Warner Music Group Corp F1Q08 (Qtr End 12/31/08) Earnings Call Transcript

| About: Warner Music (WMG)

Warner Music Group Corp (NYSE:WMG)

F1Q08 (Qtr End 12/31/08) Earnings Call

February 5, 2009 8:30 a.m.ET


Steven Macri – CFO and Principal Accounting Officer

Michael D. Fleisher – Vice Chairman of Strategy and Operations

Edgar Bronfman – Executive Chairman and CEO


Howard Gleicher – Metropolitan West

Bishop Sheen – Wachovia

Jessica Reif-Cohen – Bank of America

Richard Greenfield – Pali Capital

Jason Bazinet – Citigroup

Tuna Amobi – Standard and Poors

Ingrid Chung – Goldman Sachs

Douglas Mitchelson – Deutsche Bank Securities

Mike Cartel – ClearBridge Advisors

[00:00:00] beginning of audio transcribed



Welcome to Warner Music Group 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 following today's presentation. (Operator's instructions). I would now 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

Thank you very much. Good morning everyone. Welcome to Warner Music Group's fiscal first quarter 2009 conference call. This morning we issued a 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. Your Executive Vice President and CFO, Steve Marci, will discuss our financial results for the quarter. Then Edgar will wrap up before Edgar, Steve, and Michael Fleisher, our Vice Chairman, Strategy and Operations take your questions.

Before Edgar’s comments, let me remind you 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, believe, should and will, and variations of such words or similar expressions that predict or indicate future events or trends or do not relate to historical matters, identify forward-looking statements.

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

Edgar Bronfman, Jr.

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 worldwide economic and industry challenges.

As we anticipated on 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 the see the impact of current global economic conditions on our fiscal reported music business.

Nevertheless we once again out performed 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 coventance going forward. We remain confident in our capacity to execute on our long-term goals, based on our proven ability to develop new music business 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 reality of today's economic environment. Accelerating declines in U.S. recorded music physical sales mirror declines experienced generally in the U.S. in other retail businesses.

Warner Music saw smaller U.S. unit sales declines in the recorded music industry as a whole, and our declines were offset in part 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 minimize the impact of 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 fundamental 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 turbulence and adapt to position the company for future growth while delivering significant free 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 declines 15% in U.S. track equivalent out muted (ph) sales according to Sound Scan.

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 point from last year's quarter.

We're also confident 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 4 years that one of our labels has held the top in the U.S..

Second, we remain an industry leader in the important digital arena. Our quarterly digital revenue rose 24% to a 171 million on a constant currency basis, and in the U.S., digital represented 31% of recorded music revenue as compared to 23% in the prior year quarter.

We sustain our significant digital track equivalent album share advantage over fiscal album share in the U.S. 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 recording agreements with new artists around the world as a 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 catalogue and growing our digital revenues while developing enhanced results.

I'd like to discuss some of these accomplishments in more depth. Our improved U.S. Recorded music share was led by current releases from artists including Nickel Back, Danette, TI and Flies. In addition, the Creative Grass Roots marketing efforts of our Atlantic team magnified the success of the sound track to the hit movie, "Twilight."

Atlantic leveraged the promotion of the movie and the book series, both online and at book retailers, to maximize sales of the sound track 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 U.S..

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 with "Twilight", but it will also serve as a great setup for Paramore's next album release.

As expected, our achievements this quarter were tempered by comparison with last year's quarter, which marked the release of Josh Gorran's (ph) Noel. Although we sold an additional 600,000 of Noel this holiday season, we sold a staggering 5 million units in the prior year quarter, nearly 4 million of which were in the U.S., making Noel the number one album for all of calendar 2007.

Softer revenue performance in the December quarter from our U.S. Recorded music business was also the results of ongoing Recorded music industry transitional pressures as fiscal decline, magnified by the economic crisis, are not yet being offset by digital growth. Even so, digital performance held up well.

Outside the U.S., a handful of solid local and international sellers, and our growing Artists Service business, contributed to 5% constant currency revenue growth, and allowed us to minimize the impact of a challenging retail landscape, which was most pronounced in the UK or EUK. Pinnacle and Savvy (ph) have each got 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 Share.

In the week ending December 27, 2008, Warner Music France has four of the top ten albums, 6 of the top 15, and was the number one company in terms of weekly chart share at 33%. So the new album released from Warner Brothers super star recording artist, Feel, was a 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 Holliday and the new A&R success story, Christoff (ph) May, were also important local repertoire contributors to France's results.

Let's turn now to our increasing Digital Recorded music revenue, a bright spot and a significant imprudence for our long-term growth. As expected, we saw post holiday pickup in U.S. demand, similar to that of the past few years, which signals a new weekly benchmark, the U.S. digital track sales in 2009.

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

As in prior years, U.S. digital track sales have now pulled back somewhat so 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 in indicator of how the mobile business may develop in other countries.

Japan has 39% growth in full track mobile downloads in calendar 08 and mobile was the dominate 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 pricing. Apples adoption of multiple pricing tiers on iTunes for single track downloads which will begin on April 1st, will give us the flexibility to offer consumers more choice and better value persona.

Importantly, it also gives us an opportunity to differentiate our offer. The iTunes music store is present in about 20 countries online and 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.

We are excited that consumers are now able to purchase BFM 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 competitive. 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, TBC's Play, and Sony Ericson'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 come with music is ramping up across additional territories in 2009 after its initial UK launch. Nokia had indicated that although it needs to further calibrate the marketing and value propositions of the service, they are committed to its long-term success.

TVC, a Danish telecom operator, have seen strong initial results and improved customer retention after the April 08 launch of its bundled music subscription service. The Play Service from TVC provides it 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 sharing 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 to acquisitions, partnerships, and new hires so we can best serve RS 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 artist service companies, including operations in the U.S., UK, Japan, Germany, Italy, France, Spain, China, and Finland.

Fan club management is an area that continues to gain traction at Warner Music through artists arena, an investment of ours since June 2007. This business which was formed in 2004 specializes in fan club management and marketing, pre-sell and VIP ticketing, and e-commerce solutions for recording artists.

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

Recent additions to Artist Arena's roster include WMG artists Shine Down and Sting, and non-WMG artists such as King Doubleon 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. So much of recorded music, the music publishing business continues to be characterized by strong (inaudible) cash flow conversion, favorable working capital dynamic, and low CapEx requirements.

However, music publishing currently enjoys a more diversified revenue stream than recorded music. Our goal is to continue to enhance the results of our distinctly valuable music publishing.

As we've noted in the past we have a global multi-prong plan to drive long term growth at Warner Chappell. This plan includes continuing to invest in talented song writers to support the development of our music publishing catalogue, building new opportunities to exploit the value of our existing catalogue, expanding our leadership position in digital music by playing a key role in industry initiatives, and leveraging our international reach.

Adding to its legacy as the well established home for award winning song writers this year's Grammy nominations highlight the success of Warner Chappell's urban music initiative. Warner Chappell's Lil Wayne received five nominations including album of the year, best rap album, and best rap song.

Atlantic Records recording artist and Warner Chappell song writer T.I. was also nominated for best rap album. Additionally Warner Chappell song writers 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 U.S. albums and three of the top ten U.S. 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 record – our recorded music business and music publishing.

Warner Chappell continues to invest to support the developments of its music publishing catalogue. For example in the U.K. we recently announced the extension of our long term publishing agreement with award winning masters of rhythm rock INXS, one of the highest selling Australian recording artists of all time.

Not only will we administer the worldwide rights to most of INXS's catalogue of songs which spans the groups 30 year career but the agreement also includes future musical compositions and valuable sound recording synchronization rights in all non-U.S. territories.

Warner Chappell also continues to press ahead in concluding agreements with collection societies to further its innovative and European digital licensing initiative known as PEDL. PEDL is designed to facilitate pan-European licensing and musical compositions for digital music services throughout Europe.

To date collection societies in the U.K., Germany, France, Spain, Sweden, and most recently in the Netherlands have joined PEDL. Before moving on to 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 leading ISPs and content companies to work together constructively to address online 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 on principles around graduated response programs designed to deter copyright infringement. In light of this development we're pleased with the RIA's decision to discontinue its broad based end-user litigation program.

At WMG we are great advocates of any legal use of new technology. Given the ability of ISPs to deter illegal activity on their networks it's essential that they play an active role in promoting the legal and legitimate flow of data.

We believe that all the stake holders, ISPs, content companies, and consumers alike gain the most when we all work together to support common values. Steve, will now run through the financials before Michael, Steve, and I take your questions.

Steven Macri

Thank you Edgar, and good morning everyone. I would like to start by covering some of our key financial highlights for the quarter. All of the revenue data I'm 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 is most affected by the comparisons against the strong recorded music results from the first quarter of 2008. In addition the current quarter's results were also affected by the recorded music industry pressures and the general economic and retial 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 due to the seasonal nature of the recording music business and timely release schedules.

Thought mobile and online digital revenue both grew, online remains the primary contributor to our digital business. Roundly about 1/3 of our digital business is mobile and 2/3 is online. Mobile continues to be more penetrated internationally than in the U.S.

Approximately 65% of our digital revenue was generated in the U.S. while 35% was generated in the rest of the world. Our operating income before depreciation and 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 volumes 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 on our global digital and international licensing businesses more than offset by global physical declines.

International recorded music revenue grew 6% while domestic recorded music revenue dropped 21% year-over-year. These recorded music results were due to the continued contracted demand for physical product by U.S. retailers in the soft economic and retail conditions.

International strength was driven by both local and international repertoire (ph) as Edgar previously discussed. Partially offsetting 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 same period last year.

Recorded music OIBDA from continuing operations fell 21% year-over-year. This reflects tough comparisons over last year's first quarter 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 the same quarterly period in fiscal 2008 music publishing revenue, $134 million grew 1% with stable performance both domestically and internationally.

Mechanical revenue fell 16% due to the declines in the industry wide physical recorded music business. Growth in digital, performance, and synchronization revenue more than offset the mechanic revenue decline. Music publishing in 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 quarter include two artists 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 improve our cash flow continues to yield results. We increased our free 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 is calculated by taking cash from operations of $43 million, plus 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 of our remaining interest in Front Line through Ticketmaster.

We ended the quarter with a cash balance of $549 million. This is a sizable step-up sequentially from $411 million at 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 we had net cash taxes of $3 millio 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 continuing operations of $23 million or $0.15 per diluted share.

This compares to the prior year quarter's 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 Frontline. 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 of an equity investment and a 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 noted last quarter we continue to expect fiscal year 2009 to be back end weighted due to the timing 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 challenging retail marketplace and difficult economy.

To minimize any impact we will continue to actively manage our expenses and take advantage of our flexible cost structure. Now I'd like to turn the call back to Edgar for closing remarks.

Edgar Bronfman

Thanks, Steve, as we all know we've entered a period of unprecedented economic instability. However, a tumultuous backdrop 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 strategies 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'd 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 through the development of our 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 we face our significant and are compounded further by the macroeconomic environment. But it remains clear that there is great opportunity for those companies which 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 for Q&A.

Question-and-Answer Session


(Operator instructions). The first question is from Bishop Sheen from Wachovia.

Bishop Sheen – Wachovia

Hi, Edgar, Jill, Steve, Michael, thanks for taking the question. Looking at your balance sheet management as you build cash it looks like against a covenant leverage definition a 4.0 times EBITDA at the out go you're right at that.

And you've got 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? And can you just give us some color on how you plan to work around those covenant issues.

Edgar Bronfman

This is Edgar, Bishop, Steve can give you some more detail but the short answer to your first question is yes, we can and will meet our covenants. And in fact at the end of the December quarter our covenant ratio that you referred to 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.

Bishop Sheen – Wachovia

Okay, that is the short answer, thank you.


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

Jessica Reif Cohen – Bank of America

It's Bank of America/Merrill Lynch. I had 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 protect your fixed cost structure? You know are there any pockets you can cut?

Edgar Bronfman

Okay, you want to ask them one by one. The answer, yes, we don’t manage fixed costs, Jessica, on a quarterly basis which is why you sometimes have the you know we had the slight margin contraction in Q1. But yes we believe, first of all, remember that 75% of our cost base is variable.

And only a quarter or slightly less than that is fixed, but yes we think that there are things that we can do and in fact are doing to manage our fixed costs, as well.

Steven Macri

Just one thing to add to that, Jessica, this is Steve. You know the really the quarter-to-quarter comparisons are apple-to-oranges when you look at "Noel". You know the vast majority of our year-over-year decline is because we had the blockbuster release in the quarter with five million units.

It's not so much the five million units it's more that the five million units in a 2 1/2 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 from "Noel".

Jessica Reif Cohen – Bank of America

Okay, thank you and the second question and then the one after that is could you talk about A&R spends for this fiscal year versus a year ago and what are you doing differently?

Edgar Bronfman

Jessica, we've actually had outside consultants come in and review our A&R spending to determine the returns that we received. And the returns that we received from our A&R spending are very strong. And I would venture to say without knowing that they're probably strongest in the industry. And 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 pretty much constant over the past two or three years and we expect that it will remain constant in '09.

Jessica Reif Cohen – Bank of America

Is there anything that you're doing differently in terms of A&R?

Edgar Bronfman

I think we've 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're doing differently. As you will recall when we took over Warner Music in '04 our U.S. share was around 15%. It's not about 40 to 50% higher than that at 21%.

And so I think we're doing a lot right, obviously we're not doing everything right. So what we're trying to do is understand what we do well and do more of that and try and 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.

Jessica Reif Cohen – Bank of America

And then my last question is you seem, Edgar, you seem pretty excited about the stuff that's going on in mobile in Europe. I was just wondering you know are there any deals for the U.S. or is there any discussions on doing something here?

Edgar Bronfman

I think the mobile music – the wireless Internet is by far the norm outside of the U.S. and the wired Internet is by far the norm here in the U.S. So consumer behavior is more focused on accessing content data and information wirelessly outside the U.S. more than it is in the U.S.

But I would say that I think that the introduction of OTA downloads on the i-phone will show a significant increase in consumers beginning to access content in that way. I mean the i-phone already was delivering data at a sort of three or four to one 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 Ericsson or Nokia or others have plans to come into the U.S. in '09 but I do believe there will be access models introduced in the U.S. 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 U.S. will be through the Apple i-phone OTA agreement.

Jessica Reif Cohen – Bank of America

Thank you.


The next question is from Doug Mitchelson from Deutsche Bank.

Douglas Mitchelson – Deutsche Bank Securities

Thanks, good morning, everyone. Couple of questions, so first sort of further along those lines, Edgar, if you look out five years, I know it's difficult to predict at this stage. But you know if you had your druthers based on what you see in terms of the subscription model with things like Nokia based on what you think you're going to see with digital downloads expanding because of wireless availability and then what you're seeing at retail with CDs.

You know where do you think the percentage source of your revenue will be from those three buckets five years from now? Where would you like them to be?

Edgar Bronfman

Yes, you know, I think what we try to do is not provide forward looking statements as much as possible. But I think what I would say overall, Doug, is that you know it's obviously quite clear that physical recorded music business will continue to be a smaller and smaller part of our business.

And this is – the music industry will unquestionably become a growth industry. The only question is when does that turn a curve and from what base? And I would expect in five years that not only will we have strong revenues from mobile, not only will we have strong revenues from digital online but we'll also have significant revenues from artist's service business.

So we'll be in the business of not only selling songs however customers acquire them and licensing songs to our music publishing business but we'll also be significantly in the businesses of sharing in revenue with artists, ticketing, touring, artist management, sponsorship, fan clubs, et cetera.

So I think our revenue picture will look quite differently than it does today. I have no doubt that within that period of time we'll be a growing industry. The question is when between then and now does that occur and off of what base?

Douglas Mitchelson – Deutsche Bank Securities

Well than I'll even though you said you don’t want forward looking statements I'm still going to throw another sort of question along those lines. I mean given that business mix, you know given the different business models that are evolving do you think margins stay similar to these levels? Get better? Get worse?

Edgar Bronfman

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

Douglas Mitchelson – Deutsche Bank Securities

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

Edgar Bronfman

It does.

Douglas Mitchelson – Deutsche Bank Securities

Okay, good, and then the 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 you know Circuit City going bankrupt. I mean there is a lot changes taking place. What are you seeing?

Steven Macri

This is Steve, Doug. You know we've been partnering with our retailers for quite some time to you know manage shipments, not only to reduce our credit exposure but also our returns risk. So, you know fortunately the company's like Circuit City or Woolworth in the U.K. they represent such a small part of our business that the vast majority of our physical business right now is with companies such as Wal-Mart, Best Buy, so you know, and the other thing that we've noted too is that the floor space that's been trumped at the retailers has been some of our slowing moving SKUs.

So you really haven't seen a drastic decline in the physical business.

Douglas Mitchelson – Deutsche Bank Securities

And then lastly in case I missed it but 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?

Edgar Bronfman

I think as that merger has not yet 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'll be commenting on you know any potential agreements between other companies.

Douglas Mitchelson – Deutsche Bank Securities

All right, well fair enough. Okay, thank you.


The next question is from Howard Gleicher from Metropolitan West.

Howard Gleicher – Metropolitan West

Hi, thanks. I just wanted to follow up on the last question about Live Nation, Ticketmaster, I know you can't comment on that. But given your purchase and then sale of Frontline are there pieces of the music business that would be and I know you're – it's 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?

You know performance is a big deal and that's something that's 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.

Edgar Bronfman

So, 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 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 to – that vary from artist to artist that involve either actively managing pieces of their broader income streams including touring, ticketing, fan club merchandise, et cetera 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 you know 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.

Howard Gleicher – Metropolitan West

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.

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?

Edgar Bronfman

First, the answer to your question is no. We've actually re-signed in the past few months just about every senior executive in the company. So I expect no major management fallout from a 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 you know it is – it's 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, and at that point the market will reflect a fairer value for our company.]

Howard Gleicher – Metropolitan West

Understood, thank you very much.


The next question is from Ingrid Chung from Goldman Sachs.

Ingrid Chung – Goldman Sachs

Good morning, thanks, so a couple of quick questions. First, Edgar, I think you mentioned that you saw the global recession impact your business. I was just wondering if you felt more of an impact in the U.S.? I know there is the tough (inaudible) in comp but I was wondering if there was maybe a lag outside the U.S.?

And then 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 mix shift between new releases and catalogue has that been impacted by shelf space reductions?

Edgar Bronfman

Okay, so let me just do away with the last question first, which is there has really been no discernable shift between new releases and catalogue. And o the extent that there has been shelf space reductions as Steve mentioned it's really been around far – the most slow moving SKUs.

So it's really impacted – shelf space adjustments and floor space has really impacted our business very little, if at all. In terms of the global recession, obviously we did as you said had the Josh Groben compare. But we as we noted have strong business in Europe, particularly where we had very strong local release schedules, as well as, some strong international sales with Enya and Feel (ph).

I – from what I can see I don't think there is a lag in that you know we are expecting you know a fundamentally softer Europe in the next couple of quarters. But, of course, we'll 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'd say 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 you know Apple continues to grow its business with us and with consumers. And this notion that somehow we need to dethrone Apple I'm not sure is a notion that we need to spend a lot of time on.

So 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 so long as we together are satisfying consumers I think that's already served as a pretty good model for the industry and can continue to do so.

Ingrid Chung – Goldman Sachs

Okay, great. Thank you.


The next question is from Mike Cartel from ClearBridge Advisors.

Mike Cartel – ClearBridge Advisors

Hi, thanks a lot. Just a question, obviously you have a very nice cash balance. Given where you bonds are trading in the market I just wanted to know you guys' thoughts on buying those in at a discount here. And the – obviously the sort of super charged effect it would have on improving your balance sheet?

Steven Macri

Yes, sir, Mike, this is Steve. You know if you remember what our strategy was about a year ago, it was to build cash and improve financial flexibility in our balance sheet. And quite frankly I think we've done a great job of doing that, growing the cash from $160 million a year ago to $549 million at 12/21.08.

You know buying back bonds is clearly an option we're exploring when we're looking at our total capital deployment strategy. So you know we'll continue to look at that as an option, but right now given this economic environment we like the comfort and flexibility that the $549 million of cash provides us.

Mike Cartel – ClearBridge Advisors

Okay, thanks.


The next question is from Richard Greenfield with Pali Capital.

Richard Greenfield – Pali Capital

Hi, thanks for taking the question. First off, there was legislation introduced yesterday on royalties on, I believe, Terrestrial Radios, and wondering how do we think about how that would impact your business? I mean obviously it's positive but can you give us some sense of how meaningful this could be or maybe put some type of range around what it could mean you know say some of this would be pure profit if it actually happened to the recorded music business?

Two, you've made a number of investments over the last couple of years like IMeem and Lala and just curious how much some of these investments which you don’t own 100% of – how much of that is actually contributing to y our digital revenue at this point?

And then last question is related to returns from retail, the book business looks like it's moving to a no-return model. I'm just curious whether you think the music business you know will shift move to something similar in the near future? Thanks.

Edgar Bronfman

Rich, it's Edgar, on Terrestrial Radio I don’t think we can necessarily give you a range. What I would say is there I think five countries in the world that do not pay recorded music artists and recorded companies for the use of songs on the radio.

United States is one, China is one, Rowanda is one, I believe Iran is one, and North Korea is the last. It's quite an unusual group for the United States to be included in and interestingly China used to pay such a fee but when it joined the WTO and noted that the U.S. did not it stopped.

So before that the U.S. was on even uglier short list. So you know I think we're going 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 would be it would be imprudent to try and put a range around the potential income. As far as IMeem and Lala and I'll 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 and to the extent that we have commercial arrangements that would drive revenue from either of those I can tell you that the impact on our OIBDA is negligible at this stage.

Steve Macri

Hey, Rich, this is Steve. With regards to you know a no-return model for music I mean we've partnered with our retailers like I said before on maximizing you know inventory at retail and we've (inaudible) looking at different models for returns whether it's a returns charge or maybe potentially going one way with certain SKUs.

But you know to be determined if we get to the book publishing model.

Edgar Bronfman

Well and to say the book publishing business hasn't gotten to a book publishing model on no-returns yet, either. But you're right to say that those are certainly are going increasingly in that direction.

Richard Greenfield – Pali Capital

I mean are you against the idea of a no-return model? I mean is that good or bad, I guess if it moves in that direction?

Steve Macri

Again, Rich, it would depend on the terms on which we were able to strike that arrangement. So you know clearly there would be give and take on a no-returns basis and the question is you know how do we come out in that negotiation with retailers?

So we certainly have nothing against it. In many ways it could simplify our business. The question is you know what's in it for the retailers and at what price and at what cost would they be prepared to have that discussion?

Richard Greenfield – Pali Capital

Okay, thank you.


The next question is from Jason Bazinet with Citi.

Jason Bazinet – Citigroup

I just have a quick question on the recorded music business. I think you guys have highlighted in the past, including in this quarter, that you've gained you know pretty significant share. I think 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 sort of give us a sense from a historical standpoint in terms of you know where Warner share has moved around?

Do – in other words have there been periods in the past when you've moved up to 25 to 26% of the recorded music business? Or is this – or are we sort of sitting on record highs where we sit right now? Thanks.

Edgar Bronfman

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

Jason Bazinet – Citigroup


Edgar Bronfman

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 consistently had sort of a 20 to 23% share of the U.S. business.

But I'd also note in those days there were six major music companies in the U.S. and many stronger independent companies. So that while Warner was the leading company at that time you had a far less concentrated supplier environment which makes the comparison a little bit apples-to-oranges.

Warner started to lose market share along 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 U.S. market when we acquired the company back in 2004.

Our market share, I think, remained relatively flat the first year that we owned the company 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.

And so Universal's share today of the U.S. market in the low –about around 30 to 33% of the market, Sony is approximately 1/4 of the market, maybe a little bit 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 U.S. and, therefore, as we've said in our comments we expect we'll be able to continue to do that.

Richard Greenfield – Pali Capital

Very helpful, thank you.


The last question comes from Tuna Amobi from Standard and Poors.

Tuna Amobi – Standard and Poors

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, so as you look at all the different areas whether it's recording concepts, promotion, ticketing, artist relationships, venue management, merchandisers, sponsorship, just to name a few, right, it just seems like all of these areas have been converging over the past few years. Edgar, I know you won't 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 seemed to be a deal that was made after you guys sold out of Frontline.

I think at the time you said that Frontline was no longer a strategic stake for you. And yet you seem to have a lot of glowing things to say about fan club management in your prepared remarks.

And I am also whether you purchase (inaudible) in Europe which is a concert promotion and artist management company just a few months ago.

So just putting all of this together it's very, very you know it's becoming very blurred and difficult to see how you know all of this landscapes shapes converge. So the question is can you perhaps articulate a little bit better you know how you see the whole convergence thing you know happening. And where you guys actually what role you see Warner Music playing in this whole you know landscape.

Clearly the multiple rights deal I think gets you in that direction. But it just seems that you know that is not going to be – it doesn 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.

Edgar Bronfman

Let me try and comment. I would say that we are in a different business than some other companies that you've talked about on the – in the question. We are more in the venture capital business. We are not so much in the business of renewing or partnering with artist when they are already at a very mature level of their careers.

At that point you know there is not industry that I am aware of and the music business is frankly the best of them where the talent does not get an extraordinary amount of the pie that's available once that talent is highly established. We, therefore, think the highest margin opportunity is to partner with our artists at the outset. So that we can be partners in building their careers and be able to exploit all of their rights whether through our own infrastructure or through other people's infrastructures.

We're very focused on trying to maintain margins, not to decrease 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 infrastructure that either exists or that could potentially come together those are infrastructures focused more on mature artists and how to exploit those artist's rights.

And they do a outstanding job. But in those models the artists tend to be – tend to have extremely high margins and those helping those artists exploit them tend to have lower margins. And, therefore, we think as we said partnering with artists early in their careers is the best opportunity both for our artists and for ourselves.

Tuna Amobi – Standard and Poors

Okay, that's very helpful. Just real quick, separately on the I-tunes you know deal if you can just you know provide some commentary on the incremental impact that you see from the three tier pricing. And you know the thought process that led up to that. You know what seems like a potentially ground breaking development and also you know how you can reconcile that to your earlier position in terms of the DRM you know discontinuation? You know any kind of new information in terms of piracy (inaudible) leading up to that announcement that would be helpful as well.

Edgar Bronfman

I think that you know 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'm not – I don’t think we'll see any difference in piracy activity with or without DRM on Apple would be my perspective there.

I think with regard to variable pricing tiers that Apple is going to introduce in April, I think it's simply to early to predict what that – what will happen as a result of that or how many songs will end up at what price points. Clearly each record company has the choice to price any of its or to suggest that its songs go with any one of those three price tiers.

But how many of our songs will what at 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's way to early to predict. But we are hopeful that it will result both in a better consumer experience and an improved position for us and our colleagues in the record industry.

So I think with that I appreciate that this was the last question.

Tuna Amobi – Standard and Poors

Thank you.

Edgar Bronfman

Thank you for your interest and we look forward to talking to you again in a quarter's time. Thank you, bye-bye.


That concludes today's conference. You may disconnect at this time.

[01:02:48] end of audio transcribed

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