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Glum Music Industry Outlook Plagues EMI

EMI Group emerged on Tuesday from a dismal year of slumping profits confident that things could only get better, but the music giant’s shares spun lower as a glum industry outlook rattled already jangled nerves.

EMI, home to artists such as Radiohead and Kylie Minogue, posted a sharp but expected 40 percent fall in adjusted pre-tax profit and said its radical overhaul was going to plan despite an industry ravaged by an economic slowdown and piracy.

The world’s third biggest music company saw its battered stock slide almost seven percent as analysts took fright after a post-results meeting, shrugging off the British group’s promise of a “substantial improvement” in results this year.

“(EMI) faces so much of a struggle with piracy and they need to find a way to protect themselves. Sales are falling and there are a number of factors to take into consideration, such as the HMV float not going well,” said Martin Dobson, head dealer at Natwest Securities in London.

In a drive to clear the decks and improve its chances of discovering top acts, EMI unveiled an extensive overhaul in March with 1,800 job cuts and 400 artists scrapped from its roster. EMI said at the time it had not paid enough attention to what the business was really about – generating big-name stars.

While a turnaround is expected to take some time, EMI said it expected two or three of its albums to sell more than five million this year, although sales will remain flat. EMI said albums scheduled for release this year included Coldplay, Atomic Kitten, Massive Attack, and Japanese star Utada Hikaru.

EMI, which has suffered two profit warnings and two failed mergers in two years, closed 6.55 percent down at 271 pence in London, having already lost a fifth of its value this year.


Aside from the issues of a soggy industry and rampant piracy, analysts cited operating margins as a worry. EMI told analysts its previous assumptions on operating margins did not include overheads – something analysts had not factored in.

“The analysts meeting was not brilliant and the sensitivity analysis for operating margins took people by surprise,” said Paul Richards, media analyst at broker Numis.

At the unveiling of its restructuring in March, EMI said it hoped to reach an operating margin of 11-13 percent within three years. The company said on Tuesday it would reach around nine percent this year, compared with under five percent last year.

Weakness in the U.S., Japan and Latin America pushed pre-tax profit before amortization and exceptionals to 153.3 million pounds ($224 million) for the year to end March, compared with a previous 260 million and forecasts of around 150 million.

EMI said it was seeing signs of a pick-up in Latin America and Asia and expected industry growth to range between plus and minus 2.5 percent this year. That compares with many analysts who have forecast an industry fall of more like three percent.

On the piracy front, the group said it was fighting back by using copy-protection on repertoire in Asia and Latin America and testing technology for other areas. However, many analysts are not convinced about its long-term strategy to beat piracy.


EMI said it would soon start talks about re-signing top UK performer Robbie Williams, whose contract has expired, brushing off reports it had offered the star a 40 million pound contract.

Williams’ “Swing While You’re Winning” album was EMI’s best- selling release last year, selling 5.4 million copies, despite not being released in the United States. That compares to the Beatles 1 album, which sold 22 million in the previous year.

EMI said it underperformed a weak industry, with its global music market share falling 0.7 percentage points to 13.4 percent and its troubled U.S. share slipping to 10.4 percent from 10.8 percent.

Recorded music revenues fell 11 percent, partly offset by a 6.6 percent rise in music publishing revenues to give an 8.5 percent fall in group revenues to 2.446 billion pounds.

Music publishing, which manages the copyrights of songs, represents just 15 percent of revenues but 32 percent of profit.

Core earnings (EBITDA) fell to 241.9 million pounds, from 389.5 million. However, the company made a pre-tax loss on ordinary activities of 153 million pounds, compared with a 129 million pound profit in the previous year.

“There is nothing really to go for in these results,” said one dealer.

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