By Don Jeffrey Bloomberg.com

Nov. 29 (Bloomberg) -- Warner Music Group Corp., the recording company of Eric Clapton and Metallica, said fourth- quarter profit dropped 58 percent because of costs to cut jobs amid a drop in compact disc sales.

Net income fell to $5 million, or 3 cents a share, from $12 million, or 8 cents, a year earlier, the New York-based company said today in a statement. Revenue for the quarter ended Sept. 30 rose 1.8 percent to $869 million, beating the $861.5 million average of five analysts' estimates compiled by Bloomberg.

Warner, whose best-selling act in the quarter was rock band Linkin Park, said digital revenue from downloads and ringtones rose 25 percent to $130 million, representing 15 percent of total sales. The increase helped offset declining CD demand. Reflecting the industrywide drop in CDs, Warner cut 400 jobs this year, resulting in $9 million in costs in the quarter.

``The results were generally mixed,'' said Tuna Amobi, a stock analyst at Standard & Poor's in New York. ``Digital at 15 percent of revenue shows some progress, but the decline on the physical side is the biggest concern we have.''

Amobi recommends buying the shares and doesn't own them. Warner Music had tumbled 69 percent this year before today and declined 3 cents to $7.12 at 10:20 in New York Stock Exchange composite trading.

CD Declines

Recorded music sales, which include downloads and ringtones as well as CDs, vinyl and videos, gained less than 1 percent to $736 million in the quarter, led by artists including Nickelback, James Blunt and Linkin Park. With U.S. CD sales down 19 percent industrywide this year, Warner cut distribution costs for the format and reinvested in digital operations.

International recorded music sales fell 6.3 percent, more than expected, Amobi said.

``We had a very weak release schedule in the U.K.,'' Chief Executive Officer Edgar Bronfman said on a conference call.

Music publishing revenue, which comes from songs used in recordings, movies, ads and video games and on TV, rose 7 percent to $137 million on higher royalties from performances in international markets.

Warner, the third-largest record company in the world, is now the only one of the top four to be publicly traded. During the quarter it abandoned a possible bid for the fourth-largest, EMI Group Ltd., which was acquired by London-based private equity firm Terra Firma Capital Partners Ltd. for $4.9 billion.

The company is also losing one of its biggest artists, Madonna, after more than 20 years. She signed a 10-year deal in October valued at more than $100 million with concert promoter Live Nation Inc. that covers touring, merchandise, videos, TV and films and new recordings.

``It would've been economically imprudent of us to do that deal,'' Bronfman said on the call.

New Investments

To add new sources of revenue, Warner invested in artist management companies such as Taisuke in Japan and Irving Azoff's Front Line Management. Yesterday Warner said it is forming a venture with Frank Sinatra's family to market recordings and videos as well as merchandise bearing his name and likeness.

For the fiscal year ended Sept. 30, Warner Music reported a net loss of $21 million, or 14 cents a share, on revenue of $3.39 billion, a 3.7 percent decline.

Vivendi SA's Universal Music Group is the world's largest record company, followed by Sony BMG Music Entertainment, a joint venture of Sony Corp. and Bertelsmann AG.

(Warner Music held a conference call at 8:30 a.m. New York time to discuss the results. For a replay, a Webcast is available at http://www.wmg.com .)

To contact the reporter on this story: Don Jeffrey in New York at djeffrey1@bloomberg.net