Billboard: Author: Ed Christman, December 8, 2016

Warner Music Group 2016 Earnings See First Post-Blavatnik Profit

Warner Music Group has posted its best full-year financial results of the Len Blavatnik era (the Russian-born businessman purchased WMG via Access Industries in spring of 2011), with revenue jumping 9.4 percent year-over-year, to $3.24 billion, up from $2.96 billion.

Another piece of good news for the company: After enduring $737 million in losses since that Access acquisition, WMG has posted its first profit, with net income totaling $30 million. The company saw an $88 million loss in the prior year.

The good news comes on the heels of a strong fourth quarter that saw revenue grow just under three points — 12.1 percent — above the year’s average, to $841 million. The company lost $4 million during the quarter, verses $23 million in the prior period.

Getting back to full year results, Warner Music showed improvements across nearly every metric, with operating income almost doubling, to $214 million from $127 million; operating income before interest, taxes, depreciation and amortization (OIBDA) jumped to $507 million from $436 million, a 16.3 percent increase.

“We’ve had another excellent year, in which we posted strong financial results and outperformed the industry,” WMG’s CEO Steve Cooper said in a statement. “This fiscal year marked our highest total revenue in eight years and our highest OIBDA in a decade. We’re creating great momentum by investing in a flow of fantastic new music, expanding our presence around the globe and embracing new business models early. Given our extraordinary roster of recording artists and songwriters and the strength of our operators around the world, we’re excited by the possibilities in 2017 and beyond.”

Warner Music’s recorded music operation posted $2.736 billion in revenue, a 9 percent increase over the prior year’s total of $2.5 billion. Meanwhile, the segment’s OIBDA grew substantially, by 21.1 percent to $459 million, up from $379 million.

Within its record segment, digital, which includes streaming, generated for $1.364 billion, nearly 50 percent of the total recorded music segment’s income and up 19 percent year-over-year; physical, $726 million, or 26.5 percent of revenue; artist services and expanded rights, $368 million, or 13.5 percent; and licensing and other income streams, $278 million, or 10.2 percent. That 19 percent growth in digital “reflects a continuing shift to streaming revenue,” the company writes.

Publishing saw revenue growth of 8.7 percent, to $524 million from $482 million in the prior year. But due to the “Happy Birthday” lawsuit, which saw the company agree to pay $14 million and lose the song to public domain, OIBDA shrank to $138 million from $146 million in the prior year.

Within publishing, the company saw performance revenue grow 4.8 percent to $193 million, up from $184 million in the prior year; digital revenue jumped 42.4 percent to $141 million from $99 million; synchronization grew 6.8 percent to $110 million from $103 million; other revenue held steady at $10 million; and mechanical fell to $70 million from $86 million, an 18.6 percent decline.

In the U.S. recorded music operations generated $1.129 billion in revenue, while publishing rang up $231 million. Internationally, recorded music garnered $1.607 billion and publishing $293 million.

During a Thursday morning conference call with Wall Street analysts, Cooper said “while it is clear that we are benefiting from the macro effect of strong subscription revenue growth, we are also consistently outperforming the industry.”

For instance, in the first half of this calendar year, WMG has posted a 2.5 percentage point increase, Cooper said, noting it was the best of any major. In fact, according to Nielsen Music, the other two big label groups, Sony Music Entertainment and the Universal Music Group, have lost market share this year.

In addition to benefiting from the growing strength of streaming, Cooper says WMG is receiving dividends from its investment in A&R. “This past year, we increased our direct investment in our artists and their music to over $1 billion,” Cooper said. “This spend is paying off, as we’re seeing increased output from a wider range and a greater number of artists resulting in a healthier, less top heavy, revenue distribution.  For example, in fiscal 2013, our Top 10 sellers represented over 12 percent of our recorded music revenue; while in 2016, they represented only 8 percent.”

To illustrate what he termed a healthy mix, Cooper pointed out that that company’s top 25 sellers were spread across different genres, naming the Red Hot Chili Peppers (rock); Charlie Puth (pop), Blake Shelton (country), Kevin Gates (hip-hop); Galantis (dance); and Suicide Squad (soundtracks).

He also cited the amazing year that Atlantic Records is having, which is helping to drive WMG’s overall results. “Twelve years into the partnership between Julie Greenwald and Craig Kallman, the label is having a fantastic run by any metric, including chart performance, market share, revenue and OIBDA,” Cooper said. “Atlantic has led the industry by mastering artist development in the streaming age, breaking new artists such as Melanie Martinez and Twenty One Pilots, while building the careers of established stars such as Bruno Mars and Panic! at the Disco.”

Getting back to the overall company, he said that its fiscal 2017 is off to a good start, citing releases from Green Day, Bruno Mars, with other releases still coming from Michael Bublé, Clean Bandit, Robin Shulz, Dua Lipa and Charli XCX.

As part of its attention to improving its A&R capabilities, Cooper noted that the company has “pursued a strategy of building or acquiring recording studios and writing rooms in or near our offices. We believe that over the long-term this will foster experimentation and strengthen relationships with the creative community.”

He said that the company installed new studios at Atlantic Records in New York;  launched The Firepit, an innovation center in our London office; and created a new studio complex for the APG venture in LA.

Moreover, when the company moves to its new Los Angeles office, it will be designed to contain multiple “state of the art media studios,” he added.

Looking deeper into the financial results, executive vp/CFO Eric Levin noted that the company improved operating cash flow to $342 million from $222 million in the prior fiscal year; and ended the year with $359 million in cash on the balance sheet.

In addition to improving company performance, cash was also boosted by $42 million by the sale of real estate and by $45 million through the sale of assets, including selling the Radiohead catalog to XL Recordings, Levin said. It sold that catalog and others in order to comply with the agreement it cut with indie label trade groups in conjunction with them signing off on its acquisition to the EU Commission for the Parlophone label in 2013.

While the company has been astutely managing the $3 billion debt load it took on its leveraged buyout by refinancing debt at lower interest rates, this year the company also paid down debt by about $175 million, finishing with $2.81 billion, down from nearly $3 billion. Further, Levin said that its refinancing is saving the company about $35 million in annual interest payments.

Giving WMG’s improving operations, the growth in the overall music business and its well-honed management of debt and cashflow, parent the Access Group decided to reward itself with its first dividend since buying the company. As such, WMG will make a $54 million dividend payout to shareholders on Jan. 3, 2017.

Going forward, Levin warned that over the next two years the company will take on charges due to spending $40 million to $50 million for consolidating the company into new LA offices, and by $30 million for consolidating its shared financial services in a new center in Nashville.

On the topline side, revenue growth next year will be offset by sales lost to the PLG asset divestitures and a European concert promotion business, he added.