Warner Music Group 2nd-quarter loss widens

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NEW YORK -- Warner Music Group Corp. reported a widened fiscal second-quarter loss Tuesday because of a lack of big releases and continued music retail sluggishness as it unveiled details of an organizational realignment that will see the firm move jobs and financial resources into digital and other areas where it expects growth.

In a conference call, chairman and CEO Edgar Bronfman Jr. lauded his company's solid digital revenue gains in the quarter and reiterated WMG's commitment to digital rights management, even though music major EMI Group recently announced a DRM-free trial with Apple Inc.'s iTunes.

He also told analysts that WMG's next big album release, the Tuesday bow of Linkin Park's "Minutes to Midnight," will be available in a new format developed by the company called MVI, which stands for music, video, interactive.

Bronfman said it is designed to give consumers who nowadays often put CDs into their computers content beyond the pure music, including videos and bonus content. "The CD is a tired medium," having been around for about 30 years, the CEO said.

Asked whether his support for DRM has changed since the EMI-Apple deal, Bronfman said Tuesday, "We continue to think that DRM is an important element of our ongoing business," though he added that his team will closely watch the EMI experiment.

In a regulatory filing, WMG said its realignment will lead to about 400 job reductions in traditional retail and other areas, sources said. The company also said it will take restructuring charges of $65 million-$80 million during the current fiscal year as a result.

However, Bronfman said the move is not about cutting costs and positions but about reallocating resources into future growth areas, including digital and video distribution and the creation of programming unit Den of Thieves, which WMG announced Monday (HR 5/8).

"We are not going to be able to save our way to growth," Bronfman told analysts on the earnings call. WMG's filing said it expects "the majority of any cost savings to be offset by new hirings and ongoing investment focused on new business initiatives."

WMG brass on Tuesday signaled that the company's push into the video space likely will mainly create revenue in the form of advertising and that such revenue will start materializing next year.

WMG's fiscal second-quarter loss amounted to $27 million or, when adjusted to exclude nonrecurring items, $15 million compared with a year-ago loss of $7 million.

Operating income before depreciation and amortization fell from $104 million to $80 million. Adjusted for nonrecurring items, it fell 8% to $96 million.

WMG's revenue slipped 2% to $784 million, driven by difficult year-ago comparisons in the recorded music unit. On a constant-currency basis, revenue fell 5%.

A 4% recorded music revenue decline, or 7% on a constant-currency basis, was only partially offset by gains in digital and music publishing.

Softer recorded music sales in the U.K., France, Canada and Latin America dragged down results, though the company gained album share in the U.S., according to WMG. Major sellers in the quarter included titles from Madonna, Pretty Ricky and Red Hot Chili Peppers.

Quarterly music publishing revenue rose 11%, or 4% on a constant-currency basis.

Digital revenue rose 23% year-over-year and 11% over the previous quarter to $111 million, or 14% of total revenue.

While the first half of WMG's fiscal year saw it struggling in the recorded music space, brass Tuesday said comparisons should increasingly ease as the rest of the fiscal year unfolds.

Goldman Sachs analyst Anthony Noto lauded that WMG's financial trends came in "ahead of reduced expectations" but warned that "digital growth of just 23% continues to highlight the earlier-than-expected maturation of the secular growth opportunity."

WMG shares closed down 0.9% to $17.14.
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