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Operator
Welcome to the Warner Music Group's fiscal second quarter earnings call for the period ended March 31, 2010.
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.
(Operator Instructions).
Now I would like to turn today's call over to your host, Ms.
Jill Krutick, Senior Vice President of Investor Relations and Corporate Development.
You may begin.
Jill Krutick - SVP-IR & Corporate Communications
Thank you very much.
Good morning, everyone.
Welcome to Warner Music Group Corp's fiscal second quarter 2010 conference call.
Both our earnings press release and the Form 10-Q we filed this morning are available on our website.
Today, Chairman and CEO, Edgar Bronfman, Jr., will update you on our business performance and strategy.
Executive Vice President and CFO, Steve Macri, will discuss our quarterly financial results, and then Edgar, Steve, and Michael Fleisher, our Vice Chairman, Strategy and Operations, will take your questions.
Before Edgar's comments, let me remind that 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 estimates, expects, plans, intends, believes, should and will, and variations of such words or similar expressions that predict or indicate future events or trends or do not relate to historical matters, identify forward-looking statements.
Such statements include, but are not limited to, estimates of our future performance, such as the success of future albums, projected digital sales increases and declines in physical 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, the impact general economic conditions may have on us, market share gains and our intentions to deploy our capital, including the level 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 assurance that management's expectations, beliefs, and projections will result or be achieved.
Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties, and other factors that can cause actual results to 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-Q, and other SEC filings.
We plan to present certain non-GAAP results during this conference call.
We have provided schedules reconciling these results to our GAAP results in our earnings press release posted on our website.
With that, let me turn it over to Edgar.
Thank you.
Edgar Bronfman - President & CEO
Thanks, Jill.
Welcome, everyone.
And thank you, everyone, for joining us.
The second quarter provided another example of our ability to deliver stable results even in the face of an ongoing recorded music industry transition and general economic pressures.
We saw only moderate revenue declines while we expanded our OIBDA margins and delivered improved OIBDA.
We remain confident that our efforts should drive sustained growth over time.
That confidence is fueled not only by our successful track record which includes shifting our business mix, managing costs, developing new business models, and delivering strong returns on our A&R investments, but also by our enhanced digital leadership position.
We are fast approaching a key milestone in the evolution of our business.
With digital revenue reaching 47%, nearly half of our US reported music revenues this quarter, we are approaching the digital divide.
While this number will fluctuate quarter to quarter, it is indicative of the great strides we've been making to create a more digital centric business model.
We have consistently proven that we can adapt our strategies in order to position ourselves for future growth while continuing to generate strong free cash flow.
This free cash flow gives us the flexibility to continue to invest in A&R, marketing and promotion activities, the essence of our recorded music and music publishing businesses, and also to explore other opportunities that can deliver incremental value to shareholders.
Today we'll discuss the Company's quarterly performance in four key areas.
First, our A&R marketing and promotional efforts continue to yield results.
Second, we sustained our industry leadership in the digital arena with our quarterly digital revenue rising 12% to $199 million on a constant currency basis.
And as mentioned in the US, digital representing 47% of Recorded Music revenue as compared to 41% in the prior year quarter.
Once again we sustained our significant digital share advantage over physical share in the US in the quarter and we have the greatest digital share advantage of any of the major music companies.
Third, we continue to transform the Company by entering into expanded rights deals with new recording artists and building our worldwide artist services business.
And fourth, we continue to fortify our music publishing business by further strengthening our artist roster, business mix, and catalog.
Now let's take a look at the quarter's results more closely.
As expected, given our light release schedule for the quarter and the challenging industry and economic backdrop, Recorded Music in constant currency revenue, which was primarily driven by carryover releases, declined both domestically and internationally, off 7% and 4% respectively.
As a result of our light release schedule, our US share contracted by 1.7 percentage points to 19.2%.
There are notable [price bumps] this quarter that indicate the strength of our core Recorded Music business.
Results were driven by releases from a number of artists enjoying global success including Michael Buble and Muse, as well as Christophe Mae, an exciting French artist with whom we have an expanded rights agreement.
Our international Recorded Music results included a handful of stylus performances from both local and international artists and a particularly strong international digital business.
We saw modest declines in revenue across major European territories as well as the Asia Pacific region.
The UK proved to be an exception showing 15% revenue growth over the prior year quarter on a constant currency basis.
Our UK business continues to show the positive effects of our investments over the last few years.
For the quarter, Warner Music UK achieved the greatest year on year share growth of all the music majors, up 3.9 percentage points to 15% making it the third largest major in the UK.
Strong carryover momentum from Michael Buble, Paolo Nutini, and Muse contributed to the improving UK results.
Michael Buble's album, Crazy Love, released in October 2009 has passed the five million mark in global tracked equivalent album units.
Warner Brothers Records operates Michael's merchandise and fan club businesses and Michael's sold out Arena Tour in Europe and the US is reaping benefits for both businesses.
Michael recently won four Juno Awards including Album of the Year, Single of the Year, Pop Album of the Year, and the Fan Choice Award.
Looking ahead on the new release front, Warner Brothers Records' developing artist, Jason Derulo, continues to gain traction on a worldwide basis.
Jason recently became the first solo male artist in the 17-year history of Billboard's Pop Songs Radio Airplay Chart to notch consecutive number one hits with his first two entries.
His two hit singles have together some more than 5.6 million tracks in the US since release.
Both appear on his autonomous debut album which was released in March and has sold over 1 million track equivalent album units globally to date.
As we've previously said, we remain confident about our full year release schedule, recognizing that it will be backend weighted.
We have multiple artist development stories beginning to take shape at Atlantic Records, including BOB, Trade Songs, Plan B and the Zac Brown Band.
Each of these artists has had number one radio singles in their respective genres and have or will have album releases in the fiscal year.
The success to date of these artists lays the foundation for continued growth at Atlantic which for the last two years has been the number one label in the US.
Taking a closer look at our digital business, we recognize both our challenges and our growth opportunities.
Industry wide, US digital unit growth for the quarter was up 5% over the prior year quarter, consistent with the growth rate for the December quarter.
Our US recorded digital revenue grew about 6% for the quarter while we sustained strong growth in our international digital revenue.
International revenue was boosted by the implementation of variable pricing downloads, the growing global demand for iTunes and iPhones, and new business development activity.
On a constant currency basis, our international recorded music digital revenue increased 20% year over year and 4% sequentially.
Needless to say, achieving robust digital gains remains the top priority and is one of the key elements of our long term growth strategy.
We expect digital revenue growth to continue over time driven by several factors including the rollout of new mobile products and business models on a global basis, the advance of device capabilities and network technologies, and the continued traction of access models which bundle mobile devices, ISP services or consumer electronics, with access to music.
We continue to transform our business within the music value chain while broadening our revenue mix in the growing areas of the music business such as sponsorship, fan clubs, artist websites, merchandising, touring, ticketing, and artist management, among others.
This quarter, nontraditional revenue returned to about 6% of our Recorded Music revenue as the results of our concert promotion business fluctuates based on the timing of touring schedules.
Essentially all of the contracts we enter into with new recording artists today are expanded rights deals.
With over half of our active global artist roster now signed to expanded rights deals, we continue to believe the growth in nontraditional Recorded Music revenue attributable to these deals will help to offset declines in physical revenue over time.
Turning to Warner/Chappell Music, this business enjoys very attractive financial attributes such as high conversion rate, OIBDA free cash flow, and favorable working capital dynamics.
This quarter Warner/Chappell's revenue contracted and digital growth, driven primarily by growth in streaming services and Internet radio, did not offset declines in mechanical performance and synchronization revenue.
Mechanical declines tracked the physical declines in the Recorded Music industry.
As we have previously discussed, we have a global plan to drive long term growth at Warner/Chappell featuring three key principals.
Supporting the development of our Music Publishing catalog by continuing to invest in talent song writers and complementary acquisitions, building new opportunities to exploit the value of our existing catalog, and expanding our leadership position in digital music.
Building on these principals, Warner/Chappell continues to invest in the Production Music business.
Production Music is a complimentary alternative to licensing standards in contemporary hits for television, film, and advertising producers.
This is the high margin area within our music publishing business and further diversifies our revenue streams.
Recently we made two acquisitions in the space, the Groove Addicts Production Library in the US and Carlin Production Music in the UK.
The Groove Addicts library includes a vibrant film trailer business in addition to owned content and some published content.
Film trailers have grown to become one of the largest generators of revenue in production music.
Carlin is a well established company that will add scale to our production music operations in Europe.
And these businesses supplement our previous Production Music acquisitions.
We are also focused on increasing our level of activity in synchronization licensing.
One recent highlight at Warner/Chappell was the Power of Madonna episode from Fox's hit television series, Glee.
For the first time, Glee aired an episode using the music of a single artist, in this case 12 Madonna songs, 10 of which are majority controlled by Warner/Chappell.
In conjunction with the episode, Fox released a 7-song soundtrack featuring the cast of Glee performing Madonna songs which has been selling well.
In addition, Warner/Chappell has always had a strong connection to Broadway musicals and has maintained its uniquely expansive and valuable catalog of theater music and standards.
This Broadway season contains some exciting Tony nominated entrants featuring Warner/Chappell music.
In March, Twyla Tharp's Come Fly Away, with the music of Frank Sinatra as its soundtrack opened to critical acclaim.
This show uses 12 Warner/Chappell songs and 13 sound recordings licensed from Warner Music Group's Frank Sinatra's Enterprises joint venture.
That venture is also operating all of the retail merchandise associated with the show.
April 20th marked the premier of American Idiot, a rock opera based on Green Day's album of the same name.
This exciting musical scored a rave review from the New York Times.
Warner/Chappell administers all of the songs in the show and Warner Brothers Records just released the original cast album which features two performances from Green Day.
On the A&R front, Warner/Chappell is continuing its efforts to strengthen its catalog to artist signings and extensions of existing agreements.
We recently extended our worldwide co-publishing agreement with pop songwriter Claude Kelly which includes Kelly's shares of recent hit songs recorded by Miley Cyrus, Britney Spears, and our own Jason Derulo.
In addition, Warner/Chappell recently extended its co-publishing/co-administration agreement with Lady Antebellum band members Dave Haywood and Charles Kelly.
This group has been enjoying critical and popular success lead by a triple platinum single which spent the past 37 weeks on Billboard's Top 100 Singles Chart and won Song of the Year at the Academy of Country Music Awards.
Before moving onto our financials, let me take a moment to describe some progress we are making on the public policy front.
The momentum continues to build all over the world to implement graduated response programs in which ISPs notify and eventually institute sanctions on copyright infringing customers.
More than a decade after digital piracy began its attack on content businesses, graduated response programs are finally gaining traction and are being implemented through legislation or voluntary agreements in a number of countries throughout Europe and Asia.
France was the leader in Europe enacting its landmark legislation in 2009.
In an important milestone, last month the UK passed the Digital Economy Act.
Under the new law, ISPs in the UK will notify subscribers whose accounts have been reported to be infringing and a Secretary of State will be able to require ISP to implement technical measures to limit internet access for serious repeat infringers.
We are pleased that the United Kingdom has joined a growing list of countries that have established a strong framework to enable creative industries to thrive in the digital world and hope that these efforts will serve as an example to other nations.
And we are heartened to see ISPs around the world recognize the critical role that they play in helping to fight the piracy that occurs over their networks.
Steve will now run through the financials before Michael, Steve and I take your questions.
Steve Macri - EVP & CFO
Thank you, and good morning.
Revenue data I will provide today is on a constant currency basis.
For the three months ended March 31, 2010, we reported revenue of $662 million, down 6% year-over-year.
Domestic revenue declined 7%, while international fell 4%.
As expected, revenue continued to be affected by a light release schedule, recording music industry pressures and the general economic environment.
As we continue to execute on our strategy to transition to digital, our quarterly digital revenue grew 12% to $199 million, or 30% of total revenue.
Digital revenue was up 11% sequentially due primarily to strong international download growth.
About 65% of our digital revenue was generated in the US, and 35% was generated internationally.
Our operating income before depreciation and amortization, or OIBDA, grew 9%, and our OIBDA margins expanded to 13% from 12% in the prior year quarter as we continued to carefully manage costs and leverage our highly variable cost structure.
Looking at our different business segments for the quarter, Recorded Music revenue fell 5% to $534 million as digital gains were more than offset by expected declines in physical revenue.
Recorded Music digital revenue grew 11% from the prior year quarter to $189 million, or 35% of total Recorded Music revenue.
That is up from 31% in the same period last year.
International Recorded Music digital revenue grew 20% as iTunes continues to gain traction outside the US.
Domestic Recorded Music digital revenue grew 6% to $117 million.
This represents 47% of domestic Recorded Music revenue as compared to 41% in the same period last year.
As a result of ongoing cost management, as well as efforts to manage our highly variable cost structure, Recorded Music OIBDA grew 9% year over year.
Moving on to our Music Publishing business.
Music Publishing revenue of $134 million was down 6% versus the prior year quarter.
Synchronization revenue declined 8% and performance revenue fell by 11%.
Mechanical revenue declines of 9% tracked the overall weakness in the physical Recorded Music business.
Partially offsetting these declines, digital revenue grew 63% to $13 million or 10% of Music Publishing revenue.
This reflects the timing of cash collections and the growth in the overall Digital Recorded Music business.
Music Publishing OIBDA increased 11% to $61 million over the prior year quarter, and OIBDA margin expanded 5.1 percentage points to 45.5%.
The margin expansion is primarily the result of an adjustment in royalty reserves and our continued focus on maximizing the profitability of our publishing investments.
Turning to our balance sheet and cash position, we continue to execute on our effective balance sheet strategy.
We ended the quarter with a cash balance of $383 million, up sequentially from $339 million at December 31, 2009.
Free cash flow declined to $54 million from $125 million in the prior year quarter.
Our free cash flow is calculated by taking cash provided by operating activities of $93 million less capital expenditures of $8 million and cash used for investments of $31 million.
There are several contributors to the change in free cash flow including the $31 million in cash paid for Music Publishing investments included the two Warner/Chappell Production Music acquisitions that Edgar previously described, lower year over year sales, and the timing of sales and collections versus the prior year.
Looking forward, we remain confident in our ability to generate significant free cash flow this fiscal year as we have in the past.
Our taxes continue to benefit from our tax planning efforts resulting in a decrease in income tax expenses.
We had a tax revision of $2 million, and net cash taxes of $6 million on a pre-tax loss of $26 million.
We generated a net loss of $25 million, or $0.17 per diluted share compared to a net loss of $68 million or $0.45 per diluted share in the prior year quarter.
As a matter of policy, we do not provide financial guidance.
As you know, this business traditionally includes fluctuations based on our Recorded Music release schedule and associated marketing and promotional expenses.
Recognizing that our third quarter release schedule is extremely light, we remain confident in our overall release schedule for the fiscal year .
I will turn the call back to Edgar for closing
Edgar Bronfman - President & CEO
Thanks, Steve.
I am pleased with our ability to consistently deliver stable results even as we work to transform our business.
We continue to lead the industry's transition to new digital formats and platforms.
We're seeing meaningful diversification in our revenue streams as we move into new growth areas.
We continue to generate healthy free cash flow, and we are delivering solid performance in our core Recorded Music and Music Publishing businesses.
I would like to reiterate five critical strategies in which we continue to focus.
Manage our balance sheet by generating significant free cash flow while controlling our overhead costs and other expenses.
Strengthen our digital leadership through a combination of consistent execution on our current business model and development of new business models.
Enhance the value and growth of Warner/Chappell.
Monetize businesses in growing segments of the music industry by expanding partnerships with artists and building relationships with consumers.
And invest in A&R marketing and promotion, which remain the core strengths of our Recorded Music and Music Publishing businesses.
Michael, Steve and I look forward to answering your questions.
Thank you.
Operator, would you please open it up to Q&A?
Operator
(Operator Instructions).
Bishop Cheen, Wells Fargo.
Bishop Cheen - Analyst
Hi, everyone.
Thank you for taking the questions.
Edgar, two questions.
The release schedule, I think Michael just said it's going to be light in Q3.
It sounds like the backend better release schedule is all going to be compacted into that September quarter.
And second, I didn't hear you talk a whole lot about subscription models and/or an update on progress in royalties in the US.
Can you give us your view on that?
Edgar Bronfman - President & CEO
Okay, Bishop.
First of all, you heard Steve correctly, the release schedule for Q3 is light.
It's weighted towards Q4, not dissimilar from last year where we had a relatively light Q3 and a much stronger Q4.
So nothing terribly unusual, but that's just the way the release schedule is laying out quarter to quarter as we see it sitting here today.
In terms of progress particularly on royalties in the US, as you know, the Performance Rights Act has moved out of Committee.
Democratic leadership remains committed to seeing that legislation through.
We're very hopeful that we'll be able to get it through but obviously legislation is unpredictable both as to timing as well as outcome.
So we remain hopeful, but to be honest, we can't make any promises.
And I did refer to subscription models which we're really referring to more as access models.
But we do believe that there will be significant growth in bundling the access to content, particularly music, with the sale of a device or a subscription from various ISPs around the world.
Bishop Cheen - Analyst
So you think that that's more evolutionary as the penetration of Smart Phones, iPads, etc., develop?
Edgar Bronfman - President & CEO
I do.
I think the number of Smart Phones in increasing at an extraordinary rate and the ability for both devices and network operators, particularly when they pay attention to very facile user interfaces, the opportunity for them to add value to their customers is significant.
And therefore we do see significant interest from ISPs and device manufacturers in this area and do see it as an area of continued growth for the Company.
Bishop Cheen - Analyst
All right.
Thank you, Edgar.
Operator
Laura Martin, Needham.
Laura Martin - Analyst
Good morning.
Thanks for taking the question.
A couple of things, Edgar.
Could you give us -- it seems like the digital growth has really kind of slowed structurally.
It sounded to me like it was up 12%.
Could you give us what the industry wide physical decline was in the quarter and what's your best guess for when the crossover point is when digital, which is now I guess 30% of your revenue, will crossover the physical decline point?
And then the second point is you see markets are really volatile around what's going on with the Euro increase in Germany and I'm just curious as to how much of your revenue comes in in Euro -- how much of that Euro base kind of volatility right now would affect your earnings as the markets worry about what's going on in Europe.
Thanks.
Edgar Bronfman - President & CEO
I think maybe I'll let Steve take a crack at that, Laura.
If you need more, I'll come back to that.
Steve Macri - EVP & CFO
So with regard to the overall physical declines for the industry for the quarter, that was 14%.
So as digital, as we've noted in the past, as digital becomes a bigger part of our business, it's going to be more highly correlated with our overall release schedule.
And then with regard to the effect of the Euro on our business, we do have somewhat of a natural hedge in our business that the revenues not only borne in the foreign territories, but also the majority of the expenses for those records are also in the international territories as well.
So from an OIBDA standpoint, the flow through from an impact on FX is minimal.
Laura Martin - Analyst
And the crossover point, if we've got physical down 14%, digital up 12%, and digital is 30% of our revenue today, when do you think the crossover point is once digital can get big enough to offset these physical declines?
Edgar Bronfman - President & CEO
So, Laura, it's Edgar.
A couple points.
You're mixing a little bit of apples and oranges there.
The 14% in physical decline was in the US.
The 12% growth was on a global basis.
Digital growth in US was actually slower at about 5% to the industry, 6% for Warner.
But I think that masks some strong trends even so.
The international revenue, digital downloads were up significantly more than 20%, but we had a number of the mobile deals and other things flow out of this particular quarter.
So I think structural growth of digital downloads and the flight to iTunes and iPhones continues to be very, very strong on a global basis.
We have resisted predicting when we think digital will outpace, digital growth will outpace the physical decline, and I'd like to continue resisting that prediction as I will invariably be wrong.
But obviously the fact that 47% of our digital revenue in the US was digital all bodes well for a turn, but predicting when that comes is probably a little too mysterious for me.
Laura Martin - Analyst
Okay, thanks so much, Edgar.
Operator
Ingrid Chung, Goldman Sachs.
Ingrid Chung - Analyst
Thanks.
Good morning.
So I guess first one for Steve and then another one for Edgar.
I was wondering what percentage of your costs are fixed versus variable now and how much in terms of cost cutting do you think is left?
Or will margins just improve on a mix shift from physical to digital?
And then for Edgar, on the last call you said that you were looking for ways to increase value to equity holders.
I was wondering if you could give us an update there.
What do you think are the best ways to invest Warner Music's cash?
Steve Macri - EVP & CFO
Sure, good morning, Ingrid.
With regards to the percent of costs that are fixed, roughly 20% to 25% of our costs are fixed and the rest is variable.
And that variable infrastructure, being able to leverage that, is actually reflected in our OIBDA margins in this quarter.
And given the light release schedule, we don't have a lot of the marketing promotion expenses that you would have to support the records.
With regards to cost cutting, we continue to make cost cuts to our fixed overhead, either eliminating that overhead and/or moving it from fixed to variable.
So in the current quarter we had a couple million dollars of restructuring.
We continue to make those actions.
Given that it's one-year anniversary of our refinancing, that gives us a lot of flexibility and we've taken advantage of that flexibility and taken actions to reduce overhead.
So while it's more difficult to take costs out, we'll continue to do so.
And it's not just a matter of taking costs out, it's also a matter of making more efficient processes.
So a great example would be our supply chain where we've taken a lot of effort to proactively work with our physical retailers and that's showing up in the current quarter's returns rate being down a couple of points year over year.
Edgar Bronfman - President & CEO
Ingrid, just in terms of your question on increasing value to equity holders and what we're going to do with the cash, as I said, we continue to generate strong cash flow.
We will obviously look to see whether or not there are acquisitions in the music space that we think can add incremental value to shareholders.
But there are lots of ways for us to use the cash that we think can create incremental value to shareholders over time.
And those obviously, we all know what those menu of options are from paying down debt to making acquisitions to paying dividends to doing all sorts of things.
And when we know exactly what route we're going to take, we'll obviously be happy to tell the market.
Ingrid Chung - Analyst
Okay, great.
Thank you.
Operator
Jason Bazinet, Citigroup.
Jason Bazinet - Analyst
Thanks so much.
I think you guys are doing a solid job in this transition from physical to digital.
But when we ultimately get to a digital centric world, I have two questions.
Are you concerned at all about the prospect at least in the US of Apple having monopolies in like power over the industry?
And two, what sort of changes do you see on the horizon in terms of breaking the Apple lock on digital music?
Thanks so much.
Edgar Bronfman - President & CEO
Jason, it's Edgar.
First of all, thanks for your nice comment.
I think as the world becomes more digital, clearly Apple has proven to be frankly by far and away the most adept software and hardware manufacturer out there in delivering content to consumers in a seamless and very attractive consumer experience.
And they've reaped the benefit of doing that with tremendous growth in not only a much smaller part of this which is actual content sales, but in the device sales which generate by far the vast majority of Apple's revenue and profit.
But I do think that Apple will continue to execute extremely well and will remain a very tough competitor for other device manufacturers, network operators, and such.
But I do think that Apple's growth has widened the range of competition from just now consumer electronics manufacturers to network operators, to device manufacturers, to all kinds of other companies.
And I think that's probably good for the music industry when we see more competent coming into the market.
But no one's gotten very rich betting against Steve Jobs and I certainly don't want to be the first one to do it.
Steve has been an extraordinarily talented chief executive and he's done a phenomenal job at Apple and Apple continues to deliver great experiences for consumers.
But I would also add as one last comment that Apple so far has never based its growth or its appeal, on discounted pricing.
Not on its devices, not on its product, and not on its content.
And I think as they grow their worldwide business and as their business grows with other of its competitors over time, that the value of content will continue to be apparent in its ecosystem and other ecosystems as well.
Jason Bazinet - Analyst
But if I can just follow up, but the way you see the world today, you don't see an implicit subsidy that's going on where Apple is sort of, I don't want to say undercharging, but maybe not maximizing the value of your content to subsidize -- subsidize is too strong of a word, but at least push all of the value to the device?
Because on the PB side of the world, we see folks that are quite reluctant to go down this path because they perceive that there's some sort of cross subsidization going on.
In other words, I think if I'm hearing you correctly, there is not a big effort afoot within the music industry to sort of alter what's happening today in the digital world.
Is that right?
Edgar Bronfman - President & CEO
I think if you look at what's happening in other industries, particularly the book industry where they are working to control their own retail pricing, we've said from day one that we want to control retail pricing or at least be able to make our own suggestions to retailers rather than be essentially dictated to.
And we made great progress with Apple last year with the introduction of variable pricing.
And obviously it's our hope that we can continue to make progress and continue to advantage content in a digital world.
But I can't say if there's a specific initiative today with Apple to -- I think we need to sort of digest and the consumer needs to digest this first move to variable pricing.
And once that happens and is happening, then I think the next set of conversations are probably due.
But that's not happening today.
Jason Bazinet - Analyst
Okay.
Thank you very much.
Operator
Tuna Amobi, Standard & Poor's.
Tuna Amobi - Analyst
Great.
Thank you very much and good morning.
So just a couple of quick questions.
First, on the Apple, Edgar, even given all the glowing comments that you just made, were you surprised about their position to shut down their LaLa service?
And if so, how do you think that affects the evolution of the access model which you've spoken so much about?
It seems like their view of the world is a little different than how you guys would like the digital arena to continue to evolve.
What do you read into that and what implication does that have for you?
Edgar Bronfman - President & CEO
Well I think I'd probably like not to speculate quite honestly on what Apple's plans are or how it can use the really interesting technology that it acquired in the LaLa acquisition.
I really think that's a question that Apple management should answer rather than have Warner Music Group management answer that.
Tuna Amobi - Analyst
But you don't see that having an impact at all over your iTunes base, right?
Edgar Bronfman - President & CEO
I think it's yet to be seen what the acquisition of LaLa will be to the iTunes service.
I don't think Apple has made that clear to the market and so I wouldn't suggest that it will not have an impact, but I'm simply not going to speculate what impact it will have.
And Apple is not just, is not currently a retailer that's involved in an access model or a subscription model.
So Apple's growth to me is independent of the growth that we foresee in other business models other than the straightforward download model that Apple has pioneered.
Tuna Amobi - Analyst
And just on the iPad, are you having any conversations right now about possibly developing any apps for the iPad, specifically on the music video side?
And do you see that as a large opportunity?
Edgar Bronfman - President & CEO
I wouldn't characterize the opportunity as being large in the near term, but I would say that the iPad, including being a great device, is obviously quite visually oriented, much like the iPod or the iPod touch devices have visual elements, but also more focused on audio.
We have 20 years or 25 to 30 years of catalog of videos and we certainly can do things with our vast catalog of videos as well as apps to create a more visual experience going forward with the music that we release.
So I think we'll evolve as the devices evolve and that's always been the case with the content industry.
But suggesting that that will create a new and large revenue stream in the short term I think is probably more optimistic than I want to be today.
Tuna Amobi - Analyst
And on EMI, Edgar, I'm sure you've been watching developments there pretty closely.
Any update on your thoughts on that as to how things could unfold and any role Warner Music might play in that evolution of EMI?
Edgar Bronfman - President & CEO
Well look, as you're aware, we really try not to respond to rumors and speculation and I would say particularly in light of the heightened media rumors and speculation regarding EMI, I think it's prudent for us not to make any comment in that regard.
Tuna Amobi - Analyst
And lastly a housekeeping question for Steve.
If you exclude the $31 million Warner/Chappell investment, it seemed like free cash decline was still pretty fairly substantial I might state.
I know you mentioned some timing issues about sales collections which evidently might be reversing.
Can you quantify how much of those timing benefits we might expect in the back half of this fiscal year?
Steve Macri - EVP & CFO
Yes, sure.
As you know, in addition to the cash expended on investments, it's really the timing of the sales and when they happen in the quarter.
So the lion's share of our physical revenue in this March quarter happened in the month of March.
So it's not a collection issue, it's just a revenue recognition issue.
So depending on timing of sales of the year you would expect to pick that timing difference up in the back half of the year.
Tuna Amobi - Analyst
How much of that?
Just roughly.
Steve Macri - EVP & CFO
It's millions, I mean a substantial amount.
Tuna Amobi - Analyst
Okay, that's very helpful.
Thank you very much.
Appreciate it.
Operator
Richard Greenfield, EPIG/Pali Research
Richard Greenfield - Analyst
Hi, it's Rich Greenfield.
Quick question on free cash flow, just following up on Tuna's question.
When I look at kind of leaving off frontline last year and leaving off your investments so far this year, I think you're down to like $30 million from $160 million plus last year.
And you both on previous calls have talked about kind of your confidence in the stability of free cash flow and I just wanted to make sure that that was still the case and that you felt like you could continue to keep free cash flow relatively stable for the year.
On an organic basis, leaving off the investments.
And then just related to that, last quarter you mentioned that the European concert business had affected your free cash flow quite negatively.
Was that benefit picked up now or is that actually something you pick up later in the year?
Just wondering how the timing of that kind of flows through because you didn't mention that related to the cash flow this quarter.
Thanks.
Edgar Bronfman - President & CEO
Sure, so with regard to the European concert promotion business, that's all going to be based on the timing of when those tours happen.
So the March quarter or our Q2, is traditionally a low quarter for concerts in general.
So as those concerts happen, they'll be reflected in our cash flow.
With regard to -- you're right, it's roughly $160 million year over year when you adjust for the frontline cash.
The lion's share of that really is twofold.
One is the lower year over year sales and two, it's just the timing of cash collections happened later in the quarter.
So as I said in my prepared comments, we feel extremely confident in our ability to generate cash flow for the rest of the year as we have in the past.
Richard Greenfield - Analyst
Thank you.
Edgar Bronfman - President & CEO
Well, everyone, I appreciate your time and attention to our results and we look forward to talking to you again in a few months.
Thanks and have a good day.
Operator
That concludes today's conference.
You may disconnect at this time.