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Home / Business / Companies

EMI profit warning hits sour note with markets

8 Feb, 2005 07:13 AM4 mins to read

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LONDON - Shares in EMI, the world's third-largest music company, had their steepest decline in more than three years after album delays and lower-than-expected sales forced it to cut its earnings forecast.

Pretax profit for the year to March will be about 138 million ($366 million), EMI said. Analysts expected
168 million.

The stock fell 46.25 pence, or 16 per cent, to 2.35 and Standard & Poor's said it might cut EMI's credit rating to junk status.

Coldplay, working on a third album, and Gorillaz, producing their second, shelved the releases until next fiscal year, while CD sales in January missed forecasts, the London-based company said. EMI also said it expects its share of the US$32 billion ($45.7 billion) global market will fall. Chairman Eric Nicoli said in November that EMI expected to at least maintain its share.

"It's going to stay a difficult market," said Stephan Eger, who manages assets worth about US$321 million for Deutscher Investment Trust. "What makes me slightly nervous is that the two albums aren't explaining the whole extent of the downgrade."

Coldplay's last album, A Rush of Blood to the Head, sold nine million copies, generating between 2 and 3 per cent of EMI's sales, according to analysts at Bear Stearns. The self-titled debut from Gorillaz sold four million, making about 1 or 2 per cent of the company's revenue, the bank said.

EMI said recorded music sales will fall between 8 per cent and 9 per cent this fiscal year, excluding the effects of currencies. The company had previously expected to maintain its share in a market that would shrink as much as 4 per cent.

Vivendi Universal, with artists including Eminem and U2, may be capturing EMI's market share. Paris-based Vivendi, owner of the world's largest music company, this month said fourth-quarter sales at Universal Music Group rose 4.1 per cent to 1.76 billion ($3.2 billion).

Sluggish demand for EMI's music in January is likely to continue "over the next two months", Nicoli said. Still, he said he was "positive about the overall industry trends and EMI's prospects".

EMI, whose recorded music revenue accounts for 80 per cent of the group's total, is more dependent on music sales than Vivendi, which also owns cellphone and pay-television businesses. EMI's group revenue has declined for three years.

Global music sales dropped 7.6 per cent to US$32 billion in 2003, the fourth straight annual decline, according to the International Federation of the Phonographic Industry (IFPI), as record companies struggled to cope with illegal song downloads over the internet. EMI has axed about 1500 jobs and 20 per cent of its artists.

Nicoli also faces a larger competitor after Bertelsmann and Sony combined their music units to form Sony BMG last year. He tried to merge EMI with Warner Music in 2000. A second attempt was trumped by a group of investors including Edgar Bronfman jnr, which acquired Warner Music from Time Warner last March.

EMI's recorded music division would maintain last fiscal year's profit margin by cutting costs, the company said. The record company generates the rest of its revenue from music publishing. Earnings at that unit matched forecasts.

Standard & Poor's put EMI's credit rating on review, saying it may cut its BBB- rating one step to junk grade. Moody's Investors Service already rates EMI debt at Ba1, one level below investment grade.

EMI said in November that CD sales in the US would rise in 2004. Nicoli said at the time he saw an "improving trend".

Record companies may be succeeding in limiting illegal music sharing. Anti-piracy campaigns shut 60,900 illegal download sites last year, the IFPI said.

Companies had also stepped up efforts to make catalogues available online. Legal music downloads grew 10-fold in 2004, as demand for broadband internet, online music services and iPod digital players converged, IFPI said. Still, digital sales - worth US $330 million last year or about 1 per cent of the industry - were dwarfed by traditional revenue.

- BLOOMBERG

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