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A dirge for Warner Music - February 7, 2008

Pali Research media analyst Rich Greenfield continues to see no hope for the recorded music business. In a note to clients Thursday (reg. req.) after Warner Music Group reported a $16 million Q1 loss, Greefield all but sticks a fork in the company and its business. From the note:

• While management refuses to break out the specific benefit of acquisitions on revenue growth, their response to our question on the conference call implies that organic revenue growth (with constant currencies) was down low-mid single digits.
• At the end of fiscal (Dec) Q1, WMG’s net debt stood at $2.1 bn, up from $1.9 bn with EBITDA in the quarter down 8% year-over-year.
• While some investors were excited by an improvement in CD sales (smaller declines) in the first two weeks of 2008, unit sales have rapidly dropped off, with year-over-year declines now back over 20% on a weekly basis. As floor space at retail continues to contract and consumers begin to forget what a CD is, we expect physical CD unit sales declines to accelerate. In addition, digital unit sales are up only 30% so far this quarter, about half of the growth experienced last year at this point in the quarter.
• Mobile revenues (ringtones) are declining with US revenues down and international sales about flat.

Greenfield also excoriates management for lowering the performance bar on the company bonus pool in order to compensate senior executives despite the declining metrics ("in our mind, it's like repricing options") and for taking an $18 million impairment charge related to an acquisition the company had not disclosed when it made it.

"How can a company with declining revenues and declining EBITDA, make an acquisition of that size, and nobody gets fired for the mistake and everyone in senior management is still paid millions of dollars each in total annual compensation?" Greenfield wonders without really wondering.

The note urges clients to sell or short the stock.

Things only got worse for WMG CEO Edgar Bronfman, when French judicial officials disclosed later in the day that Bronfman is being investigated for suspected insider trading relating to his sales of Vivendi shares in 2000, according to this AP report.

Bronfman is the former executive vice chairman of Vivendi. Several other former Vivendi executives, including ex-chairman Jean-Marie Messier, also face preliminary charges as part of the investigation, the report said.
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