Warner Music Group Corp (WMG) 2008 Q4 法說會逐字稿

Welcome to the Warner Music Group fiscal third quarter earnings call for the period ended September 30, 2008.

At the request of Warner Music Group, today's call is being recorded for replay purposes, and 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 would like to turn the call over to your host, Ms.

Jill Krutick, Senior Vice President of Investor Relations and Corporate Development.

You may begin.

Thank you very much.

Good morning, everyone.

Welcome to Warner Music Group's fiscal fourth quarter 2008 conference call.

This morning, we issued the press release announcing our results.

If you haven't already seen them, both the press release and our Form 10-K are available on our web site at WMG.com.

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

And our Vice President and CFO, Steve Macri, will discuss our financial results for the quarter.

Then Edgar will wrap up before Edgar, Steve and Michael Fleisher, our Vice Chairman, Strategy and Operations, take your questions.

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

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

Such statements include but are not limited to estimates of our future r performance such as the success of future album sales, projected digital sales increases and declines in digital sales, expected expansion of the online marketplace, the success of strategic actions we are taking to accelerate our transformation, as we redefine our role in the music industry.

Market share gains and our intentions to deploy our capital, including the level of and effectiveness of future A&R investments.

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's 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're 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 10-K 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 web site.

With that, let me turn it over to Edgar.

Thank you.

Thanks Jill.

Welcome, everyone.

Thank you for joining us.

This quarter capped a year of strong progress at Warner Music.

As I look back at fiscal '08, I am very proud of what we accomplished.

We consistently out performed our competitors and the marketplace, gaining share, diversifying our revenue mix and improving our financial flexibility.

In addition, despite a worsening global economy, and a recorded music industry still in transition we sustained revenue, no small achievement in this challenging environment.

We moved to a more conservative balance sheet posture early in our fiscal year, which has served us well, given the recent turmoil in the economy.

Our declining net debt with results from our building cash position gives us the financial flexibility to not only weather the storm but also to prepare us for growth.

We remain confident in our ability to execute on our long term goals, given our track record of developing new business music solutions, maintaining our digital leadership position, managing costs, gaining share by delivering strong returns on our A&R investment.

While the economy is experiencing significant turbulence, the music industry has been relatively resilient in prior financial downturns as its products are low priced relative to other entertainment goods.

Whether this downturn will be different still remains to be seen.

Let me give you some highlights for this quarter and for the fiscal year.

First, as a result of our focused investment in A&R, marketing and promotion, we continue to discover and development successful artists.

This quarter, Warner Music again outpaced the industry, down 4% while the industry declined 7% in US tracked equivalent album unit sales according to SoundScan and Warner Music was the only music major to increase share over the 12 months ending September 30, gaining 2.2 percentage points to end at 21%.

For the quarter, we raised our share to 21.5%, up 0.5 a point from last year's quarter.

Second, we remain an industry leader in the important digital arena.

Our quarterly digital revenue rose 28% to $167 million in the US, digital represented 27% of recorded music revenue.

Our fiscal year digital revenue rose 39% to $639 million, 18% of our total revenue.

We sustained our significant digital tracked equivalent share advantage over physical album share in the US.

We believe the new business models we've been implementing to broaden our consumer reach and align our interest with our partners will enable us to monetize our content more efficiently.

Third as part of the transformational effort to broaden our role in the music business, we continue to expand our rights and recording agreements with new artists around the world, giving us a presence in the greater music and artist services businesses that will be increasingly meaningful over time, and fourth we continue to develop our music publishing business by strengthening artist, roster and catalog, and expanding our digital presence while delivering improved results.

I'd like to provide you with some detail about these achievements.

A&R marketing and promotion remain at the heart of our business activities.

Our improved US recorded music share was driven by current releases from artists changing from Metallica and Kid Rock to TI.

TI's most recent album, Paper Trail, was another successful premium digital album with an innovative three month windowing effort leading up to the launch.

The album's first week's sales of 568,000 were a personal best for TI.

Softer revenue performance in the September-quarter from our US recorded businesses is tied to ongoing recorded music industry transition pressures, as physical declines are not being offset by digital growth, and to a lesser extent, our proactive efforts in managing retailer inventories.

Internationally, strength in Japan and modest gains in France and Italy were more than offset by weakness in Spain, Germany and the rest of Europe.

As part of our effort to optimize performance and dynamic regions around the world, we recently announced a strategic partnership with EMI in southeast Asia.

This multiyear agreement built upon existing relationships between Warner and EMI in India, Middle East and North Africa.

Under the new agreement, Warner will distribute EMI's worldwide repertoire in Hong Kong, Malaysia, Indonesia, Singapore, Korea and Thailand.

We are delighted to work together with EMI to focus our efforts in these territories.

Now let's turn to digital recorded music revenue, one of the key drivers to future growth in the recorded music business, and an area in which we continue to grow.

As extracted sequentially we saw modest digital revenue growth this quarter consistent with seasonal patterns exhibited in prior years.

While on line digital revenue picked up globally year-over-year, ring tone revenue continues to lag expectations in Europe.

As new mobile products and business models are rolled out on a global basis and as device capability and network technology advances, we believe mobile revenue growth will accelerate.

We are already seeing this acceleration in Japan, where the mobile music space has a compound annual growth rate of about 34% over the past three years.

In addition, mobile accounts were 91% of Japan's digital music revenue and over the year, download revenue there is more than three times greater than it is in Europe.

We have now arrived at a very significant point in the evolution of digital music.

The launch of access models that bundle the purchase of the device with access to music.

Several of these models are just now being launched, including Nokia's kung fu music and Sony ericcson's play and unplug.

We believe that major global handset makers and other device manufacturers are in a strong position to introduce new digital music offers.

We continue to transform our business within the music value chain while broadening our revenue mix into growing areas of the music business including sponsorship, fan club, website, merchandising, touring, ticketing and artist management.

As we have mentioned, we have expanded rights deals in place with about one-third of our global recorded active music roster.

We recently announced the sale of our minority stake in Front Line to Ticketmaster for $123 million in cash.

In total, including the $18 million we received from a small sale of Front Line shares to Madison Square Garden in June of 2008, we will have realized $141 million for our original $119 million investment, generating a return well in excess of our cost of capital.

The strategic rationale for purchasing our stake in Front Line fit in with our larger revenue diversification plan.

However, as we gain experience and focus on these 360 investments, it is important we can control and consolidate these businesses for the full benefit of our artist partnerships.

Front Line did did not ultimately fit this profile, and the proceeds from the sale will bolster our already strong cash position.

While there may be occasional targeted opportunities which can enhance our global 360 footprint, we have largely built the necessary resources through acquisitions, partnerships, and new hires so we can effectively engage in the artist services business on behalf of our artists and artists signed to other record companies.

One recent opportunity which required a relatively small investment was our acquisition of the majority stake in Get In, a leading artist services company in Spain, that specializes in artist management, live production, tour promotion and brand partnerships.

Not only does Get In have an impressive list of established artists that it manages, but it has also staged concerts for major local and international acts including Metallica, DEVO, and Lenny Kravitz.

One of our principal strategic goals is to enhance the results of our distinctly valuable Warner Chapel Music.

Warner Chapel, which is the third largest music company and enjoys a stable, diversified revenue stream from its extraordinary library of songs has delivered solid performance over the past year.

We continue to invest in talented songwriters to support the development of our music publishing catalog.

We recently expanded with Timbaland, one of the most important writers and producers in the urban hip hop genre and The Dream, a writer-producer who has experienced tremendous success with several singles, including Umbrella by Rihanna.

Adding to Warner Chapel's legacy is the well-established home for award-winning songwriters, Dido, the multiplatinum English singer/songwriter was recently named songwriter of the year at the ASCAP awards in London.

Warner Chapel has also had great success this year concluding agreement with collection societies to further its innovative Pan European digital licensing initiative known as Pebble.

Pebble is designed to facilitate Pan European licensing of musical compositions for digital music services throughout Europe.

Recently, the Spanish societies joined Pebble.

Another important development for music publishes and recorded music companies alike is the US copyright decision to maintain physical and digital mechanical rates at $0.091 per song through the end of 2012 and to establish a compulsory rate for rank downs of $0.24.

The board also set a first of its kind mechanical royalty for interactive streaming of 10.5% of revenue which applies to audio subscription services with interactive features.

This decision brings critical clarity in rates for the next four years and represents a win-win outcome for all stake holders including consumers, digital service providers, record companies, music publishers and artists.

In addition, to the continuing progress in several European countries, I want to mention two US legislative developments that are helpful to the music industry.

First, is the passage of the Pro IP Act of 2008, a law that protects copyrights both domestically and internationally.

Echoing similar efforts across Europe and Australia, the Pro IP act toughens US criminal laws against piracy and counterfeiting and adds important accountability in the law's implementation.

Second is enactment of the Higher Education Act, which sets out provisions designed to ameliorate the piracy problem on college campuses.

The act requires colleges to consistently disseminate information to better educate students about the policies disciplinary actions, risks and penalties of piracy.

Furthermore, for educational institutions to have continuing eligibility for federally funded assistance programs, they must develop plans to effectively combat unauthorized content distribution on campus.

Finally, I'd like to discuss our recently announced senior management moves, which will be instrumental in accelerating our progress to exploit growth opportunities in the evolving music business.

As we had announced in September, Michael Fleisher and Lyor Cohen have joined me in the newly created Office of the Chairman which is responsible for strategy, transformation and operations of the company.

Lyor was named Vice Chairman, Warner Music Group, and Chairman and CEO, recorded music of the Americas and UK.

In this role he will expand his responsibilities across a larger geographic footprint, enabling us to more effectively coordinate our world wide recorded music strategy.

Michael has been named Vice Chairman, Strategy and Operations.

He will oversee corporate strategy and operations and will lead the transformation of Warner Music's business models and operational processes on a global basis.

Steve Macri, our Controller stepped up as our new CFO.

Steve has been with our company since (technical issues).

And so without and designed to insure the quality -- and so without further adieu, Steve will now run through for Michael l and I take your questions.

Thank you, Edgar.

Good morning, everyone.

Let me begin by saying how thrilled I am to be CFO.

I would like to start by commenting some of our key financial highlight for the quarter and for the fiscal year.

All of the revenue data I'm about to discuss is on a constant currency basis.

As we will be comparing this quarter's metrics with those of the prior year's quarter, we should note that the prior years quarter included a pretax net benefit of $7 million.

The prior full year included a pre-tax net expense of $3 million, all from items that are detailed in our press release, and which we have adjusted for in the figures I am discussing.

Looking at the income statement for three months ended September 30, 2008.

We reported revenue of $854 million which declined 5%.

During the fiscal year period, the revenue was $3.5 billion, a decline of 2%.

For the quarter, domestic revenue fell by 5%, while international decreased by 4%.

For the fiscal year, 2008, domestic revenue dropped by 4% while international revenue slipped less than 1%.

Looking at our digital revenue growth.

Overall, it grew 28% to $167 million or 20% of total revenue.

Up from $131 million or 15% of total revenue in the prior year quarter.

Digital revenue improved 1% sequentially given the seasonal nature of the business and timely release schedules.

Approximately 65% of our total digital revenue was generated in the US and 35% was generated in the rest of the world.

Online continues to be the primary growth driver of our digital business, while mobile was weak in the US we did see a pick up internationally over the prior year quarter.

Managing our costs remains a top priority while transforming our business mix.

For the quarter, our operating income before depreciation and amortization or OIBDA from continuing operations declined 4%.

And our OIBDA margin was relatively flat at 16%, as we continue to manage costs to the recorded music industry transition.

For the full fiscal year, our OIBDA was $475 million, essentially flat with last year.

Our OIBDA margin held fairly stable at 14%.

Even given the prior year benefit we realized from lower annual bonus compensation.

Let's now look at our different business segments.

Quarterly recorded music revenue decreased 7% to $707 million.

We saw growth in both our global digital and licensing businesses, more than offset by global physical declines.

International recorded music revenue fell 6%, while domestic recorded music revenue declined 8% year-over-year.

As expected, continued contracting demands for physical products our retailers led to soft recorded music results.

Mostly offsetting the physical declines, recorded music digital revenue grew 26% from the prior year quarter to $156 million or 22% of total recorded music revenue up from 17% in the same period last year.

Domestic recorded digital revenue grew 24% to $99 million or 27% of domestic recorded revenue, compared to 20% in the same period last year.

Quarterly recorded music OIBDA from continuing operations fell 8% year-over-year which reflected higher third party distribution costs, partially offset by improved digital sales mix.

Moving on to our music publishing business, in comparison to the same quarterly period from fiscal 2007, music publishing revenue of $156 million grew by 6% as revenue was strong both domestically and internationally.

Mechanical revenue fell 6%, better than the mid-teens year-over-year decline we reported in our third fiscal quarter.

Timing of releases and the ongoing support from our catalog were the primary factors that led to this better than expected result.

Growth and performance, synchronization and digital revenue more than offset the mechanical revenue decline.

Music publishing OIBDA was $54 million, up 2% from the prior year quarter.

OIBDA margin from music publishing contracted to 34.6%, partially due to minor severance costs.

Let's look at a year-over-year organic constant currency revenue growth in the quarter and fiscal year.

We registered just about 3 percentage point benefit from investments made over the past quarter and 12 months.

At this point we have already anniversaried our largest acquisitions including Road Runner.

Recent investments that are reflected in our current results include a Kamu, a touring company in France and Frank Sinatra Enterprises.

Turning now to our balance sheet and cash position, our strategy to build cash on our balance sheet and improve our cash flow has continued to yield results.

We increased our free cash flow to $100 million from negative $48 million in our prior year quarter, reflecting our conservative strategy and reduced M&A spending.

Our free cash flow was calculated by taking cash from operations of $119 million less capital expenditures of $6 million, and net cash paper investments of $13 million.

We entered the quarter with a cash balance of $411 million, another sign we stepped up sequentially from $338 million at June.

This $411 million cash balance is more than double our December 31, 2007 level of $160 million.

As Edgar mentioned, our cash balance will benefit from an additional $123 million collected in the first quarter of fiscal 2009.

As we receive the proceeds from the sale of our Front Line equity stake to Ticketmaster.

we remain comfortable with our balance sheet, and our capital deployment strategy has only increased our financial flexibility.

Turning now to taxes.

For the three months ended September 30, 2008, we had net cash taxes of $1 million, and a tax provision of $13 million on pretax income from continuing operations of $19 million.

Our tax expense for fiscal 2008 was $49 million, which is the same as prior year level.

At September 30, 2008, we had a US tax loss carryover of $203 million and foreign tax credit carryovers of $70 million.

These carryovers will be available to reduce our US income taxes in future years.

For the quarter, we generated income from continuing operations of $6 million or $0.04 per diluted share, compared to the prior year income from continuing operations of $11 million or $0.07 per diluted share.

As you know, as a matter of policy, we do not provide guidance, primarily because fluctuations from our recorded music release schedule, and associated marketing and promotional expenses are a normal part of the recorded music business.

Since we are two months into our December-quarter and this year's Holiday season weighs heavily on investors minds I thought we should update you on our current expectations.

We have previously said that fiscal year 2009 will be more back end weighted due to timing of releases.

We continue to believe this is a correct assessment.

You may recall that in our first quarter of 2008, we sold a staggering 5 million of Josh Groban's Noel, the number one selling album in the US last year.

This release will set up the first quarter of fiscal 2009 for a tough comparison, but we have confidence in our overall release schedule for the '09 fiscal year.

Beyond the timing of releases, it is too early to fully assess the impact of the cautious retail marketplace on music sales.

Let me asure you we will continue to monitor current events closely and take advantage of our flexible cost structure to minimize any impact.

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

Thanks, Steve.

We expect challenges at a time when the recorded music business is in such fundamental state of transition.

No doubt, that will be compounded by the macro economic environment.

But it is clear that there is great opportunity for those companies that understand where the music business is going, have a progressive strategy in place to get them there, and know how to operate in difficult times.

Over the course of the new fiscal year, our priorities continue to evolve but remain centered on optimizing and transforming our business, and doing that I would like to reiterate we will manage our balance sheet by generating significant free cash flow while balancing our cost and investment, fortify our digital leadership to the development of original business models, focus on enhancing the value and growth at Warner Chapel, expand partnerships with artists and nurture relationships with consumers to monetize businesses that represent growing segments of the music business and increase market share while maximizing on margin potential in the core reported music and music publishing businesses.

Recognizing that we have made substantial progress but still have a significant way to go, we are confident we are building the most progressive company in the music industry today.

Michael, Steve and I look forward to answering your questions.

Thank you, operator.

Please open it up for Q&A.

(OPERATOR INSTRUCTIONS).

Please stand by for the first question from Bishop Sheen from Wachovia.

Hi Edgar, Michael, Jill, thank you for taking the question.

Edgar, I am looking at your balance sheet and your leverage and you are managing debt by building up cash.

Have you considered the arbitrage of buying in your bonds which are at significant discounts and is there anything in your credit facility right now that would specifically restrict you from doing that other than the normal lRP tests?

I would say to the second part of the question, no we don't believe there's anything in your credit agreement that would restrict our ability, and we are always looking at ways to create yield for all of our stakeholders, bond holders, shareholders, alike.

We continue to monitor the situation, and are pleased with the amount of financial flexibility that we have in order to take advantage of market opportunities.

One quick follow up, $123 million from front line, I think that deal closed end of October.

Have you already received those proceeds?

We have.

Okay.

All right.

That's it.

Thank you very much.

Thank you, Bishop.

The next question is from Rich Greenfield from Pali Capital.

Hi, good morning.

A couple of questions.

One just a housekeeping question for Steve.

You reported last year about $146 million or $134 million of EBITDA which included I think about $3 million of nonrecurring benefits of your net Napster versus restructuring charges now you are talking about $146 million with a $7 million gain and I am just trying to flip the numbers year over year, what is being included, excluded, what should we think about within those numbers, and two just to Edgar's comment on the overall economy, aside from the overall economy, it looks like we're seeing a pretty significant decline in CD sales in the calendar fourth quarter due to floor space cut backs or potentially weak demand but just wondering, it seems like the fourth quarter started out weaker than the prior three quarters of the year.

Any sense on what's driving that, is it retail, just consumers not spending et cetera thanks.

Thanks for the question, Rich.

Just to put some clarity on that.

In addition to the prior year net benefit of $7 million I spoke to earlier, the prior year results also include a $12 million impact from are our Bulldog investment, discontinuing operations.

That's the difference between the year-over-year numbers you are looking at.

Rich, to your question, on the fourth quarter, we see that the weakness we have seen so far is not really due to reduction in floor space.

But just I think lower traffic in the stores.

However, we are happy with the product that we have in the marketplace, we are actually happy with the results we are seeing of our product in the marketplace.

And every piece of product that we had planned for our December-quarter to be in the market is in the market.

To the extent that the trends that you're seeing in terms of foot traffic continue for the next several quarters, how much can you reduce your cost structure by year over year, given it may not even be the quality of your releases, it may just be the environment at large weakening.

What I would say, Rich is that the market has been skeptical since the day we got here that we could reduce our cost structure and increase our profitability and maintain our investments in A&R.

I expect that skepticism will continue, though in my mind it should not.

The reason I made the reference to this management knowing how to operate in difficult times is we have spent the last five years since we have been here operating in a difficult environment, we know how to do that, we have an extraordinarily talented management team, and we do believe that there is the opportunity for further cost reductions if we shall see weakening sales.

Next question, please.

The next question is from Howard Gleicher from Metropolitan West.

Thanks for taking my question.

The music publishing business this quarter was particularly good, I believe.

And congratulate you for it.

In the past, I was concerned that that hadn't been doing as well as maybe you had expected it would be doing by now, and while I have listened to your few comments about why in the quarter it was good.

Can you comment in general, is there something just about releases that made the quarter good in terms of music publishing or is there something more sustainable and we can expect this kind of results going forward.

Thank you.

Well, Howard, this is Edgar.

I am reluctant to give financial forward-looking guidance.

What I would tell you is obviously we had a good quarter, the music publishing business is obviously a mix of growing businesses such as performance, sink, digital and other, and the declining business of the mechanical royalties which relates to the decline of physical as well as the growth of digital but the mix is still declining.

Mechanicals represent 40% or less of our music publishing business, so we have more growing businesses than declining.

One thing I would like to point to with regard to Warner Chapel is I now think we have a fine leadership team in place not only with Dave Johnson as our Chairman and CEO but Scott is now running the newly created position of the Chairman, CEO of the US business as well as President of the worldwide company, Ann Sweeney as head of digital and Brian Roberts as CFO.

Finally we have got a really strong cohesive management team, along with a number of very, very strong executives and international.

So I think you shall be able to see that management team build on the growing strengths of revenue streams other than mechanical l while we try our best to stem the declines on the mechanical business.

But if you had what you would consider to be let's say a release schedule on par with the prior several quarters, would we have still seen the improvement in music publishing.

You have to remember that with the Warner Chapel is from all of the companies not just Warner Music, in fact Warner Music only represents about 15% or so of Warner Chapel revenue.

So it is a little more difficult for Warner Chapel to predict release schedule fluctuations, given there's so many companies involved and so much fluctuation in company release schedules, but I don't think had this quarter was better because of an unusually good release schedule.

Great.

Thank you very much.

The last question comes from Tuna Amobi of Standard & Poor's.

Thank you very much.

Edgar as you talk about this innovative window effort, I am just trying to understand the strategy a little bit better because you know, if you look across the industry, it seems like it does work for some artists, much more so than others.

So I am just trying to get a handle on, is this something you intend to do a little bit more and how can you demonstrate in numbers in terms of numbers the incremental impact that it may have on your results.

I know you cited TI for example.

Let me -- the listeners know that we do have another question or so after yours.

We will continue the call.

We have had I think a fairly innovative digital bundling strategy for several years now.

We have led the industry, we continue to lead the industry and we continue to see success really quite, quite across the board with artists from, from Madonna where we had a very innovative product to TI.

So from pop to urban, we even see it in other genres.

I don't think it is restricted to certain artists.

We have yet to see, I think the rest of the industry follow us as aggressive or be as aggressive as we have in the number of premium priced products that we have placed at retail but the reason that we have been successful quite honestly is because consumers like what we offer and they buy what we offer.

And we certainly intend to continue to do that and as a result, we think our profitability and the digital space is, is ahead of our competition.

Okay.

And separately on impairment, I just want to kind of an update if you have conducted any impairment tests of late and if so, what the results of that has been, I suspect this may be for either Steve or Michael.

Sure, Tony.

This is Steve.

We can talk annual impairment test as required and there's absolutely no impairment issues at all.

Okay.

And lastly, Michael, this is a question following your comment in last call about the state of the retail market.

I think you specifically cited the steel are credit worthiness of the retailers and we have seen what has happened in the past month or two, with circuit city and some of the retailers.

So just kind of an update on that comment, Michael, do you still believe that there's no issue in that channel, and if not, then what has been doing to kind of, you no mitigate that?

Thanks, Tuna.

I think my comments last quarter were really focused on the biggest physical retailer, certainly sort of the Wal-Marts of the world.

And I think we continue to feel very confident about their credit worthiness even in this sort of difficult economic and market environment.

We have always dealt with for the last four years I have been here, sort of challenges of credit worthiness of the smaller retailers and continue to do so.

We have managed that through credit insurance risks but also just good day-to-day management of how much product and inventory we let them take versus how much they're paying us and so far we have managed that extraordinarily well.

I don't anticipate we we will going forward.

We continue to manage it very carefully.

Great.

Thank you very much.

The next question comes from Doug Mitchelson from Deutsche Bank.

Thanks.

Good morning.

One not to harp on the retailers but have you thought about the possibility of excessive returns sort of post the Holiday season as retailers try to manage their inventory given working capital is a big deal for them this year.

Doug, I had will take that you know, to add to what both Michael and Steve have said the various comments we are managing inventory very, very carefully, we are not overshipping.

As a matter of fact, as I said on the call even our September results were impacted by the fact that we shipped less than we scanned.

So that we are managing retailer inventory proactively.

So I am confident that we are on top of this as hard as we can be.

I don't think any of us know what the Christmas shopping season will but we are monitoring it not only week by week but day by day to make sure our inventories do not get out of hand and do not see an excessive level of returns come Q2.

You talked about the premium product pricing with iTunes and how that was helpful for your pricing strategy.

Is there a hope you can move to a variable pricing vat joy with iTunes?

You know, I think as I have declined to comment in the past on our negotiations with Apple or relationship other than to say that they have, you know they have continued to be a strong and innovative partner particularly around our digital bundling strategy and we look forward to growing our relationship with Apple.

I understand that.

It is not necessarily specific to any current conversations just more long term goal you think about your digital distribution, relative to what you are seeing in the marketplace, is variable pricing something that over a long period of time you would like the to achieve regardless of current leverage or negotiations?

Well with, I have said repeatedly probably three or four years now that I think variable pricing is appropriate for all kinds of content including music content.

I don't believe that every song is worth the same thing to consumers or even -- at one particular time versus a later time and I think artists and record companies should have the right to experiment with pricing and consumers will tell us whether we are underpricing, overpricing, whether we get it right or wrong.

The consumers should have that right.

Long term I do hope there will be an opportunity to have more variable pricing in the industry, no doubt about it.

On top of the premium pricing still an incremental value.

Last one, big picture I know the environment right now is certainly interest to go say the least but structure you have been a big believer in wireless and the impact on music.

Is the growth on smart phones here in US notably impacting music revenue yet or can you talk about how you see wireless evolving because we have been talking about it the last few years.

Well, as I mentioned in my prepared comments, I think the growth of improved handset devices and networks are definitely going to increase content consumption.

Whether it is in sales on a per down load basis or through other models like Nokia comes with music.

I do think it is clearly going to increase.

If you look at the amount of content consumption and frankly sales on the iPhone versus other hand sets, you know, it is multiples greater.

I mean in some cases 10 or 20 times greater than it is on regular phones.

So I think that augurs well as I said phones get smarter and networks get better and as business models get more diverse and I think the business model of owning essentially for nothing the content with the price of the device is a, is a very attractive consumer offer which should also be I think quite attractive to device many manufacturers.

So I do think we will see an acceleration in mobile over time, difficult to predict the timing, and difficult to know how quickly, you know, smart phone distribution network enhancements will roll out, but as they do, there's no question that content will be positively affected.

And then I guess if I can just sort of add one more and you have gathered this around you ha Lyor and Michael having their entire day free to sort of think strategically, anything that has been new that has sort of come out of having the change in their relationship with you?

I think what, if anything, we have, we are applying Lyor's extraordinary A&R talents across a broader geographic region and I think that's very helpful.

If you think about your global portfolio, our global repertoire, it is basically English speaking and a lesser degree Spanish speaking.

Those are the two languages that travel globally.

Now in charge of both and I think for Michael, clearly as we generate new business models, the entire way that we are structured needs to change over time.

Five years ago were entirely a physical business, five years from now, I don't say we will be entirely digital but we will be within a decade a fundamentally different company than we were, and that has all kinds of implications on how we structure ourselves, who we hire what they do, what products we create, the systems necessary to support those products, our customers and our artists et cetera.

And that's why we need it Michael, full time to be able to both think through and implement the kind of structural and process changes necessary to support what is already a very different and what will be an increasingly different business than we have ever managed before.

So Michael is not bored yet.

That's good.

I hope not.

He's too well paid to be bored.

All right.

Thank you.

Thank you very much and thank you for joining us on the call.

That concludes today's conference.

You may disconnect at this time.