Warner Music Group has today revealed its Q2 earnings for the three-month period ending March 31, with total revenues up 10.7% year-on-year from $745 million to $825m (12.7% in constant currency).
The major’s revenue growth was driven by an uptick in revenues across both its recorded music (10.5%) and publishing (14.2%) operations.
Overall operating income was $78 million, compared to $52 million in the prior-year quarter, with OIBDA increasing 11.0% to $141 million from $127m year-on-year and OIBDA margin rose 0.1 percentage point to 17.1% from 17.0% in the prior-year quarter. The increase in OIBDA margin was attributed to revenue mix, which was partially offset by higher variable compensation expense. Adjusted OIBDA rose 13.2% and adjusted OIBDA margin was up 0.4 percentage points to 17.7% as a result of the same factors that impacted OIBDA and OIBDA margin.
Net income totaled $20m, compared to $12m in Q2 2016, and adjusted net income was $25m, compared to $14m in the prior-year quarter. The increase was due primarily to higher OIBDA, lower interest expense and a tax benefit that primarily related to currency losses on an intercompany loan. These factors were offset by higher other expenses related to losses on the Company’s Euro-denominated debt and derivative assets, as well as a loss on investment.
As of March 31, WMG reported a cash balance of $476m, total debt of $2.767 billion and net debt (total long-term debt, which is net of deferred financing costs of $34m, minus cash) of $2.291bn. There was no balance outstanding on the Company’s revolver during the second quarter.
Cash provided by operating activities reached $70 million, compared to $111 million in the prior-year quarter. The change was largely a result of working capital use related to higher receivables at quarter-end due to improved operating results, which more than offset the increase in OIBDA.
Growth in digital and artist services and expanded-rights revenue in its recorded music business was partially offset by a decline in physical revenue due to the continuing shift to streaming revenue. Digital revenues rose by a total of 22% year-on-year from $328m to $686m for the quarter.
The improvement in artist services and expanded-rights revenue was due primarily to higher merchandising revenue in the US. Recorded Music revenue grew in the US, Asia and Latin America, although this was offset by a currency-related decline in Europe. Top sellers during the quarter included Ed Sheeran, Bruno Mars, Kyosuke Himuro, twenty one pilots and the Hamilton original cast album.
Recorded Music operating income was $69 million up from $38m in the prior-year quarter, and operating margin was up 4.0 percentage points to 10.1% versus 6.1% in the prior-year quarter driven by revenue growth. Adjusted operating margin rose 4.2 percentage points to 10.6% from 6.4% in the prior-year quarter. OIBDA rose to $112m from $93m in the prior-year quarter driven by revenue growth. OIBDA margin rose 1.3 percentage points to 16.3% driven by revenue growth. Adjusted OIBDA was $116m versus $95m in the prior-year quarter with Adjusted OIBDA margin up 1.6 percentage points to 16.9%.
Elsewhere, WMG’s publishing revenues grew by 14.2% to $145 from $127m in the same quarter of the previous year. Revenue grew in performance, digital and synchronisation. Mechanical revenue was flat due primarily to timing.
Publishing operating income was $41m, up from $37m in the prior-year quarter. The improvement in operating income was due to revenue growth. Operating margin declined 0.8 percentage points to 28.3% from 29.1% driven by revenue mix.
Publishing OIBDA rose by $4m to $58m due to the same factors, which impacted operating income, while OIBDA margin declined by 2.5 percentage points to 40.0% from 42.5%, due to the same factors that impacted operating margin.
“We had another excellent quarter, with double-digit growth in both the current and prior-year quarters,” said Steve Cooper, Warner Music Group’s CEO. “Our streaming revenue is now double that of physical and triple that of downloads. An improved industry environment is helping, but we continue to outperform our competition due to fantastic new music and outstanding execution by our operators around the world.”
“This was a very strong quarter, marking the 7th consecutive quarter of year-over-year revenue growth,” added Eric Levin, Warner Music Group’s EVP and CFO. “Although tough comparisons could make for a more challenging second half, I’m confident we’ll have another great full fiscal year.”
During the conference call announcing the findings, Cooper also commented on the company's renewed deal with YouTube: "We negotiated for an extended period of time. We fought for, and got, the best possible deal for our artists and songwriters given the current environment. As we have said many times, we strongly, strongly believe in the need for legislation that would mean actively managed user uploaded services no longer can take advantage of the safe harbour laws. Those laws create fundamental market distortions and they skew competition. That has been and remains our position."