Warner Music Posts $958M in Q3 Revenue, Says It Sold Remaining Spotify Shares
Warner Music Group again flirted with a billion dollars in revenue for the third quarter, fueled by growth in streaming that continues to offset a decline in physical sales. Total revenue for the three-month period ended June 30 was $958 million, up 5 percent in the prior-year quarter, but down slightly from the $963 million in Q2 sales.
During an earnings call on Tuesday (Aug. 7), WMG CEO Steve Cooper also revealed that the company had sold its remaining stake in Spotify holdings, realizing $504 million in total proceeds. In May, Cooper announced they had sold 75 percent of its Spotify assets, accounting for $400 million of that total. As promised, the company will share proceeds with its artists on the same basis as it does for digital revenue. "I’m pleased to say that, in connection with the sale of our Spotify equity, an estimated $126 million will be credited to artist accounts on their June 30 royalty statements which are issued around the world in August and September," Cooper said on the call.
The sale of its Spotify shares, as well as foreign currency gains on debt, helped boost net income to $321 million, compared to $143 million the prior-year quarter. The increase was largely attributable to $317 million (net of tax) from Spotify and other sources.
Operating income was $28 million, down 45 percent from $51 million in the prior-year quarter. Operating income before depreciation and amortization (OIBDA) took a smaller hit, declining 13.9 percent to $99 million from $115 million the prior-year quarter. WMG pointed to higher administrative costs -- including those related to the company's Los Angeles office consolidation, as well as the relocation of its shared service center in Nashville -- and compensation expenses for the declines.
Recorded music posted $67 million in operating income on revenue of $802 million for the third quarter, as compared with $77 million in operating income on revenue of $770 million in the same period in 2017. That represents a 13 percent decrease in operating income and 4 percent increase in revenue.
Of that $802 million in revenue, a hefty $519 came from digital sources, broken down to $448 million from streaming and $71 million from downloads. That's up from $360 million in streaming and $88 million for downloads year over year. "While Apple and Spotify continue to grow their global subscriber numbers, Amazon and YouTube are both off to a great start with their premium services," said Cooper. "This increased competition is good news for our business, and we’re happy to see other large tech companies, such as Facebook, begin to recognize the true value that music brings to their platforms."
Keeping with industry trends, the physical segment continued its decline during the quarter with revenue of $130 million, down from $163 million the year before. Artist services and expanded-rights took a slight hit with $85 million, down from $93 million, which the company says was due to lower concert promotion activity, and licensing ticked up to $68 million, from $66 million.
The company said recorded music revenue declined in Europe, but grew in the U.S., Latin America and Asia. Major sellers included Ed Sheeran, Cardi B, Bruno Mars, Dua Lipa and the soundtrack to The Greatest Showman.
Music publishing generated $159 million in revenue, an increase from the $150 million garnered in the same quarter of the prior year. Within publishing, performance revenue was flat at $51 million compared to $52 million the year-prior quarter; digital was up to $59 million from $50 million; mechanical was down slightly to $17 million from $18 million; while synchronization also saw slight gains to $28 million from $27 million; and other revenue rose a bit to $4 million from $3 million.
As of June 30, the company said it had a cash balance of $905 million and total debt of $2.814 billion. Free cash flow was $608 million compared to $89 million in the prior-year quarter, largely due to the sale of the company’s Spotify shares.
On the earnings call, WMG was asked about Spotify's controversial direct licensing deals with managers and independent artists. "As the digital landscape becomes more crowded, our services become more needed... and while Spotify's move will be applauded by some, at the end of the day it will be a situation we'll just have to deal with over time," said a representative, who added that the company doesn't foresee a "negative impact on our business when artists see what WMG has to offer."