Warner Music Group Corp (WMG) 2007 Q3 法說會逐字稿

Welcome to Warner Music Group's fiscal third quarter earnings call for period ended June 30, 2007.

At the request of Warner Music Group, today's call is being recorded for replay purposes.

If you object, you may disconnect at any time.

As a reminder, there will be a question-and-answer session following today's presentation.

(OPERATOR INSTRUCTIONS)

Now I'd like to turn today's call over to your host, Ms Jill Krutick, Senior Vice President of Investors Relations and Corporate Development.

You may begin.

Thank you very much.

Good morning, everyone.

Welcome to Warner Music Group Corp's fiscal third quarter conference call.

This morning we issued the press release announcing our results.

If you haven't seen them, both the press release and our form 10Q are available on our website at wmg.com.

Today, our Chairman and CEO, Edgar Bronfman, Jr, will update you on our business performance and strategy.

And our EVP and CFO, Michael Fleisher, will discuss fiscal third quarter results.

Then Edgar will wrap up before we take your questions.

Before Edgar's comments let me remind you that this communication includes forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance.

Words such as estimates, expects, plans, intends, believes, should and will, and variations of such words or similar expressions that predict or indicate future events or trends or do not relate to historical matters identify forward-looking statements.

Such statements include but are not limited to estimates of our future performance, such as the success of future album sales, projected digital sales, increases and declines in physical sales, expected expansion of the online marketplace and market share gains.

All forward-looking statements are made as of today and we disclaim any duty to update such statements.

Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them.

However, there can be no assurance that management's expectations, beliefs and projections will result or be achieved.

Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties and other factors that can cause actual results that differ materially from our expectations.

Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our earnings press release and form 10Q and other SEC filings.

We plan to present certain non-GAAP results during this conference call.

We have provided schedules reconciling these results to our GAAP results in our earnings press release posted on our website.

With that, let me turn it over to Edgar.

Thank you.

Thanks, Jill.

Welcome everyone.

Thanks for joining us.

First let me briefly comment on EMI.

On July 17th, Warner Music confirmed that we didn't intend to make an offer for EMI.

Since our purchase of Warner Music in 2004, we've been focused on transforming our business.

The proposal to acquire EMI was not a change in that strategy, rather we had always viewed it as a way of continuing our transformation over a broader set of assets.

Terra Firma's 265 pence offer from EMI created market expectations for a price from us that we couldn't justify.

In order for us to succeed as a Company, it is essential that we maintain our financial discipline.

Accordingly we elected not to make an offer.

We have renewed our focus on transitioning in this dynamic marketplace from a traditional music Company to a music-based content Company.

We intend to optimize the value of our investment in artists by partnering with our artists to exploit additional revenue streams, which I will elaborate on more fully in a moment.

Turning now to our quarterly earnings results, I'll discuss with you today some key performance metrics, the state of the Recorded Music and Music Publishing industry, and also the important strategic actions we're taking to accelerate our transformation as we more broadly define our role in the music industry.

This proved to be another challenging quarter industry-wide, as a difficult global Recorded Music environment persisted and declines in sales of CDs were significant.

But even so, we still delivered sequential year-over-year improvement in our quarterly comparison.

Michael will discuss the detailed financial data and update you on the realignment initiatives announced last quarter, but there are several key performance metrics that I'd like to highlight, since they underscore our ongoing focus and commitment to achieving our strategic objectives.

This quarter we outpaced the U.S.

industry by gaining album market share.

We managed our costs effectively to improve our margin share, we retained our leadership position in the music industry's digital revolution and we attained some notable A&R achievements.

Warner is the only major to deliver an improvement in its June quarter U.S.

album share, rising over one point year-over-year according to SoundScan.

In the U.S., we achieved a 10-year album share record for Warner Music, for both the quarter at 21% and for the first half of calendar 2007 at 20%.

In another milestone, it was recently noted by the trade publication Music & Copyright that Warner Music overtook EMI to become the third largest Recorded Music business by global market share in 2006, another testament of the success of our A&R efforts and ongoing business strategy.

We were able to expand our OIBDA margin, adjusted for non-recurring items, by more than 2 percentage points to 12.6%, as we continue to manage our costs across the Company.

While we felt a small boost from some of our previously announced realignment initiatives, we intend to reinvest those dollars into new businesses.

While gaining market share from our multi-pronged A&R strategy, we continue to grow our margin share as well.

We remain committed to the expansion of digital revenue streams in the face of the shrinking CD business.

Warner Music Group is the only major music Company that reported digital album share in the U.S.

substantially above its physical album share for the June quarter of '07.

Moreover, we have had $100 million or more in digital revenue for each of the last four quarters, including a sequential gain of 7% in the current quarter and a 29% gain compared to the same quarter last year.

On a percentage of total revenue basis, we remained the leader in digital revenue among the majors.

This quarter our digital revenue was 15% of our total revenue.

And for our domestic Recorded Music business, digital revenue was 22%.

Before turning to our most recent A&R achievements, I'd like to update you on some of the other important strategic actions we are taking to accelerate our transformation.

At Warner Music, everything begins with the selection of talented artists, who we nurture and develop to maximize their career potential.

In the past, our investment in recording artists had a sufficient return from the Recorded Music business alone.

Today that is not the case and our return needs to be enhanced through a broader partnership with artists.

As you know, our two main businesses today are Recorded Music and Music Publishing, which are only a subset of the broader music business.

While the overall music business, including management, touring, sponsorship, merchandising, et cetera, is growing, the Recorded Music business at present is not, while the Music Publishing business remains stable.

A&R and marketing investments that we make in recording artists fuel the growing segment, in which we are not materially participating.

Accordingly, as we transform to a music-based content Company, our goal is to redefine our role in the music value chain.

We already have a good start.

This more comprehensive business model has been common place for us in Asia for a number of years and increasingly in other markets around the world, including the U.S.

We intend to accelerate and broaden this approach.

Consistent with these efforts, we have invested $110 million to increase our minority equity stake in the largest U.S.

music management Company, Front Line Management.

Front Line will continue to be run by its founders, Irving Azoff and and Howard Kaufman.

The management business is a paradigm and a leading example of the business that participates in all artist revenue streams.

Front Line is also in the merchandising, sponsorship, and premium ticketing businesses.

To further execute our strategy of broadening our partnership in artists revenue streams, Warner Music and Chris Lighty, founder and CEO of the artists management company Violator Management, announced the formation of a new joint venture, Brand Asset Group.

Brand Asset Group will aggressively manage artists' brands from all genres and capitalize on the value of those brands through corporate sponsorships, strategic and integrated marketing campaigns, and comprehensive brand extensions.

This Company is securing high-profiled sponsorships with companies like Coca-Cola and Pepsi for musical artists, similar to what other companies arrange for major sports figures.

Beyond our efforts to broaden our partnership with artists, we continue to selectively establish relationships that will advance our digital agenda and drive higher margin revenue stream.

Warner announced an agreement with one of the fastest growing and most innovative social networks, imeem, which boosts more that 16 million active users.

Our catalog of music and video content will be made available for interactive on-demand streaming on imeem's free ad-supported service in North America.

WMG is the first major media Company to partner with imeem and will use the alliance to explore pioneering promotion and distribution opportunities, such as user created digital stores, online A&R development, direct artist to fan exclusives, and collaborative advertising sponsorship initiatives.

In addition, Warner is the first music major to team up with the new online retailer, Lala, which is the first service designed to be fully interoperable with market leader iTunes.

Lala is a new web-based service that enables users to store their iTunes music libraries online for free and then stream that music from any internet connected device.

Lala also allows users to purchase music for their iPods and offers a robust recommendation engine and funds social networking elements.

On the international front, we have made progress in unlocking the potential of the Russian digital music business, where physical piracy has all but eliminated the ability to generate sales and profits.

Beginning this fall, Digital Access, which is a venture between Warner Music, Sony BMG Music Entertainment, two Russian music labels and Access Industries, will begin distributing local and international music to digital service providers and mobile operators in Russia and the Commonwealth of Independent States.

While pressing forward with our digital strategy, we continue to support and encourage physical product innovation as well.

As we discussed last quarter, Warner launched a new DVD based physical product called MVI, which stands for Music's Video Interactive.

In addition to a full album of music, the MVI contains video material and original content with a functionality that brings together the physical and digital world in an interactive, creative, customized consumer experience.

Lincoln Park's Minutes To Midnight was our first MVI release, which received excellent consumer reviews.

We are committed to the development of this product as part of the connected music experience that transcends the traditional release schedule by providing a platform for artists to deliver both music and other content to fans on a more frequent basis that we can then monetize in a variety of ways.

We are also committed to this product because we believe it is urgent that the record industry meet the demands and expectations of consumers for higher quality, higher value media platforms.

Moving to A&R, we continue to have success.

In the June quarter, total U.S.

album sales, including digital track equivalent, based on the RIA standard 10 tracks per album, fell 8% on a year-over-year basis to the industry according to SoundScan.

Despite a light release schedule, Warner Music outpaced the industry, declining 4.5% in the same period.

In the U.S.

we gained about 1 point of quarterly album share year-over-year in both current and catalog albums, each reaching levels not seen for us in a decade.

Current releases from Warner Bros.

Lincoln Park and Michael Buble and Atlantic's T.I.

contributed to these results.

In fact, in the U.S.

Warner Music had the top two album debuts this year, Lincoln Park's Minutes To Midnight, and T.I.'s T.I.

vs.

TIP, according to SoundScan.

Following on Warner Bros records performance in 2005 and first half of 2006 when it was the number one label for both total and digital U.S.

album share, it continues to boast these achievements in the June quarter and calendar year-to-date.

Long-term efforts to diversify Warner Music Group's genre profile were also evident in the June quarter.

According to SoundScan, we grew our U.S.

album share over 5 points year-over-year in country, hard music, which is hard rock, jazz and sound track, thanks to contributions from Tim McGraw, Nickelback, Michael Buble, and the sound tracks from Happy Feet and Music and Lyrics.

Our out-performance in the U.S.

only paints part of the picture for our overall results.

In fact we saw mixed results internationally.

A very light local and international release schedule limited our performance, particularly in countries like the U.K.

and France.

In addressing this issue, our significant investments in local repertoire and a pickup in our international release slate, should help to reverse this trend in fiscal 2008.

On the positive side, our ongoing effort to enhance our roster of local repertoire artists is paying off in Japan, the world's second largest Recorded Music, where industry trends are a bit better and Warner's operating momentum continues.

Warner Music Japan expanding its share of album sales 1.6 points to 6% in the June quarter year-over-year, helped by local pop artist Mariya Takeuchi and Kobukuro.

Turning to Music Publishing, this quarter we continued to make progress in improving our operating performance, while we significantly strengthened the executive team with the new head of U.S.

Creative and a new leader for our global digital business.

Warner Chappell also strengthened its music catalog, by entering the production music library business with the acquisition of Non Stop Music.

Production music is a high margin segment of the music publishing business which compliments our traditional business.

Non Stop's ever expanding library of music, for which it also owns the sound recordings, can be heard in movies that include Pirates of the Caribbean, Harry Potter, Shrek 3 and the Transformers, commercial music for television ad campaigns from Chevrolet, Nike and Acura and the TV theme music for ESPN SportNite, ABC's Wild World of Sports, and the Grammy Awards on CBS, among many others.

In addition, Warner Chappell continues to receive strong industry recognition.

Recently we were named BMI's top publisher of the year, acknowledging that Warner Chappell song writers, publishers, and producers made the most significant contribution to the top BMI pop songs played on American radio and television.

Warner Chappell was also named SESAC publisher of the year for the fifth consecutive year, which is a testament to our roster of exceptional song writers.

As we've consistently said, the timing of our release schedule will result in fluctuations between periods and the transformation of the industry will contribute further to variable performance.

The pace of technological introductions remain the key gating factor in the development of the mobile music business.

We were excited that Apple's iPhone sets the bar high for the rest of the telecom industry, while further raising worldwide awareness of mobile music.

The mobile industry's development of a seamless interface for consumers remains critically important to the success of our business.

As always, we remain focused on improving Warner Music's results while building a stronger foundation to enhance shareholder value.

We are developing new business models to broaden our business and revenue stream, as we become a music-based content company, with a comprehensive approach to the music industry.

Now I'd like to turn the call over to Michael for a run through of our financials.

Thank you, Edgar, and good morning, everyone.

Let me begin by providing some context on our quarterly financial results.

First, to get some housekeeping out of the way, we had a number of non-recurring items this quarter.

There were $38 million in expenses related to our realignment initiative, on which I will provide a detailed update shortly.

We also expensed $8 million of costs related to the potential acquisition of EMI.

In addition, we had a $52 million benefit from the $110 million settlement of contingent Recorded Music and Music Publishing claims held by Warner Music relating to the Bertelsmann relationship with Napster in 2000 and 2001.

Please note, we do not capture settlements in our revenue line, they are reflected in other income.

The balance of the settlement, $58 million, is being shared with recording artists and song writers.

We reported a net loss of $17 million or $0.12 per diluted share.

Excluding non-recurring items, our net loss was $29 million or $0.20 per diluted share.

Looking at the income statement for the three month ended June 30, 2007, we reported revenue of $804 million, which declined 2% from the same period last year or 5% on a constant currency basis.

An ongoing challenging environment for physical sales is clearly evident in our results.

Domestic revenue was relatively flat, while international revenue fell 9% on a constant currency basis.

Declines in our physical recorded music business were the primary reason for the drop in total worldwide revenue.

But they were partially offset by year-over-year revenue increases in our digital Recorded Music business and Music Publishing business.

In Recorded Music constant currency quarterly revenue declines, primarily in the U.K., France and Canada, were partially offset by revenue increases in countries including Japan and Spain.

As Edgar mentioned, Japan was a standout again this quarter, with revenue rising more than 45% year-over-year as strength in local repertoire drove sales.

Quarterly digital revenue rose 29% to $119 million or 15% of total revenue, up from $92 million or 11% of total revenue in the prior year quarter.

Quarterly digital revenue rose sequentially by 7%, driven mainly by strong online performance.

The year-over-year mobile performance was limited by our release schedule, which had very strong digital sales from urban releases in the prior year quarter.

Approximately 70% of our digital revenue was generated in the U.S.

and 30% in the rest of the world.

Our worldwide digital revenue remains about 60% online and 40% mobile.

Currently online is larger than mobile in the U.S.

and the reverse is true internationally.

Logically, as the penetration of U.S.

music enabled handsets improves, the mobile contribution to digital revenue should grow.

As Edgar mentioned, we are pleased to see the iPhone raising the profile of music on mobile handsets and look forward to an outpouring of exciting competitive products.

As we all know, today's Recorded Music business is challenged.

On the physical side, we're seeing soft initial weekly sales on new releases and steeper than usual sales declines after the first week.

On the digital side, while uptake is growing, the rate of change continues to be wed to 3G in broadband penetration rates, the quality of the consumer mobile experience, new product introductions and ongoing piracy issues.

At Warner Music we are broadening our approach to the music business to mitigate our exposure to current Recorded Music industry trends.

We're diversifying into growth areas that include advertising, sponsorship, touring and merchandise to drive overall growth.

While transforming our business mix, we remain vigilant about managing our costs.

This was evident in this quarter's profitability.

Last quarter we announced a global realignment plan designed to advance our longstanding digital strategy in efforts to build a more progressive organization equipped to take advantage of the changing global music market.

For example, we're modernizing our sales force, outsourcing certain IT processes and investing in people with expertise in video production, advertising, and mobile and online sales.

We're on track to incur substantially all of the restructuring costs associated with the realignment plan by the end of the current fiscal year.

During the quarter we took restructuring related charges of $38 million associated with our realignment efforts.

Added to the $16 million taken last quarter, this brings us to a running total of $54 million in structuring related charges in the fiscal year.

Total restructuring related charges are still expected to be in the range of $65 million to $80 million, including $10 million to $15 million in implementation costs.

In our press release we have provided tables calculating our results adjusted to exclude the restructuring related expenses.

As we've said, we expect our business initiatives, our new business initiatives to largely offset the economic effects of our realignment plan.

The very nature of our realignment is to redirect the benefits of these actions, coupled with transformational spending initiatives, to drive faster growth at the Company.

Our operating income before depreciation and amortization, or OIBDA, adjusted for non-recurring items, rose 17% to $101 million compared to $86 million in the prior year quarter.

Margins expanded this quarter due primarily to careful cost management and in part a more profitable mix of revenue.

Some of these margin benefits are tied to the timing of ongoing investments focused on new business initiatives as part of our realignment plan.

Our OIBDA margin, adjusted for non-recurring items, rose 2.1 percentage points to 12.6%.

Now let's look at our different business segments.

Quarterly worldwide Recorded Music revenue fell 6%to $653 million on a constant currency basis.

Declines in international markets were responsible for the revenue weakness.

Quarterly domestic revenue was relatively flat year-over-year.

International Recorded Music revenue fell 12% on a constant currency basis from the prior year, as industry pressures mounted creating tough comparisons with last year's quarter in which the multi-platinum Red Hot Chili Peppers double album release and a platinum selling album from Gnarls Barkley had significant international sales.

Recorded Music digital revenue grew 27% from the prior year quarter to $112 million or 17% of total Recorded Music revenue, up from 13% in the same period last year.

Domestic Recorded Music digital revenue amounted to $77 million or 22% of total domestic Recorded Music revenue up from 19% last year.

Quarterly Recorded Music OIBDA, adjusted for non-recurring items, amounted to $93 million, up 1% from the prior year quarter.

Let's now move on to our Music Publishing business.

In comparison to the same quarterly period in 2006, Music Publishing revenue grew 5% to $157 million and was up 1% on a constant currency basis.

Music Publishing revenue grew 9% internationally and 3% on a constant currency basis, more than offsetting a 2% domestic decline.

The improvement in total revenue was the result of an increase in digital and synchronization revenues.

Performance revenue was flat year-over-year while mechanical revenue declined slightly.

Digital revenue rose 40%, as our collection efforts begin to yield results.

And synchronization revenue improved 5%.

Music Publishing OIBDA, adjusted for non-recurring items, rose 35% over the prior year quarter to $31 million, due in part to a change in the revenue mix as well as timing of new artists spending and royalty reconciliations.

As far as cash management and our balance sheet, we ended the quarter with a cash balance of $396 million.

Total net debt amounted to approximately $1.9 billion, which reflects total debt less cash.

We paid our latest quarterly dividend of $0.13 per share on July 25th, giving us a yield of 5% based on yesterday's close.

For the quarter we generated free cash flow of $57 million.

Our free cash flow is calculated by taking cash from operations of $90 million, less capital expenditures of $8 million and net cash paid for investments of $25 million.

Our unlevered after tax cash flow, we believe, provides the most accurate reflection of the ongoing cash generation capability of our business.

Unlevered after tax cash flow calculated by adding back $48 million in cash interest to free cash flow was $105 million in the quarter.

This unlevered after tax cash flow does include $21 million of cash paid for non-recurring restructuring related items and the receipt of $110 in cash for settlement with Bertelsmann regarding Napster.

Our net cash taxes were $14 million for the quarter.

Substantially all of our income taxes are being paid outside the U.S.

because our U.S.

taxable income is being offset by our interest expense deduction and the annual recurring noncash amortization deduction.

For the three months ended June 30, 2007 we had a tax provision of $11 million on a pretax loss of $6 million.

Our tax expense includes income taxes accrued primarily outside the U.S.

and withholding taxes paid to non-U.S.

countries, where we generate royalty income from sales of repertoire outside of the U.S.

Our taxes will fluctuate based on which jurisdictions generate income overseas.

As we have consistently said, we do not manage our business for any single quarter.

We strive to release the right content at the right time in an effort to maximize fiscal year profit potential and artist career development.

As a matter of policy, we do not provide financial guidance to the investment community given that quarterly fluctuations in the rhythm of our music release schedule and associated marketing and promotional expenses are normal.

We are confident in our future and we remain pleased with our financial strength, digital leadership, transformation initiative and restructuring efforts.

Now I'd like to turn the call back to Edgar for closing remarks.

Thanks, Michael.

Looking ahead, our agenda will be focused on several areas.

We plan to broaden our partnership with artists to add new revenue streams from growing segments of the business, drive profitable growth through innovation and financial discipline, maintain digital leadership, and increase our margin and market share.

Our goal is to drive shareholder value over the fiscal year and beyond.

We view our intellectual property rights, validated by recent market activity, as important support for the true value of our assets.

Implementation of our strategy of transforming to a music-based content Company has already improved our competitive position since we became a standalone music Company three plus years ago.

We intend to remain on that path.

We look forward to answering your questions about our business.

Thank you and operator if you would open it up to Q&A

(OPERATOR INSTRUCTIONS) Our first question is coming from Eric Handler and please state your company name.

Good morning, Lehman Brothers.

Can you give us a sense about catalog sales and how you feel you're doing relative to the market and do you get a sense that the big box retailers are cutting back on the amount of catalog in the stores relative to front line?

Secondly, can you give a sense -- what is your ideal leverage now in this current environment and if you're comfortable right now with your leverage are you able at all given your current covenants to maybe raise your dividend?

Thanks.

Thanks, Eric.

On catalog we gained one market share point, so we feel, in the U.S.

according to SoundScan, so we feel pretty good about our catalog sales and our catalog marketing efforts.

And to answer the leverage question, I think we're comfortable with where our leverage is today and I don't think anything's changed on that front.

Yes, it's Edgar.

Without getting into the specifics of our covenant, I would just say we're comfortable with our leverage ratios, we're comfortable with our ability to continue to produce cash.

I would note that, at least at yesterday's close, we're already giving investors a yield of 5%, but we are comfortable that we can continue to generate significant free cash flow.

Okay and the one other thing in that question was are you getting a sense that the big box retailers are cutting back on the amount of catalog that they're putting in stores?

What we're seeing are the big box retailers constantly evaluating their floor space and they're buying strategies, but I would say today we are not seeing any significant decline in their stocking and, quite honestly, if you look at catalog sales versus front line sales, they're reasonably consistent with each other.

Thank you.

Our next question comes from Mike Clarfeld and please state your company name.

Hi, it's ClearBridge Advisors.

Good morning guys.

Good morning, Mike.

A bigger picture question.

There recently been a lot of transactions in particularly in the Music Publishing space, including, I guess, Terra Firma's bid for EMI, all of which have really underscored the value of publishing assets.

I was just wondering what you think these deals mean for the value of publishing assets within Warner Music and what that implies for the recorded business?

And also if you guys are thinking about doing anything to unlock that value and kind of close the gap.

Thanks.

Well, I do think that there is a significant gap between the actual value of our assets and our current share price.

The gap, as our shareholders have noted, has widened dramatically in the sort of recent months.

But if you look at the -- the deals that Universal buying BMG Music Publishing, Terra Firma's bid for EMI and ascribing any kind of reasonable music publishing multiple to that, and a whole host of smaller music publishing deals, which have either transpired or are transpiring in the industry, you're looking at multiples at or around 20 times EBITDA for these assets, sometimes even higher.

If you ascribe to anything close to that value to Warner Chappell, which remains one of the greatest music, catalog music publishing copyrights ever assembled, either our Music Publishing business is not being appropriately valued or people are ascribing essentially no value to our Recorded Music business, which I think would be inappropriate.

So there clearly is significant underlying asset value here at Warner Music.

How we unlock that value for shareholders, what we do to make that evident to the market I think remains for management to decide, but clearly we've got to try and deliver increased value to our shareholders given where our share price is and we clearly have the values inherent in our businesses to do that.

Okay great, thank you

Our next question comes from Anthony Noto and please state your company name.

Thank you very much.

Goldman Sachs.

Edgar, Michael had made the comment that your new releases are seeing slower initial first week sales and then a greater decline in the following weeks.

I'm just wondering if you could put a little context behind that.

Are you still supporting new releases with the same level of marketing and promotion?

Is this a function of lower distribution?

If so, why would you see a greater decay after -- lower distribution would clearly have an impact, assuming all else equal, on the first week, but then the decay after that would not be impacted by lower distribution.

So I'm trying to really square up that trend.

Second question, I think for the first time you gave us domestic recorded digital music of $77 million, I'm just wondering what that year-over-year growth rate was, thank you.

Anthony, on the first week issues that Michael raised, it is not a question of lower distribution.

It's really just, I think, a question of lower consumer demand for the physical product of the CD, which is why I made the comment that on the one hand we need to, as an industry, introduce a new format and deliver to consumers higher value, media platform, higher quality, higher value, media platform than the CD, which is somewhere between 25 and 30 years old.

I think partly also what we're seeing is while there's less reason for consumers to go into stores to buy the CD, given how much other entertainment, how many other entertainment options they have and the fact that the CD itself is a format that's been around for so many years.

And in every other media consumers are used to technological innovation which they haven't received from the music industry.

I think also there is a sense that music is everywhere.

Music is ubiquitous to a degree that also, I think, is probably not helpful for the industry.

And I think one thing you're going to see going forward is, at least as far as Warner Music is concerned, a more careful strategy about who we're going to partner with for -- and in our online efforts.

But we may not take the approach that we have taken in the past to have digital distribution deals with every conceivable digital distribution partner.

Anthony, on your question about the U.S.

digital Recorded Music numbers, we have actually been breaking that out for the last few quarters.

The growth year-over-year is 18.5% for U.S.

digital Recorded Music revenue.

I would note that last year's third quarter was an extraordinarily strong third quarter in the mobile, related to a few particular products.

We had a couple products last year that had giant urban singles that sold many, many, many ringtones.

So the mobile was a weak spot for us this year, this quarter digitally just because of the release schedule comparison.

Great, thank you.

Our next question comes from Bishop Cheen and please state your company name.

The company is Wachovia.

Good morning Edgar, Michael and Jill.

Thanks for taking the question.

You are in this transition and you're doing things that seem to make sense with management content, production, et cetera, et cetera, what about touring?

Do you have any plans to get more involved in the economics of music touring?

I think our plan, Bishop, is to partner more broadly and more deeply with artists in all of the revenue streams that are represented and that frankly flow from the initial investment that we make in an artist's career.

What form that takes, it certainly will include touring, but what form that takes -- as a management company, you participate in touring revenues, as a merchandising company you participate in touring revenues.

If we get further through front line into the premium ticketing business, you will be participating in touring revenues, it doesn't necessarily mean that we need to become a touring company per se.

I think all of that remains on the table as we explore, as I said, and redefine our relationship to the entire music value chain.

That's a helpful answer.

One follow-up, housekeeping.

Do you anticipate anymore one-time inflows to come similar to the Napster settlement, I don't know what else might be pending out there in this fiscal year for potential inflows.

I don't think we expect any potential inflows in this fiscal year from significant litigation.

As you know, there continues to be, though, significant litigation both with Viacom's issues with YouTube and Universal's law suit with MySpace and we will have to wait and see how all of that sorts out.

But I would, I would expect that and I would hope that the Bertelsmann's' experience and all of the decisions so far would -- would try to -- would work as an incentive for the new digital distribution companies to be mindful of and respectful of copyright.

Thank you, Edgar.

Our next question comes from Jessica Reif Cohen and please state your company name.

Merrill Lynch, good morning.

On the acquisitions that you made in the past quarter, can you just talk about the opportunities for further acquisitions in music management and what the economics of this business are?

And along those lines, what the metrics for valuation in your purchases have been.

And then along the acquisition front, just wondering if you could just explore that a little further in terms of either how much you might consider, how much more you might consider in terms of acquisitions and what types of acquisitions, including recorded music, for example Univision's music is reportedly for sale.

Thanks.

So, Jessica, it's Edgar.

I think that as we think about music management -- well, first of all let me say, as I said earlier, we have significant free cash flow, we're going through a transformation, we're going to use that cash flow to make investments, both organic internal investments and acquisitions, to grow our business.

We think the management business is an important area to focus, that's why we made the significant investment in Front Line.

The economics of that business are really quite good.

The margins are high.

But Front Line is really the only music management company that's really amalgamated a whole host of smaller management companies to become a large business in and of itself.

It will be up to Front Line Management to determine whether they want to continue on the pace that they've been.

But that is one area where Warner, with Front Line and potentially even separately, will focus on becoming a much greater factor.

In terms of teeing up additional acquisitions, obviously we're not going comment on additional acquisitions.

We look at businesses in recorded music and we are increasingly looking at businesses throughout the music value chain, whether that's physical businesses, whether it's management businesses or potentially even digital distribution businesses.

We're looking at a wide range of businesses.

We feel comfortable with our ability to finance any acquisition we might contemplate, but beyond that I don't think I'd comment.

Your next question comes from Tuna Amobi and please state your company name.

Standard & Poor's Equity Group.

Good morning, all.

I guess, Edgar, why don't you clarify a statement a couple weeks ago on the EMI bid.

I can already several times and I was kind of scratching my head to understand the circumstances that you might get back into -- into the bid, I think you said six months, over the next six months.

Can you comment on possibly an interest you might even have kind of in talking to Terra Firma, should they decide to sell after the deal closes on the recorded music side.

And separately, on the new revenue streams, I wanted to understand kind of is this something that you're focusing mostly on new artists or are you going back to existing artists to -- to kind of maybe renegotiate some of the contracts that may not have contemplated these kinds of revenue streams?

And if these continue to ramp up, I would expect at some point you may want to break it out in terms of kind of segment.

Is this something that we should expect to happen sooner rather than later in terms of actually classifying all of these new initiatives under a separate segment as opposed to just lumping them into Recorded Music.

Thank you.

So, Tuna, let me sort of maybe start backwards and go through your questions.

I think certainly at the moment we don't have planned to segment these businesses.

We actually see our initiatives as broadening our current businesses and I'm not sure that we're going to separately segment them.

But we'll obviously continue to revisit that over time.

But currently we have no plans to do that.

I think with regard to broadening our revenue streams and partnerships with artists, we're certainly looking at relationships with our existing artists and we're also going to be very disciplined about what new artists we sign and how broad that partnership can be.

Because as I said, the economic model for making an investment in an artist's career is not any longer sufficient if our return comes only from the Recorded Music business.

And therefore we're going to be very disciplined about speaking to artists and their managers and their lawyers as we sign them as to what's required for us to make an investment in their career.

It will be a mix of both new artists and existing artists on our roster.

With regard to the EMI comment, it actually was part of the sort of legal requirement that the takeover panel requires in clarifying our bid and the nature of what happens when we elect not to bid, which means that without takeover panel approval, we would have been unable to bid again within a six month period of time having formally withdrawn.

All of that frankly is moot now that Terra Firma is acquiring EMI.

It will be a private company and not subject to any kind of public U.K.

market requirements.

Okay, that's helpful.

Any interest then in kind of -- I know this is probably maybe a preemptive question, but if Terra Firma decides to offload the recorded music, should we assume that you will be front and center in the process?

I think we have no knowledge of any of Terra Firma's intentions with regard to EMI and beyond that we can't comment on potential acquisition activity.

Thank you.

Our next question comes from Jason Bazinet and please state your company name.

Citigroup.

Just one quick question for Edgar.

Regarding your expanding role, as you described it in the music value chain, I just had one comment on timing and sorry, one question on magnitude.

Is this the sort of thing that we should begin to think about being material in sort of 2009, 2010?

And then second in terms of magnitude, in those parts of the world where this area of your business is more developed, I think you mentioned Japan, what percentage of it is it of total in country revenues?

Thank you.

Jason, I think it would be fair to say that it will be material in 2009, 2010.

And actually I think I mentioned Asia rather than Japan as places where we have that model.

And it's basically been a result, actually not so much in Japan, though it does exist in Japan as well, but it exists more broadly in markets in southern Asia where physical piracy has essentially made it so it is mandatory for us to expand our revenue streams.

These are small markets, but they're markets, including China, where the total relationship with an artist is now sort of the accepted approach to the music business and there we are having real success.

These are still small markets, so they're not material to our overall results, but they do point the way to a different business model and one that, frankly, we're going to insist upon adopting as we go forward.

I think that pretty much concludes our time.

We appreciate everybody giving us your time and attention and we'll look forward to talking to you again in a couple of months.

Thanks.

That does conclude today's conference.

You may disconnect at this time.