Aggressive cost-cutting and restructuring allowed EMI to report a small gain in operating profits for the first half of its financial year, despite a double-figure fall in total revenues.

Aggressive cost-cutting and restructuring allowed EMI to report a small gain in operating profits for the first half of its financial year, despite a double-figure fall in total revenues.

In his report on the company's interim results for the six months ended Sept. 30, EMI Group chairman Eric Nicoli says a strong second-half release schedule means the company remains on track to deliver its financial objectives for the fiscal year.

The results showed sales down 11.4% to £851 million ($1.58 billion) compared to the same period in 2003, although operating profit rose 0.3% to £80.1 million ($148.3 million). Pre-tax profits excluding exceptional items and amortization of goodwill fell 7.3% to £36.9 million ($68.3 million).

The financial sector reacted positively to the results, released today (Nov. 19). Shares in EMI Group opened on the London Stock Exchange at 208.5p ($3.86) but by midday had climbed 13.7% to 237p ($4.39). Sources suggest the market was particularly enthused by the positive sentiments expressed by Nicoli in his chairman's report.

Nicoli predicts "a substantial and very welcome full-year improvement in the performance of the recorded music market" in coming months. He justifies that by citing "the positive overall trend in the global music market over the past year and the expected high levels of release activity across the industry in the months ahead."

The EMI management team is reported to have been in an "upbeat" mood at this morning's London briefing for analysts. Prior to the results, there had been speculation in the financial sector that EMI might release a profit warning or at least express caution about the outlook for recorded music, says one London-based analyst, who describes the rise in EMI's share price as a "relief bounce."

"The numbers were actually worse than anticipated," notes the analyst, "at least in terms of revenue growth of the recorded music division. But people have got excited to a certain extent because [EMI] has actually managed to improve their margins quite significantly, and also because the company is talking in a very upbeat manner about the music industry."

In his statement, Nicoli says the group has made a "significant improvement" in the profitability of both the EMI recorded-music business and EMI Music Publishing. He says that was driven by "ongoing commitment to efficiency improvements and thoughtful investment, the initial benefits from this year's recorded-music restructuring and the recent outsourcing of our manufacturing in Europe and the U.S."

Reflecting those "efficiency improvements," the company's overall operating margin on sales increased to 9.4% from 8.3% in 2003.

In North America, the group had sales for the six months of £287 million ($531 million), down from £328.5 million ($607.3 million) in the same period in 2003. Asia-Pacific revenues fell slightly to £172.1 million ($318.6 million) from £173.8 million ($321.8 million). In the United Kingdom, sales were down to £117.9 million ($218.3 million) from £129.3 million ($239.4 million). Continental Europe showed the steepest fall, to £241.4 million ($446.9 million) from £303 million ($561 million).

Nicoli claims that EMI's album release schedule is more heavily weighted toward the second half of the financial year than in the past. As a result, he said, sales for October and November are already "well ahead of last year, significantly reducing the first-half decline."

EMI Music saw sales fall to £660 million ($1.2 billion) from £758.6 million ($1.4 billion) in the first half. Tightened cost management and restructuring meant that the division's operating profit after exceptional items and amortization rose to £27.4 million ($50.7 million) from £7.6 million ($14.1 million) in 2003.

Nicoli notes that the U.S. record market showed "attractive growth" during the period, while continental Europe proved to be the "most difficult" region.

EMI Music Publishing had revenues of £191 million ($353.6 million), down from £201.7 million ($373.4 million) in 2003. Operating profit was relatively stable, declining to £26.2 million ($48.5 million) from £26.3 million ($48.7 million). The division's synchronization business increased its sales by 13.7% at constant currency values.

Digital revenues from publishing more than doubled during the period, to £6.1 million ($11.3 million) from £2.8 million ($5.2 million) in 2003. Digital revenues accounted for more than 2% of EMI Group's overall revenues, according to the report.