CD slump leaves WMG spinning

Hits 52-week low as losses grow in fiscal third quarter

Shares of Warner Music Group fell to a 52-week low Tuesday before ending down 10.3% after reporting weaker-than-expected results for its fiscal third quarter.

A continuing slump in CD sales and charges for a realignment of its operations hurt the company's revenue and boosted its loss, with management saying new releases these days are seeing a faster decline in sales momentum after the first week. WMG couldn't fully make up for the sluggishness in recorded music via music publishing and digital music gains. The stock closed at $9.89 after going as low as $9.79.

WMG reported a loss of $17 million for the latest quarter, or $29 million when excluding nonrecurring items, compared with a $14 million loss a year ago. Revenue decreased 2% to $804 million. Both figures fell short of Wall Street expectations.

The latest quarter included $38 million in realignment charges and $8 million related to the possible acquisition of EMI Group, which was more than offset by a $52 million gain related to a Napster settlement and $6 million in tax benefits.

WMG chairman and CEO Edgar Bronfman Jr. highlighted a 10-year market-share high in the U.S. for both the latest quarter and the first half.

However, recorded music revenue fell 4% to $653 million in the quarter. Major sellers included releases from Linkin Park, T.I. and the White Stripes, featuring frontman Jack White (pictured). Operating income before depreciation and amortization in the recorded music unit rose from $92 million to $109 million.

Meanwhile, quarterly revenue at the Warner/Chappell music publishing unit climbed 5% to $157 million, or 1% when assuming constant currencies. OIBDA rose 44% to $33 million.

Recorded music digital revenue rose 27% to $112 million, weaker than many analysts hoped, to make up 17% of overall revenue in this area. Including publishing, digital revenue rose 29% to $119 million, accounting for 15% of the firm's total and more than 20% in the U.S.

Goldman Sachs analyst Anthony Noto said the digital figures were "disappointing for the third consecutive quarter, pointing to (a) faster-than-expected secular slowdown." He added he is reviewing his price target on WMG.

Bronfman said Tuesday in a conference call that WMG might become more careful about picking only select digital music partners in the future as online music has become ubiquitous.

He also reiterated that the expected price tag for EMI had been too high to justify but signaled continued interest in other possible deals.

The CEO also argued that WMG's share price has moved further away from representing his firm's true value after a 50% or so decline in the stock this year. Bronfman said either Wall Street is assigning no value to WMG's recorded music business or undervaluing its music-publishing operation. "How we can unlock that remains to be decided," he said.