Warner Music(WMG) - 2023 Q3 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Warner Music Group Corp. as of June 30, 2023, and for the three and nine-month periods then ended Condensed Consolidated Balance Sheets As of June 30, 2023, total assets were $8.150 billion, a slight increase from $7.828 billion at September 30, 2022, primarily driven by higher accounts receivable and long-term debt Condensed Consolidated Balance Sheets (in millions) | | June 30, 2023 | September 30, 2022 | | :--- | :--- | :--- | | Total current assets | $2,317 | $2,139 | | Total assets | $8,150 | $7,828 | | Total current liabilities | $3,290 | $3,368 | | Long-term debt | $3,988 | $3,732 | | Total liabilities | $7,851 | $7,660 | | Total equity | $299 | $168 | Condensed Consolidated Statements of Operations For the three months ended June 30, 2023, revenue was $1.564 billion, up from $1.432 billion in the prior-year period, with net income stable at $124 million Statements of Operations Highlights (in millions, except per share data) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $1,564 | $1,432 | $4,451 | $4,422 | | Operating Income | $189 | $146 | $578 | $551 | | Net Income | $124 | $125 | $285 | $405 | | Net Income attributable to WMG | $122 | $124 | $278 | $403 | | Diluted EPS (Class A & B) | $0.23 | $0.24 | $0.53 | $0.77 | Condensed Consolidated Statements of Cash Flows For the nine months ended June 30, 2023, net cash provided by operating activities was $349 million, while net cash used in investing activities significantly decreased to $104 million due to lower acquisition spending Cash Flow Summary for Nine Months Ended June 30 (in millions) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $349 | $336 | | Net cash used in investing activities | $(104) | $(763) | | Net cash (used in) provided by financing activities | $(233) | $280 | | Net increase (decrease) in cash | $16 | $(154) | | Cash and equivalents at end of period | $600 | $345 | Notes to Condensed Consolidated Financial Statements The notes provide detailed information on the company's accounting policies and financial results, including business description, revenue recognition, debt structure, and a recent restructuring plan - The company's business is divided into two main operations: Recorded Music (discovery, development, marketing, and sale of music) and Music Publishing (generating revenue from the use of musical compositions)[24][25][26] - In March 2023, the company announced a restructuring plan involving a 4% headcount reduction (approx. 270 people), expecting to incur $41 million in severance costs[70] - Total long-term debt as of June 30, 2023, was approximately $4.0 billion, with the company engaging in several debt-related transactions to replace LIBOR with SOFR-based rates[52][58][59] Revenue Disaggregation for Nine Months Ended June 30 (in millions) | Segment/Type | 2023 | 2022 | | :--- | :--- | :--- | | Recorded Music | | | | Digital | $2,445 | $2,475 | | Physical | $377 | $440 | | Artist services & expanded-rights | $555 | $563 | | Licensing | $287 | $244 | | Total Recorded Music | $3,664 | $3,722 | | Music Publishing | | | | Digital | $477 | $404 | | Performance | $130 | $119 | | Mechanical | $46 | $37 | | Synchronization | $126 | $133 | | Total Music Publishing | $790 | $704 | | Total Revenues | $4,451 | $4,422 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition, detailing segment performance, cost structures, and liquidity management - Management uses OIBDA (operating income before depreciation and amortization) as a key performance indicator, with Q3 2023 OIBDA increasing 18% to $275 million and the margin improving to 18%[116][157] - A restructuring plan announced in March 2023 is expected to generate pre-tax cost savings of approximately $19 million in fiscal 2023 and $48 million on an annualized basis in fiscal 2024[133][134] - The company's financial transformation initiative, launched in 2019, is ongoing with expected upfront costs of $235 million and annualized run-rate savings of $35-$40 million once fully implemented[249] Results of Operations - Three Months Ended June 30, 2023 For the third quarter of fiscal 2023, total revenues increased by 9% to $1.564 billion, driven by growth in both Recorded Music and Music Publishing segments Q3 2023 vs Q3 2022 Revenue by Type (in millions) | Revenue Type | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Recorded Music | $1,282 | $1,189 | 8% | | Music Publishing | $283 | $245 | 16% | | Total Revenues | $1,564 | $1,432 | 9% | - Recorded Music streaming revenue grew 6% to $822 million, benefiting from a stronger release schedule and recovery in ad-supported revenue[144] - Music Publishing digital revenue increased 26%, driven by growth in streaming, digital deal renewals, and a $9 million revenue true-up[146] Q3 2023 vs Q3 2022 OIBDA by Segment (in millions) | Segment | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Recorded Music OIBDA | $261 | $224 | 17% | | Music Publishing OIBDA | $73 | $57 | 28% | | Total OIBDA | $275 | $233 | 18% | Results of Operations - Nine Months Ended June 30, 2023 For the nine months ended June 30, 2023, total revenues increased 1% to $4.451 billion, with operating income rising 5% to $578 million, aided by a divestiture gain offsetting restructuring costs Nine Months 2023 vs 2022 Revenue by Type (in millions) | Revenue Type | Nine Months 2023 | Nine Months 2022 | % Change | | :--- | :--- | :--- | :--- | | Recorded Music | $3,664 | $3,722 | -2% | | Music Publishing | $790 | $704 | 12% | | Total Revenues | $4,451 | $4,422 | 1% | - Recorded Music revenue was negatively impacted by a lighter release schedule, an extra week in the prior year, and a market-related slowdown in ad-supported streaming revenue[190] - Music Publishing revenue growth was driven by an 18% increase in digital revenue and a 9% increase in performance revenue, reflecting continued growth in streaming and recovery from COVID disruptions[192] - A pre-tax gain of $41 million from the sale of certain sound recording rights was recorded, which was offset by $41 million in restructuring costs[204][203] Financial Condition and Liquidity As of June 30, 2023, the company had $600 million in cash and equivalents and $3.988 billion in debt, with sufficient liquidity for the next twelve months Financial Condition (in billions) | Metric | June 30, 2023 | September 30, 2022 | | :--- | :--- | :--- | | Cash and equivalents | $0.600 | $0.584 | | Total debt (net) | $3.988 | $3.732 | | Net debt | $3.388 | $3.148 | - The company's weighted-average interest rate on debt was 4.1% as of June 30, 2023, with the nearest-term debt maturity in 2028[250] - On May 10, 2023, the board declared a cash dividend of $0.16 per share, with total dividends paid in the nine months ended June 30, 2023, amounting to $251 million[260][261] Adjusted EBITDA Reconciliation for Twelve Months Ended June 30, 2023 (in millions) | Metric | Amount | | :--- | :--- | | Net Income | $435 | | Income tax expense | $149 | | Interest expense, net | $136 | | Depreciation and amortization | $335 | | Other Adjustments (Restructuring, etc.) | $94 | | Adjusted EBITDA | $1,260 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign currency exchange rates, interest rates, and inflation, using foreign exchange forward contracts and interest rate swaps to manage these exposures - The company uses foreign currency forward contracts to manage exposure on major currencies, holding contracts for the sale of $172 million and purchase of $98 million of foreign currencies as of June 30, 2023[274] - Of the $4.028 billion in total debt, $1.314 billion is variable-rate, with an interest rate swap effectively fixing the rate on a portion, resulting in 80% of total debt being effectively fixed-rate[276] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes in internal control over financial reporting during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures are effective at a reasonable assurance level[283] - No changes occurred during the three months ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[284] Part II. Other Information Item 1. Legal Proceedings The company is involved in various claims and legal proceedings arising in the ordinary course of business, which management does not expect to have a material adverse effect on its financial condition - While litigation has inherent uncertainties, the company does not currently expect pending legal matters to have a material adverse impact on its financial condition or operations[286] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2022 - No material changes to risk factors from the Annual Report on Form 10-K for the fiscal year ended September 30, 2022, are reported[287] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable for the reporting period - Not applicable[288] Item 3. Defaults Upon Senior Securities This item is not applicable for the reporting period - Not applicable[289] Item 4. Mine Safety Disclosures This item is not applicable for the reporting period - Not applicable[290] Item 5. Other Information This item is not applicable for the reporting period - Not applicable[291] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to credit agreements, an indemnification agreement, and officer certifications - Exhibits filed include amendments to the Senior Term Loan Credit Agreement, CEO and CFO certifications, and XBRL data files[294]