Warner Music’s quarterly sales drop 6%

Warner Music Group Corp. on Friday posted disappointing operating results for its fiscal fourth quarter and said it saw substantial pressure on operating income in the current quarter.

Warner Music’s fiscal first quarter coincides with the crucial holiday music sales season, but the New York-based company suggested that it probably would not replicate year-earlier results, when it said it outperformed expectations. In the same period last year, sales were driven by artists Madonna and Enya.

“We will face even tougher comparisons in the first quarter of fiscal year 2007 than the fourth quarter of fiscal year 2006,” Michael Fleischer, Warner Music’s chief financial officer, told analysts during a conference call.

The company swung to a fourth-quarter profit of $12 million, or 8 cents a share, compared with a loss of $30 million, or 21 cents, a year earlier. However, excluding a $13-million gain from its litigation against Kazaa, an online music downloading service, Warner Music posted a loss of 1 cent a share.

Wall Street analysts, on average, expected the company to break even.

Strong sales of artists including Red Hot Chili Peppers, Gnarls Barkley and Panic at the Disco were not enough to prevent a decline in fourth-quarter revenue to $854 million, off 6% from a year earlier, when sales were driven by Green Day, Faith Hill and James Blunt.

Warner Music, the world’s fourth-largest music company, said sales in the quarter were down compared with last year because of a relatively thin album release schedule and broader weakness in the recorded music and music publishing businesses.

The music industry has been struggling in recent years with falling sales of CDs because of what it calls the proliferation of online piracy and competition from other forms of entertainment such as video games and DVDs.

Warner’s digital sales, both in online downloads and cellphone music sales, nearly doubled in the fourth quarter ended Sept. 30 to $104 million and accounted for 12% of total revenue.

Warner Music Chief Executive Edgar Bronfman told analysts Friday that the gains in digital recorded music revenue overshadowed falling sales of CDs and reiterated his company’s plans to roll out a new format called DVD albums at the start of the year.

DVD albums will include more features, such as ring tones, photos and video clips, than existing formats.

Both Bronfman and Fleischer said the company would see tougher comparisons on revenue and operating income before depreciation and amortization, or OIBDA, in the first quarter of fiscal year 2007 compared with a year earlier.

“We expect to see substantial pressure on our OIBDA line in the first quarter of fiscal ‘07,” Fleischer said.

Warner Music shares fell 62 cents, or 2.4%, to $24.80 on Friday.