Warner Music Group Corp (WMG) 2009 Q1 法說會逐字稿

Welcome to Warner Music Group's fiscal first quarter earnings call for the period ended December 31st, 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 at the end of today's presentation.

(Operator Instructions)

I would now like to today's call over to your host, Miss 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 first quarter 2009 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-Q 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 Executive Vice President and CFO, Steve Macri, will discuss our final results for the quarter.

Then Edgar will wrap-up before Edgar, Steve, and Michael Fleisher, our Vice Chairman, Strategy and Operations, takes 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 success of future album sales, projected digital sales increases, and declines in physical sales.

Expected expansion of the online marketplace, success of strategic actions we're taking to accelerate our transformation as we redefine our role in the music industry, the impact general economic conditions may have on us, 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 is a reasonable basis for them.

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

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

We plan to present certain non-GAAP results during 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.

Welcome everyone.

Thanks for joining us.

Thanks, Jill.

As we work to deliver on our long-term strategic and financial goals, this quarter demonstrated Warner Music's continued ability to stay the course, even in the face of significant world wide economic and industry challenges.

As we anticipated in our last earnings call, this quarter presented a difficult comparison to our very strong first quarter last year.

And we, like many retail reliant companies, did see the impact of current global economic conditions on our physical Recorded Music business.

Nevertheless, we once again outperformed our competitors and the marketplace gaining share and diversifying our revenue mix.

Importantly, given the state of the economy, our efforts to establish and maintain a conservative balance sheet continue to improve our financial flexibility and prepare us for growth.

Rising cash balances also reduce our net debt, and continue to enhance our ability to satisfy our financial covenants going forward.

We remain confident in our capacity to execute on our long-term goals based on our proven ability to develop new business music solutions, maintain our digital leadership position, manage costs, gain share, and deliver strong returns on our A&R investment.

Even with this record of executing on our goals, we recognize the realities of today's economic environment.

Accelerating declines in the US recorded music, physical sales, mirrored declines experienced generally in the US and other retail businesses.

Warner music saw smaller US unit sales declines in the recording music industry as a whole and our declines were offset apart by gains in international recorded music, stability in Music Publishing, rising revenues from our artist service business, and continued solid growth in digital Recorded Music and Music Publishing.

We have so far been able to fine tune our business to impact the downturn at retail.

We continue to monitor developments closely and will adjust our highly variable cost structure as necessary to drive profitability.

In this economy we take great comfort in the fact that we are no stranger to difficult environments.

After all, given the rapid and fundmental transformation of the music industry over the past five years, this management team has been tested and has proven that we can look forward, anticipate turbulent, and adapt to position the company for future growth, while delivering significant pre-cash flow.

Now let's turn to our quarterly highlights.

First, our disciplined A&R marketing and promotional efforts continue to yield results.

This quarter warner music again outpaced the industry, down 11% while the industry declined 15% in US track equivalent album unit sales according to SoundScan.

Warner music gained more share than any of the other music majors in calendar '08, rising one percentage point to 21%.

For the quarter we raised our share to 21.8% up 1.1 points from last year's quarter.

We're also proud that in calendar 2008 Atlantic records won the distinction of being the Number One label in the United States based on total album share.

This marks the third time in the past four years that one of our labels has held the top spot in the US.

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

Our quarterly digital revenue rose 24% to $171 million on a constant currency basis and in the US, digital represented 31% of Recorded Music revenue as compared to 23% in the prior year quarter.

We sustained our significant digital track equivalent album share advantage over physical album share in the US this quarter and for calendar '08 we had the greatest digital share advantage of any of the major music companies.

Third, as part of our transformational effort to enlarge our role in the broader music business, we continue to expand our rights and according agreements with new artists around the world and to leverage the power of these new partnerships through our artist service businesses.

And fourth, we continue to strengthen our Music Publishing business by further developing our artist roster and catalog and growing our digital revenues while delivering enhanced results.

I would like to discuss some of these accomplishments in more depth.

Our improved music share was led by current releases from artists including Nickelback, Enya, TI, and Plies.

In addition, the creative grassroots marketing efforts of our Atlantic team magnified the success of the soundtrack to the hit movie, Twilight.

Atlantic leveraged the promotion of the movie and book series both online and at book retailers to maximize sales of the soundtrack and raise visibility for Warner artists.

Twilight debuted at Number One on the billboard album chart and has already become a platinum seller in the US.

The album features Decode, another hit track from breakout band Paramore, one of the first groups which we signed to an expanded rights deal.

This track not only drove sales of Twilight, but it will also serve as a great set up for Paramore's next album release.

As expected, our achievements this quarter were tempered by comparison to last year's quarter which marked the release of Josh Groban's, Noel.

Although we sold an addition 600,000 units of Noel this holiday season, we sold a staggering five million units in the prior year quarter nearly four million of which were in the US making Noel the Number One album for all of calendar 2007.

Softer revenue performance in the December quarter from our US Recorded Music business was also a result of ongoing recorded music industry transitional pressures, as physical decline magnified by the economic crisis are not yet being offset by digital growth.

Even so, digital performance held up well.

Outside the US a handful of solid local and international sellers and our growing artist service business contributed to 5% constant currency revenue growth and and allowed us to minimize the impact of a channeling retail landscape, which was most pronounced in the UK.

Where EUK, Pinnacle, and Savi have each gone into administration.

We delivered strong Recorded Music results across several major European countries including France, Germany, Italy, and Spain.

Warner Music France was a particular standout this period.

In December, warner music France was the Number One French label as measured by [Chart Cher].

In the week ending December 27, 2008, Warner Music France had four of the top 10 albums.

Six of the top 15, and was the Number One Company in terms of weekly chart share at 33%.

Soul, the new album release from Warner Brothers superstar recording artist, Seal, was the key driver of France's success as it reached triple platinum there and was our top international unit seller in the quarter.

The legendary Johnny Hallyday and the new A&R success story, Christophe Mae, were also important local repertoire contributors to France's result.

Let's turn now to our increasing digital Recorded Music revenue, a bright spot and a significant impetus for our long-term growth.

As expected, we saw post holiday pickup in US demand similar to that of the past few years that signals a weekly benchmark for US digital track sales in 2009.

During this holiday season, sales of MP3 players and holiday gift cards help drive weekly US track sales up 126% sequentially to a record 47.7 million digital tracks during the week ended December 28, '08.

As in prior years, US, digital track sales have now pulled back somewhat, though this year's weekly pace is trending about 20% above last year's comparable weekly track sales pace.

We continue to believe mobile revenue growth will accelerate as new mobile products and business models are rolled out on a global basis and as device capabilities and network technologies advance.

We view Japan, which is the most successful mobile music market as measured by industry sales fast approaching $1 billion annually, as an indicator of how the mobile business may develop in other countries.

Japan is 39% growth and full track mobile downloads in calendar '08 and mobile was the dominant platform for digital music sales.

We continue to be encouraged by progress in our digital business.

The recent Apple announcement is a welcome development and has significant implications for our business.

We have long advocated for variable prices.

Apple's adoption of multiple pricing tiers on iTunes for single track downloads that will begin on April 1 will give us the flexibility to offer consumers more choice and better value for songs.

Importantly, it also gives an opportunity to differentiate our offer.

The iTunes music store is present in 20 countries online and the iPhone is growing market share in about 80 countries.

As a result, the introduction of over the air downloads on the iPhone significantly multiplies the potential footprint of the iTunes music store front into territories that were previously without iTunes.

And we are excited that consumers are now able to purchase DRM free upgrades of their existing libraries.

Other product and platform innovations such as iTunes Genius enhancement will add incremental revenue over time.

Taken together, we believe the latest Apple developments will foster the expansion of the digital marketplace and continue to raise the bar for industry competitors.

We are also monitoring the progress of recently launched services based on access models, that bundle the purchase of a mobile device with access to music.

Several of these services are in their early stages including Nokia's Comes With Music, TDC's Play and Sony Ericsson's Play Now Plus.

We believe access models will ultimately prove successful and that the level of success will be closely tied to the implementation strategies of individual providers.

Nokia's Comes With Music is wrapping up across additional territories in 2009 after its initial UK launch.

Nokia has indicated that although it needs to further calibrate the marketing and value proposition at the service, they are committed to its long-term success.

TDC, a Danish telecom operator, has seen strong initial results and improved customer retention after the April '08 launch of its bundled music subscription service.

The play service from TDC provides its mobile and broadband customers unlimited access to over two million tracks.

Uptake has been encouraging with a reported 7.2 million downloads per month and churn was reduced by 30% to 40% for mobile customers and by about 60% for broadband customers according to recent statistics.

Now let's turn to the steps we're taking to continue to broaden our revenue mix in the growing areas of the music business including sponsorship, fan club, websites, merchandising, touring, ticketing and artist management.

As we've discussed, over the past several years we have built the necessary resources through acquisitions, partnerships, and new hires so we can best serve artists globally in these expanded activities.

This includes building in-house capabilities with broader expertise, leveraging strategic partnerships ,and making investments in a growing number of global artists service companies including operations in the US, UK, Japan, Germany, Italy, France, Spain, China, and Finland.

Fan club management is an area that continues to gain traction at warner music through Artist Arena, an investment of ours since June 2007.

This business that was formed in 2004 specializes in fan club management and marketing, pre-sale and VIP ticketing, and ecommerce solutions for recording artists.

Artists Arena has grown its roster to more than 150 artists and has greatly expanded its expert, capabilities, and international presence while consistently increasing revenue and profit.

Recent additions to the Artist Arena's roster includes WMG artist, Shinedown and Staind and non-WMG artists such as Kings of Leon and Hinder.

Fan clubs create a powerful connection between artists and their fans which lays the foundation for further monetizing that relationship.

Turning to Warner Chappell Music.

This business continues to be a stable performer with very attractive financial attributes.

Similar to Recorded Music, the Music Publishing business continues to be characterized by strong OIBDA free cash flow conversion, favorable working capital dynamics, and low CapEx requirements.

However, Music Publishing currently enjoys a more diversified revenue streams than Recorded Music.

Our goal is to continue to enhance the results our distinctly valuable Music Publishing business.

As we noted in the past, we have a global multi-prong plan to drive long-term growth and Warner Chappell.

This plan includes continuing to invest in talented songwriters that support the development of our Music Publishing catalog, building new opportunities to exploit the value of our existing catalogs, expanding our leadership position in digital music by playing a key role in industry initiatives, and leveraging our international reach.

Adding to its legacy is the well established home for its award winning songwriters.

This year's Grammy nominations highlights the success of Warner Chappell's urban music initiative.

Warner Chappell's Lil Wayne received five nominations including Album of the Year, Best Rap song.

Atlantic Records recording artist and Warner Chappell's songwriter, TI, was also nominated for Best Rap Album.

Additionally, Warner Chappell's songwriters contributed their efforts to three of the five albums nominated for Best Contemporary R&B Album.

In calendar '08, Warner Chappell artists were writers on two of the top five US albums and three our of the top 10 US digital songs including Katy Perry's, I Kissed a Girl.

Warner Chappell writers and Rhino recording artists were represented on about one dozen Super Bowl ads, up from eight last year which represents the success of our continuing efforts to build our synchronization business in both our Recorded Music business and Music Publishing.

Warner Chappell continues to invest to support the developments of its Music Publishing catalog.

For example, in the UK we recently announced the extension of our long-term publishing agreement with our award winning masters of rhythm rock, INXS, one of the highest selling Australian recording artists of all time.

Not only will administer the world-wide rights to most of INXS's catalog of songs which spans the groups 30 year career.

But the agreement also features future musical compositions and valuable sound recordings synchronization rights in all non-US territories.

Warner Chappell also continues to press ahead in concluding agreements with collection societies to further innovative Pan-European digital licensing initiative known as PEDAL.

PEDAL is designed to facilitate Pan-European licensing and musical composition for digital music services throughout Europe.

To date, collection societies in the UK, Germany, France, Spain, Sweden, and most recently, in the Netherlands, have joined PEDAL.

Before moving onto our financials, I want to highlight the recent progress that content providers and ISPs have made in partnering to ensure speedy, legal, and robust digital delivery of content.

Recently, New York State Attorney General, Andrew Cuomo, encouraged leaving ISP and content companies to work together constructively to address on-line copyright infringement by developing graduated response programs similar to those being implemented in Europe.

The Attorney General is right.

There is much at stake and much to be gained on all sides if we can all reach out across companies and industries to foster legal commerce and respect for intellectual property.

Warner Music will continue to work cooperatively with ISPs to address these issues.

In that vane, we are particularly gratified that the IRAA and several leading US ISPs have agreed on principals around graduated response program's design to deter copyright infringement.

In light of this development, we are pleased with IRAA's decision to discontinue its broad-based and user litigation program.

At WMG, we are great advocates of any legal use of new technology.

Given the ability of ISPs to deter illegal on their networks, it's essential that they play an active in promoti8ng the legal and legitimate flow of data.

We believe that all the stakeholders, ISPs content companies and consumers gaine the most when we all work together to support common values.

Steve will now run through the financials before Michael, Steve, and I will take your questions.

Thank you, Edgar, and good morning everyone.

I would like to start by covering some of the key financial highlights for the quarter.

All the data I am about to discuss is on a constant currency basis.

Looking at the income statement for the three months ended December 31, 2008, we reported revenue of $878 million, which declined 6% year-over-year.

Domestic revenue declined 19% while international grew by 5%.

Domestic revenue was most affected by the comparisons against the strong quarter music results from the first quarter of 2008.

In addition, the current quarter results were affected by Recorded Music industry pressures and general economic and retail environment.

Our quarterly digital revenue grew 24% to $171 million, or 19% of total revenue.

That is up from 14% of total revenue in the prior year quarter.

Digital revenue improved 6% sequentially which is the due to the seasonal nature of the recorded music business in time to release schedules.

Though mobile and on-line digital revenue both grew, on-line remains the primary contributor to our digital business.

(inaudible) about one-third of our digital business is mobile and two-thirds is on-line.

Mobile continues to be more penetrated internationally than in the US.

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

Our operating income before depreciation amortization or OIBDA from continuing operations fell 17% and our margins contracted to 12% from 13%, primarily from lower revenue and substantially similar fixed costs.

As we previously discussed, last year's first quarter release of Noel outperformed our expectations from both a revenue and an OIBDA perspective.

It generated substantially higher than expected sales volume in the quarter with limited marketing expense.

As a result, last year's first quarter had better than expected profit characteristics.

Looking at our different business segments for the quarter.

Recorded Music revenue decreased by 7% to $749 million.

We saw growth in our Global, Digital and International Licensing businesses more than offset by global physical declines.

International Recorded Music revenue grew 6% while domestic Recorded Music dropped 21% year-over-year.

These Recorded Music results were due to the continued contracted demand for physical product by US retailers in this soft economic and retail conditions.

International strength was driven by both local and international repertoire as Edgar previously discussed.

(inaudible) the physical declines, Recorded Music digital revenue grew 21% from the prior year quarter to $156 million, or 21% of total Recorded Music revenue.

That is up from 16% in the same period last year.

Domestic Recorded Music digital revenue grew 10% to $99 million, or 31% of domestic Recorded Music revenue as compared to 23% in the the same period last year.

Recorded Music OIBDA from continuing operations fell 21% year-over-year.

This reflects tough comparisons with last years first quarters holiday release of Noel as well as negative operating leverage from lower sales on a similar fixed cost base.

Moving on to our Music Publishing business.

In comparison to fiscal 2008, the Music Publishing revenue $134 million, grew 1% which [stabled] performance both domestically and internationally.

Mechanical revenue fell 16% due to declines in industry-wide physical recorded music business.

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

Music Publishing OIBDA was $21 million flat with the prior-year quarter.

OIBDA margin increased to 16% from 15% in the prior year quarter due primarily to a change in our sales mix.

Our revenue this quarter was largely organic.

Investments made over the last 12 months represented about a two percentage point benefit in the current quarter.

Recent small investments that are reflected in our current results include two artist service companies, Friends and Partners in Italy and Get In in Spain.

Turning to our balance sheet and cash position.

Our strategy to build cash and to improve our cash flow continues to yield results.

We increased cash flow to $160 million from negative $155 million in our prior-year quarter.

This reflects our conservative balancing strategy and reduced M&A spending.

Our free cash flow was calculated by taking cash from operations of $43 million less capital expenditures of $3 million and adding back net cash received from investments of $120 million, which includes the proceeds from the previously announced sale from our remaining interest in Front Line to Ticket Master.

We ended the quarter with a cash balance of $549 million.

This is a sizable step up sequentially from $411 million as of September 30th.

This $549 million cash balance is more than triple our December 31, 2007, level of $160 million .

Turning now to taxes.

For the three months ended December 31, 2008, the next cash taxes of $3 million and a tax provision of $16 million on pre-tax income from continuing operations of $39 million.

For the quarter, we generated net income from continued operations of $23 million or $0.15 per diluted share.

This compares to the prior year's quarter net income for continuing operations of $2 million or $0.01 per diluted share.

In the quarter we had a gain of $36 million on the sale of Front Line.

We also had two additional items which essentially netted each other out.

A $9 million non-cash gain on a foreign exchange transaction and a $10 million write-off on an equity investment and venture to develop an outsource royalty platform.

Excluding these items, we generated a net loss from continuing operations of $0.08 per share.

As you know, as a matter of policy, we do not provide financial guidance.

This is primarily because fluctuations from our Recorded Music release schedule and associated marketing promotional expenses are a normal part of our business.

Consistent with what we know from last quarter, we continue to expect that fiscal year 2009 will be back-end weighted due to the timing of our releases.

We remain confident in our overall release schedule for the fiscal year.

That being said, the music industry is not immune to the challenge in the retail marketplace in difficult economy.

To minimize any impact, we will continue to actively manage our expenses and take advantage of our flexible cost structure.

I would now like to turn the call back over to Edgar for closing

Thanks Steve.

As we all know, we have entered a period unprecedented economic instability.

However, tumultuous backdrops is not new to us.

The recorded music industry has been in a fundamental state of upheaval for several years and we have proven time and time again that Warner Music can adapt our strategy in order to position ourselves for future growth while continuing to generate strong free cash flow.

Over the course of the new fiscal year, our priorities continue to evolve but remain centered on optimizing and transforming our business.

In doing that, I would like to reiterate that we will manage our balance sheet by generating significant free cash flow while balancing our costs and investments, fortify our digital leadership to the development of original business models, focus on enhancing the value and growth of Warner Chappell, expand partnerships with artists and nurture relationships with consumers in order to broaden our revenues in growing segments of the music business, and increase market share while maximizing our margin potential in our core Recorded Music and Music Publishing businesses by continuing to make strong returns on investments in artists and their careers.

There is no doubt that the challenges are significant and are compounded further by the current macro-economic environment.

But it remains clear that there is great opportunity for those companies that understand where the music business is going and have a progressive strategy in-place to get them there.

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

Thank you, operator, and please would you open it up for Q&A.

(Operator Instructions) The first question is from Bishop Cheen from Wachovia.

Hi Edgar, Jill, Steve, Michael.

Thanks for taking the call today.

Looking at your balance sheet management as you build cash, it looks like against a covenant leverage definition of 4.0 times EBITDA at the (inaudible).

You're right at that and you have a step down as you go on later this year.

Do you think you can build cash fast enough and keep your EBITDA from falling so you can stay in compliance?

Can you just give us some color on how you plan to work around those covenant issues.

Thank you Bishop.

Steve can give you some more details, but the short answer to your first question is yes.

We can and will meet our covenants and, in fact, at the end the December quarter our covenant ratio is already below the step down to which you refer.

So, there is room and there will continue to be increasing room as we continue to manage our business and our balance sheet.

Okay.

That is the short answer.

Thank you.

The next question is from Jessica Reif-Cohen of Bank of America.

It's Bank of America, Merrill Lynch.

I have three questions.

First.

Lots of companies are experiencing negative leverage given the environment.

I am just wondering if there is anything you can do to attack your fixed cost structure.

Are there any pockets that you can cut?

Okay.

You want to ask them one by one.

The answer is yes, we don't manage fixed costs, Jessica, on a quarter basis which is why you sometimes have the slight margin contraction in Q1.

Yes, we believe - - first of all, remember that 75% of our cost base is variable and only a quarter slightly less than that is fixed.

But, yes, we think that there are things we can do and, in fact, are doing to manage our fixed costs as well.

Just one thing to add to that, Jessica.

This is Steve.

Really, the quarter-to-quarter comparisons are apples to oranges when you look at Noel.

The vast majority of our year-over-year decline is because we had that blockbuster release in the quarter with 5 million units.

It's not so much the 5 million units, it's more the 5 million units in a two and a half month period.

You had a large amount of units with limited market expense and high profit characteristics.

So, the quarter operating leverage was really impacted by the apple-to-oranges results with Noel.

Okay.

Thank you.

And the second question and then I have one after that.

Could you talk about A&R spend for this fiscal year versus a year ago and what are you doing differently?

Jessica, we have actually had outside consultants come in and review our A&R spending to determine the returns that we received.

The returns that we received from our A&R spending are very strong.

I would venture to stay, without knowing, that they are probably the strongest in the industry.

As a result, it makes sense for us to continue to spend A&R money because we are achieving such strong returns.

So, generally speaking our A&R spending has been petty much constant over the past two or three years and we expect that it will remain constant in '09.

Is there anything you are doing differently in terms of A&R?

I think we found a formula to deliver strong returns, and so we try to perfect that formula each week.

I wouldn't say there is anything we are doing differently.

As you will recall, when we took over Warner Music in '04, our US share was around 15%.

It is now about 40% to 50% higher than that at 21%.

so, I think we're doing a lot right.

Obviously, we are not doing everything right.

So, what we are trying to do is understand what we do well and do more of that and try to do less of what we do poorly.

But, overall we have had a remarkably consistent record of A&R success and I think we can continue to do that.

My last question is you seem, Edgar, to be pretty excited about stuff that's going on in mobile in Europe.

I was just wondering if there are any deals for the US or are you (inaudible) here?

I think the mobile music - - the wireless internet is by far the norm outside the US and the wired internet is by far the norm here in the US.

So, consumer behavior s more focused on accessing content data and information wirelessly outside the US more than it is inside the US.

But I would say the introduction of OTA downloads on the iPhone will show a significant in consumers beginning to access content in that way.

I mean, the iPhone already was delivering data at a 3 or 4 to 1 ratio versus other devices prior to OTA downloads being available.

Now that they are available, I would expect to see a mobile increase there.

I don't know that Sony Erikkson or Nokia or others have plans to come into the US in '09, but I do believe there will be access models introduced in the US in the next couple of years.

I just don't know the timing.

But I do think the mobile business will grow globally and I think the first sign of growth in the US will be through the Apple iPhone OTA agreement.

Thank you.

The next question is from Doug Mitchelson of Deutsche Bank.

Thanks and good morning everyone.

Couple questions.

First, further along those lines, Edgar, if you look out 5 years and I know it's difficult to predict at this stage, but if you had your druthers, based on what you see in terms of the subscription model with things like Nokia.

Based in what you think you are going to see with digital downloads expanding because of wireless availability, and with what you are seeing at retail with CDs.

Where do you think the percentage source of your revenue is going to be from those three buckets 5 years from now?

Where would you like them to be?

I think what we try to do is not provide forward-looking statements as much as possible.

But I think I would say overall, Doug, is that it obviously is quite clear that physical Recorded Music business will continue to be a smaller and smaller part of our business end.

This is - - music industry will unquestionably become a growth industry.

The only question is when does that turn occur and from what base.

I would expect that in 5 years that not only will we have strong revenues from mobile, not only will we have strong revenues from digital online, but we will also have significant revenue from artist (inaudible).

So, we will be in the business of not only selling songs, however customers acquire them, and (inaudible) songs our Music Publishing business, but we will also be significantly in the business of sharing in revenues with artists on ticketing, touring, artist management, sponsorships, fan clubs, etcetera.

So, I think our revenue picture will look quite differently than it does today.

I have no doubt that in that period of time will be a growing industry.

The question is when between then and now does that occur and off of what base.

Well, then - - even though you said you don't want forward-looking statements, I am just looking through another question along those lines.

Given that business mix and given the different business models that are evolving, do you think margins today similar to these levels get better, get worse?

Again, with the caveat we don't know at what point we become a growing business and off of what base and therefore, where the margins go between then and now.

What we have consistently said is that the digital business is a higher margin business than the physical business.

We have every expectation that that will continue to be the case.

And to the extent that we switch to more subscription revenue over time you think that comment still holds?

It does.

Okay good.

And then, the last couple of questions for you.

Can you give us a sense of what changes are taking place at retail given the recessionary backdrop.

I'm primarily thinking domestically of things like Circuit City going bankrupt.

There are a lot of changes taking place.

What are you seeing?

This is Steve, Doug.

We have been partnering with our retailers for quite some time to manage shipments not only to reduce our credit exposure, but also our returns risk.

So, fortunately, the companies like Circuit City or Woolworth in the UK, they represent such a small part of our business.

The vast majority of our physical business right now is with companies such as Walmart, Best Buy.

So, and the other thing that we have noted too is that floor space that has been trunked at the retailers has been (inaudible), so you really haven't seen the drastic decline in the physical business.

And, lastly, in case I missed it.

I didn't hear any comments on thoughts behind the potential for Live Nation and Ticketmaster to get together.

Would that have any impact on your business?

I think as that merger has not been announced, but remains a rumor in the papers.

I don't think it's prudent for us to comment on rumors.

So, I don't think we will be commenting on any potential agreements between other companies.

Alright.

Fair enough.

Thank you.

The next question is from Howard Gleicher from Metropolitan West.

Hi, I just want to follow-up on the last question about Live Nation and Ticketmaster.

I know you can't comment on that.

Given your purchase in the the sale of Frontline, are there pieces of the music business that would be - - and I know your - -it is difficult for you to do anything about that now.

But looking out several years, are there pieces that would be required, in order for you to garner a more meaningful part of the artists' total package.

Performance is a big deal and that is something that has been very difficult for anyone to get a piece of.

How do you go about profiting from that over time?

And I have an unrelated follow-up if you don't mind.

Howard, I can tell you how we go about profiting from it and I can tell you that I don't think we need additional infrastructure in order to do so.

And that is that as we expand in our partnerships with artists when we sign our recording contracts, and, in fact, even our Music Publishing contracts in some cases, we have agreements with artists that vary from artist-to-artist but involve either actively or managing pieces of their broader income streams including touring, ticketing, fan club merchandise, etcetera,.

Or in some cases, simply sharing with them in the revenues that they receive from those income streams.

So, we have the infrastructure in place to exploit those areas and we obviously can simply share in those revenue streams with our artists.

The infrastructure pieces of the business are, in my view, the pieces that are increasingly commoditized and low margin.

And therefore, I think we are better remaining with a variable cost structure and having the strategic advantage of being first in and broadening our relationship with artists.

Okay I appreciate that comment.

And then, secondly, your stock price, while of course disturbing to everybody, putting that aside for a second, does it in any way hamper your ability to attract new people and potentially retain the people you have, or are you in danger of losing any material representatives of your management team, due to the perceived lack of ability to be compensated on that side?

Well, first the answer to your question is no.

We have actually resigned in the past few months, just about every senior executive in the Company.

So I expect no major management fallout from result of having this stock price, number one.

Number two, while there is no question that the market has been - -has severely reduced the valuations for all media companies, it is an environment where I think our management sees real opportunity, and to the extent that people can be re-signed at stock prices around these levels I think people are very excited and encouraged by that because they know what I know which is this is going to be a growth business one day and one day relatively soon, we can't predict how soon.

At that point the market will reflect a fairer value for our Company.

Understood, thank you, very much.

The next question is from Ingrid Chung from Goldman Sachs.

Good morning.

Thanks.

Couple of questions.

First, Edgar I think you mentioned you saw the global recession impact your business.

I was just wondering if you felt more of an impact in the US.

I know there is the tough Josh Groban comp -- but I was wondering if there was maybe a lag outside the US.

Secondly I was wondering in terms of digital music initiatives or businesses, what do you think could potentially rest dominance away from apple and potentially make the playing field more even?

And then last , I was just wondering in terms of the makeshift between new releases and catalog has that been impacted by shelf space station

Okay so let me just do with the last question first.

There has really been no discernible shift between new releases and catalog.

And to sense there has been shelf space reductions, as Steve mentioned, it has really been around the most slow-moving SKUs.

So it has really impacted shelf space adjustments in floor space has really impacted our business very little.

If at all.

In terms of the global recession, obviously we if as you said have the Josh Groban compare.

But as we noted, we had strong business in Europe, particularly where we had very strong local release schedules as well as some strong international sales with Enya and Seal.

From what I can see, I don't think there is lag and that we were expecting a fundamentally softer Europe in the next couple of quarters.

But, of course, we will have to wait and see as in this economic environment it seems to be a day-by-day if not hour-by-hour issue rather than being able to look out even a month or two.

And lastly, I do think that I have a lot of heart for the access models that are being developed in the mobile space, and I do think increasingly there will be competition for Apple.

Having said that, Apple continues to grow its business with us and with consumers.

And this notion that somehow we need to dethrone Apple, I am not sure is a notion we need to spend a lot of time on as long as they continue to allow us to make the progress that we have in our recent announcement.

As long as they continue to innovate and allow us to continue to innovate and as long as we together are satisfying consumers, I think that has already served as a pretty good model for the industry and can continue to do so.

Okay, great, thank you.

The next question is from Mike [Carfeld] from Clear Bridge Advisors

Hi.

Thanks a lot.

Obviously you have a very nice cash balance.

Given the way your bonds are trading in the market ,I just want to know your guys' thoughts on buying those at a discount and obviously the super charged effect it would have on improving your balance sheet.

Thanks.

Yes, Mike, this is Steve.

If you remember, what our strategy was about a year-ago, was to build cash and improve financial flexibility in our balance sheet.

Quite frankly, I think we have done a great job of doing that growing the cash from $160 million a year ago to $549 million at 12-31-08.

Buying back bonds is clearly an option we're exploring.

We're looking at our total capital deployment strategy.

So we will continue to look at that as an option.

But right now, given this economic environment, we would like to comfort and flexibility that the $549 million of cash provides us.

Okay.

Thanks.

The next question is from Richard Greenfield from Pali Capital.

Thank you, for taking the question.

First of all, there was legislation introduced yesterday regarding royalties on, I believe, [threshfield] radio.

Wondering how do we think about how that would impact your business?

Obviously it is positive but can you give us a sense of how meaningful this could be or put a range around what it could mean because I assume this would be pure profit if it actually happened to the Recorded Music business.

Two, you have made a number of investments over the last couple of years like iMeme and Lala.

I'm just curious how much of these investments, that you don't own 100% of, how much of that is actually contributing to your digital revenue at this point.

And then last question is related to returns from retail.

The book business looks like it is turning to a no return model.

Just curious if you think if music business will shift to something similar in the near future, Thanks.

Rich, it is Edgar.

On terrestrial radio, I don't think we can necessarily give you a range.

But what I would say is there are, I think, five countries in the world that do not pay recorded music artists and recording companies for the use of songs on the radio.

United States is one.

China is one, Rwanda is one.

I believe Iran is one and North Korea is the last.

Quite an unusual group for the United States to be included in.

Interestingly, China used to pay such a fee but when it joined the WGO and noted that the US did not, it stopped.

So before that, the US was on an even uglier short list.

So I think we're being to work very hard to do what is right for recording artists and record companies and other copyright owners.

And I think one can say that depending on what is achieved by that legislation, the impact can be anywhere from negligible to very significant.

But I think until we know whether or not we can pass legislation and what that legislation would be, would be imprudent to try and put a range around the potential income.

As far as iMeme and Lala, I will let Steve talk about return.

Both of those are minority investments.

Neither of them are accounted for in our OIBDA so they essentially have no impact.

To the extent we have commercial arrangements that would derive revenue from either of those I can tell that you the impact on our OIBDA is negligible at this stage.

Rich, this is Steve.

With regards to a no return model for music.

I mean, we partner with our retailers, like I said before, on maximizing inventory at retail and constantly looking at different models for returns whether it is a returns charge or maybe potentially going one way with certain SKUs, but to be determined if we get to the book publishing model.

Well, and to say the Book Publishing business hasn't got to a book publishing model on no returns yet either, but you're right to say they certainly are going increasingly in that direction.

Are you against the idea of a no returns model?

Is that good or bad I guess if it moves this in that direction?

Again, Rich, it would depend on the terms on which we were able to strike that arrangement.

So clearly, there would be give-and-take on a no returns basis and the question is how do we come out in that negotiation with retailers.

So, we certainly have nothing against it and in many ways it could simplify our business.

The question is what is in it for the retailers.

And at what price and what cost would they be prepared to have that discussion.

Thank you,.

Next question is from Jason Bazinet from Citi.

I just have a quick question on recorded music business.

I think you guys highlighted in the past include this quarter that you gained a pretty significant share.

You said it was up another 1.1%.

Given the lack of public music companies that are out there, I was wondering if you could just take a minute and give us a sense from an historical standpoint in terms of where Warner shares moved around?

Do you - -in other words have there been periods in the past where you have moved up to 25 or 26% of recorded music business?

Or is this - - are we sitting on record highs where we sit right now?

Thanks.

Well, Jason, let me try to give you some comparisons, although, but let me try at least to explain where there are apples and oranges.

Warner's historic market share highs are approximately equal to where we are now.

But in the- - I would say in the late '80s and early '90s and I don't have the exact information in front of me, Warner continually had a 20% to 23% share of the US business.

But I would also note in those days there were six major music companies in the US and many stronger independent companies.

So that while Warner was the leading Company at that time, had you a far less concentrated supplier environment.

Which makes the comparison a little apples to oranges.

Warner started to lose market share along with when it lost its senior management in the middle '90s, and that market share decline continued frankly for approximately 10 years.

To a low of ,as I mentioned, about 15% of the US market when we acquired the Company back in 2004.

Our market share, I think, remained relatively flat the first year we owned the Warner as we reorganized Electra and Atlantic and then has grown every year since on a very consistent basis to our current position of about 21% for the year, you noted 21.8% for the quarter.

However, in that time there have been several mergers, one of which I was involved in with Universal and Polygram, Sony, BMG merged so Universal's share today of the US market is in the low - - around 30 to 33% of the market.

Sony is approximately a quarter of the market maybe a little higher than that.

So you have increased concentration.

Therefore, I don't see our current market share as a ceiling at all.

And against both of these larger competitors we have consistently gained market share in the US and therefore as we said in our comments we expect we will be able to continue to do that.

Very helpful, thank you,.

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

Great, I actually have two questions thank you, very much.

So the first one is kind of a philosophical, bigger picture question on the blurring lines in the music industry.

As you look at all the different areas, whether it is recording, concept ,promotion, ticketing, artists relationships, venue management, merchandising, sponsorship, just to name a few, right, just seems like all of these areas have been converging over the past few years.

Edgar, I know you don't want to talk about the Live Nation Ticketmaster deal but, at least, talking about actual transactions like Live Nation did acquire SMG, and Ticketmaster did acquire Frontline all in the past few months which seems to be a deal that was made after you guys sold out of Frontline and I think at the time you said that Frontline was no longer strategic stake for you, and yet, you seem to have a lot of glowing things to say about Sam Club management in your prepared remarks.

And I am also aware that you purchased [Getty] in Europe which is a Concept Promotion and Artist Management Company just a few months ago.

So just putting all of this together, is very, very - - it is becoming very blurred and difficult to see how all of this landscape sheets converge.

So the question is, can you perhaps articulate for us a little bit better how you see a whole convergence thing happening and where you guys actually - - what role you see Warner Music playing in this whole landscape.

Clearly, the multiple rights deal I think get you in that direction, but it just seems that,that is not going to be - - doesn't look like it - - seems like a lot more is going to be needed now, as all of these deals are occurring and the lines continue to blur.

So any comments along those lines would be helpful.

Let me try and comment.

I would say that we are in a different business than some other companies that you have talked about in the question.

We are more in the venture capital business.

We are not so so much in the business of renewing or partnering with artists when they are already at a very mature level of their careers.

At that point, there is no industry that I am aware of, and frankly the the music industry is the best of them, where the talent does not get an extraordinary amount of the pie that is available once that talent is highly established.

We think, therefore, that the highest margin opportunity is to partner with our artists at the outset so we can be partner in building their careers and be able to exploit all of their rights whether through our own infrastructure, or through other people's infrastructure.

We're very focused on trying to maintain margins, not to decrease our margins by going into low margin areas of the business.

And we believe that the venture capital model that we employ in the recorded music business is the best model to continue to do that.

So that when you think about the infrastructures that either exist on that can potentially come together, those are infrastructures focused more on mature artists, and how to exploit those artists' rights.

And they do an outstanding job.

But in those models, the artists tend to be and have extremely high margins and those helping those artists exploit them tend to have lower margins and therefore we think, as we said, partner with ours early in their careers is their best opportunity both for our artists and for ourselves.

Okay that's very helpful.

Just real quick separately on the iTunes deal, if you can just provide some commentary on the incremental impact you see from the three-tier pricing and the thought process that led up to that seem like a potentially ground-breaking development.

And also, how you can reconcile that to your earlier position in terms of the DRM discontinuation, any new information in terms of piracy concerns that you had leading up to that announcement would be helpful as well.

I think the industry has lived in many quarters now without DRM in a number of areas and I don't think that the piracy aspects have changed.

So I am not - -I don't think we will see any difference in piracy activity with or without DRM on Apple.

That would be my perspective there.

I think with regard to variable pricing tiers that Apple is going to introduce in April, I think it is simply too early to protect what will happen as a result of that or how many songs will end up at which price points.

Clearly, each record company has the choice to price any of its or to suggest that those songs - - its songs go with any one of those three price tiers.

But how many of our songs will be at what price level for how long in what way, really has yet to be determined and what the consumer reaction will be to those price levels is yet to be determined.

So I think it is way to early to predict.

But we are hopeful that it will result both in a better consumer and in an improved position for us and our colleagues in the record industry.

So, I think with that I appreciate this was the last question for your interest and we look forward to talking to you again in a quarter's time.

Thank you, bye.

That concludes today's conference.

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