Favorable market trends are helping Warner Music Group right the ship, CEO Stephen Cooper said during Thursday morning's earnings call for the quarter ended June 30. With growth in streaming and slowing declines in download and physical revenues, "the business looks like it's stabilizing," he said.
Revenue in the quarter was down just 1 percent excluding the impacts of currency fluctuations but was down 10 percent when the impact of a stronger dollar was taken into account. The quarter's revenue change fared well considering it was being compared to a prior-year quarter in which revenue grew 17 year over year.
Revenue looks more stable over a longer time period. For the nine-month period ended June 30, Warner's revenue was actually up 6 percent at constant currency but down 1 percent as reported.
The highlight of the quarter was growth in services like Spotify and Pandora. Streaming revenue grew 26 percent in the quarter, putting greater distance between streaming and downloads. Last quarter, Warner announced its streaming revenues had exceeded download revenues for the first time.
Cooper gave time to subscription services during the earnings call, saying Warner believes that "streaming, especially subscription streaming, has the power to propel our industry's growth." He singled out the launch of Apple Music subscription service and Apple's new Beats 1 online radio station. "The fact that the world’s biggest retailer of downloads has launched a subscription service is clearly a milestone for the music business," said Cooper.
Continuing to talk about subscription services, Cooper mentioned Spotify adding video and podcasts, Google Play adding Internet radio, SoundCloud's upcoming subscription services -- Warner is the only major to license thus far -- and Rdio's $3.99 limited subscription service. "The heightened competition among streaming services is also positive. We are hopeful that it will encourage more aggressive marketing, bolder experimentation, and faster innovation."
Warner's total revenue was almost flat, although currency fluctuations -- the same that impacted Sony Music last quarter -- left a deep scar on Warner's financials. Excluding currency fluctuations, Warner's revenue dropped just 1 percent to $783 million in the quarter ended June 30. However, including changes in currency that account for a stronger dollar, Warner's revenue dropped 9.9 percent to $710 million.
Helping stabilize the business, Warner's record labels have been on a bit of a hot streak. Warner had 12 number one albums in the U.S. over the latest 12 months compared to 2 in the prior 12 months. “See You Again" by Wiz Khalifa, from the Fast and Furious 7 soundtrack, spent 12 weeks at number one on Billboard's Hot 100 chart -- tied with the Black Eyed Peas' "Boom Boom Pow" for the longest streak for a rap single at number one. Ed Sheeran continues to connect with fans. His song "Thinking Out Loud" became the first single to spend a full year inside the U.K. top 40.
Music formats' trends followed their familiar paths last quarter. With falling download sales in opposition to strong streaming growth, digital revenue in the quarter declined 2 percent to $293 million, although it increased roughly 5 percent at constant currency. Physical revenue dropped 20 percent to $161 million.
Revenue wouldn't hold up if consumers more aggressively shifted away from downloads and physical formats. But while purchases are declining, Cooper said he believes some people "prefer to own as opposed to rent, so to speak," and both physical and download sales still account for "an enormous amount" of Warner's business. "Let's not shoot physical so quickly," said Cooper.
Revenues for both the recorded music and publishing divisions were down 10 percent but at constant currency were down just 1 percent. U.S. recorded music revenue was down just 5 percent. International recorded music revenue was down 13 percent but was in positive territory at constant currency.
Warner's net loss last quarter improved 76.6 percent to $43 million. It posted better results in the nine-month period ended June 30. Nine-month revenues were down just 1.8 percent to $2.2 billion while net loss improved 76.7 percent to $65 million.
The bottom line improved because of lower cost of revenues -- digital music has better margins than physical product -- but mainly reduced selling, general and administrative expenses. As percentages of revenue, SG&A expense dropped to 35.4 percent from 40.5 percent in the quarter and to 36.1 percent from 39.2 percent in the nine-month period.
Net income comparable was helped by a reduction in restructuring costs related to Warner's acquisition of Parlophone Label Group. Total restructuring costs were $2 million in the most recent nine-month period compared to $42 million in the prior nine-month period.
Artist services and expanded rights revenue accounted for nine percent of total revenue in the nine-month period.