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PolyGram's Profit Plunges 84.5%

Earnings: Shortage of big pop releases, losses at film unit blamed for music company's second-quarter woes.

July 23, 1998|From Bloomberg News

BAARN, Netherlands — PolyGram, the world's biggest recorded music company, said second-quarter net income plummeted 84.5% on a shortage of big-selling pop releases and widening losses in its film unit.

Net income fell to $11.5 million from $74 million.

An economic slowdown in emerging markets in Asia and elsewhere is hobbling already slumping growth in the world music market. PolyGram's pop music sales dropped 7% in the first half even with a new release from teen trio Hanson, whose debut album "Middle of Nowhere" went platinum last year with more than 8 million copies sold.

"PolyGram was the best-positioned music company in the world with a broad range of artists," said Ab Barneveld, an analyst at Oyens & Van Eeghen. "If this company can't post a good track record in the last couple of years, what can we expect from the others?"

Chief Executive Jan Cook forecast music earnings at the Netherlands-based company would "continue to improve over the coming months," with new releases from Bryan Adams, Sheryl Crow and the Cardigans scheduled for the second half.

ING Barings analyst Andre Moons said the outlook was enough to convince many investors that Canada's Seagram Co. won't seek an additional price break in its purchase of PolyGram from Royal Philips Electronics. After agreeing to buy PolyGram in May for $10.6 million, Seagram was granted a $200-million discount last month because of "lower-than-expected financial results" in the second quarter.

Neither Philips nor PolyGram would provide details on the profit warning before Wednesday's earnings release.

For PolyGram's first half, net income fell to $19 million from $135 million.

"The continued economic turbulence in Asia had its impact during the first half of 1998," PolyGram said.

An Asian slowdown doesn't seem to be the only hurdle for music companies. Even as the U.S. expands at a record pace, music sales are falling in the world's biggest music market. Sales here were down 3% in 1997 while global music sales gained only 2%, according to the International Federation of the Phonographic Industry.

Most consumers have already switched their home music libraries from vinyl to compact discs, ending a sales push that kept music growth in double-digits in recent years, analysts said. Piracy is also robbing music companies of profit. Dwindling growth pushed Britain's EMI Group to a 7% drop in fiscal 1998, and Time Warner Inc.'s Warner Music Group suffered a 9% decline in second-quarter cash flow.

The film division's losses doubled as costs piled up with no relief from a major release.

Studios are finding it hard to recoup ever-swelling budgets. Walt Disney Co. reported Tuesday a 2% drop in fiscal third-quarter net, its first decline in several quarters.

The operating loss in PolyGram's film unit widened to $49.5 million in the second quarter from $21 million. The operating loss for the first six months of the year grew to $82.5 million from $54 million.

The film business had been launched and nurtured by former Chief Executive Alain Levy, who left the company last month after seven years at its helm to be replaced by Cook until the Seagram takeover is completed.

"Management's time has been spent talking with Seagram," said Michael Woodcock, an analyst at Nikko Securities. "The whole thing has been left to go to seed a bit in the second quarter."

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