Digital Revenue Grows 45% to $100 Million or 11% of Total Revenue
-- Total revenue of $928 million for the first quarter of fiscal 2007 decreased 11% from the prior-year quarter, or 14% on a constant-currency basis. -- Digital revenue was $100 million, or 11% of total revenue in the quarter, up 45% from $69 million in the prior-year quarter and down 4% sequentially from $104 million in the fourth quarter of fiscal 2006. -- Operating income declined 44% to $80 million in the quarter compared to $144 million in the prior-year quarter. -- Operating income before depreciation and amortization (OIBDA) declined 31% to $140 million from $202 million in the prior-year quarter. -- Net income of $0.12 per diluted share in the quarter was down from $0.46 per diluted share in the prior-year quarter.Warner Music Group Corp. (
Figure 1. Warner Music Group Corp. - Consolidated Statement of Operations Three Months Ended 12/31/06 versus 12/31/05 (dollars in millions, except per share amounts) Three Three Months Months Ended Ended December 31, December 31, 2006 2005 % Change ------------- ------------- ------------- (unaudited) (unaudited) Revenues: $ 928 $ 1,044 (11%) Costs and expenses: Cost of revenues (508) (530) 4% Selling, general and administrative expenses (290) (323) 10% Amortization of intangible assets (50) (47) (6%) ------------- ------------- ------------- Total costs and expenses $ (848) $ (900) 6% ------------- ------------- ------------- Operating income $ 80 $ 144 (44%) Interest expense, net (47) (45) (4%) ------------- ------------- ------------- Net income before income taxes $ 33 $ 99 (67%) Income tax expense (15) (30) 50% ------------- ------------- ------------- Net income $ 18 $ 69 (74%) ============= ============= ============= Net income per share: Basic $ 0.12 $ 0.49 (75%) ============= ============= ============= Diluted $ 0.12 $ 0.46 (73%) ============= ============= ============= Weighted averages shares outstanding: Basic 144.9 141.4 2% ============= ============= ============= Diluted 151.5 150.5 1% ============= ============= ============= Figure 2. Warner Music Group Corp. - Consolidated Balance Sheets as of 12/31/2006 and 9/30/06 (dollars in millions) December 31, September 30, 2006 2006 % Change ------------- ------------- ------------- (unaudited) (audited) Assets: Current Assets Cash & cash equivalents $ 327 $ 367 (11%) Short-term investments 10 18 (44%) Accounts receivable, less allowances of $233 and $207 610 585 4% Inventories 63 59 7% Royalty advances (to be recouped w/in 1 year) 199 191 4% Deferred tax assets 53 45 18% Other current assets 84 35 140% ------------- ------------- ------------- Total Current Assets $ 1,346 $ 1,300 4% Royalty advances (to be recouped after 1 year) 216 207 4% Investments 26 25 4% Property, plant & equipment, net 135 146 (8%) Goodwill 943 929 2% Intangible assets subject to amortization, net 1,679 1,711 (2%) Intangible assets not subject to amortization 100 100 - Other assets 99 102 (3%) ------------- ------------- ------------- Total Assets $ 4,544 $ 4,520 1% ============= ============= ============= Liabilities & Shareholders' Equity: Current Liabilities Accounts payable $ 197 $ 209 (6%) Accrued royalties 1,225 1,142 7% Taxes & other withholdings 45 32 41% Current portion of long-term debt 17 17 - Dividend payable 22 22 - Other current liabilities 310 377 (18%) ------------- ------------- ------------- Total current liabilities $ 1,816 $ 1,799 1% Long-term debt $ 2,249 $ 2,239 0% Dividends payable 3 3 - Deferred tax liabilities, net 196 197 (1%) Other noncurrent liabilities 225 224 0% ------------- ------------- ------------- Total Liabilities $ 4,489 $ 4,462 1% Common stock - - - Additional paid-in capital 572 567 1% Accumulated deficit (517) (516) 0% Accumulated other comprehensive income - 7 (100%) ------------- ------------- ------------- Total Shareholders' Equity $ 55 $ 58 (5%) ------------- ------------- ------------- Total Liabilities & Shareholders' Equity $ 4,544 $ 4,520 1% ============= ============= ============= Figure 3. Warner Music Group Corp. - Summarized Statement of Cash Flows, Three Months Ended 12/31/06 versus 12/31/05 (dollars in millions) Three Three Months Months Ended Ended December 31, December 31, 2006 2005 ------------- ------------- (unaudited) (unaudited) Net cash provided by operating activities $ 37 $ 29 Net cash used in by investing activities (58) (16) Net cash used in financing activities (21) (22) Effect of foreign currency exchange rates on cash 2 (1) ------------- ------------- Net decrease in cash $ (40) $ (10) ============= =============Supplemental Disclosures Regarding Non-GAAP Financial Information OIBDA We evaluate our operating performance based on several factors, including our primary financial measure of operating income before non-cash depreciation of tangible assets and non-cash amortization of intangible assets (which we refer to as OIBDA). We consider OIBDA to be an important indicator of the operational strengths and performance of our businesses, and believe the presentation of OIBDA helps improve the ability to understand the company's operating performance and evaluate our performance in comparison to comparable periods. However, a limitation of the use of OIBDA as a performance measure is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenue in our businesses. Accordingly, OIBDA should be considered in addition to, not as a substitute for, operating income, net income (loss) and other measures of financial performance reported in accordance with accounting principles generally accepted in the U.S. ("GAAP").
Figure 4. Warner Music Group Corp. - Reconciliation of OIBDA to Net Income, Three Months Ended 12/31/06 versus 12/31/05 (dollars in millions) Three Three Months Months Ended Ended December 31, December 31, 2006 2005 % Change ------------- ------------- ------------- (unaudited) (unaudited) OIBDA $ 140 $ 202 (31%) Depreciation expense (10) (11) 9% Amortization expense (50) (47) (6%) ------------- ------------- ------------- Operating income $ 80 $ 144 (44%) Interest expense, net (47) (45) (4%) ------------- ------------- ------------- Income before income taxes $ 33 $ 99 (67%) Income tax expense (15) (30) 50% ------------- ------------- ------------- Net income $ 18 $ 69 (74%) ============= ============= ============= OIBDA Margin 15.1% 19.3% Operating Income Margin 8.6% 13.8% Figure 5. Warner Music Group Corp. - Reconciliation of GAAP Operating Income to Non-GAAP OIBDA, for the Three Months ended 12/31/06 versus 12/31/05 (dollars in millions) Three Three Months Months Ended Ended December 31, December 31, 2006 2005 % Change ----------- ----------- -------- (unaudited) (unaudited) Total WMG Operating Income - GAAP $ 80 $ 144 44% Depreciation and Amortization 60 58 3% ----------- ----------- -------- Total WMG OIBDA $ 140 $ 202 31% =========== =========== ======== Recorded Music Operating Income - GAAP $ 99 $ 166 (40%) Depreciation and Amortization 42 40 5% ----------- ----------- -------- Recorded Music OIBDA $ 141 $ 206 (32%) =========== =========== ======== Music Publishing Operating Income - GAAP $ 3 $ 6 (50%) Depreciation and Amortization 16 15 7% ----------- ----------- -------- Music Publishing OIBDA $ 19 $ 21 (10%) =========== =========== ========Constant Currency As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of results on a constant-currency basis in addition to reported results helps improve the ability to understand the company's operating results and evaluate our performance in comparison to prior periods. Constant-currency information compares results between periods as if exchange rates had remained constant period over period. We use results on a constant-currency basis as one measure to evaluate our performance. However, a limitation of the use of the constant-currency results as a performance measure is that it does not reflect the $34 million, $27 million and $6 million unfavorable impact of exchange rates on our Total, Recorded Music and Music Publishing revenue, respectively, in the three months ended December 31, 2006 compared to the comparable prior-year three months. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a constant-currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and is not a measure of performance presented in accordance with GAAP.
Figure 6. Warner Music Group Corp. - Reconciliation of GAAP Operating Income to Non-GAAP OIBDA, Constant Currency for the Three Months ended 12/31/06 versus 12/31/05 (dollars in millions) Three Three Months Months Ended Ended December 31, December 31, 2006 2005 % Change ----------- ----------- -------- As reported Constant $ (unaudited) (unaudited) Total WMG Operating Income - GAAP $ 80 $ 150 (47%) Depreciation and Amortization 60 59 2% ----------- ----------- -------- Total WMG OIBDA $ 140 $ 209 (33%) =========== =========== ======== Recorded Music Operating Income - GAAP $ 99 $ 170 (42%) Depreciation and Amortization 42 41 2% ----------- ----------- -------- Recorded Music OIBDA $ 141 $ 211 (33%) =========== =========== ======== Music Publishing Operating Income - GAAP $ 3 $ 7 (57%) Depreciation and Amortization 16 15 7% ----------- ----------- -------- Music Publishing OIBDA $ 19 $ 22 (14%) =========== =========== ======== Figure 7. Warner Music Group Corp. - Revenue by Geography, Three Months Ended 12/31/06 versus 12/31/05 As Reported and Constant Currency (dollars in millions) Three Three Three Months Months Months Ended Ended Ended December 31, December 31, December 31, 2006 2005 2005 ------------- ------------- ------------- As reported As reported Constant $ (unaudited) (unaudited) (unaudited) Revenue by Geography: US revenue 406 459 459 Recorded Music 362 407 407 Music Publishing 44 52 52 International revenue 527 592 625 Recorded Music 438 513 540 Music Publishing 89 79 85 Intersegment eliminations $ (5) $ (7) $ (6) $ 928 $ 1,044 $ 1,078 ============= ============= ============= Revenue by Segment: Recorded Music $ 800 $ 920 $ 947 Music Publishing 133 131 137 Intersegment eliminations (5) (7) (6) ------------- ------------- ------------- Total Revenue $ 928 $ 1,044 $ 1,078 ============= ============= =============Free Cash Flow Free Cash Flow reflects our cash flow provided by operating activities less capital expenditures and cash paid or received for investments. 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 service debt, make strategic acquisitions and investments, fund ongoing operations and working capital needs and pay ongoing regular quarterly dividends. 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 used by management. In addition, Free Cash Flow is also a primary measure used externally by our investors and analysts for purposes of valuation and comparing the operating performance of our company to other companies in our industry. As Free Cash Flow is not a measure of performance calculated in accordance with GAAP, Free Cash Flow 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. As Free Cash Flow deducts capital expenditures and cash paid or received for investments from "cash flow provided by operating activities" (the most directly comparable 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 GAAP -- "cash flow provided by operating activities." Unlevered After-Tax Cash Flow Free Cash Flow includes cash paid for interest. We also review our cash flow adjusted for cash interest, a measure we call Unlevered After-Tax Cash Flow. Management believes this measure provides investors with an additional important perspective on our cash generation ability. We consider Unlevered After-Tax Cash Flow to be an important indicator of the performance of our businesses and believe the presentation is relevant and useful for investors because it allows investors to view performance in a manner similar to the method used by management. A limitation of the use of this measure is that it does not reflect cash interest and, therefore, does not necessarily represent funds available for discretionary use, and is not necessarily a measure of the company's ability to fund its cash needs. Accordingly, this measure should be considered in addition to, not as a substitute for, net cash flow provided by operating activities and other measures of liquidity reported in accordance with accounting principles generally accepted in the U.S.
Figure 8. Warner Music Group Corp. - Calculation of Free Cash Flow and Unlevered After-Tax Cash Flow, Three Months Months Ended 12/31/06 versus 12/31/05 (dollars in millions) Three Three Months Months Ended Ended December 31, December 31, 2006 2005 -------------- -------------- (unaudited) (unaudited) Net cash flow provided by operating activities $ 37 $ 29 Less: Capital expenditures 5 5 Less: Cash paid (received) for investments, net, excluding short-term investments 16 11 -------------- -------------- Free Cash Flow (a) $ 16 $ 13 ============== ============== (a) - Free Cash Flow includes cash paid for interest as follows (in millions): Three Three Months Months Ended Ended December 31, December 31, 2006 2005 -------------- -------------- Free Cash Flow $ 16 $ 13 Plus: Cash paid for interest 49 47 -------------- -------------- Unlevered After-Tax Cash Flow $ 65 $ 60 ============== ==============
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