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Monday, October 27, 2008


EMI Music Group posted a brutal financial scorecard for the year ending March 31st. The company dropped 757 pounds during the period, or $1.2 billion at weekend exchange rates, while revenues slipped 19 percent to 1.45 billion pounds ($2.3 billion). That compares to year-earlier losses of 287 million pounds, or $454.5 million.

The recent losses are the result of a number of factors, including softening core profits, major accounting and restructuring write-offs, and various depreciation and financing costs. During the period, market share also dropped markedly to 9 percent from 12 percent. EMI experienced a one-time restructuring hit of 123 million pounds.

Sounds brutal, though the story gets worse. Physical sales, principally CDs, dropped 28 percent for the period, and recording-specific revenues dropped a resounding 23 percent. Meanwhile, incoming owner Terra Firma disclosed a number of serious operational and incentive issues at the company, including a massive over-shipment of CDs and gross overcompensation for top executives. Of particular note, Terra reported that CD sales actually dropped more than 45 percent between the years of 2005 and 2007, far worse than the industry average of 19 percent.

Meanwhile, Terra has been forced to realign assets and losses at fair market value. "The main factor behind the very large loss was continued operational poor performance, but more particularly accounting factors, in particular the revaluation of the balance sheet and the requirement to mark assets and liabilities to fair values," wrote Lord Brit, chairman of Terra investment arm Maltby Capital.

But Terra now has the opportunity to deliver a cleaner balance sheet, as recent losses reflect a serious accounting realignment. Brit noted that the company "does not expect to see other costs and charges recur at the same level" in future reporting periods.

Other positive signs also surfaced. Publishing revenues declined a mild 2 percent, and digital revenues increased 19 percent. But the overwhelming thrust is one of serious decline and downsizing. Terra Firma chief Guy Hands has already exacted deep cuts, while installing a new cast of top executives within a globalized organization. That includes ex-Googler Douglas Merrill, as well as Second Life cofounder Cory Ondrejka, both dynamic digital brains but newbies to the music industry.

The stark performance raises questions of what happens next. In the absence of a serious turnaround, Hands could opt to divest or liquidate aspects of the recording division, and focus on more promising areas like publishing and catalog. That sort of action has been rumored from the start, though the company remains just months into a serious company overhaul. "Many turnarounds are primarily about strategic, financial or business change. EMI does indeed face such challenges - but beyond these customary issues, many of EMI's problems have their origin in a culture and behaviors embedded not just in EMI but in much of the wider music industry," Brit noted. "EMI cannot be turned around overnight."