Record Label Shake Ups, Sales Make For A Tumultuous Year In The Music Industry
Record Label Shake Ups, Sales Make For A Tumultuous Year In The Music Industry

In issuing the first annual financial report since Access Industries completed its acquisition of the Warner Music Group in July, the headline $205 million net loss the company reported will likely fuel more uneducated speculation about Access having has buyer's remorse. But when you get under the hood and dig into the numbers, investors can see that the company will work just fine as a stand-alone entity, even without a merger with EMI.

For the year, the company reported that its loss widened considerably to $205 million for the year ended Sept. 30, 2011, from $143 million net loss reported in the prior fiscal year. But that was largely due to $67 million in costs related to the company's acquisition this year.

For the year, the company saw sales decline by 4% to $2.87 billion from $2.99 billion in the prior year, while operating income before interest, taxes, depreciation and amortization declined 16.4% TO 290 MILLION from the $348 million in OIBDA the company generated in 2010. But when you add back in the $67 million in acquisition-related costs, adjusted OIBDA stands at $357 million, which represents a 2.5% increase from the prior year.

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Its OIBDA total provides plenty of cushioning for the higher interest payments the company is making due to the debt structure Access put onto WMG in order to finance its acquisition. In the fiscal year just ended, interest expense totaled $213 versus $190 million in the prior year. But the company's new financing with higher interest payments is only partially captured in the above total. For a full year, Billboard estimates its interest payments will be about $230 million on its current debt.

Yet rumors have surfaced that because Access Industries was unsuccessful in acquiring EMI, that the Russion billionaire Len Blavatnik is unhappy with his investment in WMG. Buyer's remorse usually occurs when the new owner discovers that their due diligence wasn't thorough enough and undetected problems emerge; or discover they have paid too much. On the contrary, of all the bidders that competed in the auction for WMG, Blavatnik has the best handle on what the company is about. After all, he has only been serving on its board of directors since 2004. He was a member of the equity consortium that acquired WMG from Time Warner.

During a conference call with bond investors, WMG CEO Steve Cooper also dispelled rumors that its failure to buy EMI, which is being sold in two pieces to a consortium led by Sony USA and the Universal Music Group, has somehow soured Access' investment in WMG.

"Access has indicated that acquiring WMG has always been viewed as a stand-alone independent transaction." He also said Access is taking a "long-term view" on its ownership of WMG and said it will continue to "seek smart, strategic opportunities to drive growth."

Looking at the company by its parts, the recorded music operation produced $282 million in OIBDA on $2.344 billion in revenue before intersegment payments within the company are eliminated for the year ended Sept. 30, 2011, according to the company's 10-K filing with the SEC. For OIBDA that represented a slight increase of 1% from the prior year's total of $279 million, while the revenue was down 4.6% from the $2.46 billion the company produced in the prior year.

Of the total, physical music sales and other unspecified sales accounted for $1.342 billion, or 57.3% of total recorded music revenue; while digital accounted for $768 million or 32.7%; and licensing produced $234 million, or 10.

While the licensing revenue grew 7.3% from $218 million total in the previous year and digital increased by 7.7% to $768 million from $713 million, physical revenue dropped 12.1% to $1.342 billion from $1.528 billion.

Within the $2.344 billion total, the U.S. accounted for $958 million, or nearly 41%, while international totaled $1.386 billion, or 59%.

Meanwhile, Warner Chappell Music Publishing generated $147 million in OIBDA on $544 million in revenue in the year ended Sept. 30, 2011. Its OIBDA total is down 6.3% from the $157 million the publishing company produced in the prior year, while its revenue total decreased 2.1% from the $556 million it tallied in the prior year.

In looking at a breakout of publishing revenue, the company spent $330 million on artist and repertoire costs, while its selling, general and administrative expenses totaled $69 million, which means that the company's net publisher's share was about $216 million.

Within publishing, mechanical revenue totaled $142 million, a 19.7% drop from the $177 million garnered in the prior year. But that's due to the fact that in the prior year ending Sept. 30, 2010, the company received a $25 million payout from the pending and unmatched settlement and only a $5 million payout in 2011. Meanwhile, performance revenue grew 3.3% to $214 million from the $207 million reported in the prior year; synchronization grew 10.7% to $113 million from $102 million; digital revenue increased slightly to $60 million from $59 million; and other revenue jumped to $15 million from $11 million.

Breaking out publishing revenue by territory, the U.S. accounted for $195 million, or 35.8% of overall publishing revenue while international publishing revenue was $349 million, or 64.1%.