Warner Music Group Corp. Reports Results for Fiscal Third Quarter Ended June 30, 2022

09 August 2022 - Press release

Financial Highlights

• Solid Underlying Streaming Growth Despite Ad-Supported Pressure
• Impressive Recovery of Artist Services with Continued Double-Digit Revenue Growth
• Continued Momentum in Music Publishing with Double-Digit Revenue Growth
• Significant Growth in Operating and Free Cash Flow 

For the three months ended June 30, 2022

• Total revenue grew 7% or 12% in constant currency
• Digital revenue grew 2% or 6% in constant currency
• Net income was $125 million versus $61 million in the prior-year quarter
• OIBDA decreased 3% to $233 million versus $241 million in the prior-year quarter or increased 3% in constant currency
• Adjusted OIBDA decreased 3% to $255 million versus $263 million in the prior-year quarter or increased 2% in constant currency
• Adjusted EBITDA decreased 7% to $263 million versus $282 million in the prior-year quarter
• Cash provided by operating activities increased 79% to $163 million versus $91 million in the prior-year quarter

Warner Music Group Corp. today announced its third-quarter financial results for the period ended June 30, 2022. 

“We delivered solid double-digit growth on a constant-currency basis, even against the backdrop of a slowdown in the advertising market and some one-time items affecting year-over-year comparisons,” said Steve Cooper, CEO, Warner Music Group. “In June, we saw the beginning of a new wave of amazing releases and we’re looking forward to a strong end to our fiscal year. Long term, we have the scale to best capitalize on trends in artist development, and the agility and resources to continue to propel the globalization and diversification of our business.” 

“Our third-quarter results reflect the inherent resilience of our business that comes from our diverse portfolio of revenue streams,” said Eric Levin, CFO, Warner Music Group. “With significant runway ahead in our core streaming business and new growth vectors constantly emerging, we are incredibly bullish on our growth potential for many years to come.” 

Revenue was up 6.9% (or 12.1% in constant currency). Growth in the quarter was unfavorably impacted by foreign currency exchange rates as the U.S. dollar strengthened. Revenue growth was driven by continued recovery of Recorded Music artist services and expanded-rights revenue, which was impacted by COVID in the prior-year quarter and increased 42.9% (or 55.7% in constant currency) in the quarter, as well as continued growth in Music Publishing performance revenue. Consistent with the prior two quarters, the quarter included the impact of a new deal with one of the Company’s digital partners affecting Recorded Music streaming revenue. Digital revenue increased 1.7% (or 5.7% in constant currency). Total streaming revenue increased 2.7% (or 6.5% in constant currency) primarily driven by growth in Music Publishing streaming revenue of 29.6% (or 34.6% in constant currency), which includes a benefit of $17 million resulting from a July 1 remand ruling by the Copyright Royalty Board in Phonorecords III upholding higher percentage of revenue U.S. mechanical royalty rates for 2018 to 2022 and reflects amounts expected to be paid (the “CRB Rate Benefit”). Recorded Music streaming revenue decreased by 1.0% (or increased by 2.7% in constant currency) primarily due to the impact of a new deal with one of the Company’s digital partners, consistent with the prior two quarters, and an $11 million catch-up payment from one of the Company’s digital partners that benefited the prior-year quarter (the “Catch-Up Payment”), partially offset by continued growth in streaming, which was affected by market-related slowdown in ad-supported revenue. Digital revenue represented 65.9% of total revenue in the quarter, compared to 69.3% in the prior-year quarter. The decrease in digital revenue as a percentage of total revenue is due to the growth of artist services and expanded-rights revenue and performance revenue. Revenue increases in the quarter were also driven by growth in Recorded Music licensing revenue and Music Publishing synchronization revenue. Recorded Music physical revenue was lower on an as-reported basis, but higher in constant currency. Music Publishing mechanical revenue was lower on both an as-reported basis and in constant currency, primarily due to the unfavorable impact of exchange rates. 

Operating income was $146 million compared to $162 million in the prior-year quarter. OIBDA was $233 million, compared to $241 million in the prior-year quarter, a decrease of 3.3% (or an increase of 2.6% in constant currency), and OIBDA margin decreased 1.7 percentage points to 16.3% from 18.0% in the prior-year quarter. The decreases in operating income, OIBDA and OIBDA margin were primarily as a result of revenue mix due to the growth of lower-margin artist services and expanded-rights revenue and the unfavorable impact of exchange rates, partially offset by the impact of the mark-to-market adjustment of an earn-out liability related to an acquisition. 

Adjusted operating income, Adjusted OIBDA and Adjusted net income exclude non-cash stock-based compensation and other related expenses and expenses related to restructuring and other transformation initiatives in both the quarter and the prior-year quarter. Adjusted EBITDA excludes these items and includes expected savings resulting from transformation initiatives and the pro forma impact of certain specified transactions. See below for calculations and reconciliations of Adjusted operating income, Adjusted OIBDA, Adjusted net income and Adjusted EBITDA. 

Adjusted OIBDA decreased 3.0% from $263 million to $255 million (or increased 2.4% in constant currency) and Adjusted OIBDA margin decreased 1.8 percentage points to 17.8% from 19.6% in the prior-year quarter. The decrease in Adjusted OIBDA and Adjusted OIBDA margin was primarily due to the same factors affecting OIBDA. Adjusted operating income decreased 8.7% from $184 million to $168 million due to the same factors affecting Adjusted OIBDA and higher amortization expenses due to recent acquisitions and capital spending.

Adjusted EBITDA decreased 6.7% from $282 million to $263 million with margins decreasing 2.6 percentage points from 21.0% to 18.4% largely due to the same factors affecting Adjusted OIBDA and the impact of the mark-to-market adjustment of an earn-out liability related to an acquisition which is excluded from Adjusted EBITDA. 

Net income was $125 million compared to $61 million in the prior-year quarter. Adjusted net income was $147 million compared to $83 million in the prior-year quarter. The increase in net income and Adjusted net income was primarily due to the favorable impact of exchange rates on the Company’s Euro-denominated debt and a loss on extinguishment of debt in the prior-year quarter, which offset lower operating income. 

Basic and Diluted earnings per share was $0.24 for both the Class A and Class B shareholders due to the net income attributable to the Company in the quarter of $125 million. 

As of June 30, 2022, the Company reported a cash balance of $345 million, total debt of $3.785 billion and net debt (defined as total debt, net of deferred financing costs, premiums and discounts, minus cash and equivalents) of $3.440 billion. 

Cash provided by operating activities increased 79% to $163 million from $91 million in the prior-year quarter. The change was largely a result of timing of A&R investment, partially offset by other movements within working capital. Capital expenditures increased to $35 million in the quarter as compared to $20 million in the prior-year quarter, mainly due to investments in IT infrastructure and facilities, including the EMP fulfillment center expansion. Free Cash Flow, as defined below, increased 80% to $128 million from $71 million in the prior-year quarter.  

Recorded Music revenue was up 3.2% (or 8.5% in constant currency) due to artist services and expanded-rights revenue growth of 42.9% (or 55.7% in constant currency), reflecting an increase in concert promotion revenue, which was disrupted by COVID in the prior-year quarter. Licensing revenue increased 1.4% (or 8.7% in constant currency), mainly due to higher synchronization and other activity, partially offset by the unfavorable impact of exchange rates. Digital revenue was down 1.7% (or up 2.2% in constant currency) and streaming revenue was down 1.0% (or up 2.7% in constant currency). Adjusted for the impact of the new deal with one of the Company’s digital partners and the Catch-Up Payment, Recorded Music streaming revenue was up 5.0% (or 9.2% in constant currency). Streaming revenue reflects continued growth, which was affected by market-related slowdown in ad-supported revenue. Digital revenue represented 67.4% of total Recorded Music revenue versus 70.7% in the prior-year quarter. The decrease in digital revenue as a percentage of total Recorded Music revenue is due to the continued recovery of artist services and expanded-rights revenue, which was impacted by COVID in the prior-year quarter. Physical revenue was down 5.4% (or up 1.7% in constant currency) primarily due to the unfavorable impact of exchange rates, which offset higher sales due to the success of new releases in Asia. Major sellers included Ed Sheeran, Dua Lipa, Tatsuro Yamashita, GOT7, Jack Harlow and Gunna. 

Recorded Music operating income was $166 million, down from $197 million in the prior-year quarter and operating margin was down 3.1 percentage points to 14.0% versus 17.1% in the prior-year quarter. OIBDA decreased 10.4% to $224 million from $250 million (or 5.5% in constant currency) in the prior-year quarter and OIBDA margin decreased 2.9 percentage points to 18.8%. Adjusted OIBDA decreased 9.1% from $254 million to $231 million (or 4.1% in constant currency) with Adjusted OIBDA margin down 2.6 percentage points to 19.4%. The decreases in OIBDA, Adjusted OIBDA, operating margin, OIBDA margin and Adjusted OIBDA margin were primarily due to revenue mix resulting from the growth of lower-margin artist services and expanded rights revenue and the unfavorable impact of exchange rates, partially offset by the impact of the mark-to-market adjustment of an earn-out liability related to an acquisition. 

Music Publishing revenue increased 29.6% (or 34.6% in constant currency). The revenue increase was driven by growth in digital, performance and synchronization revenue, partially offset by a decline in mechanical revenue. Digital revenue increased 27.4% (or 32.1% in constant currency) and streaming revenue increased 29.6% (or 34.6% in constant currency), reflecting the continued growth in streaming, the CRB Rate Benefit and timing of new digital deals. Adjusted for the CRB Rate Benefit, streaming revenue increased 13.9% (or 18.3% in constant currency). Digital revenue represented 58.8% of total Music Publishing revenue versus 59.8% in the prior-year quarter. The slight decrease in digital revenue as a percentage of total Music Publishing revenue is due to an increase in performance revenue as bars, restaurants, concerts and live events continued to recover from COVID disruption. Synchronization revenue increased due to higher television and commercial licensing activity. Mechanical revenue decreased primarily due to the unfavourable impact of exchange rates. 

Music Publishing operating income was $33 million compared to $21 million in the prior-year quarter, largely driven by increased revenue. Operating margin increased 2.4 percentage points to 13.5%. Music Publishing OIBDA increased 32.6% to $57 million (or 35.7% in constant currency) and OIBDA margin increased 0.5 percentage points to 23.3%. Adjusted OIBDA increased 29.5% to $57 million (or 32.6% in constant currency) and Adjusted OIBDA margin remained constant at 23.3%. The increase in operating income, OIBDA and Adjusted OIBDA were primarily due to strong operating performance, partially offset by revenue mix and the unfavourable impact of exchange rates. 

Financial details for the quarter can be found in the Company’s current Quarterly Report on Form 10-Q for the period ended June 30, 2022, filed today with the Securities and Exchange Commission.