For the year ended March 31, 2008, EMI lost £757 million (US $1.204 billion at today's rate) for private equity firm Terra Firma. Revenues dropped 19% to £1.45 billion for the year ending March 2008. EMI took a hit from £123 million of one-off restructuring costs. Most telling was EMI Music's loss of global market share -- to 9% from 12% a year earlier.

A PDF of the 101-page report can be downloaded here. It's good reading.

EMI Music's gross margin was 34% and EBITDA was £58 million (under 6% of sales). Operating loss restructuring costs were £150 million and total operational loss was £250 million. Interest expense totaled £165 million and "other" financial charges amounted to £258 million.

EMI Music's physical sales were down 28% in fiscal 2008 while digital rose 19% EMI Music revenues dropped 23% while EMI Publishing revenues increased 2%. Revenue from CD sales accounted for less than 40% of publishing revenues in 2008 (the fraction was almost 60% in 1999).

Lord Birt, the chairman of Maltby Capital, the investment vehicle of Terra Firma that acquired EMI, wrote an introduction to the report that laid out the problems and obstacles. Maltby was the firm that prepared the report. Here are the key points outlined by Birt:

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.

While interest charges will recur annually and we anticipate a restructuring charge in the next financial year, we do not expect to see other costs and charges recur at the same level. Operating performance for the full year continued to be poor and this reflected long-term weaknesses in EMI Music which we discuss in this report.

EMI’s operational performance has improved significantly during the first seven and a half months of Maltby ownership and we expect the six months results ended 30 September 2008 to show year on year improvement.

EMI now has a stronger balance sheet and team with which to start a new era.

Birt blamed high expenditures, a "traditional way of looking at artists" more in tune with high CD sales, EMI's internal reporting for EMI's poor operating performance. But he insists EMI has "got costs under control" and has introduced more rational compensation policies as well as "business discipline." The brunt of the criticism is aimed at EMI Music. The publishing division is portrayed as being far more well run, progressive and profitable.

Overall, the report is very frank and honest. Sometimes it's too honest and too bright a light is shone on the company's poor management (there are quite a few "you've got to be kidding" moments about the company at the time of its acquisition). There are multiple admissions of problems with internal reporting that disguised the poor performance of EMI's new music sales. The overshipping of CDs was frequently blamed for EMI's ignorance of its eroding sales. Between 2005 and 2007 EMI CD sales fell 45% versus a 19% average market decline (page 18). That sound you just heard was my jaw hitting the ground. I'm amazed nobody knew what was going on and/or did nothing to address it. Incredible.

Later in the report, Maltby covers many of the changes that have taken place: overhauled compensation, the new matrix operational structure, improved internal reporting and analysis, a new corporate governance structure, clearer financial accountability and an effort by Malty to instill within EMI a culture of integrity.

More items from the report worth highlighting:

• As an example of how incentives were out of line with the goals of the company, unpaid advances were regularly written off as extraordinary items even though they were commonplace. "Because these provisions did not affect reported underlying earnings, there was little to discourage the practice of overpaying established artists." (Page 26)
• "A typical marketing and promotion spend on a developing artist in the UK was £98,000 which represented, on average, 81% of sales."
• "For audio assets, the top 250 artists today represent more than 75% of sales, leaving a long tail that is under-utilised." Actually, that looks about right. The hits represent the majority of sales, especially for a company obstensably in the business of making hits.
• "Recent investigation showed EMI Music to be the fourth largest spender on a well known taxi firm in London, with a bill of over £700,000 in the last year. This was only slightly less than the bills of 3 investment banks, with 8-10 times more staff than EMI Music."
• "Business practices that focused EMI Music on short term financial reporting goals are being actively discouraged. In particular, the company has now radically cut over-shipping of CDs, a practice which was distorting sales figures at quarter ends and resulting in substantial returns of CDs later down the line. CD return rates as a percentage of sales have been substantially reduced."