Warner Music Group's IPO Blues
By
Steven Mallas
August 9, 2005
|
Wall Street heard Warner Music Group's (NYSE: WMG) post-IPO third-quarter results last week, but those numbers might not inspire any new shareholders to buy the stock.
The company's net loss for the quarter was $179 million, or $1.41 per diluted share, compared with a net loss of $91 million, or $0.85 per diluted share, in the year-ago quarter. It's important to keep in mind that this loss includes a load of one-time charges related to Warner Music Group's initial public offering (such as a $73 million termination fee for a management contract and IPO bonuses) and an accounting expense of $9 million under Financial Accounting Standard 123, which includes the effect of stock options. Backing those items out, the loss would become $35 million, or $0.27 per diluted share, a dramatic improvement over the previous year. But stock-options charges are something we may want to keep in mind (as Bill Mann has pointed out). Even if you take out the $9 million for accounting, you get a $44 million loss, which still represents about 50% less hemorrhaging.
Total revenues went up only 2% to $742 million (they actually decreased 1.6% for the first three quarters). But the big trick with Warner Music Group is watching how its digital recorded music sales progress -- that operation offers better margins than the CD business. These revenues represented a higher percentage of the overall take for the recorded music segment (which went up 2% as well) for the third quarter, increasing a point to 6% of revenues.
In the music publishing segment, revenues rose 5% to $161 million: One thing I found interesting was that video games were mentioned as a partial driver for higher synchronization royalties (the kind of royalties that result when a music company licenses a song it owns to be used in another entertainment property such as a scene in a movie). With the video-game industry sure to grow, one has to wonder how well music companies like Warner Music Group will leverage such an opportunity. Performance royalties (generated when songs are executed in public, such as being played on the radio) offset the success in music publishing, with the company saying it had fewer radio hits. Just like the movie business, each quarter can be hit-and-miss depending on how the current roster resonates with the public, making prospects volatile.
To be honest, I'm not that interested in Warner Music Group as a potential investment idea. As CEO Edgar Bronfman Jr. points out, piracy is a huge challenge for the music industry; I think revenue growth may be stymied for a while because of this issue. If the company continues to generate bigger digital recorded sales and increase its margin potential, then it could become more compelling than it is today. And if you check out Rick Munarriz's two commentaries from the company's IPO back in March and May, you'll see a whole host of reasons why individuals may not want to spin this record just yet.
More musical Takes:
Fool contributor
Steven
Mallas
owns none of the companies mentioned. The Fool has a
disclosure policy
.
Terms & Conditions
RSS Headlines
Fool UK