The shift in demand from CDs to downloads is taking its toll on Warner Music Group, which reported a loss of $37 million in the second quarter. The company said it will suspend its dividend, and its shares paid the price, sliding more than 20 percent in early trading Thursday.
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Warner Music Group, whose artists include R.E.M., Madonna and Green Day, said Thursday that higher costs and a shift to digital music resulted in a wider second-quarter loss, and it suspended dividends.
Shares tumbled more than 20 percent, or US$1.87, to $7.18 in morning trading.
For the period ended March 31, the New York-based recording company reported a loss of $37 million, or 25 cents per share, compared with a loss of $27 million, or 19 cents per share, a year earlier. Losses from continuing operations totaled 23 cents per share in the latest period.
Revenue grew 2 percent to $800 from $784 million a year earlier.
Bad News All Around
Analysts polled by Thomson Financial expected a loss of 12 cents per share on revenue of $779.7 million.
"Physical recorded music sales continued to decline industrywide, and slowing ringtone growth as well as a softening broader economy are negatively impacting the music industry," Warner Music Chairman and Chief Executive Edgar Bronfman Jr. said during a conference call with Wall Street analysts.
Warner said it was suspending its dividend to shareholders to reduce debt amid the uncertain economy, unstable credit markets and ongoing softness in the recorded music market.
Bronfman said the move would enable the company to sustain its investment level and develop its artist roster. He also sought to reassure investors about the company's cash position.
"We feel totally comfortable that we have the complete financial flexibility we need to meet the (debt) covenants going forward," Bronfman said.
Sales Flat
Overall recorded music sales were essentially flat during the quarter, rising 0.6 percent to $652 million versus a year earlier, as retailers shifted inventory amid a slowing economy and demand for more digital music.
Total revenue from digital music sales jumped 48 percent to $164 million versus $111 million in the prior-year period, driven primarily on growth in music download purchases, Warner said.
The latest digital music sales tally represents 21 percent of the company's total revenue.
Improved international sales of recorded music did not offset domestic sales declines.
Domestic recorded music sales tumbled 17 percent from the prior-year period to $297 million; international recorded music sales jumped 22.4 percent to $355 million.
Warner attributed the decline in domestic sales to the timing of its album release schedule compared to a year earlier, and falling demand for CDs.
The company said retailers have been slow to replenish their inventory of CDs due to the lagging U.S. economy and ongoing weakness in CD sales.
Top Sellers
Albums by REM, Simple Plan, Nickelback and the soundtrack to the movie "Juno," were among Warner's best-selling releases during the quarter.
Sales for Warner's music publishing segment rose 8.4 percent to $155 million from $143 million in the prior-year quarter.
For the first half of its fiscal year, Warner posted a $53 million loss, or 36 cents per share. Revenue in the period totaled 1.8 billion.
Warner has invested heavily to diversify its business into artist management and related services the past two years. It has also sought to widen its online presence.
Music downloads during the quarter accounted for most of the digital revenue, while mobile music sales remained soft, management said.
Business Model Shift
Bronfman noted music download sales at Amazon.com (Nasdaq: AMZN) , which began selling tracks in the unrestricted MP3 file format last fall, appear to be expanding the digital music market, and not taking away sales from Apple's (Nasdaq: AAPL) market-leading iTunes Music Store.
Bronfman said it's unlikely the company will see any meaningful returns from MySpace Music before next year. The service, which the executive said will launch around September, is a new online music venture between News Corp.'s social networking giant, Warner and two other major recording companies.
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