Like most major music companies, Warner Music Group has been impacted by the COVID-19 pandemic. Warner Music Group Corp. revealed its third-quarter financial results for the period ending June 30, 2020. Total revenue decreased 4.5% (3.1% in constant currency), even as digital revenues grew 11.1% (13.4% constant currency). Note: Constant currency refers to exchange rates used in order to eliminate foreign currency fluctuations when calculating financial performance numbers.
“We’re very pleased with our performance this quarter, especially in light of the global pandemic. Our results highlight the underlying strength and resilience of our business. Streaming revenue grew double digits and our digital transformation continues,” said Steve Cooper, CEO, Warner Music Group. “Our commitment to new artist development is illustrated by the fact that four out of our top five best-sellers this quarter were from artists releasing debut or sophomore albums. Our artists and songwriters continue to create music that moves the world including, in the U.S., the most-streamed song of 2020, as well as the No.1 and No. 2 biggest Pop songs during the first half of the calendar year.”
“These results are slightly better than our expectations, given the sustained effect that COVID has had on certain aspects of our business,” added Eric Levin, Executive Vice President and CFO, Warner Music Group. “That’s a testament to the incredible ability of our teams, our artists and our songwriters to pivot and adapt, and to keep the hits coming. We have a robust cash position and all the music and resources needed to come out the other side of this with our long-term prospects as strong as ever.”
WMG’s earnings statement revealed that growth in Recorded Music and Music Publishing digital revenue was more than offset by a decline in Recorded Music physical, artist services and expanded-rights and licensing revenue and in Music Publishing performance, mechanical and synchronization revenue. The revenue decline was primarily due to COVID-related business disruption and the unfavorable impact from foreign currency exchange rates, partially offset by the continued growth in streaming. Digital revenue grew 11.1% (or 13.4% in constant currency), and represented 71.3% of total revenue, compared to 61.2% in the prior-year quarter.
Operating loss was $433 million compared to operating income of $58 million in the prior-year quarter. Operating income before depreciation and amortization (“OIBDA”) was a loss of $371 million, down from income of $124 million in the prior-year quarter and OIBDA margin decreased 48.4 percentage points to (36.7)% from 11.7% in the prior-year quarter. Net loss was $519 million compared to income of $14 million in the prior-year quarter. The decrease in net income, operating income, OIBDA and OIBDA margin was primarily due to a higher non-cash stock-based compensation expense of $426 million related to the Company’s long-term incentive plan reflecting changes in the value of the Company’s common stock, as well as $86 million in one-time costs associated with the Company’s IPO.
Adjusted operating income, Adjusted OIBDA and Adjusted net income exclude costs related to the Company’s IPO, non-cash stock-based compensation and restructuring and other transformation initiatives in the current quarter and costs related to the Company’s Los Angeles office consolidation, non-cash stock-based compensation and restructuring and other transformation initiatives in the prior-year quarter. See below for calculations and reconciliations of Adjusted operating income, OIBDA, Adjusted OIBDA and Adjusted net income.
Adjusted OIBDA increased 12.2% from $148 million to $166 million in the quarter due to lower expenses resulting from COVID-related business disruption and active cost-management efforts and Adjusted OIBDA margin increased 2.4 percentage points to 16.4% from 14.0% due to margin improvement associated with a decrease in lower-margin physical revenue and artist services and expanded-rights revenue and an increase in higher-margin streaming revenue, as well as lower operating costs. Adjusted operating income increased 27% from $82 million to $104 million in the quarter due to the same factors affecting Adjusted OIBDA.
Adjusted net income was $18 million compared to $38 million in the prior-year quarter. The decrease was due to an increase in income tax expense in the current quarter due to higher pre-tax income before non-deductible expenses related to the Company’s long-term incentive plan and one-time costs associated with the Company’s IPO, partially offset by gains on investments.
Adjusted EBITDA was $189 million compared to $159 million for the prior-year quarter. The increase was largely due to the same factors impacting Adjusted OIBDA in addition to higher pro forma savings expected to be realized from certain transformation initiatives.
Basic and Diluted earnings per share was a loss of $1.03 for both the Class A and Class B shareholders. The loss was due to the same factors affecting net loss.
As of June 30, 2020, the Company reported a cash balance of $532 million, total debt of $3 billion and net debt (defined as total long-term debt, net of deferred financing costs, minus cash and equivalents) of $2.468 billion.
Cash provided by operating activities was $123 million compared to $150 million in the prior-year quarter. The change was largely a result of the timing of working capital including royalty payments. Free Cash Flow, defined below, was $87 million compared to $103 million in the prior-year quarter largely due to lower operating cash flow, partially offset by a decrease in capital expenditures and investment activity.
Recorded Music revenue was down 5.7% (or 4.2% in constant currency). The revenue decline was primarily due to COVID-related business disruption and foreign exchange rates in the current quarter, partially offset by the continued growth in streaming. Growth in digital revenue was more than offset by declines in physical revenue, artist services and expanded-rights revenue and licensing revenue. Digital revenue growth reflects the continuing shift to streaming. The decline in physical revenue reflects lower physical sales due to the impact of COVID and the continuing shift to streaming. The decline in artist services and expanded-rights revenue was due to the timing of tour schedules compared to the prior-year quarter and tour postponements and lower tour merchandise revenue resulting from COVID-related business disruption. The decline in licensing revenue reflects a decrease in advertising spend and licensing activity due to the impact of COVID. Major sellers included Dua Lipa, Roddy Ricch, Lil Uzi Vert, Tones And I and Ed Sheeran.
Recorded Music operating loss was $160 million, down from operating income of $85 million in the prior-year quarter and operating margin was down 27.9 percentage points to (18.6)% versus 9.3% in the prior-year quarter. OIBDA decreased to a loss of $119 million from income of $131 million in the prior-year quarter and OIBDA margin decreased 28.1 percentage points to (13.8)%. Adjusted OIBDA was $167 million versus $146 million in the prior-year quarter with Adjusted OIBDA margin up 3.4 percentage points to 19.4%. The decrease in operating income and OIBDA was driven by a higher non-cash stock-based compensation expense of $276 million. The increase in Adjusted OIBDA and Adjusted OIBDA margin was primarily due to overall cost savings and revenue mix.
Music Publishing revenue grew 1.4% (or 2.8% in constant currency). Growth in digital revenue was partially offset by declines in performance, synchronization and mechanical revenue. Digital revenue growth reflects the continuing shift to streaming and timing of digital deals. The decrease in synchronization revenue relates to a decrease in advertising spend and licensing activity resulting from COVID-related business disruption. The decrease in mechanical revenue is due to COVID-related business disruption, the continuing shift to streaming and one-time distributions in the prior-year quarter. The decrease in performance revenue was primarily driven by COVID-related business disruption.
Music Publishing operating income was $14 million compared to $18 million in the prior-year quarter. Operating margin decreased 2.8 percentage points to 9.4%. Music Publishing OIBDA decreased by $3 million or 8.3% to $33 million, and OIBDA margin declined 2.4 percentage points to 22.1% from 24.5%. Adjusted OIBDA decreased by $2 million and Adjusted OIBDA margin declined 1.7 percentage points to 22.8% due to revenue mix.
