Warner Music Beats Despite 58% Decline in Net; Debt Issue Held Up

Warner Music Group saw its net income fall 58% from a year ago but still managed to top consensus analyst estimates by a penny. CEO Edgar Bronfman, Jr. said in the press release, "As expected, this has been a challenging quarter, reflecting the difficulties in any industry transformation of this scale," (full earnings call transcript later today). The company's continued struggles highlight the music industry's ongoing struggle to remain profitable, amid growing piracy and cheap (legal) digital downloads that cut into profits. Net income in Warner's latest quarter (Q407) was $5 million, good for EPS of $0.03, versus net of $12 million (EPS of $0.08) during the previous year period. Revenue was up 1.8% to $869 million, helped by favorable forex conversions, but actually fell 1.5% on a constant-currency basis. Wall Street was looking for EPS of $0.02 on sales of $875 million. An 8.9% rise in U.S. sales was offset by an 8% fall-off in international sales. Digital revenue rose 25% to $130 million.

Meanwhile, The Financial Times is reporting that the global credit crunch will likely hold up a plan by Warner and rival EMI Group to issue billions in debt backed by revenues from their publishing catalogues. The raised capital was to be used to ease the transition from CDs to digital downloads, which has been taking a toll on both companies' bottom lines. According to one industry insider, "it just isn't going to happen." Warner was hoping to raise as much as $2 billion; it is unclear how much EMI planned to raise. Warner shares are down nearly 69% YTD.

Sources: Press release, Wall Street Journal, MarketWatch, Financial Times, Reuters
Commentary: Private equity, Debt and Rock and Roll [Alphaville] • Warner Music Won't Bid for EMI • Shrinking Floor Space Affecting Warner Music's Outlook
Stocks to watch: WMG, EMIPY.PK Competitors: AAPL, SNE, VIVEF.PK
Earnings call transcript: Warner Music Group F3Q07 (Qtr end 6/30/07)

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