Financial Highlights
- Solid Results Driven by Growth Across Recorded Music and Music Publishing
- Recorded Music Results Underpinned by an Acceleration in Subscription Streaming
- Music Publishing Delivered Revenue Growth of 19%
- Reiterating Full-Year Operating Cash Flow Conversion Guidance of 50-60%
For the three months ended March 31, 2024
- Total revenue increased 7%, the same in constant currency
- Net income was $96 million versus $37 million in the prior-year quarter
- Operating income decreased 4% to $119 million versus $124 million in the prior-year quarter
- Adjusted OIBDA increased 9% to $312 million, versus $286 million in the prior-year quarter, the same in constant currency
- Cash used in operating activities increased to $31 million, versus $6 million in the prior-year quarter
NEW YORK, New York, May 9, 2024 — Warner Music Group Corp. today announced its second-quarter financial results for the period ended March 31, 2024.
“This quarter we saw a healthy, dynamic mix of hits across a range of genres, geographies, and generations,” said Robert Kyncl, CEO of Warner Music Group. “With our commitment to artist and songwriter development as our guiding principle, we continue to discover great talent, build sustainable careers, champion the value of music, and grow the catalog of tomorrow. We are positioning WMG for long term growth and look forward to delivering successful music in the second half of 2024 and beyond.”
“Our performance in the quarter was driven by an acceleration in Recorded Music subscription streaming growth and continued momentum in Music Publishing,” said Bryan Castellani, CFO, Warner Music Group. “Encouraged by the continued growth in engagement and value of music, we remain focused on delivering on our strategy and driving long-term shareholder value.”
Revenue was up 6.8% (or 6.9% in constant currency). Consistent with the prior quarter, Recorded Music digital revenue growth was unfavorably impacted by the termination of the distribution agreement with BMG (the “BMG Termination”), which resulted in $22 million less revenue compared to the prior-year quarter, and a $4 million unfavorable impact within Recorded Music streaming revenue due to a renewal with one of the Company’s digital partners (the “Digital License Renewal”), which resulted in upfront revenue recognition in the prior quarter. Excluding the BMG Termination and the Digital License Renewal, total revenue was up 8.8% (or 9.0% in constant currency).
Digital revenue increased 9.9% (or 10.2% in constant currency) and streaming revenue increased 10.7% (or 11.1% in constant currency). Recorded Music streaming revenue increased 7.1% (or 7.7% in constant currency); however, adjusted for the impact of the BMG Termination and the Digital License Renewal, Recorded Music streaming revenue was up 10.5% (or 11.1% in constant currency). Music Publishing streaming revenue increased 30.3% (or 29.4% in constant currency). Revenue increases in the quarter were also driven by growth in Recorded Music licensing revenue and Music Publishing performance and synchronization revenue, partially offset by lower Recorded Music physical and artist services and expanded-rights revenue.
Operating income decreased 4.0% (or 3.3% in constant currency) from $124 million to $119 million primarily due to the factors affecting Adjusted OIBDA discussed below, as well as $95 million of restructuring and non-cash impairment charges, which includes severance costs of $46 million and an impairment loss of $50 million due to the exit of certain non-core owned and operated media properties pursuant to the Company’s restructuring plan announced in February 2024 (the “Strategic Restructuring Plan”), compared to $41 million of restructuring charges in the prior-year quarter, and $5 million of incremental expenses related to transformation initiatives and other related costs. The decrease in operating income was partially offset by lower non-cash stock-based compensation of $11 million, lower amortization expenses due to certain intangible assets becoming fully amortized of $4 million, and a $14 million net gain on a divestiture of certain music publishing rights in the quarter.
Adjusted OIBDA increased 9.1% from $286 million to $312 million (the same in constant currency) and Adjusted OIBDA margin increased 0.5 percentage points to 20.9% from 20.4% in the prior-year quarter (or increased 0.4 percentage points to 20.9% from 20.5% in constant currency). Adjusted OIBDA growth was primarily due to strong operating performance and $12 million of savings from the March 2023 restructuring plan (the “2023 Restructuring Plan”), partially offset by the reinvestment of these savings in the Company’s business including $6 million of incremental investment in technology in the quarter.
Net income was $96 million compared to $37 million in the prior-year quarter. The increase in net income was primarily due to the factors described above, and the impact of exchange rates on the Company’s Euro-denominated debt resulting in a gain of $21 million in the quarter compared to a loss of $20 million in the prior-year quarter, partially offset by an increase in interest expense, net, primarily due to increased costs on the Company’s variable rate debt.
Basic and Diluted earnings per share were $0.18 for both the Class A and Class B shareholders due to the net income attributable to the Company in the quarter of $96 million.
As of March 31, 2024, the Company reported a cash balance of $587 million, total debt of $3.984 billion and net debt (defined as total debt, net of deferred financing costs, premiums and discounts, minus cash and equivalents) of $3.397 billion.
Cash used in operating activities increased to $31 million in the quarter compared to $6 million in the prior-year quarter. The increase was largely due to increased artist and repertoire investment and the timing of working capital, partially offset by strong operating performance. Capital expenditures decreased 26% to $26 million from $35 million in the prior-year quarter, driven by the timing of investment in technology. Free Cash Flow, as defined below, decreased to a use of $57 million from a use of $41 million in the prior-year quarter.
Recorded Music revenue was up 4.0% (or 4.3% in constant currency) driven by growth in digital and licensing revenue, partially offset by lower physical and artist services and expanded-rights revenue. Excluding the impact from the BMG Termination and the Digital License Renewal, Recorded Music revenue increased 6.4% (or 6.7% in constant currency). Digital revenue was up 6.5% (or 7.1% in constant currency) and streaming revenue was up 7.1% (or 7.7% in constant currency). Adjusted for the impact of the BMG Termination of $20 million and the Digital License Renewal of $4 million, Recorded Music streaming revenue was up 10.5% (or 11.1% in constant currency). Streaming revenue reflects growth in subscription revenue of 8.3% (or 8.8% in constant currency) and growth in ad-supported revenue of 3.9% (or 4.4% in constant currency). Adjusted for the BMG Termination and the Digital License Renewal, subscription revenue increased 12.8% (or 13.5% in constant currency). Licensing revenue increased 6.1% (or 5.1% in constant currency), driven by an increase in copyright infringement settlements. Physical revenue decreased 5.9% (or 6.7% in constant currency), primarily driven by the timing of new releases. Artist services and expanded-rights revenue decreased 3.8% (or 3.1% in constant currency) primarily due to lower merchandising revenue, partially offset by higher concert promotion revenue in France and Japan. Major sellers included Zach Bryan, Ed Sheeran, Jack Harlow and Green Day.
Recorded Music operating income was $134 million, a decrease from $151 million in the prior-year quarter, and operating margin was down 1.9 percentage points to 11.3% versus 13.2% in the prior-year quarter. The decrease in operating income was primarily driven by severance costs of $42 million and $47 million of impairment losses on unamortized intangibles primarily due to the exit of certain non-core owned and operated media properties in connection with the Strategic Restructuring Plan announced in February 2024, compared to $41 million of restructuring charges in the prior-year quarter, partially offset by lower amortization expenses of $7 million due to certain intangible assets becoming fully amortized.
Adjusted OIBDA increased 9.2% to $272 million from $249 million (the same in constant currency) and Adjusted OIBDA margin increased 1.1 percentage points to 22.9% from 21.8% in the prior-year quarter (the same in constant currency). The increases in Adjusted OIBDA and Adjusted OIBDA margin were driven by strong operating performance and $12 million of savings from the 2023 Restructuring Plan of which a portion has been reinvested in the Company’s business, partially offset by the unfavorable impact of exchange rates.
Music Publishing revenue increased 19.1% (or 18.6% in constant currency). The increase was driven by growth in digital, performance and synchronization revenue. Digital revenue increased 28.1% (or 27.2% in constant currency) and streaming revenue increased 30.3% (or 29.4% in constant currency), reflecting the continued growth in streaming, the impact of digital deal renewals and continued investment in the Company’s publishing catalog. Performance revenue increased 15.6% (or 18.2% in constant currency) due to strong artist touring activity in Europe. Mechanical revenue decreased $1 million or 6% (the same in constant currency), primarily driven by lower physical sales. Synchronization revenue grew 4.3% (or 2.1% in constant currency), driven by the timing of copyright infringement settlements.
Music Publishing operating income increased to $69 million compared to $52 million in the prior-year quarter and operating margin increased 2.3 percentage points to 22.5%. The increase in operating income was primarily driven by the same factors affecting Adjusted OIBDA discussed below, as well as a $14 million net gain on a divestiture of certain music publishing rights in the quarter.
Music Publishing Adjusted OIBDA increased 7.9% to $82 million (the same in constant currency) and Adjusted OIBDA margin decreased 2.8 percentage points to 26.8% from 29.6% in the prior-year quarter (or decreased 2.7 percentage points to 26.8% from 29.5% in constant currency). The increase in Adjusted OIBDA was driven by higher revenue, while the decrease in Adjusted OIBDA margin compared to the prior-year quarter is primarily attributable to revenue mix.
Financial details for the quarter can be found in the Company’s current Quarterly Report on Form 10-Q for the period ended March 31, 2024, which will be filed this morning with the Securities and Exchange Commission.
This morning management will be hosting a conference call to discuss the results at 8:30 A.M. EST. The call will be webcast on www.wmg.com.
With a legacy extending back over 200 years, Warner Music Group today is home to an unparalleled family of creative artists, songwriters, and companies that are moving culture across the globe. At the core of WMG’s Recorded Music division are four of the most iconic companies in history: Atlantic, Elektra, Parlophone and Warner Records. They are joined by renowned labels such as TenThousand Projects, 300 Entertainment, Asylum, Big Beat, Canvasback, East West, Erato, FFRR, Fueled by Ramen, Nonesuch, Reprise, Rhino, Roadrunner, Sire, Spinnin’ Records, Warner Classics and Warner Music Nashville. Warner Chappell Music – which traces its origins back to the founding of Chappell & Company in 1811 – is one of the world’s leading music publishers, with a catalog of more than one million copyrights spanning every musical genre from the standards of the Great American Songbook to the biggest hits of the 21st century.
“Safe Harbor” Statement under Private Securities Litigation Reform Act of 1995
This communication includes forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance. Words such as “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts” and variations of such words or similar expressions that predict or indicate future events or trends, or that do not relate to historical matters, identify forward-looking statements. All forward-looking statements are made as of today, and we disclaim any duty to update such statements. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, we cannot assure you that management’s expectations, beliefs and projections will result or be achieved. Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from our expectations. Please refer to our Form 10-K, Form 10-Qs and our other filings with the U.S. Securities and Exchange Commission concerning factors that could cause actual results to differ materially from those described in our forward-looking statements.
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Supplemental Disclosures Regarding Non-GAAP Financial Measures
We evaluate our operating performance based on several factors, including the following non-GAAP financial measure:
Adjusted OIBDA
We evaluate our operating performance based on several factors, including our primary financial measure of operating income (loss) before non-cash depreciation of tangible assets and non-cash amortization of intangible assets adjusted to exclude the impact of non-cash stock-based compensation and other related expenses and certain items that affect comparability including but not limited to gains or losses on divestitures and expenses related to restructuring and transformation initiatives (“Adjusted OIBDA”). We consider Adjusted OIBDA to be an important indicator of the operational strengths and performance of our businesses. However, a limitation of the use of Adjusted OIBDA as a performance measure is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses. Accordingly, Adjusted OIBDA should be considered in addition to, not as a substitute for, operating income (loss), net income (loss) attributable to Warner Music Group Corp. and other measures of financial performance reported in accordance with United States generally accepted accounting principles (“U.S. GAAP”). In addition, our definition of Adjusted OIBDA may differ from similarly titled measures used by other companies.
Constant Currency
As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of revenue and Adjusted OIBDA on a constant-currency basis in addition to reported results helps improve the ability to understand our operating results and evaluate our performance in comparison to prior periods. Constant-currency information compares revenue and Adjusted OIBDA between periods as if exchange rates had remained constant period over period. We use revenue and Adjusted OIBDA on a constant-currency basis as one measure to evaluate our performance. We calculate constant-currency by calculating prior-year revenue and Adjusted OIBDA using current-year foreign currency exchange rates. Revenue and Adjusted OIBDA on a constant-currency basis should be considered in addition to, not as a substitute for, revenue and Adjusted OIBDA reported in accordance with U.S. GAAP. Revenue and Adjusted OIBDA on a constant-currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not a measure of performance presented in accordance with U.S. GAAP.
Free Cash Flow
Our definition of Free Cash Flow is defined as cash flow provided by operating activities less capital expenditures. We use Free Cash Flow, among other measures, to evaluate our operating performance. Management believes Free Cash Flow provides investors with an important perspective on the cash available to fund our debt service requirements, ongoing working capital requirements, capital expenditure requirements, strategic acquisitions and investments, and any dividends, prepayments of debt or repurchases or retirement of our outstanding debt or notes in open market purchases, privately negotiated purchases, any repurchases of our common stock or otherwise. As a result, Free Cash Flow is a significant measure of our ability to generate long-term value. It is useful for investors to know whether this ability is being enhanced or degraded as a result of our operating performance. We believe the presentation of Free Cash Flow is relevant and useful for investors because it allows investors to view performance in a manner similar to the method management uses.
Free Cash Flow is not a measure of performance calculated in accordance with U.S. GAAP and therefore it should not be considered in isolation of, or as a substitute for, net income (loss) as an indicator of operating performance or cash flow provided by operating activities as a measure of liquidity. Free Cash Flow, as we calculate it, may not be comparable to similarly titled measures employed by other companies. In addition, Free Cash Flow does not necessarily represent funds available for discretionary use and is not necessarily a measure of our ability to fund our cash needs. Because Free Cash Flow deducts capital expenditures from “net cash provided by operating activities” (the most directly comparable U.S. GAAP financial measure), users of this information should consider the types of events and transactions that are not reflected. We provide below a reconciliation of Free Cash Flow to the most directly comparable amount reported under U.S. GAAP, which is “net cash provided by operating activities.”
