Warner Music Group Corp., one of the nation's largest record companies, on Tuesday posted an unexpected loss in the fourth quarter as severance costs weighed on results despite a strong slate of music releases from artists including Jay-Z and Madonna.
It shares slumped $1.11, or 16 percent, to $5.95 in afternoon trading after falling as low as $4.44 earlier in the day.
The earnings miss, coming on top of a recent run-up in the shares, prompted Wedbush Securities analyst Chris White to cut his rating on Warner Music's stock to "neutral" from "outperform" while maintaining a $6.50 price target.
"We believe the stock's appreciation of recent months has raised the operational bar for the company, and we're not sure recent results meet this elevated standard," he said in a research note.
Sales of digital copies of music grew faster than CD sales, and international sales far outpaced domestic business. But Warner, based in New York, said strong music releases were dampened by weak economic conditions and an industry shift from CD to digital music sales.
Warner Music reported a fourth-quarter loss of $18 million, or 12 cents per share, compared with net income of $6 million, or 4 cents per share a year ago. The quarter included $14 million in severance costs as the company shifted resources from promoting CDs to generating revenue from digital music.
Revenue rose in the quarter that ended Sept. 30 by nearly 1 percent to $861 million, from $854 million, the first revenue gain since the fourth quarter of 2008. Excluding the effects of foreign exchange translation, revenue would have risen by 4.7 percent.
Analysts expected a profit of 5 cents per share in the quarter on revenue of $820.3 million, on average, according to Thomson Reuters. Analysts typically exclude one-time items.
In the quarter, U.S. sales fell by 7.4 percent while international sales rose by 8.8 percent, or 17.8 percent excluding the impact of foreign currency fluctuations.
Digital revenue was up 10 percent to $184 million, or 11.5 percent on a constant-currency basis. Digital sales made up 21.4 percent of total revenue in the quarter, up from 19.6 percent a year earlier.
Big sellers in the quarter included Michael Buble, Muse and Paramore, as well as Japanese artists Ayaka, Kobukuro and Superfly.
Chief Executive Edgar Bronfman Jr. told analysts the company increased its U.S. market share over the year by a quarter of a percentage point to 21 percent, "despite a surge in sales of Michael Jackson's recordings," which are distributed by Sony Music Entertainment.
For the year, Warner reported a loss of $100 million, or 67 cents per share, compared with a loss of $56 million, or 38 cents. Revenue fell 9 percent to $3.18 billion.
The company said the current fiscal year was led off by promising releases, including the soundtrack to "The Twilight Saga: New Moon," but that the music industry faces more challenges ahead.