Digital distributor The Orchard reported a 9% increase in revenue in 2009, but a $14.1 million impairment of goodwill in the third quarter left the company with a loss of $17.8 million. Without the impairment, net loss would have been $3.7 million, even deeper than the $2.3 million loss reported in 2008.

In the fourth quarter, the company had record earnings of $16.7 million, an increase of 3% over the prior-year period. Operating expenses were 20% lower as a result of layoffs and other cost-cutting measures.

In spite of gains and cost savings, The Orchard’s full-year results show the lackluster state of digital sales. Even though its catalog grew by 33% and it is part of the music market’s digital transition, the company could muster only a 9% increase in revenue. Considering roughly a tenth of the company’s total revenue comes from non-core activities (such as artist services and marketing) that are supposed to buoy top line numbers, that slight increase is somewhat disappointing.

To be fair, The Orchard’s 9% gain did exceed Warner Music Group’s 8% increase in recorded music digital revenue during the calendar year 2009. The slowdown is being felt by everyone.

The Orchard announced on March 16 it had reached a merger deal with Dimensional Associates, the private equity affiliate of JDS Capital that already owns 42% of The Orchard’s common stock and 99% of its preferred stock. The company did not comment on the merger during Thursday’s earnings call.

Other notes from the earnings release and conference call:

- Downloads account for about 67% of revenue while subscription is about 8% and mobile accounts for about 8%, said CFO Nathan Fong. He added that 10% to 12% is revenue from non-core activities such as marketing and client services.

- An increase in catalog did not produce commensurate increases in downloads or revenue. The number of The Orchard’s saleable tracks rose 33% on the year to 1.8 million but the number of track downloads increased 20% and its revenue increased only 9%. In other words, adding long tail titles will result in smaller and smaller incremental gains.

- The company had 61.5 million paid downloads during 2009, a 20% increase.

- The Orchard’s active catalog averaged 38 downloads per track and 81% of its catalog was downloaded at least once in 2009.

- iTunes, eMusic and Amazon are top three retailers. iTunes accounted for 60% of total revenues in 2009, up from 55% in 2008.