Warner Music Group enjoyed a 15 percent increase in revenue to $1.2 billion in its fiscal first quarter, from $1.045 billion in the corresponding period in the prior year, while also seeing net income rise to $86 million from $5 million.
Within that, the recorded music operation also grew 15 percent to $1.041 billion from $904 million, marking the first time as a stand-alone entity that division reached that milestone. That company also posted $147 million in operating income, up 63 percent from $90 million in the first quarter ended Dec. 31, 2017; while operating income before depreciation and amortization totaled $215 million, or a 39 percent increase from the earlier corresponding period when it was $155 million.
“Our first-quarter results are evidence that our long-term strategy is paying off,” Warner Music Group’s executive vp and CFO Eric Levin said in a statement. “Our Recorded Music business alone exceeded $1 billion in revenue, and we also had strong OIBDA and cash flow.”
Breaking out revenue by operation, recorded music garnered $1.041 billion, publishing revenue came in at $165 million and intercompany eliminations at $3 million.
In contrast, the Warner Music Group appears to have slightly outpaced Sony Music Entertainment’s recorded music operation, which had $1.039 billion after currency translations for the same period ending Dec. 31.
WMG recorded music benefitted by a net gain of $54 million. In that, $76 million gross revenue was picked up from the company’s EMP acquisition in September 2018, which was offset by $24 million lost to divesting a concert promotion operation and due to a change in the way it accounts for booking revenue.
Looking at profitability, recorded music produced $211 million in operating income before depreciation and amortization; and operating income of $163 million, versus OIBDA of $173 million and operating income of $129 million in the year prior’s corresponding period.
Breaking out recorded music revenue by format, digital overall accounted for $563 million in revenue. Of that, $507 million was from streaming and $46 million was from downloads. Compared to the previous year, those totals represent a 17 percent overall increase from $481 million in digital, a 25.5 percent increase in streaming from $404 million and a 27.3 percent decrease in downloads from $77 million.
Surprisingly, physical revenue increased slightly to $231 million from $223 million in the previous year, thanks to sales of releases by the late Johnny Hallyday in Europe. Also, artist and expanded rights services were up significantly to $166 million from $105 million, due to the acquisition of EMP, an entertainment online retailer — a move that also increased distribution costs to $36 million from $20 million last year in the first quarter.
Digital now amounts to 54.1 percent of WMG’s total revenue, breaking down to 48.7 percent for streaming and 5.4 percent for downloads, overall. Meanwhile, physical sales account for 22.2 percent of revenue, 15.9 percent is artists services and expanded rights and 7.8 percent for licensing and other revenue.
In the prior quarter, respectively, those formats and income streams broke out to 50.4 percent digital (39 percent was streaming and 11.4 percent downloads), 28.5 percent for physical, 11.3 percent for artists services and 9.8 percent for licensing.
In discussing the result during a conference call, WMG CEO Steve Cooper noted that while the industry in general and WMG in particular were helped by the digital services geographical expansions into new markets, he was concerned about the trend of falling average revenue per user across digital services platform.
“I have a critically important point to make about streaming,” Cooper said during the conference call. “Our artists make music that is meaningful and has long-lasting value…. In our view, the value of music should be treated as independent of the choices thats streaming platforms make about their pricing of their services and their customer acquisition strategies.”
In other words, as services seek to differentiate themselves and entice customers with new marketing schemes, don’t expect the labels and artists to shoulder those costs.
When an analyst asked about digital services like Spotify doing direct deals with artists, Cooper’s answer showed he is not concerned about that development. He said he thinks that the streaming service will continue to look for ways to improve margins and that it will likely come from outside music. But where they do make moves like signing artists directly he said that he is not concerned because “we have an expectation of a level playing field.” He continued that as long as the services provide a level playing field and not use their ability to “steer music to playlists that disadvantage us … we will be able to compete effectively in the environment longterm regardless of the left and right turns the streaming services choose to make” with regards to their business.
Moreover, Cooper added that he didn’t see the services as a competition threat in signing artists directly. “Its important to remember they are not organized to create value and careers for artist,” like labels are.
In other discussions, during the conference call the company executives talked about its deal in helping Sesame Street revive its music operation saying that the catalog is now available digitally with new music expected later in the year.
Meanwhile, music publishing revenue likewise grew 15 percent to $165 million from $143 million, with all of that gain due to the change in how the company books revenue. On the other hand, operating income improved to $22 million compared with a $1 million operating loss in the prior year’s fiscal first quarter.
Breaking out publishing revenue, performance revenue totaled $53 million, a 23 percent increase from the prior period when royalties from those rights produced $43 million. Meanwhile, digital increased by 22.6 percent to $65 million from $53 million, synchronization rose by 7.4 percent to $29 million from $27 million, and other revenue grew to $3 million from $2 million. Mechanical revenue fell to $15 million from $18 million a 16.7 percent drop.
In those totals, performance accounted for 32.1 percent of total publishing revenue, performance 39.4 percent, mechanical 9.1 percent, synch 17.6 percent and other 1.8 percent. The prior year, revenue broke down to 30.1 percent performance, 37.1 percent mechanical, 12.6 percent, 18.9 percent synchronization and 1.4 percent other.
Shifting to a geographic view of the company, its U.S. operation totaled $404 million, marking a 16.4 percent increase from $433 million. International revenue ticked up 14.3 percent to $702 million.
Within recorded music, $431 million of WMG’s $1.041 billion came from the U.S. and $610 million from international operations. For the $165 million in publishing, U.S. operations accounted for $73 million and $92 million came internationally.
The company reports it paid 166 million euros ($190 million) to acquire EMP Merchandising during the year. As a result of that acquisition, long-term debt grew by almost $180 million to nearly $3 billion, with $220 million of that coming due in 2022.
During the quarter, WMG paid Access Industries a $31.25 million dividend and said that it would make similar sized payments in its fiscal second and fiscal third quarter. It added that the fourth quarter dividend would be determined depending on the company’s financial situation after taking into account other potential uses for cash, such as acquisitions, investments in the business and the repayment of debt.
During the earnings call, an analyst asked WMG executives how buying an entertainment merchandising online retailers like EMP fits in with the direction of the company’s mergers and acquisition strategies. Chief Financial Officer Eric Levin responded with assurance that the company would also continue to make traditional acquisitions in strategic growing areas when deals with the right economic metrics come along. He also said the EMP deal improves WMG’s direct reach to music fans. Noting that importance going forward, he added that WMG will continue to look for deals “that will help us expand our reach to consumers.”