The one expense that increased as a percentage of revenue was product costs — which in addition to the expense associated with manufacturing CDs and vinyl and the escalating price to meet consumer demand for more elaborate packaging, also includes costs associated with the products offered through the company’s merchandising business. So that expense center increased 12.4% in the company’s fiscal first quarter to $254 million in the company’s fiscal first quarter from $226 million, which as a percentage of revenue comes out to 20.2%, up from 18.8% in the corresponding year-earlier period.
After subtracting costs, that leaves operating income before depreciation and amortization of $236 million, up 9.8% from the $215 million in OIBDA in the fiscal first quarter of 2018. That means OIBDA margin grew almost a full percentage point to 18.8% from 17.9%; and after subtracting out depreciation and amortization, operating profit comes in at $165 million, a 12.2% increase over the $147 million in the year earlier period. So operating margin also increased to 13.2% of revenue from 12.2% in the corresponding period of the prior year.
Breaking out revenue, music publishing grew 4.8% to $173 million from $165 million in the fiscal first quarter of the prior year, while recorded music totaled $1.084 billion, up 4.1% from $1.04 billion. Of the two operations, record labels exhibited tight cost control discipline, with SG&A declining $3 million to $316 million from $319 million, which as a percentage of revenue means that category of expenses declined more than a full percentage point to 29.2% from 30.6% in the fiscal first quarter of 2018.
Likewise A&R costs also were flat at $294 million in the three-month period just ended versus $295 million.
Moving over to a strong profit side of the income statement, the recorded music operation produced $241 million, a 14.2% increase over $211 million, which gives it an OIBDA margin of 22.2%. So, thanks to economies of scale and squeezing expenses, operating income totaled $191 million, a 17.2% increase over the $163 million, which drives operating margin up almost two percentage points to 17.6% from 15.7%.
Breaking out recorded music revenue by format and operation, streaming grew 17.3% to $589 million from $502, but downloads and other digital revenue fell from $44 million from $61 million, a 27.9% decline; and physical products fell 20.3% to $184 million from $231 million. Revenue from the declining physical formats are falling at a much faster pace at WMG than the other two majors, apparently due to a company decision to disinvest in physical staff while also making an ill-fated warehousing switch that has caused it to lose a number of major independent labels with large physical presences like Epitaph, Beggars Banquet, Secretly Canadian, and Third Man, among other defecting labels.
Artist services and expanded rights grew 13.3% to $188 million from $166 million and licensing was down slightly to $79 million from $81 million. As a percentage of recorded revenue, streaming now comprises 54.3%; physical 17%; downloads at 4.1%; artist services at 17.3% and licensing and other at 7.3%. Last year, in the fiscal first quarter, those percentages, respectively from 48.2% for streaming, 22.2% for physical, 5.9% for downloads, 15.9% for artist services and 7.8% on licensing.
Publishing financial results were also positive, if not as strong as recorded music. Revenue grew 4.8% to $173 million from $165 million for the fiscal first quarter but that was an increase of just $8 million. Performance revenue was the weak spot, falling 13.2% to $46 million from $53 million, and according to management’s conference call with Wall Street analysts the decline was just a matter of the timing of payments from performance rights organization. Meanwhile, digital, which is mainly mechanical revenue from on-demand services grew 12.3% to $73 million from $65 million; while mechanical held steady at $15 million as did other income streams, which generated $3 million in both time periods. However, synch revenue showed strong growth to $36 million, a 24.1% increase from $29 million in the prior year’s fiscal first quarter.
On the cost side of the income statement, publishing showed less discipline, with SG&A expenses growing to $23 million from $19 million, a 21.1% increase while A&R costs grew 9.3% to 118 million from $108 million. It looks like Warner Chappell is spending more to retain songwriters on its roster and land new signings to offset revenue lost due administration deals with Disney Music Publishing ending and signing with a competitor and songwriters like Rihanna and Beyonce following former Warner Chappell chairman to Sony/ATV.
During the conference call, WMG CEO Steve Cooper talked about the company’s "turbo charged A&R activity," but mainly from the recorded music side.
"We continue to build out the breadth and depth of our repertoire centers," he told Wall Street analysts, according to a recording of that call. “One of the most recent examples is the Elektra Music Group, which we established as a new stand-alone frontline U.S. label in the last fiscal year, under the leadership of [co-presidents] Gregg Nadel and Mike Easterlin.”
Cooper cited new talents like Lizzo, Tones & I, hip-hop artists like Cardi B and Young Thug; legends like Rod Stewart and Prince; and superstars like Coldplay and Ed Sheeran as contributing to WMG’s success during the quarter.
Moreover, he also pointed out that WMG has a strong international presence naming artists like France’s Renaud, Japan’s Wanima and TWICE, and European artists like Aya Nakumura in France; Bausa in Germany; Fred DePalma in Italy.
Finally, Cooper congratulated WMG Grammy winners like Dan & Shay, Brandi Carlile, Nipsey Hussle, Anderson Paak, and the Hadestown cast recording, noting artists up for the Brit awards include Burna Boy, Charli XCX, Foals, Lizzo, Mahalia and Rag ’N’ Bone Man.