Warner Music Group Corp. (NYSE:WMG)
F2Q10 (Qtr End 03/31/10) Earnings Call
May 05, 2010 8:30 AM ET
Jill Krutick - Senior VP, IR
Edgar Bronfman Jr. - Chairman and CEO
Steven Macri - Executive VP and CFO
Michael Fleisher - Vice Chairman, Strategy and Operations
Bishop Sheen - Wells Fargo
Laura Martin - Needham
Ingrid Chung - Goldman Sachs
Jason Bazinet - Citigroup
Tuna Amobi - Standard & Poor’s
Richard Greenfield – BTIG Pali Research
Welcome to the Warner Music Group’s fiscal second quarter earnings call for the period ended March 31, 2010. At the request of Warner Music Group, today’s call is being recorded for replay purposes and if you object, you may disconnect at any time. As a reminder, there will be question and answer session following today’s presentation (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.
Thank you very much. Good morning, everyone. Welcome to Warner Music Group Corp. fiscal second quarter 2010 conference call. Both our earnings press release and the Form 10-Q we filed this morning are available on our website.
Today Chairman and CEO, Edgar Bronfman Jr. will update you on our business performance and strategy; Executive Vice President and CFO, Steven Macri, will discuss our quarterly financial results. And then, Edgar, Steve, and Michael Fleisher, our Vice Chairman, Strategy and Operations will take your questions.
Before Edgar’s comments, let me remind 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, 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 of general economic conditions may have on us, market share gains, and our intentions to deploy our capital, including the level and effectiveness of future A&R investments.
All forward-looking statements are made as of today and we disclaim any duty to update such statements. Our expectations, beliefs, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, and projections will result or be achieved.
Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties, and other factors that can cause actual results 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.
Thanks Jill. Welcome everyone and thank you everyone for joining us. The second quarter provided another example of our ability to deliver stable results even in the phase of an ongoing reported music industry transition and general economic pressures. We saw only moderate revenue decline while we expanded our OIBDA margins and delivered improved OIBDA. We remained confident that our efforts should drive sustained growth overtime. That confidence is fueled not only by our successful track record which then include shifting our business mix, managing cost, developing new business models and delivering strong returns on our A&R investment, but also by our enhanced digital leadership position. We are fast approaching a key milestone in the evolution of our business. With digital revenue reaching 47% nearly half of our US recorded music revenue this quarter, we are approaching the digital device.
While this number will fluctuate quarter-to-quarter it is indicative of the great strives we’ve been making to create a more digital centric business model. We’ve consistently proven that we can adapt our strategies in order to position ourselves for future growth, while continuing to generate strong free cash flow.
This free cash flow gives us the flexibility to continue to invest in A&R, marketing and promotion activities, the essence of our recorded music and music publishing businesses and also to explore other opportunities that can deliver incremental value to shareholders.
Today, we’ll discuss the company’s quarterly performance in four key areas. First, our A&R marketing and promotional efforts continue to yield results. Second, we sustain our industry leadership in the digital arena with our quarterly digital revenue rising 12% to $199 million on a constant currency basis and as mentioned in the US, digital representing 47% of recorded music revenue as compared to 41% in the prior quarter.
Once again, we sustained our significant digital share advantage of a physical share in the US in the quarter and we have the greatest digital share advantage of any of the major music company. Third, we continue to transform the company by entering into expanded right fields with new recording artists and building our worldwide artist services business. And fourth, we continue to fortify our music publishing business by further strengthening all artist roster business mix and catalogue.
Now, let’s take a look at the quarter’s results more closely. I have expected given our light release scheduled for the quarter and the challenging industry and economic bankrupt, recorded music constant currency revenue which was primarily driven by carryover releases declined both domestically and internationally of 7% and 4% respectively.
As a result of light release schedule, our US share contracted by 1.7 percentage points to 19.2%. There are notable bright spots this quarter that indicate the strength of our core recorded music business. Results were driven by releases from a number of artists enjoying global success including Michael Buble and Muse as well as Christophe Mae and exciting French artists with whom we haven’t expanded rights agreement. Our international recorded music results included a handful of solid performances from both local and international artists and a particularly strong international digital business.
We saw modest declines in revenue of across major European territories as well as the Asia-Pacific region, the UK proved to be an exception showing 15% revenue growth over the prior quarter on a constant currency basis. Our UK business continues to show the positive effects of our investments over the last few years. For the quarter Warner Music UK achieved the greatest year-on-year share growth of all the music majors up 3.9 percentage points to 15%, making it the third largest major in the UK.
Strong carry over momentum from Michael Buble, Paolo Nutini, and Muse contributed to the improving UK results. Michael Buble’s album Crazy Love released in October 2009 has passed to 5 million market in global equivalent album units. Warner Bros Records operates Michael’s merchandize and fan club businesses and Michael sold out arena tour in Europe and the US is reaping benefits for both businesses. Michael recently won four Juno awards including Album Of The Year, Single Of The Year, Hot Album Of The Year and the Fan Choice Award.
Looking ahead on the new release front, Warner Bros Records developing artist Jason Derulo continues to gain traction on a worldwide basis. Jason recently became the first solo male artist in the 17 year history of Billboards top song radio air play chart to notch consecutive number one hits with his first two entries. These two hit singles have together sold more than 5.6 million tracks in the US since release. Both of on his autonomous debut album which was released in March and sold over 1 million tracks equivalent album units globally today.
As we previous said, we remain confident about our full year release schedules recognizing that it will be back in later. We have multiple artist development stories beginning to take shape for the Atlantic Records including BOP, Trey Songz, Plan B and the Zac Brown Band. Each of these artists has had a number one radio singles in their respective genres, and had or will have album releases within this fiscal year. The success today of the artists lays the foundations for continued growth of Atlantic which for the last two years has been the number one label in the US.
Taking a closer look at our digital business, we recognized both our challenges and our growth opportunities. Industry wise, US digital unit growth for the quarter was up 5% over the prior year quarter consistent with the growth rate in the December quarter. Our US recorded digital revenue grew about 6% for the quarter, while we sustained strong growth in our international digital revenue.
International revenue was boosted by the implementation of variable pricing in downloads. The growing global demands for iTunes and iPhones, and new business development activities.
On a constant currency basis, our international recorded music digital revenue increased 20% year-over-year and 4% sequentially. Needless to say achieving robust digital gains remains the top priority, and is one of the key elements of our long term growth strategy.
We expect digital revenue growth to continue over time driven by several factors, including the roll out of new mobile products and business models on a global basis. The advantage of device capabilities and network technologies and the continued traction of asset models which bundled mobile devices, ISP services or consumer electronic with assess to music.
We continue to transform our business within the music value chain, while broadening our revenue mix in the growing areas of the music business, such as sponsorship, fan clubs, artist websites, merchandising, touring, ticketing and artist management among others. This quarter, non-traditional revenue returned to about 6% of our recorded music revenue. As the result of our concert promotion fluctuate based on the timing of current schedules. Essentially all of the contracts we enter into with new recording artists today are expanded rights deals.
With over half of our active global artist roster now signed to expanded rights deals, we continue to believe the growth in non-traditional recorded music revenue attributable these deals will help to offset decline in physical revenue overtime.
Turning to Warner Chappell Music, this business enjoys very attractive financial attributes such as tight conversion rate of OBIDA free cash flow and favorable working capital dynamics. This quarter Warner Chappell’s revenue contracted a digital growth driven primarily by growth in streaming services and internet radio did not offset declines in the mechanical performance and synchronization revenue.
The capital declines track to physical declines in the recorded music industry. As we have previously discussed, we have a global plan to drive long term growth of Warner Chappell featuring three key principles, supporting the development of revenue with publishing catalog by continuing to invest in talented songwriters’ complimentary acquisition. Building new opportunities to exploit the value of our existing catalog and expanding our leadership position in digital music.
Building all these principles, Warner Chappell continues to investment in the production music group. Production music is the complimentary alternative to licensing standards and contemporary hits for television film and advertising producers. Then with the high margin area within our music publishing businesses further diversified our revenue streams.
Recently remained two acquisitions in this space. The Groove Addicts production migrate in the US and Carlin Production Music in the UK. The Groove Addicts library includes vibrant film trailer business in addition to owned content and sub-published content. Film trailers have grown to become one of the largest generators of revenue in production music. Carlin is a well established company that will add scale to our production music operations in Europe. (Muse) business is supplement, our previous production music acquisition.
We’re also focused on increasing our level of activity in synchronization licensing. One recent highlight of Warner Chappell was The Power of Madonna episode from Fox’s hit television series Glee. For the first time, we aired an episode using the music of a single artist, in this case 12 Madonna songs, part of which are majority controlled by Warner Chappell. In conjunction with the episode, Fox released Seven Pound soundtracks featuring the cast of Glee performing Madonna songs which have been selling well.
In addition, Warner Chappell has always had a strong connection to Broadway musicals and has maintained uniquely expensive and valuable catalog of theater music and standard. This Broadway season contains some exciting Tony nominated entrance, featuring Warner/Chappell music.
In March, Twyla Tharp's “Come Fly Away” with the music of Frank Sinatra as the soundtrack opened to critically acclaims. This show uses 12 one of Chappell songs and 13 sound recording license from Warner Music Group’s Frank Sinatra Enterprises joint venture. That venture is also operating all of the retailed merchandise associated with the show.
April 20 marked the premiere of American Idiot, a rocker (concert) based on Green Day’s album of the same name. This exciting musical scored a rave review from the New York Times. Warner/Chappell administers all of the song from the show and one of those records just released the original cast album which features two performances from Green Day.
On the A&R front, Warner/Chappell’s continuing its efforts to strengthen the catalog to artist signings and extension to the existing agreements. We recently extended our worldwide co-publishing agreement in pop song writer Bob Kelly which includes Kelly’s share of the recent hit songs recorded by Miley Cyrus, Britney Spears and our own Jason Derulo.
In addition, Warner/Chappell recently extended its club publishing code administration agreement, with Lady Antebellum band members Dave Haywood and Charles Kelley. This group has been enjoying critical and positive success led by triple platinum single, which spend the past 37 weeks on Billboards top 100 single charts and won Song Of The Year at the Academy of Country Music Awards.
Before moving on to our financials let me take a moment to describe some progress we are making on the public policy front. The momentum continues to build all over the world to implement graduated response program in which ISPs notify and essentially institutes sanctions on copyright infringing customers. More than a decade after digital piracy began its attack on content businesses. Graduated response programs are gaining traction and are being implemented to legislation or volunteer agreement in a number of countries throughout Europe and Asia.
France was the leader in Europe, enacting Islam mark legislation in 2009. In an important milestone, last month the UK passed the digital economy act. Under the new law ISP in the UK will notified subscribers whose accounts have been reported to be infringing. And a secretary of state will be able to require ISP to implement technical measures to limit internet access for serious repeat infringers.
We are pleased with the United Kingdom has joined the growing list of countries that have established a strong framework to enable creative industries to strive in the digital world and hope that these efforts will serve as an example to other nation. And we are hearted to you see ISPs around the world recognize the critical role that they play in helping to fight the piracy that occurs over their network. We will now roll to the financials, before Mike, Steve and I take your questions.
Thank you and good morning. Revenue data we will provide today is on a constant currency basis. For the three months ended March 31 2010, we reported revenue of $662 million down 6% year-over-year. The metric revenue declined 7% or international fell 4%. As expected, revenue continues to be affected by liability schedule according this with industry pressures and the general economic environment.
As we continue to execute on our strategy to transition to digital, our quarterly digital revenue grew 12% to $199 million or 30% of total revenue. Digital revenue was up 11% sequentially due primarily to strong international download growth. Above 65% of our digital revenue was generated in the US and 35% was generated internationally. Our operating income before depreciation and amortization or OIBDA grew 9% and our OIBDA margins expanded to 13% from 12% in the prior year quarter as we continue to carefully manage costs and leverage our highly bearable cost structure
Looking at our different business segments for the quarter. Recorded music revenue fell just 5% to $534 million, as digital gains were more than offset by expected declines of physical revenue.
Recorded music digital revenue grew 11% from the prior quarter to $189 million or 35% of total recorded music revenue that is up from 31% in the same period last year. International recorded music digital revenue grew 20% as iTunes continues to gain traction outside the US. Domestic recorded music digital revenue grew 6% to $117 million.
This represents 47% of domestic recorded music revenue as compared to 41% in the same period last year. As a result of ongoing cost management as well as efforts to leverage our highly bearable cost structure recorded music OIBDA grew 9% year-over-year.
Moving on to our music publishing business. Music publishing revenue of $134 million was down 6% versus the prior year quarter. Synchronization revenue declined 8% and performance revenue fell by 11%. Mechanical revenue declines at 9% throughout the overall weakness in the physical recording music business.
Partially offsetting these declines, digital revenue grew 63% to $13 million or 10% of music publishing revenue. This reflects the timing of cash collections and the growth in the overall digital recording music business. Music publishing OIBDA increased 11% to $61 million over the prior year quarter, and OIBDA margin expanded 5.1 percentage points to 45.5%. The margin expansion is primarily the result of an adjustment and royalty reserves and our continued focus on maximize the profitability of our publishing investments.
Turning to our balance sheet and cash position. We continue to execute on our effective balance sheet strategy. We ended the quarter with a cash balance of $383 million of sequentially from $339 million at September 31, 2009. Free cash flow declined to $54 million from a $125 million in the prior year quarter. Our free cash flow is calculated by taking cash provided by operating activities of $93 million, plus capital expenditures of $8 million and cash used for investments of $31 million.
There are several contributors to the change of free cash flow including the $31 million in cash pay per music publishing investments including the two Warner/Chappell Production Music acquisitions as Ed refused to describe. Lower year-over-year sales and the timing of sale and collections versus the prior year.
Looking forward, we remain confident, our ability to generate significant free cash flow this fiscal year as we have in the past. Our taxes continue to benefit from our tax planning efforts resulting in a decrease of income tax expenses.
We have tax provision of $2 million; the net cash tax is of $6 million, on pretax loss of $26 million. We generated a net loss of $25 million or $0.17 per diluted share compared to net loss $68 million or $0.45 per diluted share in the prior year quarter. As a matter of policy we did not provide financial guidance. As you know this business traditionally includes fluctuations based on recording music release schedule and associated marketing promotional expenses.
Recognizing that our third quarter release schedule is extremely light. We remain confident in our overall release schedule for the fiscal year. I will turn the call back to Edger for closing remarks.
Thanks Steve. I am pleased with our ability to consistently deliver stable results even as we work to transform our business. We continue to lead the industry's transition to new digital formats and platform. We are seeing meaningful diversification in our revenue stream as we move into new growth areas. We continue to generate healthy free cash flow and we are delivering solid performance in our core recorded music and music publishing business.
I would like to reiterate five critical strategies in which we continue to focus. Manage our balance sheet by generating significant free cash flow while controlling our overhead cost and other expenses. Strengthening our digital leadership to a combination of consistent execution on our current business model and development of new business model, enhance the value and growth of Warner/Chappell, to monetize businesses and growing segments of the music industry by expanding partnerships with artists and building relationships with consumers. And invest in A&R marketing and promotion which remain the core strength of our recorded music and music publishing businesses. Michael, Steve and I look forward to answering your question. Thank you. Operator, would you please open it up for Q&A
Question-and- Answer session
(Operator Instructions). The first question is from Bishop Sheen from Wells Fargo.
Bishop Sheen - Wells Fargo
Edgar, two questions, the release schedule I think Michael just said it’s going to be a light in Q3, it sounds like with backend better released schedule is all going to be compacted into that September quarter and second I didn’t hear you talk a whole lot about subscription models and/or an update on progress and royalties in the US, give us your view on that.
Okay, Bishop. First of all, you heard Steve correctly, the release schedules in Q3 is light its way towards Q4, not just some from last year where we had a relatively like Q3 and as much stronger Q4. So something terribly unusual but that’s just the way the release schedule is laying out quarter to quarter as we feel pretty good today.
In terms of progress particularly on royalties in the US. As you know the performance right to act has moved out of committee, democratic leadership remains committed to seeing that legislation through. We are very helpful that we will be able to get through this obviously, legislation is unpredictable both as to timing as well as outcome.
So we remain hopeful but we obviously can’t make any promises. And I did refer to subscription models, which were really referring to more as access models but we do believe that there will be significant growth in bundling the access to contents particularly music with the sales of the device or subscription from very nice piece around the world.
Bishop Sheen - Wells Fargo
So, you think that that’s more evolutionary as the penetration of smart phones and iPads, et cetera develop?
I do, I think the number of smart phones is increasing at an extraordinary rate, and the ability for both devices and network operators particularly when they pay attention to very facile user interfaces. The opportunity for them to add value to their customers is significant. And therefore, we do see a significant interest from ISPs and device manufacturers in this area, and do see as an area of continued growth for the company.
The next question from Laura Martin from Needham.
Laura Martin - Needham
Couple of things Edgar, could you give us, it seems like the digital growth has really kind of slowed structurally. It sounds to me as it’s at 12%. Could you give us what industry wise physical decline was of in the quarter and what’s your best guess for one that cross over point is when digital which is now I guess 30% of your revenue crossover the physical decline point?
And then the second point is as you see markets are really volatile about what’s going on with the Europe, and Greece, and Germany, and I am just curious as to how much of your revenue comes in Europe? How much of that Europe base could come? Kind of volatility right now would affect your earnings as the markets worry about what’s going on in Europe? Thanks.
I think maybe I will let Steve to take that question Laura.
So with regard to the overall physical declines for the industry for the quarter that was 14%. We noted in the past, as digital becomes a bigger part of our business, can be more highly correlated with overall release schedule and then with regards to the effect on the Europe on our business. We do have some more of a national hedge in our business that the revenue is not only important in the foreign territories but also in the majority of the expenses for those records are also in international territories as well. So from an OIBDA standpoint of flow through from an impact on FX is minimum.
Laura Martin - Needham
And the crossover point in regards physical down 14%, digital up 12% and digital 30% of our revenue today. When do you the crossover point digital can get big enough to operate these physical declines?
So, Laura, it's Edgar. A couple points, you are mixing a little bit of apples and oranges there. The 14% in physical decline was in the US, the 12% growth was on a global basis. Digital revenue growth in US was actually slower but at about 5% for the industry, 6% for Warner. But I think that math from some strong trend even so the international revenue, digital download were up significantly more than 20% but we have a number of the mobile deals and all those things slow out in this particular quarter.
So I think structural growth of digital downloads and their place to iTunes and iPhones continues to be very, very strong on a relative basis. We have resisted predicting when we think that digital growth will outpace the physical decline, I would like to continue resisting that tradition as I would invariably be wrong, but obviously the fact that 47% of our digital revenue in the US was digital, all as well for a turn but predicting when that comes is probably little too mysterious for me
The next question is from Ingrid Chung from Goldman Sachs
Ingrid Chung - Goldman Sachs
So I guess first one is for Steve and then another one for Edgar. I was wondering what percentage of your cost for fix versus variable now and how much in terms of cost cutting do you thing is left or were margins just improved on make shift from physical to digital. And then for Edgar, on the last call you said that you are looking for ways to increase value to equity holders, I was wondering if you could give us some update there, what do you think of the best ways to invest Warner Music’s cash?
With regards to the percent of cost of fix roughly 22% to 25% of our costs are fixed and the rest is variable. In that variable infrastructure we have been leverage that, that is actually reflected in our OIBDA margins in this quarter, given liquidity schedule we don’t have a lot of the marketing promotional expenses that you would have to support the records. With regard to cost cutting we continue to make cost cuts for our fixed overhead either eliminating that overhead and/or moving from fixed to variable.
So in the current quarter we had a couple of million dollars of restructuring, we continued to make those actions, given that its one year anniversary of our refinancing, if that gives us a lot flexibility and we’ve taken advantage of that flexibility and take an actions to reduce overhead.
So while it’s more difficult to take cost out. We’ll continue to do so. The fact is matter of taking cost out, it’s also a matter making more efficient processes. So great example of their supply chain where we take a lot of effort to proactively work with our physical retailers and that shown up in the current quarters returns rate being down a couple of point year-over-year.
Ingrid, just in terms of your question on increasing value to equity holders and what we are going to do with the cash. As I said we continue to generate strong cash flow, we will obviously love to see whether or not there are acquisitions in the music spaces that we think can have incremental value to shareholders.
But there are lots of place for us to use the cash that we are thinking to create incremental value to shareholders overtime. And those obviously we all know what those minute options are and preparing them to add to making acquisition same dividend to doing all sorts of things. When we know exactly what route we are going to take we will obviously be happy to tell the market.
The next question is from Jason Bazinet from Citigroup.
Jason Bazinet - Citigroup
I think you guys are doing a solid job in this transition from physical to digital. When we ultimately get to a digital centric world, I have two questions, are you concerned at all about the prospect at least in the US of Apple having monopolies in like power over the industry and two, what sort of changes do you see on the horizon in terms of breaking that Apple lock on digital music?
Jason, this is Edgar, first of all thanks to your nice comment. I think as the world becomes more digital, clearly Apple has proven to be frankly by falling away the loads of debt software and hardware manufacture out there in delivering content to consumers in a seamless and very attractive consumer experience.
And they reap the benefit of doing that with tremendous growth in normally a much slower part of business which is actually contempt sales but in the device sales which generates by far the vast majority of that Apple’s revenue and cost but I do think that Apple and I think Apple will continue to execute extremely well, will remain a very tough competitor for other device manufactures, network operators and such but I do think that Apple’s growth has widened the range of competition from just now to consumer electronic manufacturers to network operators to device manufactures and all kinds of other companies. And I think that’s probably good for the music industry.
When we are seeing more competition coming in into the market, but no one has gotten very rich betting against the jobs. And I certainly don’t want to be the first one to do it. So Steve have been an extra ordinarily talent, Chief Executive and he has done a phenomenal job at Apple and Apple continues to deliver great experiences for consumer.
But I would also add one last comment that Apple so far has never based its growth or its appeal on discounted prices, not on its devices, not on its products and not on its content and I think as they grow their world wide business and as our business grows with other of its competitors overtime, the value content will continue to be apparent in this eco system and other eco systems as well
Jason Bazinet - Citigroup
But if I can just follow-up, but the way you see the world today, you don't see an implicit subsidy that's going on where Apple is sort of, I don't want to say undercharging, but maybe not maximizing the value of your content to subsidize, subsidize is too strong of a word, but at least push all of the value to the device? Because on the PB side of the world, we see folks that are quite reluctant to go down this path because they perceive that there's some sort of cross subsidization going on. In other words, I think if I'm hearing you correctly, there is not a big effort or afoot within the music industry to sort of alter what's happening today in the digital world. Is that right?
I think if you look at what’s happening in other industries particularly the book industry where they are working to control their own retail pricing. We have said from day one that we want to control retail pricing or at least be able to make our own suggestions to retailers rather than be essentially dedicated to.
And we made great progress with Apple last year when with the introduction of variable pricing and obviously its our role that we continue to make progress and continue to advantage content in a digital world, but I cant say if there is specific initiative today with Apple to, I think we need to sort of digest its personal to variable pricing and once that happens and it is happening then I think the next set of compensations are probably due but I think that’s not happening today
The last question comes from Tuna Amobi from Standard & Poor’s.
Tuna Amobi - Standard & Poor’s
So just a couple of quick questions. First on the Apple, given all the glowing comments that you just made, were you surprised about their decision to shut down their LaLa service and if so how do you think that affects the evolution of the access model which you have spoken so much about. It seems like their view of the world is a little different than how you guys would like the digital arena to continue to evolve. What do you read into that and what implications does that have for you?
I think I probably like not to speculate but on the what Apple’s plans are or how it can use the really interesting technology that can acquire in the LaLa acquisition. I am assuming that’s a question that Apple management should answer rather than have Warner Music Group management answer that
Tuna Amobi - Standard & Poor’s
But you don't see that having any impacts at all over your iTunes base, right?
I think it is yet to be seen what the acquisition of LaLa will mean to the iTunes service, I don’t think Apple has made that clear to the market and as well I wouldn’t suggest that they will not have an impact but I am assuming its going to speculate what impact it will have. And Apple is not currently a retailer involved in an access model or subscription model so Apple’s growth to me is independent of the growth that we have foresee in other business model other than they straight forward download models that Apple has pioneered.
Tuna Amobi - Standard & Poor’s
And just on the iPad. Are you having any conversations right now about possibly developing any apps for the iPad specifically on the music video side, and so you see that as a large opportunity?
I wouldn't characterize the opportunity as being large in the near term. But I would say that the iPad including being sort of that’s a great device is often quite visually oriented much like the iPod or the iPod touch devices have visual elements but also one of our focus on audio. We have 20 years over 25 or 30 years of catalog of videos and we certainly do things with our vast catalog of videos as well as apps to create a more digital experience going forward with the music that we really sell. I think we only evolve as devices evolve as the devices evolve and that’s always been the case with cotton industries, but suggesting that will, that will create a new and large revenue stream in short term. I think it’s probably more optimistic than I want to be today.
Tuna Amobi - Standard & Poor's
And on EMI, Edgar, I'm sure you've been watching developments there pretty closely. Any update on your thoughts on that as to how things can unfold in any role Warner Music might play in that evolution of EMI?
Well look as here where we, we really try not to respond to rumors, speculation and I would say its particular in the light of heightened media rumors and speculation regarding EMI acting is good for us not to speak any comment on that regard.
Tuna Amobi - Standard & Poor's
And lastly a housekeeping question for Steve. If you exclude the $31 million Warner/Chappell investment, it seemed like free cash decline was still pretty fairly substantial I might state. I know you mentioned some timing issues about sales collections which evidently might be reversing. Can you quantify how much of those timing benefits we might expect in the back half of this fiscal year?
Yeah sure it’s in it, as you know it is in addition to the cash expanded on investments. It is really the timing of the sales and when it happened in the quarter. So the aligned share of our physical revenue in this March quarter happened in the month of March. So it’s not a collection issue, it is just that I mean of revenue recognition issue. So depending on timing of sales of the years you would expect is to depict that timing difference up in the back of the year.
Tuna Amobi - Standard & Poor's
How much of that just roughly?
You know it’s been millions I mean it’s a substantial amount.
The next question is from Richard Greenfield from BTIG Pali Research.
Richard Greenfield – BTIG Pali Research
Quick question on free cash flow, just following up on Tuna’s question, when I look at leaving off frontline last year and leaving off your investment so far this year I think you are down to like $30 million from a 160 plus last year and you both are on previous calls have talked about kind of your confidence in the stability of free cash flow and I just wanted to make sure that was still the case and that you felt like you can continue to keep free cash flow relatively stable for the year.
On an organic basis leaving off the investments and then just related to that, your last quarter you mentioned that the European concert business had affected your free cash flow quite negatively. Was that benefit picked up now or is that actually something you pick up later in the year. Just wondering how the timing of that kind of flow is through because you didn’t mention that really to the cash flow this quarter? Thanks.
Sure. So with regard to the European concert promotion business that’s all in relation to be based on the timing of when those tours happen so the March quarter or our Q2 is traditionally a low quarter for concerts in general so as those concerts happen either they will be reflected in our cash flow.
With regard to, you are right, its roughly $160 million year-over-year when you adjust for the frontline cash, the line share that really is two fall one is the lower year-over-year sales and two is just the timing of cash collections that happened later in the quarter. So as I said in my prepared comments, we feel extremely confident in our ability to generate cash flow for the rest of the year as we have in the past.
Well I appreciate your time and attention to our results and we look forward to talking to you again in a few months. Thanks and have a good day.
That concludes today’s conference. You may disconnect at this time.
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