. Adjusted OIBDA rose 3.2% and Adjusted OIBDA margin declined 1.2 percentage points to 17.3% from 18.5%. 

Net income was $12 million compared to $19 million in the prior-year quarter. The decline is attributable to an increase in OIBDA and a gain on the sale of real estate being more than offset by a loss on early extinguishment of debt, lower net currency-related gains versus the prior-year quarter on the company's Euro-denominated debt and intercompany loans and higher tax expense versus the prior-year quarter. The higher tax expense results from the use of a discrete tax rate method to calculate income tax expense as compared to the use of an annual effective tax rate method in the prior-year quarter, higher pre-tax income and losses in certain jurisdictions for which no tax benefit could be recorded. 

Adjusted operating income, Adjusted OIBDA and Adjusted net income exclude the impact of PLG-related expenses and expenses related to cost-savings initiatives. See below for calculations and reconciliations of OIBDA, Adjusted operating income, Adjusted OIBDA and Adjusted net income. 

As of March 31, 2016, the company reported a cash balance of $316 million, total debt of $2.912 billion and net debt (total long-term debt, including the current portion, minus cash) of $2.596 billion. There was no balance outstanding on the company's revolver at the end of the quarter.

Cash provided by operating activities was $111 million compared to $107 million in the prior-year quarter. The change is largely a result of improved OIBDA and the benefit of working capital management. Free Cash Flow, defined below, was $134 million compared to $85 million in the prior-year quarter, reflecting the improvement in cash provided by operating activities and proceeds from the sale of real estate. 

Recorded Music

                 
Recorded Music Summary Results                
(dollars in millions)                
  For the Three Months Ended March 31, 2016   For the Three Months Ended March 31, 2015   % Change  
  (unaudited)   (unaudited)      
Revenue $ 621   $ 564   10 %
Digital revenue   328     274   20 %
Operating income   38     35   9 %
Adjusted operating income(1)   40     38   5 %
OIBDA(1)   93     91   2 %
Adjusted OIBDA(1)   95     94   1 %
                 
                 
(1) See "Supplemental Disclosures Regarding Non-GAAP Financial Measures" at the end of this release for details regarding these measures.  
   

Recorded Music revenue grew 10.1% (or 13.1% in constant currency). Growth in digital revenue and artist services and expanded-rights revenue was partially offset by a decline in physical and licensing revenue. The decline in physical revenue was related to currency and the decline in licensing revenue was related to currency and the impact of a large initial distribution of PLG neighboring rights income in the prior-year quarter. Digital growth reflects a continuing shift to streaming revenue. The improvement in artist services and expanded-rights revenue was due to the timing of concert tours. Recorded Music revenue saw strength around the globe with Latin America the main exception predominantly driven by currency. Major sellers included Coldplay, Twenty One Pilots, Ed Sheeran, Charlie Puth and Gesu No Kiwami Otome. 

Recorded Music operating income was $38 million up from $35 million in the prior-year quarter and operating margin was down 0.1 percentage point to 6.1% versus 6.2% in the prior-year quarter. Adjusted operating margin declined 0.3 percentage points to 6.4% from 6.7% in the prior-year quarter. OIBDA rose to $93 million from $91 million in the prior-year quarter and OIBDA margin declined 1.1 percentage points to 15.0%. Adjusted OIBDA was $95 million versus $94 million in the prior-year quarter with Adjusted OIBDA margin down 1.4 percentage points to 15.3%. The improvement in OIBDA was driven by revenue growth and the decline in OIBDA margin was driven by the revenue mix including the impact of a large initial distribution of PLG neighboring rights income in the prior-year quarter and higher concert promotion revenue in the current quarter. 

Music Publishing

                 
Music Publishing Summary Results                
(dollars in millions)                
  For the Three Months Ended March 31, 2016   For the Three Months Ended March 31, 2015   % Change  
  (unaudited)   (unaudited)      
Revenue $ 127   $ 117   9 %
Digital revenue   33     24   38 %
Operating income   37     33   12 %
OIBDA(1)   54     51   6 %
                 
                 
(1) See "Supplemental Disclosures Regarding Non-GAAP Financial Measures" at the end of this release for details regarding these measures.  
   

Music Publishing revenue rose 8.5% (or 13.4% in constant currency). Growth in digital and synchronization revenue was partially offset by a decline in mechanical revenue. Performance revenue was flat. 

Music Publishing operating income was $37 million compared with $33 million in the prior-year quarter and operating margin rose 0.9 percentage points to 29.1%. The increase in operating income and operating margin was due to revenue growth. Music Publishing OIBDA rose by $3 million or 5.9% to $54 million, while Music Publishing OIBDA margin declined 1.1 percentage points to 42.5% from 43.6%, due to the revenue mix. 

Financial details for the quarter can be found in the company's current Form 10-Q, for the period ended March 31, 2016, filed today with the Securities and Exchange Commission.

This morning, management will be hosting a conference call to discuss the results at 8:30 A.M. EST. The call will be webcast on www.wmg.com.

About Warner Music Group

With its broad roster of new stars and legendary artists, Warner Music Group is home to a collection of the best-known record labels in the music industry including Asylum, Atlantic, Big Beat, Canvasback, East West, Elektra, Erato, FFRR, Fueled by Ramen, Nonesuch, Parlophone, Reprise, Rhino, Roadrunner, Sire, Warner Bros., Warner Classics and Warner Music Nashville, as well as Warner/Chappell Music, one of the world's leading music publishers, with a catalog of more than one million copyrights worldwide. 

"Safe Harbor" Statement under Private Securities Litigation Reform Act of 1995

This communication includes forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance. Words such as "estimates," "expects," "anticipates," "projects," "plans," "intends," "believes," "forecasts" and variations of such words or similar expressions that predict or indicate future events or trends, or that do not relate to historical matters, identify forward-looking statements. All forward-looking statements are made as of today, and we disclaim any duty to update such statements. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, we cannot assure you that management's expectations, beliefs and projections will result or be achieved. Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from our expectations. Please refer to our Form 10-K, Form 10-Qs and our other filings with the U.S. Securities and Exchange Commission concerning factors that could cause actual results to differ materially from those described in our forward-looking statements.

We maintain an Internet site at www.wmg.com. We use our website as a channel of distribution of material company information. Financial and other material information regarding Warner Music Group is routinely posted on and accessible at http://investors.wmg.com. In addition, you may automatically receive email alerts and other information about Warner Music Group by enrolling your email address through the "email alerts" section at http://investors.wmg.com. Our website and the information posted on it or connected to it shall not be deemed to be incorporated by reference into this communication. 

Basis of Presentation

The Company maintains a 52-53 week fiscal year ending on the last Friday in each reporting period. As such, all references to March 31, 2016 and March 31, 2015 relate to the periods ended March 25, 2016 and March 27, 2015, respectively. For convenience purposes, the Company continues to date its financial statements as of March 31. The fiscal year ended September 30, 2015 ended on September 25, 2015. For convenience purposes, the Company continues to date its balance sheet as of September 30. 

   
Figure 1. Warner Music Group Corp. - Consolidated Statements of Operations, Three and Six Months Ended March 31, 2016 versus March 31, 2015  
(dollars in millions)                    
                     
                     
  For the Three Months Ended March 31, 2016     For the Three Months Ended March 31, 2015     % Change  
  (unaudited)     (unaudited)        
Revenue $ 745     $ 677     10 %
Cost and expenses:                    
Cost of revenue   (374 )     (318 )   -18 %
Selling, general and administrative expenses   (256 )     (252 )   -2 %
Amortization expense   (63 )     (63 )   0 %
Total costs and expenses $ (693 )   $ (633 )   -10 %
Operating income $ 52     $ 44     18 %
Gain on sale of real estate   19       -     -  
Interest expense, net   (43 )     (45 )   4 %
Other (expense) income, net   (1 )     14     -  
Income before income taxes $ 27     $ 13     -  
Income tax (expense) benefit   (15 )     6     -  
Net income $ 12     $ 19     -37 %
Less: Income attributable to noncontrolling interest   (1 )     (1 )   0 %
Net income attributable to Warner Music Group Corp. $ 11     $ 18     -39 %
                     
                     
  For the Six Months Ended March 31, 2016     For the Six Months Ended March 31, 2015     % Change  
    (unaudited)       (unaudited)        
Revenue $ 1,594     $ 1,506     6 %
Costs and expenses:                    
Cost of revenue   (823 )     (763 )   -8 %
Selling, general and administrative expenses   (532 )     (548 )   3 %
Amortization expense   (125 )     (128 )   2 %
Total costs and expenses $ (1,480 )   $ (1,439 )   -3 %
Operating income $ 114     $ 67     70 %
Gain on sale of real estate   19       -     -  
Interest expense, net   (88 )     (91 )   3 %
Other income, net   7       5     40 %
Income (loss) before income taxes $ 52     $ (19 )   -  
Income tax expense   (12 )     (3 )   -  
Net income (loss) $ 40     $ (22 )   -  
Less: Income attributable to noncontrolling interest   (2 )     (2 )   0 %
Net income (loss) attributable to Warner Music Group Corp. $ 38     $ (24 )   -  
                     
                     
                     
Figure 2. Warner Music Group Corp. - Consolidated Balance Sheets at March 31, 2016 versus September 30, 2015  
(dollars in millions)                    
                     
                     
  March 31,     September 30,        
  2016     2015     % Change  
  (unaudited)     (audited)        
Assets                    
Current assets:                    
  Cash and equivalents $ 316     $ 246     29 %
  Accounts receivable, net   318       349     -9 %
  Inventories   41       42     -2 %
  Royalty advances expected to be recouped within one year   135       130     4 %
  Prepaid and other current assets   64       60     7 %
Total current assets $ 874     $ 827     6 %
Royalty advances expected to be recouped after one year   203       195     4 %
Property, plant and equipment, net   210       220     -5 %
Goodwill   1,622       1,632     -1 %
Intangible assets subject to amortization, net   2,348       2,514     -7 %
Intangible assets not subject to amortization   118       119     -1 %
Other assets   110       114     -4 %
Total assets $ 5,485     $ 5,621     -2 %
Liabilities and Equity                    
Current liabilities:                    
  Accounts payable $ 176     $ 173     2 %
  Accrued royalties   1,102       1,087     1 %
  Accrued liabilities   249       296     -16 %
  Accrued interest   53       58     -9 %
  Deferred revenue   206       206     0 %
  Current portion of long-term debt   13       13     0 %
  Other current liabilities   22       24     -8 %
Total current liabilities $ 1,821     $ 1,857     -2 %
Long-term debt   2,899       2,981     -3 %
Deferred tax liabilities, net   292       302     -3 %
Other noncurrent liabilities   239       242     -1 %
Total liabilities $ 5,251     $ 5,382     -2 %
Equity:                    
Common stock   -       -     -  
Additional paid-in capital   1,128       1,128     0 %
Accumulated deficit   (702 )     (740 )   -5 %
Accumulated other comprehensive loss, net   (205 )     (167 )   23 %
Total Warner Music Group Corp. equity $ 221     $ 221     0 %
Noncontrolling interest   13       18     -28 %
Total equity   234       239     -2 %
Total liabilities and equity $ 5,485     $ 5,621     -2 %
                     
                     
                     
Figure 3. Warner Music Group Corp. - Summarized Statements of Cash Flows, Three and Six Months Ended March 31, 2016 versus March 31, 2015  
(dollars in millions)              
               
               
  For the Three Months Ended March 31, 2016     For the Three Months Ended March 31, 2015  
  (unaudited)     (unaudited)  
Net cash provided by operating activities $ 111     $ 107  
Net cash provided by (used in) investing activities   23       (22 )
Net cash used in financing activities   (94 )     (6 )
Effect of foreign currency exchange rates on cash and equivalents   (2 )     (6 )
Net increase in cash and equivalents $ 38     $ 73  
               
               
  For the Six Months Ended March 31, 2016     For the Six Months Ended March 31, 2015  
  (unaudited)     (unaudited)  
Net cash provided by operating activities $ 172     $ 142  
Net cash provided by (used in) investing activities   5       (59 )
Net cash used in financing activities   (100 )     (9 )
Effect of foreign currency exchange rates on cash and equivalents   (7 )     (13 )
Net increase in cash and equivalents $ 70     $ 61  
               

Supplemental Disclosures Regarding Non-GAAP Financial Measures

We evaluate our operating performance based on several factors, including the following non-GAAP financial measures:

OIBDA

OIBDA reflects our operating income before non-cash depreciation of tangible assets and non-cash amortization of intangible assets. We consider OIBDA to be an important indicator of the operational strengths and performance of our businesses, and believe the presentation of OIBDA helps improve the ability to understand our operating performance and evaluate our performance in comparison to comparable periods. However, a limitation of the use of OIBDA as a performance measure is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenue in our businesses. Accordingly, OIBDA should be considered in addition to, not as a substitute for, operating income (loss), net income (loss) and other measures of financial performance reported in accordance with U.S. GAAP. In addition, OIBDA, as we calculate it, may not be comparable to similarly titled measures employed by other companies. 

   
Figure 4. Warner Music Group Corp. - Reconciliation of OIBDA to Net Income (Loss), Three and Six Months Ended March 31, 2016 versus March 31, 2015  
(dollars in millions)                    
                     
                     
  For the Three Months Ended March 31, 2016     For the Three Months Ended March 31, 2015     % Change  
  (unaudited)     (unaudited)        
OIBDA $ 127     $ 121     5 %
Depreciation expense   (12 )     (14 )   14 %
Amortization expense   (63 )     (63 )   0 %
Operating income $ 52     $ 44     18 %
Gain on sale of real estate   19       -     -  
Interest expense, net   (43 )     (45 )   4 %
Other (expense) income, net   (1 )     14     -  
Income before income taxes $ 27     $ 13     -  
Income tax (expense) benefit   (15 )     6     -  
Net income $ 12     $ 19     -37 %
Less: Income attributable to noncontrolling interest   (1 )     (1 )   0 %
Net income attributable to Warner Music Group Corp. $ 11     $ 18     -39 %
Operating income margin   7.0 %     6.5 %      
OIBDA margin   17.0 %     17.9 %      
                     
                     
  For the Six Months Ended March 31, 2016     For the Six Months Ended March 31, 2015     % Change  
  (unaudited)     (unaudited)        
OIBDA $ 264     $ 223     18 %
Depreciation expense   (25 )     (28 )   11 %
Amortization expense   (125 )     (128 )   2 %
Operating income $ 114     $ 67     70 %
Gain on sale of real estate   19       -     -  
Interest expense, net   (88 )     (91 )   3 %
Other income, net   7       5     40 %
Income (loss) before income taxes $ 52     $ (19 )   -  
Income tax expense   (12 )     (3 )   -  
Net income (loss) $ 40     $ (22 )   -  
Less: Income attributable to noncontrolling interest   (2 )     (2 )   0 %
Net income (loss) attributable to Warner Music Group Corp. $ 38     $ (24 )   -  
Operating income margin   7.2 %     4.4 %      
OIBDA margin   16.6 %     14.8 %      
                     
                     
                     
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Figure 5. Warner Music Group Corp. - Reconciliation of Segment Operating Income (Loss) to OIBDA, Three and Six Months Ended March 31, 2016 versus March 31, 2015  
(dollars in millions)                    
                     
                     
  For the Three Months Ended March 31, 2016     For the Three Months Ended March 31, 2015     % Change  
  (unaudited)     (unaudited)        
Total WMG operating income - GAAP $ 52     $ 44     18 %
Depreciation and amortization expense   (75 )     (77 )   3 %
Total WMG OIBDA $ 127     $ 121     5 %
Operating income margin   7.0 %     6.5 %      
OIBDA margin   17.0 %     17.9 %      
                     
Recorded Music operating income - GAAP $ 38     $ 35     9 %
Depreciation and amortization expense   (55 )     (56 )   2 %
Recorded Music OIBDA $ 93     $ 91     2 %
Recorded Music operating income margin   6.1 %     6.2 %      
Recorded Music OIBDA margin   15.0 %     16.1 %      
                     
Music Publishing operating income - GAAP $ 37     $ 33     12 %
Depreciation and amortization expense   (17 )     (18 )   6 %
Music Publishing OIBDA $ 54     $ 51     6 %
Music Publishing operating income margin   29.1 %     28.2 %      
Music Publishing OIBDA margin   42.5 %     43.6 %      
                     
                     
  For the Six Months Ended March 31, 2016     For the Six Months Ended March 31, 2015     % Change  
  (unaudited)     (unaudited)        
Total WMG operating income - GAAP $ 114     $ 67     70 %
Depreciation and amortization expense   (150 )     (156 )   4 %
Total WMG OIBDA $ 264     $ 223     18 %
Operating income margin   7.2 %     4.4 %      
OIBDA margin   16.6 %     14.8 %      
                     
Recorded Music operating income - GAAP $ 136     $ 87     56 %
Depreciation and amortization expense   (109 )     (115 )   5 %
Recorded Music OIBDA $ 245     $ 202     21 %
Recorded Music operating income margin   10.0 %     6.8 %      
Recorded Music OIBDA margin   18.0 %     15.8 %