NEW YORK Warner Music Group Corp WMG.N reported on Tuesday a surprise quarterly loss as higher interest expense and operating costs cut into the record label's margins.
The company said the shrinking demand for CD's and the weak economy hurt its revenue and are likely to affect future results. Shares dropped as much as 22 percent.
"Fiscal 2010 is likely to be another challenging year," said Steve Macri, chief financial officer of Warner Music, on a call with analysts. Macri said the company's results would likely continue to be pinched by the volatile global economy and transition in the music industry.
The world's third-largest music company posted a net loss of $18 million, or 12 cents a share, for the fiscal fourth quarter ended September 30, compared with a year-earlier profit of $6 million, or 4 cents a share.
Revenue rose 1 percent to $861 million, ahead of analyst forecasts, boosted primarily by growth in Japan, France and Germany. Top-selling artists in the period included Jay-Z, Madonna and Japanese acts Kobukuro and Superfly, International gains were offset by weakness in the U.S. and Latin America.
The company's operating loss excluding charges for job cuts was 3 cents a share as computed by Thomson Reuters I/B/E/S, compared with an average profit estimate by analysts of 5 cents per share on revenue of $820.3 million.
"The decline in U.S. sales versus international was the biggest surprise," said Standard & Poor's analyst Tuna Amobi. "My biggest concern was the cautious comments they had heading into fiscal 2010; they really need to stabilize their profit margins."
Warner Music's total costs and expenses in the fourth quarter increased by 2 percent, and its margin from continuing operations declined 1.5 percentage points to 6.3 percent.
Like other music companies, Warner Music is struggling with shrinking sales of recorded music as fewer fans buy albums on CDs. The transition to downloaded music has led to a decline in revenue throughout the industry as fans increasingly buy lower-priced individual songs from Web retailers like Apple Inc's (AAPL.O) iTunes Music Store.
Warner Music said its digital music sales rose 10 percent from the prior year to $184 million, or 21 percent of total revenue in the quarter.
Warner Music shares, which have been one of the strongest media performers on the stock market this year, fell by as much as 22 percent in early trading before recovering a bit.
By late afternoon Warner Music was down 81 cents or 11.5 percent to $6.25 on the New York Stock Exchange.
(Reporting by Yinka Adegoke and Franklin Paul; Editing by Derek Caney and Gerald E. McCormick)