Warner Music Group F2Q09 (Qtr End 3/31/09) Earnings Call Transcript

May. 7.09 | About: Warner Music (WMG)

Warner Music Group Corp. (NYSE:WMG)

F2Q09 Earnings Call

May 7, 2009 8:30 am ET


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

Edgar Bronfman - Chairman of the Board, Chief Executive Officer

Steven Macri - Chief Financial Officer, Executive Vice President

Michael Fleisher - Vice Chairman, Strategy and Operations


Bishop Cheen - Wachovia

Jessica Reif-Cohen - Merrill Lynch

Rich Greenfield - Pali Capital

Jason Bazinet - Citigroup

Doug Mitchelson - Deutsche Bank

Tuna Amobi - Standard & Poor’s


Welcome to the Warner Music Group’s fiscal second quarter earnings call for the period ended March 31, 2009. At the request of Warner Music Group, today’s call is being recorded for replay purposes and if you object, you may disconnect at any time. (Operator Instructions) Now I would like to turn today’s call over to your host, Ms. Jill Krutick, Senior Vice President of Investor Relations and Corporate Development. You may begin.

Jill S. Krutick

Thank you very much. Good morning, everyone. Welcome to Warner Music Group’s fiscal second 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 Junior, will update you on our business performance and strategy and our Executive Vice President and CFO, Steven Macri, will discuss our financial results for the quarter. Then, Edgar will wrap up before Edgar, Steve, and Michael Fleisher, our Vice Chairman, Strategy and Operations, take your questions.

Before Edgar’s comments, let me remind you 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 intention to deploy our capital, including the level and effectiveness of future A&R investments.

All forward-looking statements are made as of today and we disclaim any duty to update such statements. Our expectations, beliefs, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, and projections will result or be achieved.

Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties, and other factors that can cause actual results that differ materially from our expectations. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our earnings press release and Form 10-Q and other SEC filings.

We plan to present certain non-GAAP results during this conference call. We have provided schedules reconciling these results to our GAAP results in our earnings press release posted on our website.

With that, let me turn it over to Edgar. Thank you.

Edgar Bronfman

Welcome, everyone and thanks for joining us. As we had anticipated, this quarter’s declines in revenue and OIBDA reflect the timing of our release schedule, as well as the effects of the recorded music industry’s transition and macroeconomic pressures.

Nevertheless, once again this quarter we outpaced our competitors, gained market share and further diversified our revenue mix. We also continued to transform our business model to speed our digital transition while significantly increasing the number of expanded rights deals with new recording artists. Over time, we expect these efforts to drive sustained growth.

In the near term, we are particularly excited about our second half releases, which I will touch on shortly.

Our success quarter after quarter in implementing a conservative balance sheet strategy serves two important objectives. First, it maximizes our balance sheet flexibility and second it underscores our continued confidence in our ability to satisfy financial covenants.

Let me highlight the growth of our cash balance. This quarter we generated strong free cash flow and increased cash on hand to $658 million, $109 million more than last quarter and more than 2.5 times our year-ago quarter cash balance.

In any challenging environment, prioritization and focus on core strengths drives success. For us, those core strengths in both our recorded music and music publishing businesses are A&R, marketing, promotion, licensing, and increasingly artists’ services.

We will continue to maintain our investment levels in these areas to ensure that we continue to enhance these strengths. At the same time, we do not intend to make more digital venture capital investments. We had made some relatively small investments in this area which were intended to accelerate the development of young companies pursuing innovative music business models.

While our overall M&A track record is generally positive, some of these digital venture capital investments have not met expectations. This quarter, we wrote down the values of those investments, imeme and Lala, companies in which we had taken minority stakes in 2007.

It makes sense for us to recognize the very different valuations these companies are receiving in the current economic environment. The $33 million of write-downs this quarter primarily relate to these two companies. This takes essentially all of the consequential at-risk digital venture capital investments off of our balance sheet, which we think is a prudent approach, give the changed economic circumstances. And it is a reminder of our assertion that in difficult times, it is important to focus on one’s core strengths.

Looking forward, our long-term success depends on our continued execution against our strategic and operating goals. After all, we had anticipated that the second quarter would be difficult, especially given the timing of our releases. But as you know, quarterly results only provide a limited snapshot of a company’s performance.

In fact, gauging performance requires a more complete view of how a company can effectively navigate the shifting music industry landscape over a period of years, and I am proud to say that this team’s track record over the past few years gives many reasons for confidence, including a proven ability to develop new music business solutions, a position of digital leadership, successful cost and balance sheet management, market share gains, and strong returns on A&R and artists’ services investments.

Specifically, from 2004 to fiscal 2008, Warner Music’s total constant currency revenue declined by just 2% on a compound annual growth rate basis. OIBDA grew by 6% on the same basis. OIBDA margins expanded from 10% to 14%, and U.S. track equivalent unit album sales grew in 16 of the past 17 quarters, and we increased our global reported music market share to become the third largest music major.

Despite the tumultuous music industry transition from physical to digital, both our recorded music and music publishing businesses made strong contribution to this historical performance. We have successfully adjusted our highly variable cost structure to drive profitability and we have positioned the company for future growth while generating significant levels of free cash flow.

Looking at the recorded music segment, during the same 2004 to 2008 timeframe, while global recorded music revenue on an industry-wide basis according to [IPSEY], posted a negative 5% compound annual growth rate, our recorded music revenue held flat. Had we simply followed the industry’s performance from 2004 to 2008, we would have seen a staggering cumulative gap in our recorded music revenue of about $1.5 billion.

Even with this successful track record, we recognize the reality of today’s environment. For example, this quarter we continued to face secular pressures in the recorded music business that also impacted our music publishing and mechanical revenue. In contrast, the music industry’s digital performance continues to see solid growth, with total U.S. digital sales up 19% in the quarter. However, as we’ve consistently said, as digital becomes a larger share of our business, it is becoming increasingly driven by our overall release schedule. As our release schedule is back-end weighted, we saw global recorded music revenue declines and more moderate digital growth in the quarter.

Now let’s turn to our quarterly highlights -- first, our disciplined A&R marketing and promotional efforts continue to yield results. Warner Music again outpaced the industry, down 5% while the industry declined 7% in U.S. track equivalent album unit sales, according to SoundScan, and we continued to gain share, rising one-half of a percentage point to 21%.

Second, we remain an industry leader in the important digital arena -- despite a paucity of releases, our quarterly digital revenue rose 11% to $173 million on a constant currency basis. In the U.S., digital revenue represented a dramatic 41% of recorded music revenue, compared to 34% in the prior year quarter, and we also sustained our digital track equivalent album share advantage over physical album share in the U.S., having 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 growing parts of the broader music business, we continue to enter into expanded rights agreements with new recording artists around the world and to leverage the power of these new partnerships through our artists’ services businesses

And fourth, we continued to strengthen our music publishing business by further developing our artist roster and catalog, and examining and refining our investment strategy.

Our improved U.S. recorded music share was primarily led by carry-over success from prior releases. Given our limited new offerings in the quarter and the ongoing recorded music industry transitional pressures, physical decline, no doubt magnified by the economic crisis, are not yet being offset by digital growth. Nickelback, Jason Mraz, Flo Rida and T-I were the key contributors to our U.S. recorded music results.

In addition, the sales momentum from the soundtrack to the movie Twilight remained strong into the March quarter with the global DVD release further boosting demand. The Twilight soundtrack is a phenomenon that extends beyond the U.S. Selling more than 2 million units already, it has far exceeded our worldwide expectations. Atlantic Records will be releasing the soundtrack to New Moon this fall, the next movie based on the Twilight series of novels.

In international recorded music, results declined due to the release of fewer major new international sellers in the quarter, weakness in Latin America, and a particularly difficult comparison in Japan. This performance was partially offset by strength in several key European countries, including the U.K., Germany, France, and Italy.

We remain very optimistic about our upcoming releases. As you know, as a matter of policy, we do not provide specific details about our future release schedule. Nevertheless, once a single is playing on the radio, typically an album follows. That will certainly be the case for Warner Brothers’ iconic band, Greenday, whose single Know Your Enemy debuted on April 16th, ahead of the May 15th release of their highly anticipated album, 21st Century Breakdown. While the revenue will be evident in our third quarter, early indications are exciting, given the building promotional and radio airplay momentum.

We also just released Her Diamond, the first single from Rob Thomas’ third quarter album release, Cradle Song, the long awaited follow-up to his multi-platinum solo album, Something to Be.

Now let’s turn to digital recorded music revenue, a growth area and a significant impetus for our long-term progress. In an important recent development, Apple introduced variable pricing for single track downloads on iTunes on April 7th. Although we priced down a far greater number of tracks than we priced up, early results show a net positive impact on our top line digital results.

More importantly, this model gives us the flexibility to offer consumers more choice and provides us an opportunity to differentiate our offerings.

Variable pricing at iTunes and other digital stores will be even more significant for us as our business is increasingly shifting to digital. For example, in the quarter Atlantic Records continued to exceed industry standards by posting digital revenue in excess of 50% of its total revenue. Atlantic artist Flo Rida single, Right Round, from his recently released second album, Roots, broke the U.S. record for most single track downloads sold in the first week of release. It sold more than 636,000 units, a record previously held by the single Low from Flo Rida’s first album, Mail on Sunday.

T-I remains a digital centric artist as well. Two singles from his current album, Paper Trail, have combined to sell over 4 million units in the U.S. in the quarter.

We are encouraged by the growth of our digital business, although we recognize that our release schedule and general economic factors impacted our success in the quarter and will remain important factors as the business continues to grow.

Broadening our revenue mix into growing areas of the music business, such as sponsorship, fan clubs, websites, merchandising, touring, ticketing, and artist management, among others, remains a key element of our growth strategy. To participate more broadly in those activities, we have worked diligently at reaching expanded rights deals with artists. As a result of our collective efforts across our many labels, we have reached a new milestone at Warner Music.

Artists with expanded rights deals now account for about one-half of our active global artist roster, up from approximately one-third in the third quarter of fiscal 2008. This figure is even more impressive given that it does not include artists with whom we have rights for a single business activity, such as merchandising or fan clubs.

Having a substantial global artist roster with about 50% of those artists signed to expanded rights deals, represents a fundamental change to our business model. It also represents an opportunity for a far more diversified revenue growth over time.

This strategy is rapidly laying the seeds for revenue growth but the normal arc of artist development means that it will take some time until non-traditional revenue from expanded rights deals represents a meaningful share of our business. We will continue to update you on developments in this space.

Turning now to Warner Chappell Music, over time this business is a stable performer with very attractive financial attributes. However, the pressures from physical recorded music declines were evident this quarter, as our mechanical revenues dropped 21%, leading to an overall decline of 5% in our music publishing revenue for the quarter on a constant currency basis.

While the other revenue components within the publishing segment usually offset any mechanical weakness, this quarter proved a bit more challenging, mostly due to the timing of our collection, and recorded music industry physical declines from previous periods.

Looking ahead, we continue to examine ways to build value in Warner Chappell, our unique music publishing business. To enhance returns and to help to most effectively and efficiently direct our future spending, we conducted a comprehensive historical analysis of Warner Chappell’s investment track record. This review was similar to the one we conducted on our recorded music businesses A&R investment return and similar to the rigorous evaluation we conduct on all of our investment.

One key conclusion is that our current A&R investment levels at Warner Chappell are appropriate and necessary and are driving very impressive returns. This validated the thesis that A&R is one of our company’s core strengths. In fact, the results were similar to the analysis of our recorded music A&R investment, as that analysis also demonstrated that our A&R investments are driving attractive returns.

Warner Chappell’s investments continue to pay off creatively as well, as a number of its songwriters were recognized with nominations, awards, and performances at the 44th Annual Academy of Country Music Awards held in April. One of our newest signings, James Otto, won the song of the year award for In Color, which he co-wrote. He was also nominated for top new male vocalist.

Additionally, Warner Chappell music was recently recognized with the 2009 publishing corporation of the year award at the 20th Annual Billboard Latin Music Awards.

Before moving on to our financials, I wanted to provide a short update on the status of the Performance Rights Act, the legislation introduced in Congress this February to require terrestrial radio broadcasters to pay for their performance of sound recordings. Since then the bill has been gaining encouraging momentum. It now has 45 members of Congress as co-sponsors. The House Judiciary Committee held a constructive hearing on the bill on March 10th and continues to make meaningful progress on the bill in a timely fashion. There are some dedicated champions on Capital Hill that are working hard to get this legislation across the finish line. We are hopeful for passage of the Performance Rights Act, which will validate the contributions of recording artists and sound recording owners. We are pleased to be working together with all of the artists and creators through the Music First coalition to pass this legislation.

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

Steven Macri

Thank you, Edgar and good morning, everyone. First I will cover some of the quarter’s key financial highlights. All the revenue data I am about to discuss is on a constant currency basis.

Looking at the income statement for the three months ended March 31, 2009, we reported revenue of $668 million, a 10% decrease year over year. The revenue decline reflects our fiscal year 2009 back-end weighted release schedule and general economic and retailer pressures. Domestic revenue declined 10%, while international fell 11%.

As we have noted in the past, our results vary from quarter to quarter depending on our release schedule. We do not time releases to fall into a particular quarter -- instead, we release content when it is ready and when we believe we can achieve the greatest long-term success for our artists and the company.

Digital revenue this quarter grew 11% to $173 million, or 26% of total revenue. That is up from 21% of total revenue in the prior year quarter. Digital revenue improved 3% sequentially, mostly due to our more limited release schedule. Furthermore, about two-thirds of our digital revenue was generated in the U.S. and one-third was generated in the rest of the world, a reflection of the geographic makeup of digital consumption.

Looking at the component parts of the digital business, the lines between mobile and online revenues are becoming more and more blurry. For example, Apple’s reporting does not distinguish track sales versus online via a computer from those purchased via an iPhone. As another example, when carriers report to us on dual downloads, mobile downloads where a user can choose to have a second copy delivered to the user’s computer, the carrier does not identify whether the second copy has been delivered. Accordingly, it is not possible for us to accurately allocate dual download revenue between online and mobile.

For these reasons, among others, we believe the most accurate and relevant metric of digital growth is total digital revenue, which includes both online and mobile.

Our operating income before depreciation and amortization, or OIBDA, fell 17% to $80 million. Despite a decline in revenue, our OIBDA margin was flat at 12%, primarily from continued cost management efforts and revenue mix. The OIBDA figure reflects a $4 million receivables write-off from our investment in imeme. Adjusted for this write-off, OIBDA is $84 million, a 13% decline from the prior period, and OIBDA margin expanded to 13%.

Looking at the different business segments for the quarter, recorded music revenue decreased by 11% to $537 million. We saw growth in our global digital and licensing revenue, more than offset by global physical declines.

International recorded music revenue fell 13% and domestic recorded music revenue declined 10% year over year. These revenue declines were due to several factors, including the time of their releases, continued contracted demand for physical product by retailers, and soft economic and retail conditions.

Internationally, tough revenue comparisons in Japan and weakness in Latin America were partially offset by strength in most European countries.

Recorded music digital revenue grew 11% from the prior year quarter to $166 million, or 31% of total recorded music revenue. That’s up from 24% in the same period last year.

Domestic recorded music digital revenue grew 9% to $110 million, or 41% of total domestic recorded music revenue, as compared to 34% in the same period last year. Recorded music OIBDA fell 34% year over year to $46 million. This primarily reflects a light release schedule in the quarter and negative operating leverage from lower sales on a similar fixed cost base, as well as a $4 million receivables write-off.

Moving on to our music publishing business, in comparison to the same quarterly period in fiscal 2008, music publishing revenue fell 5% to $135 million, largely due to soft domestic results.

[inaudible] revenue fell 21% due to decline in the industry wide physical recorded music business. Digital was flat at $7 million due to the timing of releases and cash receipts. Growth in performance and synchronization revenue partially offset mechanical revenue declines.

Music publishing OIBDA was $54 million, flat with the prior year quarter. OIBDA margin increased to 40% from 35% in the prior year quarter, due primarily to changes in revenue mix.

Let me also note that more than 99% of our revenue this quarter was organic. Investments made over the past 12 months represented less than 1% of the current quarter revenue.

Turning to our balance sheet and cash position, as Edgar noted earlier, our conservative balance sheet strategy continued to yield results this quarter. This strategy includes reducing M&A spending, building cash, and improving our free cash flow and balance sheet flexibility.

In the quarter, we increased free cash flow to $125 million, from $99 million in the prior year quarter. Our free cash flow is calculated by taking cash from operations of $144 million, less capital expenditures of $6 million, and less cash paid for investments of $13 million.

We ended the quarter with an impressive cash balance of $658 million. This is a sizable step up sequentially from $549 million at December 31, 2008, and 60% higher than our September 30, 2008 balance of $411 million. Our second quarter cash balance was helped by the seasonal nature of holiday collections and the timing of royalty payments. We expect the seasonal working capital benefit to reverse in the third quarter.

Turning now to taxes, for the three months ended March 31, 2009, we had net cash taxes of $14 million, and a tax provision of $10 million, on a pretax loss from continuing operations of $58 million.

For the quarter, we generated a net loss from continuing operations of $68 million, or $0.45 per diluted share. That included charges of $33 million, or $0.22 per diluted share, largely related to the impairment of cost method investments in Lala and imeme. This compares with prior year quarter’s net loss from continuing operations of $34 million, or $0.23 per diluted share.

As a reminder, as a matter of policy, we do not provide financial guidance. This is largely because fluctuations from our recorded music release schedule and associated marketing and promotional expenses are a normal part of our business. As we noted last quarter, our fiscal year 2009 will be back-end weighted due to the timing of releases. We remain confident in our overall release schedule for fiscal year. That being said, the music industry is not immune to the challenging retail marketplace and difficult economy. For that reason we will continue to actively manage our expenses and take advantage of our flexible cost structure.

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

Edgar Bronfman

Thanks, Steve. We expected this quarter to be challenging, given the timing of our releases. Having said that, looking forward we remain cautiously optimistic. We have a strong second half release schedule and an outstanding team in place to exploit that potential.

Our priorities remain centered on optimizing and transforming our business. As we have demonstrated, we will continue to manage our cash balance sheet by generating significant free cash flow while balancing our costs and investments. We will extend our digital leadership through the development of original business models, focus on enhancing the value and growth of Warner Chappell, expand partnerships with artists and nurture relationships with consumers in order to broaden our revenue streams in growing segments of the music business, and increase market share while maximizing our margin potential in the core recorded music and music publishing businesses by continuing to make strong returns on investments in artists and their careers.

While the recorded music and global economic environment remain very difficult, I am gratified by our track record. Throughout our five-year tenure here, this team has executed successfully and delivered stable results despite industry transition pressures. I am delighted that our core management team is signed to long-term deals, giving us the consistency and unified sense of purpose to continue to build our profile in the artist community and tackle the industry’s challenges while generating solid financial results.

Michael, Steve, and I now look forward to answering your questions. Thank you, and Operator, please open it up for some Q&A.

Question-and-Answer Session


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

Bishop Cheen - Wachovia

Thank you for taking the question. Edgar, as usual, you gave us a lot of insight into your operations. I do have to go to a balance sheet question, though. The 9.5% discount -- cash pay in December, just please remind me again, the way your covenants work in the credit facility, will the cash pay aspect of them now be included in the calculation of interest coverage? And as I understand it, they still remain a holding company note and are not included in the calculation for your leverage covenant -- is that correct?

Steven Macri

The second part of that question, that’s correct. Not included in [that debt]. As far as the cash calculation, once we begin to pay the cash payments in June of ‘010, they will start to be reflected on our average cash balance.

Bishop Cheen - Wachovia

Right, and they will be then in the calculation for interest coverage?

Steven Macri

No, they will not be.

Bishop Cheen - Wachovia

Not for interest coverage but --

Steven Macri

That’s correct.

Bishop Cheen - Wachovia

Okay. All right, that is helpful. And just one quick follow-up, if you can give us some more color on the variable pricing and any of your digital distribution deals and because Apple’s variable pricing is relatively new, any insight into how positive the impact could be going forward for the growth of digital?

Edgar Bronfman

It’s too early to say. Certainly Apple was the first to go April 7th, others have followed, so we are really only four or five weeks in. Not even all of the tracks that reflected new pricing were available at the new price April 7th. It’s taken some weeks to get everything organized, so it really is still very early days, so I don’t think we can give you any kind of an accurate projection.

Early indications, as we mentioned in the [talk track], are positive but beyond that, I think just too early. We’ll have a much better sense of it for our next quarter’s call.

Bishop Cheen - Wachovia

Thank you, Edgar.


Our next question comes from the line of Jessica Reif-Cohen from Merrill Lynch.

Jessica Reif-Cohen - Merrill Lynch

Thanks. If the Performance Rights Act does pass, can you give us a rough estimate of how meaningful this would be to you on an annual basis, or can you clarify what the royalty might be?

Edgar Bronfman

It’s difficult to do that because the bill will have, even if it passes, we don’t know whether or not the full rate that is proposed will ultimately be adopted. We don’t know what the timing of that adoption will be, whether it will take some years to get to the full level. And so I think it’s just too early to say.

We believe that the rights of the passage though will result in a meaningful improvement to our results and should do so as the radio industry has long had content for free and has not recognized the contribution of recording artists or sound recording owners.

Jessica Reif-Cohen - Merrill Lynch

But the number that’s been thrown around in the press of $500 million for the industry, is that like roughly accurate? Is it [past] today?

Steven Macri

I think that’s been thrown around as the number that the publishers get paid, and people are looking at that and saying it could be a corollary and something that you can use as a benchmark, but I don’t think there’s any reality to any numbers yet at this point.

Jessica Reif-Cohen - Merrill Lynch

Okay. And then I guess two other things -- is there any indication of pricing pressure at the retail level, given just the overall weak retail and physical environment?

Edgar Bronfman

I would say no more than has been the case for the last five years, Jessica. Nothing new, and we’ve been -- we successfully resisted pricing pressure and our wholesale margins have been essentially flat over the five-year period and there’s no real new news on that over the last sort of six months.

Jessica Reif-Cohen - Merrill Lynch

Okay, and the last question is, is there anymore room for improvement on the cost side? Or have you really squeezed out everything at this point?

Steven Macri

No, I think, as we’ve talked before, there continues to be room on the cost side. And over many years, I think we’ve been very thoughtful and aggressive on managing the people side of our business from a cost perspective and now we are very focused on the process side. So looking at every item where we are spending money and trying to understand how can we more efficiently run our process so that we can take costs out. Some of that comes from using new tools and technology, like digitally delivering promotional materials to radio stations rather than sending out millions of physical CDs.

On the other hand, the other opportunity is outsourcing and leveraging other people’s skills and turning even more of our cost structure into a [inaudible] format.

So we’re hard at work and keeping at it and think there’s still lots of opportunities.

Jessica Reif-Cohen - Merrill Lynch

Thank you.


Our next question comes from the line of Rich Greenfield from Pali Capital.

Rich Greenfield - Pali Capital

Two questions -- one, Edgar, you talked about the recorded music, the digital piece of it being about 41%, which was up strong from that 34 last year in terms of digital as a percentage of the business. I think the equivalent number overseas is only about 21%. I was hoping you could give us some visibility, because obviously as you get to more than 50% digital, it would seem like your business starts to change dynamics. I am just wondering, that international is still trailing quite a bit and how do we think about the timeframe of getting to 50% for that international number relative to where you are in the U.S.?

And then two, on MySpace Music, MySpace clearly struggling, News Corp. talking about it last night on their conference call -- just wondering, from the music standpoint, this was one of the digital joint ventures you were excited about. I’m just wondering how you think it’s going, given the kind of struggles of MySpace and the social networking world right now. Thanks.

Edgar Bronfman

Sure. Let me talk about international first. I think there are two issues that distinguish international from U.S., but I am glad you pointed out the strong growth we’ve had in the U.S. and that the digital revenues now are at 41%, so we are starting to become a -- we can see the day very soon when more than half of our revenues will be digital in the U.S.

International, you need to remember is a wireless world rather than a wired world. The infrastructures really throughout the international world are very different than they are in the U.S. Apple iTunes, which of course led the digital growth in the U.S., has been, until the introduction of the iPhone, a wired system.

And so the penetration of PCs or the wired world in international being much smaller than it is, the opportunity for a wired infrastructure is smaller. Now, with the introduction of the iPhone in Europe and elsewhere -- in fact, in many more markets than iTunes is currently available, as well as introductions from Nokia, Sony Ericsson, many others, I think gives us an opportunity to grow that international percentage more rapidly. But that has really been the fundamental reason why international digital revenue is a lower percentage today than U.S. digital revenue.

In terms of MySpace, it is a joint venture for which we continue to hold out a good deal of hope and potential, but without putting too fine a point on it, it has disappointed us so far. MySpace Music has been slow to create monetization tools and to be able to impact in a revenue generating way the massive audience that they have been able to attract, and that needs to change, quite frankly. It needs to change for MySpace and it needs to change for the music industry and it certainly needs to change for Warner Music. But I am hopeful that with the new management team there and an increased focus from the senior-most management at News Corp. to [Owen Zanatta], CEO of MySpace Music and others, that we’ll be able to make that turn.

Rich Greenfield - Pali Capital



Our next question comes from the line of Jason Bazinet from Citigroup.

Jason Bazinet - Citigroup

I just have one small question regarding these -- this small write-down you took on imeme and Lala investments. Can you just elaborate a little bit on why the write-down? In other words, was there something that you expected to develop industrially that didn’t that prompted the write-down, or is that more just looking at comps and just saying the assets were worth less today? Thanks.

Steven Macri

I think the vast majority of the write-down really just reflects the current economic valuations for those businesses. In this economic environment, they are a lot different now than when they were when we bought those businesses, or invested in them, back in 2007.

Jason Bazinet - Citigroup

Okay. Thank you.


Our next question comes from the line of Doug Mitchelson from Deutsche Bank.

Doug Mitchelson - Deutsche Bank

A couple of questions, guys -- the first is it’s interesting the book -- a lot of book retailers and consumer products guys within media suffered in the first quarter related to sort of retail inventory shrinkage. But it seems like music and DVDs have not been impacted, so can you sort of talk about that, the inventory stocking of some of your retailers? I know looking at iTunes now, number one and Amazon is up there but retail is still a pretty good part of the mix. What’s happening there?

And then separately, I know it’s sort of a small piece of revenue but it will get more interesting as we go farther online -- I’m just curious what’s happening with music DVD sales and how you guys are thinking about trying to monetize music videos online. I mean, I know you are selling them through iTunes but is there any way to sort of ramp that as a revenue stream? Thanks.

Michael Fleisher

On the inventory piece, I think we kind of -- we took our big pain several quarters ago, so we’ve obviously been working very close with the retailers on trying to make sure that they and we together thoughtfully manage inventory. One of the ways we have been helping with that is by really trying to have people understand that there aren’t that many SKUs that make up most of their revenue and that by in effect carrying less SKUs, particularly deep catalog SKUs that don’t sell any units, we can make their business more efficient and obviously make our business a lot more efficient for shipping that stuff and taking it all back in returns is quite painful.

But I think versus what you have seen in the book retailers and others, I think that really -- we cleaned up that sort of first slug several quarters ago.

Edgar Bronfman

On the online music video space, first of all I would say that our digital growth this quarter was also impacted to some small degree by the fact that our music videos are not available on YouTube. And I think our music videos not being available on YouTube is symptomatic of a larger problem, which is, and it was referred to in the social media space by Rich, which is there’s a tremendous amount of activity, a huge amount of viewership, and very little revenue. And I think that situation in these new economic -- in this new economic environment frankly can’t continue for anyone. So I think the universal music initiative to create VIVO in concert with YouTube is a very positive direction for the music industry, and we think that creating a premium environment for advertisers is important, but I would also point out that advertising alone simply is not going to be enough. The online advertising industry is really quite small. Yahoo! has about 40% of the entire online advertising market; therefore that which is available to the rest of every other business in the United States is very modest.

So any premium online video channel is going to have to include, from our perspective, significant and serious monetization opportunities above and beyond advertising in order to be effective.

Doug Mitchelson - Deutsche Bank

Great. Thank you.


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

Tuna Amobi - Standard & Poor’s

Great. Thank you very much. So I’ve got a few as well -- maybe I can just take them one at a time, really quick questions. So Edgar, on the LiveNation Ticketmaster deal, I know last time you couldn’t comment because it wasn’t announced. Now that it’s announced, do you have any official views that you have expressed that you might want to share with us on that deal?

Edgar Bronfman

Thanks for the opportunity, Tuna, but no, we really don’t comment on other company’s activities, mergers or otherwise, frankly. We don’t have a comment for you today.

Tuna Amobi - Standard & Poor’s

Okay, so let me shift gears to expanded rights deals then -- so you’ve gone from one-third of your roster to about half in relatively short order, which is pretty impressive. I’m just trying to get a better handle on how you are doing it -- anymore color on these deals, the length of the deals, any disparity in the economics of these deals and any color by region, et cetera, would be helpful.

Edgar Bronfman

I would say we are making progress both internationally and domestically on expanded rights deals, and there is variation deal-to-deal just as there is variation deal-to-deal in our core recorded music business. Not every artist deal on recorded music is the same -- in fact, they are almost all unique in some aspect or another on recorded music and the same would be true for expanded rights. So uniformity is not a characteristic, nor frankly a desired outcome for the industry in that regard.

But I think we have made an awful lot of progress and frankly, I would note that while the number of expanded rights deals is up from a third, it’s really up from zero about three years ago, so this represents, as I said, an absolutely fundamental shift in our business model. While I don’t want to predict, and I was clear I think in the talk track, that this will not result in massive revenue for us in the next quarter or two, it will take some time. But one can begin to see how both with the digital growth becoming a much more significant part of our overall revenue and now putting in place an entirely new business model that we are going to be a very different business in the future than we are today.

And we have put together -- and one of the ways we are achieving this success, Tuna, to answer that part of your question, is we’ve put together not only a stronger internal management resources but also access in place, particularly in Europe, for both touring, ticketing, artist management, et cetera. Also, we have those strengths in Asia-Pacific that allow us to demonstrate to artists how strong a partner we can be in building their careers.

Tuna Amobi - Standard & Poor’s

Okay, so in terms of the [inaudible] date, significantly more than five years, or less? Any color on the [inaudible]? I don’t know if you commented on that.

Edgar Bronfman

I didn’t comment but I would be happy too -- they generally have tracked the same period of time for which an artist is contracted for recorded music and that usually -- like album cycles rather than years, but they are many multi-years of agreements.

Tuna Amobi - Standard & Poor’s

Okay. And lastly, on the video production unit I think you launched about two years ago, we haven’t heard much about that since then. I think you called it Den of Thieves. I love that name. I wanted to see if you had any update on that unit’s contribution thus far to your digital revenues -- is that material or any update there would be helpful.

Edgar Bronfman

We haven’t called it out because we’ve invested a relatively small amount. We are percolating some new initiatives, some new shows, but really don’t have a great deal of interesting results to articulate right now, and those results are not material so we haven’t really called them out.

Tuna Amobi - Standard & Poor’s

Okay, great. Thank you very much.

Edgar Bronfman

Thank you, everyone. We appreciate it and we look forward to talking to you again in a few months.


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

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