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Warner Music Group Corp. Reports First-Quarter 2008 Results For The Period Ended December 31, 2007
* Total revenue of $989 million increased 7% from $928 million in the prior-year quarter, and grew 1% on a constant-currency basis. * Digital revenue was $141 million, or 14% of total revenue, up 9% sequentially from $130 million in the fourth quarter of fiscal 2007 and up 41% from $100 million in the prior-year quarter. * Operating income decreased 45% to $44 million from $80 million in the prior-year quarter. Operating income in the first quarter includes an $18 million impairment charge related to Bulldog Entertainment, an entertainment services company purchased in May 2007, a business we have since exited. * Operating income before depreciation and amortization (OIBDA) fell 8% to $129 million from $140 million in the prior-year quarter. * Net loss of $0.11 per diluted share, which reflects the previously noted $18 million or $0.12 per share impairment charge, declined from net income of $0.12 per diluted share in the prior-year quarter. Warner Music Group Corp. announced its first-quarter 2008 financial results for the period ended December 31, 2007. "2007 was a challenging year for the recorded music industry. Operationally, the WMG team had some notable achievements this year - our highest U.S. album share in a decade, the top two labels for U.S. market share, the greatest U.S. digital album share advantage over physical album share for any major music company and more stable music publishing performance - among many others. We recognize that there remains much to be accomplished and are working towards translating these gains into enhanced value for shareholders," said Edgar Bronfman, Jr., Warner Music Group's Chairman and CEO. Michael Fleisher, Warner Music Group's Executive Vice President and CFO, added, "As part of our regular evaluation of our capital deployment strategy, and considering our commitment to return value to shareholders, as well as the pace of change in the industry and our need for financial flexibility as we implement our ongoing transformation initiatives, the Board of Directors determined to continue the policy of paying a quarterly dividend in an amount not to exceed $80 million per year in aggregate." First-Quarter Results For the first quarter 2008, revenue grew 6.6% to $989 million from $928 million in the prior-year quarter, and rose 0.7% on a constant-currency basis. This performance was tempered by a challenging Recorded Music industry environment as the shift in consumption patterns from physical sales to new forms of digital music continues. Domestic revenue increased 10.1% while international revenue grew 3.8%, but declined 6.0% on a constant-currency basis. Revenue gains in the U.S. were partially offset by constant-currency declines in the Asia Pacific and Latin American regions and to a lesser extent Europe. Operating income for the quarter fell 45.0% to $44 million from $80 million in the prior-year quarter and operating margin declined 4.2 percentage points to 4.4%. Operating income includes the above-mentioned $18 million impairment charge. OIBDA for the quarter declined 7.9% to $129 million from $140 million in the prior-year quarter and OIBDA margin dropped 2.1 percentage points to 13.0%. The contraction in OIBDA and OIBDA margins primarily reflects the tough comparisons against last year's highly profitable results from Japan. Other contributors to the decline were higher corporate costs associated with upgrading our IT infrastructure, including our financial reporting systems, and growth in our third-party distribution business. Net loss was $16 million, or $0.11 per diluted share, for the quarter, including the $18 million impairment charge. Net income in the prior-year quarter was $18 million, or $0.12 per diluted share. As of December 31, 2007, the company reported a cash balance of $160 million, total long-term debt of $2.27 billion and net debt (total long-term debt minus cash) of $2.11 billion. For the quarter, net cash used in operating activities was $36 million, which reflects an increase in accounts receivable due to holiday sales that occurred toward the end of the reporting period. Free Cash Flow (defined as cash flow from operations less capital expenditures and cash paid for investments) amounted to negative $155 million, compared to Free Cash Flow of positive $16 million in the comparable fiscal 2007 quarter. Unlevered After-Tax Cash Flow (defined as Free Cash Flow excluding cash interest paid) was negative $104 million, compared to Unlevered After-Tax Cash Flow of positive $65 million in the comparable fiscal 2007 quarter (see below for calculations and reconciliations of Free Cash Flow and Unlevered After-Tax Cash Flow). Cash used in investing activities in the current quarter was $119 million compared to $58 million in the prior year quarter, and included the investment in Frank Sinatra Enterprises of $50 million along with additional smaller acquisitions and investments in the current quarter. Below is the business segment discussion for the quarter. Recorded Music Revenue from the company's Recorded Music business increased 6.3% from the prior-year quarter to $850 million, and was up 0.7% on a constant-currency basis. The increase in revenue reflects strength in domestic sales and declines in international sales in certain parts of Asia and Europe and in Latin America. Declines in our international physical Recorded Music business were more than offset by year-over-year revenue increases in our domestic physical Recorded Music business and our global digital Recorded Music business. Recorded Music digital revenue of $132 million grew 41.9% over the prior-year quarter and represented 15.5% of total Recorded Music revenue. Domestic Recorded Music digital revenue amounted to $89 million or 22.3% of total domestic Recorded Music revenue. Digital sales strength was primarily driven by strength in global online downloads. Major sellers in the quarter included titles from Josh Groban, Led Zeppelin, Michael Bublé, Kobukuro and James Blunt. Domestic Recorded Music revenue grew 10.5% from the prior-year quarter to $400 million, while international Recorded Music revenue was up 2.7% from the prior-year quarter to $450 million, but fell 6.6% on a constant-currency basis. Gains in domestic revenue were largely the result of strong holiday sales and an improved domestic release schedule as compared to the prior-year quarter. The constant-currency decline in international Recorded Music revenue in the quarter was primarily the result of declines in Japan, Latin America, France, Italy and Spain, partially offset by strength in the U.K., Germany and the rest of the Asia Pacific region. These declines stemmed in part from a weaker international release schedule in the quarter when compared to top-selling albums from Kobukuro, Ayaka, Luis Miguel, Alejandro Sanz and Laura Pausini in the prior-year quarter. Recorded Music operating income totaled $71 million in the quarter, down 28.3% from $99 million in the prior-year quarter, resulting in an operating margin of 8.4% compared to 12.4% in the prior-year quarter. Operating income in the first quarter reflects the $18 million impairment charge. Recorded Music OIBDA declined 3.5% to $136 million for the quarter, compared to $141 million in the prior-year quarter. Recorded Music OIBDA margin dropped 1.6 percentage points to 16.0% from the prior-year quarter due to tough profitability comparisons in Japan and growth in our third-party distribution business. Music Publishing Music Publishing revenue in the quarter increased by 8.3% from the prior-year quarter to $144 million, and was flat on a constant-currency basis. Music Publishing revenue grew 9.0% internationally, and declined 3.0% on a constant-currency basis, while domestic revenue rose 6.8% over the prior-year quarter. Digital revenue from Music Publishing amounted to $10 million, representing 6.9% of total Music Publishing revenue for the quarter. On a constant-currency basis, declines in mechanical revenue of 4.8% and performance revenue of 1.9% were offset by a 42.9% increase in digital revenue and flat synchronization revenue. Mechanical revenue weakness reflects the industry-wide decline in physical sales while synchronization revenue was negatively impacted by the Writers Guild of America strike. Music Publishing operating income amounted to $4 million, up 33.3% from $3 million in the prior-year quarter, resulting in an operating margin of 2.8%. Music Publishing OIBDA increased 10.5% to $21 million for the quarter, compared to $19 million in the prior-year quarter. Music Publishing OIBDA margin of 14.6% showed a gain of 0.3 percentage points from the prior-year quarter, helped by an increase in digital sales. Quarterly Dividend The Board of Directors of Warner Music Group today declared a regular quarterly dividend of $0.13 per share of common stock, representing an aggregate quarterly dividend of approximately $19.4 million (based on outstanding shares of 149,522,471 as of February 5, 2008). The dividend is payable on February 29, 2008 to stockholders of record as of the close of business on February 21, 2008. As previously announced, the Company intends to pay regular quarterly dividends on its common stock outstanding in an amount not to exceed $80 million per year. The Board will evaluate whether to pay a dividend on a quarterly basis and will base its decisions on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors the Board of Directors may deem relevant.
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