Warner Music posts profit but revenue down

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NEW YORK -- Warner Music Group Corp. said Friday that it swung to a fiscal fourth-quarter profit despite a revenue decline because of fewer and weaker releases as a legal settlement with Kazaa boosted its bottom line.

For its latest fiscal quarter ending Sept. 30, the company said digital music sales exceeded the $100 million mark for the first time and contributed 12.2% of total revenue, once again outperforming analyst expectations . However, overall revenue was dragged down 5.6% because of a tough year-ago comparison provided by releases from James Blunt and Faith Hill.

In a conference call, management said revenue and operating income before depreciation and amortization in the current fiscal first quarter, which coincides with the key holiday selling season, will face even tougher comparisons.

But chairman and CEO Edgar Bronfman Jr. expressed confidence in full-year results for the new fiscal year and emphasized his belief in continued digital growth. Importantly, WMG's digital sales of recorded music outweighed a decline in physical sales for the latest fiscal year at a time when many industry watchers have wondered if digital gains are enough to offset continued weakness in music retail.

WMG posted a quarterly profit of $12 million, compared with a loss of $30 million in the year-ago period. The latest figure included a $13 million gain from a settlement in a copyright lawsuit against peer-to-peer file-sharing site Kazaa.

Operating income before depreciation and amortization edged up 0.9% to $113 million, when excluding the latest quarter's one-time items.

Revenue fell 5.6% year-over-year, or 7.1% on a constant-currency basis, to $854 million despite solid sales from Danity Kane and Muse, among others. U.S. revenue fell 8.5%, while international revenue declined only 3.1%, or 6% on a constant-currency basis.

Worldwide revenue at WMG's recorded music unit decreased 5.7%, or 6.9% assuming constant currencies, to $731 million.

Music publishing revenue fell 6.6%, or 9.2% on a constant-currency basis, to $128 million in the latest quarter.

"We will face even tougher comparisons in the first quarter of fiscal year 2007 ," chief financial officer Michael Fleischer said Friday during a conference call with Wall Street analysts.

Digital revenue rose to $104 million in the fiscal fourth quarter.

It is WMG's principle not to give financial guidance. But while analysts mostly called the latest set of figures mixed, Bronfman emphasized his confidence in the longer-term outlook for his company. "These year-end results highlight the continued transformation of Warner Music Group in 2006," he said.

Goldman Sachs analyst Anthony Noto said the latest quarterly results showed "profit and digital revenue upside despite (a) total revenue miss" because of "somewhat disappointing" recorded music figures.

But he lauded the fact that "digital growth remained strong and music publishing is showing signs of improvement."

Asked about music industry consolidation potential, Bronfman said: "We are buyers of content. ... We will be interested and active potential buyers" as deal opportunities arise.

Asked about the recent sale of BMG Music Publishing to Vivendi's Universal Music Group, Bronfman said WMG also bid "very aggressively" for it.

He didn't comment directly on a potential private-equity deal to take EMI Group private. But Bronfman joked that he expected that representatives of PE groups that are not investors of WMG were listening to the conference call, and he welcomed them.

Bronfman also said WMG will focus next year on further product innovations, such as DVD albums. He added that mobile sales likely will become a bigger part of U.S. digital music sales.

WMG shares closed down 2.4% on Friday at $24.80. During the past year, they have traded at $17.19-$31.

In reiterating his "neutral" rating on the stock, Noto said, "With few catalysts to drive the stock in the near term and the possibility of a buyout of EMI by private-equity sponsors, we do not expect WMG shares to move dramatically over the next few months."
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