Business

Warner Music Ends Pandemic Year With Solid Digital Growth, Flat Overall Revenue

Dua Lipa
Hugo Comte

Dua Lipa

"We are confident in our long-term growth prospects," says CFO Eric Levin, "particularly as the areas of our business that have been most impacted by COVID return to normal."

In the year of the COVID-19 economic downturn, Warner Music Group managed to hold its own in the fourth quarter, producing revenues of $1.126 billion versus $1.124 billion, an increase of $2 million. But on the 12-month period, WMG was down slightly to $4.463 billion from $4.475 billion in the prior year, a decrease of $12 million, or 0.27%.

"We're proud of everything we've accomplished in the past year, despite the challenging conditions that the world has faced," WMG CEO Steve Cooper said in a statement. "We're essentially flat against a record-breaking prior year and, during the quarter, we grew 11% on an as-reported basis, excluding the revenue streams most impacted by COVID."

But when looking at profit, things weren't as good for WMG as the company posted a net loss of $1 million or 0 cents per share; versus a profit of $91 million in the year earlier corresponding quarter when profit was 18 cents per share. The loss was much steeper for the full year, with $470 million in red ink for the year, versus $258 million in net profit in the prior year. And that translated into an 82 cents per share loss for Class A shareholders and 95 cents per share for Class B shareholders, according to the company, versus earnings of 51 cents per share for the Class B shareholders, Access Industries, in the prior year.

But that loss was expected as the company forecast earlier when it went public that it would have a big non-cash stock-based executive compensation expenses, which came in at $608 million, due to stock awarded to the company's management incentive plan.

Otherwise, the company posted adjusted earnings before taxes, depreciation and amortization of $177 million, up from $133 million in the year earlier quarter, while for the full year EBITDA increased by 13.6% to $837 million from $727 million in the year ended Sept. 30 2019.

And after amortization and depreciation are taken into account, the company reported operating income of $88 million for the three-months ended Sept. 30, versus $29 million for the fourth quarter of 2019, which translates into a 203.45% increase. Yet for the full year, operating income posted a $229 million loss, versus net income of $356 million in the prior year.

The company said operating income for the year was impacted by the non-cash stock-based compensation expense, COVID-19-related expenses and the company's Los Angeles office consolidation and restructuring and other transformation initiatives.

Following the financial disclosure, WMG shares fell 95 cents to $28.01 at close, according to Yahoo finance, down from Friday’s closing price of $29.96.

Breaking out company revenue by operations, recorded music generated $3.81 billion versus $3.840, a decline of 0.8%, but within that digital revenue, fueled by streaming, grew 9.6% to $2.568 billion, versus $2.343 billion in the prior year.

But the other areas of WMG’s recorded music operation were all impacted by the pandemic, with physical falling to $434 million from $559 million, or 19.5%, due to store closures during shutdowns and a continued downward trend for CDs; while artist services and expanded rights, depending on touring and merchandise, fell to $525 million from $629 million, a 16.5% decline; and licensing, heavily depending on synchronization uses for movie, TV shows and commercials, which also ceased production during the economic shutdowns, also fell to $283 million from $309 million, or 8.4%.

Overall, recorded music's operating income was down dramatically to $175 million from $439 million in the prior year, due to the aforementioned higher non-cash stock-based compensation expenses.

Looking at recorded music for the fourth quarter, revenue grew slightly to $958 million from $953 million, or half a percent.

WMG said major sellers for the year included releases by Dua Lipa, Roddy Ricch,Tones and I, Aimyon and Cardi B, among others.

Moving over to music publishing, Warner Chappell Music saw revenue decline slightly to $169 million from $172 million, a 2.3% decrease in the fourth quarter, due to performance revenue down a whopping 41.7% to $28 million from $48 million due to the closures of bars, clubs, concert halls.

For the full year, however, publishing increased 2.2% to $657 million from $643 million. But operating income was down 12% to $81 million for publishing from $92 million in the prior year.

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Within recorded music, streaming grew 9.6% to $2.568 billion from $2.343 billion (accounting for 63.1% of total recorded music revenue) but downloads fell nearly 23% to $165 million from $214 million (for 4.3% of recorded music revenue). Physical sales fell 22.4% to $434 million from $559 million; artists services and expanded rights fell 16.5% to $525 million from $629 million; and licensing and other revenue fell 8.4% to $283 million from $309 million.

That means digital is now 67.4% of recorded music revenue, physical 11.4%, artist services 13.8%, and licensing and other revenue 7.4%. In the prior year, recorded music revenue broke out to digital at 61% (of which streaming was 55.4%, and downloads 5.6%), physical was 14.6%, artist services 16.4% and licensing 8%.

As for publishing, performance licensing fell 22.4% to $142 million from $183 million; mechanical fell 12.7% to $48 million from $55 million; synch held its own at $119 million from $120 million; and other revenue was down slightly to $11 million from $14 million. As a percentage of publishing revenue, digital now comprises 51.3% this year up from 42.1% last year; performance 21.5% from 28.5% last year; mechanical 7.3% from 8.6% last year; and other 1.7% from 2.2% last year.

At the end of the fiscal year, WMG’s debt total stood at $3.104 billion, up from the prior year when debt was $2.974 billion. But after the year closed, WMG added an additional $250 million in debt and used cash to pay for two, so far, undisclosed acquisitions. During the conference call, Cooper said the company made a deal acquiring the catalogs of one of the company’s artist -- a catalog that it already had a share in. But it's not clear if they bought that catalog completely, or if the artist still retains a share.

Looking ahead, Cooper reminded that when the pandemic eventually ends, the future looks bright for the music industry. "Our streaming growth has stayed strong, and we've also seen an acceleration in a whole spectrum of emerging revenue streams such as social media, gaming, and in-home fitness," Cooper said in a statement. "In this increasingly complex environment, where music is woven into every aspect of our lives, our creative expertise and global reach are more valuable than ever."

But both executives also warned during a conference call with Wall Street analysts that in the current year that began Oct. 1, they expect the second half to be stronger than the first half due to a release schedule that has been impacted by the shutdown, which kept artists from getting together in the recording studios; and a slow return to the film, TV, and commercial Productions that fuel synch revenue.

Cooper picked up on the future is bright for the music industry them in his opening statement on the analyst conference call.

"Music is being woven into every aspect of our daily lives and we have the unique intellectual property that countless emerging platforms need," Cooper said in prepared comments. "We're standing on the threshold of a new golden age of music and the opportunities are everywhere. As a result, we see subscription streaming as just the beginning. It's only one of our many avenues for long-term growth."

He said social media would play a much more prominent role in revenue generating in the future.

"With an expanding number of partnerships including Facebook, TikTok, and Snap, among others, social media is already a meaningful nine-figure revenue stream for us and is growing at a faster rate than subscription streaming," Cooper said. "Billions of people are able to create the soundtrack to their lives. The creators are the audience and the audience are the creators, producing a massive multiplier effect. Artists and songwriters of all genres and generations have the potential to go global at any moment."

He added that COVID has supercharged the demand for 2D and 3D live streaming events, and also cited virtual concerts on platforms like Wave XR, Roblox and Fortnite.

And he predicted that when gaming explodes to a several hundred billion dollar market by 2025, music will benefit as well. Finally, he said WMG has expanded into other forms of entertainment including TV and podcasting.

On a financial note, executive VP and CFO Eric Levin addedL "Our results are underpinned by the continued momentum we are seeing in streaming and the operating leverage driven by our digital transformation and business optimization initiatives. As we look toward the future, we are confident in our long-term growth prospects, particularly as the areas of our business that have been most impacted by COVID return to normal."