February 06, 2008

By By Ed Christman, N.Y.

The Warner Music Group lost $16 million, or 11 cents per diluted share, on sales of $989 million in its fiscal first quarter ended Dec. 31, 2007, due to an $18 million write-off for shutting down its Bulldog Entertainment concert promotion company.

The fiscal first quarter results compares with the $18 million in net income, or 12 cents per diluted share, the company posted last year in the corresponding period when revenue was 6.6% lower at $928 million.

Breaking out revenue by operation, the company generated $845 million from its recorded music operation, if $5 million in intersegment payments are eliminated, and $144 million from its music publishing company.

Within the recorded music segment, WMG managed to post a 10.5% increase in domestic revenue to $400 million, even though album sales dropped 14.6% last year, according to Nielsen SoundScan. International sales, meanwhile, increased 2.7% to $450 million.

The company attributed the domestic increase to its Warner Bros. Records and Atlantic Records labels capturing the No. 1 and No.2 rankings in U.S. market share and to a strong showing in digital revenue. For the quarter digital revenue totaled $141 million, or 14% of total revenue.

"The recorded music industry pressures persisted in the quarter, WMG chairman Edgar Bronfman Jr. said in a conference call with Wall Street analysts. "The industry's physical sales declined further and digital growth, particularly mobile, remained on a slower trajectory. Nevertheless, we once again outperformed the marketplace and continued to establish a framework for becoming a business with more diversified revenue streams."

Bronfman said WMG sustained its digital lead into the December quarter and for the full calendar year, with the greatest U.S. digital album share advantage over physical album share of any of the music majors.

"We were the only major music company to increase U.S. physical plus digital album equivalent unit sales in 2007, rising 1% versus the industry's decline of 9.5%," if track equivalent albums are taken into account, according to
Bronfman.

Meanwhile, the Bulldog Entertainment write-off occurred due to a bet the company made with that acquisition as a way into the concert promotion business. Sources familiar with the situation say that the investment didn't pan out and the company decided to cut its losses.

During the year, the company also spent about $50 million, sources say, to acquire half of Frank Sinatra Enterprises, in an investment that is more in line with its traditional record company operation.

In other moves, Bronfman said WMG continues the strategic priority of signing expanded rights deals with artists which gives the company participation in growing areas of the music business such as sponsorship, fan club, merchandising, touring, ticketing and artist management. He cited Grammy nominated best new artist Paramore, whose second album "Riot" is approaching platinum, as an example of such a deal, struck in December 2005.

Also, he noted that the company's 2000 investment in Artist Arena, an artist fan club company, is beginning to pay off. Artist Arena now claims a roster of over 80 artist clients, and over the past six months, it has begun to manage artist fan clubs for Warner music artist Kid Rock, Panic at the Disco, and Death Cab For Cutie as well as non-Warner artists like Fallout Boy, Three Doors Down and All American Rejects

In publishing, he noted that Warner Chappell is moving to reinvigorate its synchronization business, and was rewarded with eight Super Bowl Ads that featured music from that company and Rhino.

For the quarter the company generated $129 million in earnings before interest, taxes, depreciation and amortization, as compared with $140 million garnered last year in its first fiscal quarter.

In looking at the company's balance sheet, the company has a negative net worth of $47 million, while long-term debt totals $2.25 billion.

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