Warner Music Group Sees Revenue Growth After Parlophone Buy, Streaming Strengthens

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Lily Allen performs live at Radio 1's Big Weekend at Glasgow Green on May 24, 2014 in Glasgow, Scotland.

Digital revenue continued its upward trend, with streaming helping to offset some download losses.

Warner Music Group revenue increased 18.9 percent to $788 million in the quarter ended June 30 with the help of its acquisition of Parlophone Label Group and gains from music streaming services. The increase was 16.9 percent excluding the effects of foreign exchange.

The acquisition of PLG, sold by Universal Music Group to ensure European Commission approval of the purchase of EMI Music, had an impact on revenue, expenses and release schedule. Without PLG, Warner's total revenue would have increased 3.5 percent.

Digital revenue grew 26.1 percent to $324 million and represented 41.1 percent of total revenue, an increase from 38.8 percent a year earlier. Excluding PLG, however, digital revenue grew just 11.7 percent.

Warner was unusually transparent about streaming growth in the press release and earnings call. The highlight was the mention of 102-percent growth in recorded music streaming revenue in the quarter. (No adjusted figure excluding PLG was given.) Streaming revenue grew $69 million, or $53 million excluding PLG. That growth helped offset an 8-percent decline in digital download revenue.

During the earnings call, CEO Stephen Cooper mentioned the reach of Spotify and Clear Channel's iHeartRadio, and mentioned recent moves by Apple (acquisition of Beats Music), Amazon (launch of Prime Music) and Google (acquisition of Songza) in streaming music. "We remain optimistic that these exciting developments, along with increasingly connected consumers, will drive even greater global consumption and monetization of music," said Cooper.

Net loss deepened to $185 million from a loss of $62 million a year earlier. However, other measurements present a better picture of Warner's quarter. Operating income, excluding non-cash expenses for depreciation and amortization, or OIBDA, was $66 million, down slightly from $69 million in the prior-year period.

Adjusted OIBDA, a metric more closely associated with actual operating results, was $109 million, an improvement from $79 million. Adjusted OIBDA does not include expenses such as integration and restructuring costs that are not regular, operational expenses. Excluding expenses associated with Warner's acquisition of PLG, adjusted OIBDA rose about 4 percent. Excluding these expenses associated with Warner's acquisition of PLG, adjusted OIBDA rose 38 percent.

The PLG acquisition accounted for two hits in the quarter, Coldplay's Ghost Stories and Lily Allen's Sheezus. Other important releases in the quarter were the Black Key's Turn Blue, Ed Sheeran's x, Linkin Park's The Hunting Party and Jason Derulo's Talk Dirty

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Warner's release schedule is weighted toward the second-half of its fiscal year. (Its fiscal year runs from October to September. Thus, its third and fourth quarters are the second and third quarters of the calendar year.) "We clearly see this in our third-quarter results and expect the impact from our strong release schedule will continue into the fourth quarter," said Brian Roberts, Warner's EVP and CFO.  

In the recorded music segment, total revenue grew 22.8 percent (20.8 percent excluding positive impact of foreign currency exchange rates). Digital revenue grew 26.7 percent and accounted for 58.9 percent of recorded music revenue, but would have grown 11 percent without PLG. Streaming revenue grew $69 million, or $53 million excluding PLG, but was partially offset by a decline of $8 million in download revenue. Artist services and expanded rights revenue grew 35.3 percent. Licensing revenue grew 21.2 percent.

Music publishing revenue grew 2.2 percent (0.7 percent without currency fluctuations). The 22.7-percent gain in digital revenue was attributed to growth in streaming revenue. Performance revenue grew 2 percent. Due to declining CD and download sales, mechanical revenue fell 6.1 percent. Synchronization revenue fell 3.8 percent.

In the United States, recorded music revenue grew 12.4 percent to $253 million and publishing revenue grew 6.3 percent to $51 million. The effect of the PLG acquisition was more apparent the international segment, where recorded music revenue grew 30.4 percent to $403 million. International music publishing revenue remained flat at $86 million.

Speaking about the PLG acquisition, Cooper said it's "now in its final stages" and annual cost savings of roughly $70 million will be realized by this time next year. Warner had $15 million of integration costs and $18 million in restructuring expenses related to PLG in the quarter.