Warner Music Group Corp (WMG) 2011 Q4 法說會逐字稿

Welcome to the Warner Music Group's fourth quarter earnings call for the period ended September 30, 2011.

At the request of Warner Music Group, today's call is being recorded for replay purposes, and if you object, you may disconnect at any time.

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

(Operator Instructions) Now, I would like to turn today's call over to your host, Mr.

Will Tanous, Executive Vice President, Communications and Marketing.

You may begin.

Good morning, everyone.

Welcome to Warner Music Group's fiscal fourth quarter 2011 conference call.

Both our earnings press release and the Form 10K we filed this morning are available on our website.

Today, our CEO, Steve Cooper will update you on our business performance and strategy.

Our Executive Vice President and CFO, Steve Macri, will discuss our financial results, and then both of them will take your questions.

Before Steve'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.

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

Our expectations, beliefs, and projections are expressed in good faith, and we believe there is a reasonable basis for them; however, there can be no assurance that management's expectations, beliefs, and projections will result or be achieved.

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

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

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

Revenue data we provide on today's call will be in a constant currency basis.

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 Steve Cooper.

Thanks, Will.

Good morning, everyone, and I appreciate you taking the time to join us.

This is my first conference call as the Company's CEO, and it's my pleasure to speak with you this morning.

First of all, I'd like to wish everyone a very happy and safe holiday season.

This has really been a year of progress and evolution for Warner Music Group, including the completion of our acquisition by Access Industries on July 20, 2011.

In the quarter and throughout the fiscal year, WMG continued to perform well.

We increased OIBDA margins excluding expenses related to our acquisition by Access, and Steve Macri will discuss this in more detail.

Our improvement was the result of management's cost containment programs and the continued benefits of the Company's diversifying revenue mix.

On an industry basis, after more than a decade of declining sales, the US recorded music industry is beginning to show signs of stabilization with retail units up 5% in the first nine months of the calendar year.

While there has been a slight dip in the December quarter to date, year-to-date, the US industry remains up 4%.

We are hopeful that these positive trends continue, albeit we recognize that results can vary from quarter to quarter.

While WMG has successfully gained US market share over the past five years, our market share did slip a bit this year largely due to a light release schedule and the underperformance of some of our key releases earlier in the fiscal year.

While market share gains are an important metric, they are not the only metric by which we measure our recorded music performance.

We focus on total contribution from our artists, considering margins, and our overall return on investments along with market share and unit sales.

Measuring ourselves against a number of key metrics requires that we take a more disciplined approach to our business, releasing albums only when they are best positioned to achieve success, maintaining a pricing strategy that appropriately recognizes the value of our music, and investing for the long term for multiple facets of an artist's career.

Adhering to this more disciplined approach, the Company delivered a solid quarterly performance.

In recorded music, as expected, physical declines continued, but even against this back drop, we expanded our 360 revenue to 17% of recorded revenue -- recorded music revenue this quarter, its highest percentage ever.

We continued to grow our digital business to 34% of recorded music revenue, which is up from 30% in the prior-year quarter, and we neared a milestone figure as quarterly digital revenue accounted for approximately half of our US recorded music revenue.

In music publishing, we continued to increase our operating and OIBDA margins.

As expected, due to the combination of severance payments and uses of cash related to our acquisition by Access, we finished September with a smaller cash balance than we had in June.

While Steve will discuss this topic in further detail, I'm confident in the Company's continued ability to generate meaningful free cash flow over the long term, and we are committed to delivering on this goal in the quarters to come.

While some of the exciting industry developments this year, we've continued the transformation of our recorded music model.

In digital, Apple is continuing to grow its global footprint, expanding its iTunes business into new territories.

In addition, they've launched iCloud and recently added iTunes Match, both of which have garnered very positive reviews and we believe will provide benefits to the industry by fostering additional competition.

Spotify also launched in the US and continues to expand internationally, having recently announced that they have 2.5 million global subscribers, a gain of 0.5 million new subscribers in last two months.

In addition, consistent with our 360 strategy, we continue to grow a number of our diversified revenue streams such as concert promotion, merchandising, artist management and direct-to- consumer sales and ticketing.

This approach has more closely aligned the Company with our artists.

Today, we are pleased that 70% of our active global recorded music roster is signed to 360 or multi-rights deals.

For the sake of clarity, 360 deals include an economic participation in touring and at least two other non-traditional rights, such as merchandising or fan club, while multi-right deals include an economic participation in more than just the sale and licensing of music.

We're also happy to see a number of our emerging 360 artists gain traction, including Bruno Mars, Wiz Khalifa, and Cody Simpson.

In Fiscal 2011, digital and 360 revenue grew to a combined 46% of recorded music revenue.

That's up from 38% in fiscal 2010 and from virtually nothing in 2004.

Digital represents 11% of music publishing revenue for the year, and due to the nature of that business, where other areas such as performance and synchronization continue to grow, digital will always represent a lower percentage than we see in recorded music.

In music publishing this fiscal year, while performance and digital revenue were flat, our synchronization business enjoyed healthy growth.

Warner/Chappell CEO Cameron Strang is focused on continuing to execute on our synchronization business as well as globalizing our production music business and creating consistent investment strategies designed to increase margins.

As always, for both recorded music and music publishing, A and R, and marketing and promotion remain at the core of our business activities.

We will continue to take the disciplined approach to recording artist and songwriter signings that this management team has practiced since 2004.

To help further that goal, in August, we announced that our recorded music division would be managed on a global basis as a unified division of WMG and that Lyor Cohen would expand his responsibilities to serve as its Worldwide CEO.

We recently made some management changes to our international operations to reflect this new approach.

This global unified structure, which had already been in place and effective in our music publishing business, gives our operating leaders greater flexibility and accountability while reducing costs and enabling each of our divisions to operate more efficiently on a worldwide basis.

Deeply ingrained in our culture is the belief that the music business offers great opportunity for those who understand where the business is going and have a strategy in place to get them there.

Access Industries has indicated that they are taking a long-term view on their ownership of WMG and both our Board of Directors and the Management Team continue to direct our investments with these long-term goals in mind.

We will keep the importance of working capital and cash generation firmly in sight while also looking to make disciplined, targeted investments that enable WMG to maintain its prominent position in the music industry.

Before I hand land the call over to Steve, I'm sure that many of you have questions regarding the recent EMI auction.

As is publicly known, WMG participated in the auction.

Even though an acquisition of EMI offered significant synergy opportunities for us, as disciplined investors, we were not willing to pay a price for EMI that would not have provided an adequate return on our investment.

Access has indicated that acquiring WMG has always been viewed as a stand-alone independent transaction and was never made on the basis that there would be a subsequent acquisition of EMI.

Going forward, we will continue to seek smart, strategic opportunities to drive growth but only as they fit with our financial metrics and model.

Because of our confidentiality obligations with respect to EMI which continue, we're not going to be able to elaborate further on this particular issue.

With that, let me take a moment to thank Steve Macri.

We recently announced that Steve has decided to leave the Company.

Brian Roberts, who currently serves as Senior Vice President and CFO of Warner/Chappell Music will become WMG's Executive Vice President and Chief Financial Officer effective tomorrow.

I appreciate and we all appreciate all of the good work Steve has done here, and we're thankful that he's taken the time to help Brian make a smooth transition to his new position.

Finally, I wanted to be sure you knew that Edgar Bronfman, Jr.

has informed the Board that due to other commitments, he will transition from the role of Chairman effective January 31, 2012.

Edgar will remain on the Board and a new Chairman will be appointed in due course.

Given Edgar's vision and his years of experience in the industry, as a Director of WMG, he will continue to be an important part of our leadership, and we all look forward to his many future contributions.

I'll now turn it over to Steve who will briefly discuss our financial results.

Thanks, Steve, and good morning.

Let me start by saying how much I've enjoyed my time at Warner Music Group.

I'll miss working with the talented employees an artists that have made this a great place to work for the past seven years.

I will mostly limit my comments this morning to details not found in today's press release.

This quarter, in the face of a light release schedule, we delivered OIBDA and OIBDA margin expansion, excluding expenses incurred related to our acquisition by Access and we continue to grow our digital and 360 revenue both on an absolute basis and as a percentage of revenue.

In fact, digital revenue represented nearly half of our US recorded music revenue in the fourth quarter.

Digital revenue which grew 2% to $210 million was fueled by continued growth in global digital downloads and by newer revenue sources from streaming and subscription businesses like Spotify.

360 revenue grew to 17% of recorded music revenue or $94 million as compared to 12% in the prior year quarter.

As Steve mentioned, this is our highest percentage to date.

These results were driven by our European concert promotion business and by expanded rights deals with certain artists.

Music publishing's revenue decline this quarter was largely the result of time of deals and collections, particularly as it relates to synchronization and digital revenue.

For the full fiscal year, synchronization revenue grew and digital revenue was flat.

Managing both our costs and our cash flow remained top priorities.

This quarter, we had some unusual expenses related to our acquisition by Access, $46 million in professional fees and $14 million in stock compensation expense.

We also took quarterly severance charges of $10 million compared to $34 million in the prior year quarter.

As we announced last quarter, we have targeted cost savings of between $50 million and $65 million over nine fiscal quarters.

We are pleased to say that as of September 30, we had already achieved $34 million of annualized cost savings, largely as a result of our migration from a public Company to a private Company with public debt.

We are on track to achieve our target and will continue to update you on our progress.

With these and other continued cost management efforts, we will continue to focus on driving further efficiency throughout the organization.

Turning now to our balance sheet and cash flows.

As you know, in connection with the acquisition by Access, we closed bond offerings in July totaling about $1.1 billion and refinanced certain of our existing indebtedness.

As a result of the refinancing in the September quarter, interest expense increased to $72 million from $47 million.

The refinancing resulted in $19 million in tender call premiums and $15 million of accrued interest in connection with the debt obligations that were repaid in full.

In addition, the new debt obligations were issued with higher interest rates.

As of September 30, 2011, our cash balance was $154 million, down from $290 million at June 30, 2011.

This quarter, we had a number of uses of cash related to our acquisition by Access which were out of the ordinary, including $179 million in cash outflows paid to shareholders and option holders net of capital contributions, $70 million in financing fees related to new debt obligations, $46 million in professional fees, $44 of which were paid during the quarter, and $34 million in cash paid for tender call premiums and interest related to the refinancing.

I also wanted to take this chance to remind you that the December quarter is traditionally a negative working capital quarter due to marketing outlays and the time of collections on holiday sales.

We continue to be keenly focused on cash management and remain comfortable with our ability to add cash to our balance sheet over the course of this fiscal year.

Free cash flow was negative $52 million compared to positive $25 million in the prior-year quarter.

The decline of free cash flow reflected our tender call premiums and interest paid as well as a decline in OIBDA driven primarily by the expense related to the acquisition by Access.

Free cash flow for the quarter is calculated by taking cash used by operating activities of $34 million, less capital expenditures of $14 million and cash used for investments of $4 million.

Looking at the fiscal year, free cash flow of negative $221 million compares to positive $65 million in the prior year.

Significant factors that impacted our free cash flow in the fiscal year of 2011 included $87 million additional investments, including the previously announced acquisitions of Southside Independent Music Publishing, production music company 615 Music, and the remaining 26.5% of Roadrunner Records, $53 million in professional fees associated with our acquisition by Access, $51 million of which were paid in fiscal year 2011, $41 million additional premiums and interest expense due to the July 2011 refinancing, and $23 million of additional cash severance expense.

Overall, we are pleased with our cost management, margin expansion and continued business transformation this year.

We are confident that our continued focus on both recorded music and music publishing artist development, our innovation of the digital space, and the continued expansion of our 360 business will position us very well for the future.

With that, Operator, please open the line for questions.

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

Hi, everyone.

Happy holidays.

Steve, best of luck to you.

Its been great working with you the last few years.

A question on covenant OIBDA.

The adjusted OIBDA detailed in the press release, as always, but for covenant purposes, there was very specific add-backs in the July recap, about $75 million added back all-in including $61 million for severance, $12 million for non-cash comp, and $2 million for LPO costs.

As we go forward, can you give us details on what the covenant EBITDA is going to be in terms of add-backs?

Good morning, Bishop.

Thanks for your kind words earlier.

With regard to covenant OIBDA, in this current quarter, in the 10-K, you look at Page 43, we do list out some of the key items that you can use that calculate bank covenant OIBDA.

Okay, I just wasn't sure if that was already in the adjusted OIBDA.

I'm looking at it.

The adjusted OIBDA that we disclosed in our press release is around the transaction costs related to the acquisition by Access.

It was not meant to reflect the bank covenant in OIBDA or EBITDA.

Okay.

What we did was we tried to provide a road map on Page 43 in the K to give you some of the key variances between GAAP and the bank covenant EBITDA.

That's helpful.

In future releases, we'll consider presenting more detail, but for the current quarter, that Page 43 is your best place to get that road map.

Okay, and then one other question, and I'll move on.

If you can, throughout the rest of the call, the key growth drivers for OIBDA and earnings -- you talked about the $50 million to $65 million of cost savings over [non-Q's] $34 million already captured.

Can you give us some other key growth drivers that you are targeting as we look out to fiscal 2012?

Thanks.

I think one of the key growth drivers in OIBDA is going to be from the continued diversification of our revenue mix.

So as we've disclosed in previous quarters, the gross margin on a digital record is much greater than that of the physical record.

And then as our 360 artists continue to grow into global brands, the additional 360 income that will accrete from those artists will be at a higher margin over time.

And while obviously, the underlying that that is the continued cost management that the Management Team has executed over, call it, since 2004, since the Company was actually acquired by Time-Warner, that won't change.

Okay, thank you.

The next question is from Andrew Finkelstein from Barclays Capital.

Hi, guys.

Good morning.

Just looking at top-line trends, I know you said a light recording schedule, but it does look like, particularly in the US at least, potentially significant underperformance relative to the industry on both maybe physical and digital.

It looks like digital was maybe up only 3%.

And I guess the question is, I mean we're seeing cost saves, but do you think the Company's been investing enough on the A&R side, and do you expect to be able to close the gap to the industry performance as we look forward, December quarter and beyond?

Well, both Steve and I will try to respond to you, Andrew.

I think that with respect to our slippage this year and our underperformance relative to the industry, as far as I've been able to ascertain, there is a tremendous amount of momentum created either by a very robust versus a light release schedule and the performance of your big ticket artists.

And frankly the schedule this year was light, and I think that the Company's expectations with respect to some of the key releases, frankly, fell short.

We have a very nice release schedule this year.

In this current quarter, I expect that the way Buble's Christmas album is performing, the Nickelback release, the Black Keys release -- hopefully, if they continue to perform well, the dip that we saw in fiscal 2011, we'll be able to claw back some of that.

And I'm hopeful that with a strong release schedule, that will continue throughout the year.

With respect to A&R spending, there has been a signed off view for 2012.

It is consistent with historical spending and finding new artists and signing them in a well thought out fashion.

There is a consistent investment policy on the music publishing side, and hopefully, now that the sale process is behind us and that we have provided both the recorded music side of the business and the publishing side of the business with more flexibility and accountability, those changes will begin to take hold, and personally, I'm looking forward to a nice year.

Steve, do you want to add anything to that?

Hopefully, that was responsive, Andrew.

Yes, no, so because you talked about being smart about shares, so there's no conscious decision to shrink your share internationally or domestically recorded.

No.

And again, as we said, share is a metric, and while it's an important metric, it's only one metric.

There is no conscious strategy or tactic to either expand or shrink share.

The view is to identify artists that are emerging and that have emerged and continue to support their growth.

The view is to do that in a focused, intelligent way and to continue to invest on both sides of our business to accomplish those goals.

There is, however, no strategy or the tactic that says let's invest X in order to get Y share.

The increase in share as a metric ought to come through the acquisition and the growth and the development of the talent of our artists on both sides of the business, but not just by running wild and spreading cash like a buffet lunch.

Okay, that's helpful, thank you.

And then just one more for me.

The investment side, the Company made over the last 12 months a few acquisitions.

Do you think that's the right level of investment or acquisition going forward, or should that come down or maybe even go up?

Well, as I think both Steve and I have already said, putting aside the investment in artists, on the A&R side, both in recorded music and publishing.

To the extent we make other investments, it really depends on A, how they fit strategically or tactically in with our plans.

Said differently, they have to be investments that make sense.

And number 2, they have to fit our investment and financial metrics.

So as opposed to taking a shotgun approach, our approach to investing in other than individual artists, on both the recorded music and music publishing side, we're going to take somewhat of a laser-like view as opposed to a shotgun view just to acquire for the sake of acquiring.

It has to be strategic or highly tactical.

It has to fit; the chemistry has to be right, and the financial metrics have to be right.

Otherwise, we're not going to do it.

Okay, great.

Thanks for taking the questions.

Sure.

The next question is from Aaron Watts from Deutsche Bank.

Hi, guys.

Last quarter, currencies had a fairly large swing on reported results.

I didn't see anything in the press release on the quarter this time around.

Should I read into that the currency swings didn't play in?

In the press release, we do show constant currency movements for both the quarter and the full fiscal year.

Okay.

I must have missed it.

So the swings weren't all that significant on a revenue basis.

Remember, from an OIBDA standpoint, it's not going to be that great because most of the expenses generated or incurred to generate the revenue in the foreign jurisdictions is actually within that territory.

There is that natural hedge, but Figure 8 in the press release will have the constant currency.

Okay, great.

Can you just remind me, as you think about leverage as it ties into you potentially making tuck-in acquisitions and how you operate the business, where you'd like to see leverage at over the next year or two?

Well I think the view that was expressed when Access made the acquisition is that we want to have, relatively speaking, a conservative balance sheet.

And albeit I can't recall specifically, and I think our leverage-to-OIBDA ratio before and after cost reduction, we maintained it in the [four] region.

I think if we do any acquisitions of substance -- again, we've already discussed they have to really have a well thought out business fit and they have to be consistent with our financial metrics, which means that acquisitions have to be able to be brought in with the right mix of capital, leverage, and/or equity so that our balance sheet and our conservative approach to our debt structure remains in place.

Under virtually no set of circumstances do we want to end up in a place where we are overlevered by any reasonable measure and end up with balance sheet metrics that, frankly, are inconsistent with our conservative approach.

Okay.

Now, that makes sense.

And then just two, semi-connected, big picture questions for you just on how you're thinking about the strategic destiny of the Company.

I guess first, if we kind of assume the Universal-EMI combination closes as contemplated leaves the industry with one clear market share leader, a second group modestly behind them, and then Warner kind of at around half of the leaders' share.

Can you talk about what that new industry dynamic means with regards to Warner's competitive position, how that new reality impacts Warner's ability to sign artists or distribution economies of scale, things of that nature?

And then I guess the second part of that being -- having just watched EMI split up their recorded and publishing business, albeit under unique circumstances, curious how you think about Warner, with regards to keeping those two under the same roof -- and I suppose with the growing influence of 360 deals that you've talked about, you seem inclined to keep them married, but just how you're thinking about those two different thoughts.

Well let me, I want to be very careful about the first part of your question with respect to EMI because A, we are, as I mentioned earlier, still under the confidentiality agreement.

I think that there is certainly going to be, with your assumption that the Universal-EMI sale is -- or acquisition -- is consummated, there is certainly going to be a different landscape, as you've already pointed out.

I think it's difficult to predict how that acquisition is going to work its way through the scrutiny of the regulatory process and what conditions, if any, that transaction closes on.

But that being said, as I mentioned before, when Access acquired Warners, it looked at Warners as, frankly, a self-contained universe and a self-contained universe that was capable of functioning and producing meaningful results as a stand-alone Company, and I don't believe that the Universal-EMI transaction has changed that view, despite the fact that we can't predict at the moment how the landscape is going to change.

That being said, let me turn to the second part of your question.

I think both on a recorded music side, as well as the publishing side, both are viewed as integral parts of this business.

In fact, my view is that as we move along, that the working relationships between the recorded music side of the business and the publishing side of the business will get stronger, and will, by way of us being able to serve and serve our artists very well on both sides of the business, that by better communication, coordination, both of them will continue to provide the Company with dividends by having them both under the same corporate envelope.

And nothing, at least in my thinking or the Board's thinking, leads me to conclude that that's going to change in the foreseeable future.

Okay, great.

I appreciate your thought, thanks.

The next question is from [Sinnon Kerman] from Neuberger Berman.

Hi, good morning.

One quick follow-up on Aaron's question.

The EMI-Universal merger may lead to some asset sales in order to get through the regulatory approval process.

I was wondering, on this, you're buying a whole companies -- are there any synergies or strategic benefit in owning some of the assets, content, or artists if you will, that could come out of an M&A transaction like that?

Well, we don't comment on M&A transactions, but I will say that we're not in a position today to determine whether there's going to be anything of meaningful value or not meaningful value available out of a combination of Universal and EMI.

I think we're all going to have to see how the regulatory review goes and what conditions, if any, the regulators put on Universal and EMI as conditions to consummating the transaction.

And I think that at this stage of the game, it would be somewhere between pointless and reckless to speculate on whether or not there's going to be any fallout that would be of interest to Warners.

That being said, I'm going to revert to what we said a couple minutes ago, that whenever we look at any acquisition, whether it's fallout from that process, if any, it's really got to be something that fits, that is accretive by way of value, and that fits nicely within our strategic goals and our financial metrics.

Thanks.

Two quick ones if I may.

One, in order to reach your cost savings goal on an annualized basis, how many more quarters of these severance/restructuring charges should we expect to see for you guys to fully realize the run rate?

I'm going to actually dodge that question, so I'll tell you that I'm going to dodge it right up front.

You know, what we've done is, as mentioned, we have realigned both recorded music and music publishing so that they are global businesses run by a global management team, and our objective is from label to label, country to country, continent to continent, to have, relatively speaking, a seamless view of the way we strategize and put in place tactics to run our business.

I am hopeful that that will also lead to a number of operating efficiencies.

As our plans are put in place, and as those efficiencies are realized, I think our investors should expect to see severance charges, but severance charges that, frankly, have appended to them a rate of return that will be associated with streamlining where appropriate and as necessary our businesses.

How long that will last and the specifics, I'm not in a position yet to share with our bondholders.

I would just add, the $50 million to $65 million, the target that we have, not all that cost savings is headcount related.

So, for example, migrating from a public to a private company, there's professional fees, etc., that don't require severance or costs to get to incur or to accrete that benefit.

Got it, thanks.

And the final one for me is, in the past, Warner Music had bank debt in place of the secured bonds, and they obviously carry a pretty high coupon, and your cash expense is high.

I was wondering what your approach is with regards to potentially having banked it in your capital structure again in place of these secured bonds, is that something you would entertain?

It obviously comes with covenants, so I was wondering your thoughts there.

Well, again, as we've said, we're going to take a conservative approach to our cap structure.

Your view about the rates we're paying is spot on, and as I think we all know, the markets have been pretty crazy these last few months.

I think that as we move forward, as we perform against our plans, and as the capital markets hopefully return to something which we can all agree approaches normalcy, that we will continue to evaluate the composition of our existing capital framework and look, if appropriate, at alternatives that will allow us to reduce our cost of capital.

Thanks.

The next question is from Howard Goldberg from Credit Agricole.

Thank you, and good morning.

I have a clarification on what you reported for adjusted OIBDA of $101 million, and I want to be clear whether that is before or after the $10 million of severance charges that you highlight in the press release?

In other words, if I backed out the $10 million would I be at $111 million, or is that what gets me to $101 million?

If you look at the figures included in the press release, the adjusted OIBDA does not back out the severance expense for the quarter.

It only backs out the transaction fees and expenses incurred with regard to the acquisition by Access.

Okay.

So the comparison to the prior year would be to the $85 million in adjusted OIBDA, which is after $34 million in severance charges.

Is that right?

That's correct.

All right.

That's very helpful.

Thank you.

The last question comes from Thomas Cubeta from UBS.

Hello.

You guys ended the year with $150 million in cash.

Can you give us a sense of what percentage of that cash is in the US versus overseas, and are there any issues of repatriation?

And sort of as a follow on to that, what kind of liquidity do you feel that you need in order to operate the business?

So I'll answer the first part of the question and then let Steve answer the second.

From a geographic location where that cash is, it's roughly 50/50 US/international.

From a repatriation standpoint, there is only a small, relatively small fortune of our cash that's in the foreign jurisdictions where it's extremely difficult to try to unlock that cash.

By no means is it trapped.

It just means it costs -- has a fee associated with getting that cash back to the US.

However, as we disclosed in previous quarters, we've implemented a transfer pricing mechanism, in particular, related to our digital revenues debt, we're able to move 100s of millions of dollars from our foreign jurisdictions back to the US in a tax-free and tax efficient manner.

And that's something we implemented roughly 18 months ago.

From a liquidity standpoint, what the optimal level of cash is that we maintain on our balance sheet -- we're comfortable with our cash balance and our capital structure that we have today.

We're centralizing our cash management around the globe, both from a European standpoint and an Asia-Pac standpoint.

So the business, as we talked about in our prepared remarks, will continue to yield and accrete free cash flow during the fiscal year.

So the $150 million is as expected, given all of the cash we used with regard to the transaction, and our ability to generate cash into fiscal 2012; we're confident that we're able to do that.

So we don't have a specific number that we're focused on.

And on the -- with respect to the latter part, what we need by way of adequate liquidity.

When the transaction was done, Thomas, and we looked at the go-forward business plans, the cash they generate, the -- I'm trying to think of the word -- the conversion of our EBITDA into actual cash flow, we're satisfied that that high conversion rate of EBITDA to cash flow, in addition to the fact that we put in a very modestly sized revolver in place, that the free cash flow generated by the operations in conjunction with the work that Steve and the rest of the Financial Group has done by way of centralizing cash management and in conjunction with the revolver.

Between those three, the business is generating more than adequate cash flow to support the operations and service our balance sheet, just embedded into plans that were described to our investors on the road show.

That's number one.

Now, to be crystal clear, if we were to do any acquisition of substance, we would then have to look at the availability of the free cash flow and how that would or would not have to be supplemented with debt and/or additional equity.

So in the normal course, sans that, I'm of the view that the business between the throw-off of the free cash flow, that is a conversion from EBITDA to cash -- the centralized cash management, which has allowed us to -- or will allow us, frankly, to eliminate peaking needs for each of our operations and the revolver cushion, we're well positioned to handle, not only our normal business, but unexpected situations, Thomas.

That's helpful.

And as a second question, just looking at your digital revenue, can you guys give us some color in terms of what that's comprised of?

And is it streaming, is it things like iTunes, and are you seeing a shift with Spotify coming in?

Is that conversation changing?

And do you think Spotify, some of the streaming services are all cannibalistic of iTunes, like track sales?

Thanks.

Why don't I answer the second part and then Steve can kind of give you the sources.

First of all, again, as was described, when we were in the marketplace looking for financing, when you look at Scandinavia, apples-to-apples, where iTunes and Spotify were launched at about the same time, there doesn't appear to be meaningful amounts of cannibalization, where there's been a region where there was an apples-to-apples comparison.

And what I'm told by people that do meaningful in-depth studies, that there are actually people that have a preference to own, which is kind of the iTunes person, and there are people that have a preference to rent, which are the Spotify people.

But I think that the service, and the way it bumps up against iTunes, it's just too new to conclude as to whether or not there is, has been, or will be any meaningful amounts of cannibalization, frankly, in either direction.

That's number one.

Number two, again as we described a number of months ago, when you look at the economics of iTunes and the economics of streaming, again, studies indicate that a typical iTunes customer spends plus or minus $80 a year as I understand it, and a typical streaming person spends a bit more than that.

So that at the end of the day, while the value isn't grossly disparate, both of those are good for the industry.

And from a competition standpoint, the lion's share of digital remains download business, both download albums and tracks on a global basis; however, the alternative new revenue streams such as Spotify continue to grow around the globe.

Okay, thanks.

That's helpful.

Anyway, listen, we appreciate your time.

Thanks again for joining us, and I hope everybody has a wonderful, safe, and happy holiday season.

Bye, everyone.

That concludes today's conference.

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