Warner Music Group F1Q08 (Qtr End 12/31/07) Earnings Call Transcript

| About: Warner Music (WMG)

Warner Music Group Corp. (NYSE:WMG)

F1Q08 Earnings Call

February 6, 2008 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

Michael D. Fleisher - Chief Financial Officer, Executive Vice President


Bishop Cheen - Wachovia

Doug Mitchelson - Deutsche Bank

Glenn Vogelman - Goldman Sachs

Evan Wilson - Pacific Crest Securities

Richard Greenfield - Pali Research

Tuna Amobi - Standard & Poor’s

Andrew Finkelstein - Lehman Brothers

Andrew Rittenberry - Jennison Associates


Welcome to the Warner Music Group’s fiscal first quarter earnings call for the period ended December 31, 2007. 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 Corp.’s fiscal first quarter 2008 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 EVP and CFO, Michael Fleisher, will discuss our financial results for the quarter. Then, Edgar will wrap up before we take your questions.

Before Edgar’s comments, let me remind you that this communication includes forward-looking statements that reflect the current view 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, and market share gains.

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

Thank you, Jill. Welcome, everyone. Thanks for joining us. The recorded music industry pressures persisted in the December quarter. The industry’s physical sales declined further and digital growth, particularly mobile, remained on a slower trajectory. Nevertheless, we once again outperformed the marketplace and continued to establish a framework for becoming a business with a more diversified revenue stream.

While we all recognize how strenuous industry transitions can be, we must also continue to recognize that these transitions are times of great opportunity. We are creating the foundation for future growth and believe we have the right strategy in place, not only to effectively navigate through these difficult times but also to reap the rewards of the music industry’s evolution.

Let me describe for you some of our recent achievements and ongoing initiatives aimed at positioning us for future growth.

First, in the important digital arena, Warner Music sustained its digital lead into the December quarter and for the full calendar year with the greatest U.S. digital album share advantage over physical album share of any of the music majors and we continue to explore new business models that will accelerate digital growth.

Second, as part of our transformational effort to expand our role in the music business, we made strategic investments and are expanding our rights and recording agreements with new artists that strengthen our competitive position by giving us a presence in the broader music business that will increasingly be meaningful to us going forward.

Third and perhaps most importantly, highlighting our success approach to A&R, marketing and promotion. According to SoundScan, Warner Music gained more U.S. album share than any major music company over the past calendar year, 2.1 percentage points, to end the year at over 20%, Warner’s highest U.S. album share in 10 years.

We were the only major music company to increase U.S. physical plus digital album equivalent unit sales in 2007, rising 1% versus the industry’s decline of 9.5%, and Warner Brothers Records and Atlantic Records were the number one and number two labels in U.S. album share in both the December quarter and calendar year 2007.

And fourth, we’ve been able to get our music publishing on a more solid footing with several quarters of consistent results.

Now I’d like to talk about these accomplishments in more detail. We remain committed to growing our digital revenue to first compensate and then to overtake the decline of the physical recorded music business. We had quarterly digital revenue of $141 million, a sequential improvement of 9% and a 41% improvement compared to the same quarter last year.

This quarter, our digital revenue was 14% of our total revenue and was 22% of our total U.S. recorded music revenue, up from 20% in our fourth quarter of 2007 and 17% in the prior year quarter.

This quarter, we again demonstrated both the success of our digital strategy and the strength of our content. On December 10th, our artists held the number one spot for all four musical content categories on the U.S. iTunes store, including singles, albums, ringtones, and music videos. This marks the first time that any one music company has led all four categories.

In December, we began offering DRM-freed audio downloads on the Amazon MP3 digital music store, which allows every track and album purchased to be playable on virtually any personal digital music capable device.

A major media campaign kicked off by Pepsi at last weekend’s Super Bowl raises the profile of this development. This move underscores our commitment to enhance the competitiveness of the digital marketplace and to satisfy consumers’ needs for flexibility.

In January, we announced a deal to offer our content on Play Now, Sony Ericsson’s over-the-air mobile download service. The service has greatly improved is user interface, content library, and functionality from its earlier incarnation, addressing key gating factors to growing the mobile music business generally. We are pleased to see Sony Ericsson and other mobile handset manufacturers beginning to recognize the value of music content and the importance of the consumer experience in seamlessly accessing that content on their mobile device.

As we push to expand our digital revenues, we recognize that we must also transform our business in the music value chain. We are entering into expanded rights deals giving us participation in growing areas of the music business, such as sponsorship, fan club, merchandising, touring, ticketing, and artist management. These expanded rights deals create a true partnership with our artists and increased incentive for us to nurture and grow all facets of their careers.

We have already entered into expanded rights deals with scores of artists around the world and continue to make this a strategic priority for new artist signings.

Grammy nominated best new artist Paramore is an example of the significant potential of success that expanded rights deals have for our record companies and for their artists. This was one of our very first expanded rights deals in the U.S., struck in December 2005. A multi-year grassroots marketing effort has begun to pay off as Paramore’s second album, Riot, is approaching platinum status in the U.S. Paramore’s selling out increasingly larger venues and has a fast-growing online fan club and merchandising business. This is a great example of what can happen when an artist and their record company’s interests are more directly aligned.

We are moving aggressively to establish a best-in-class skill set beyond our core recorded music and music publishing expertise, so that we can optimize our offerings to artists and broaden our revenue mix. This will be a win-win for us and our artists. While this process will require some investment, it should largely be accomplished through small incremental moves strategically designed to enhance our overall results.

A notable example of our efforts to forge stronger connections between artists and their fans, and to diversify revenue is our June 2000 investment in Artist Arena, a leading artist fan-club company. Artist Arena specializes in fan-club management and marketing, pre-sale and VIP ticketing, and e-commerce solutions for recording artists.

Formed in 2004, Artist Arena now has over 80 artist clients. Over the past six months, Artist Arena has begun to manage artist fan-clubs for Warner Music artists Kid Rock, Panic At The Disco, Death Cab for Cutie, and Gym Class Heroes, and non-Warner artists Fallout Boy, Three Doors Down, and All-American Rejects.

These fan-clubs create powerful connections between artists and their fans, laying the foundation for further monetizing that relationship.

In the international arena, we evaluate the needs of each territory to find the best solution to expand our rights offerings with artists. In France, we acquired Camus Productions, France’s leading tour production, promotion, and booking company. This transaction brings together Camus Productions’ unrivaled experience in staging live events with our world-class roster of local and international artists. The partnership will extend the range of services available to acts signed to Warner Music France as well as those represented by Camus Productions, reinforcing our ability to support a wide range of artists across all aspects of their careers.

Diversifying our business requires seeing opportunities at an early stage and seizing them. This is an important part of our job, whether we’re signing artists or making acquisitions. And overall, both our A&R and our M&A track record is a strong one and has brought many successful artists, companies, and executives into our fold.

But realistically, not every transaction can succeed as we push hard during this time of change and opportunity. In the event they do not, we act decisively and move on. This was the case with Bulldog Entertainment, an entertainment services company that we acquired in May 2007. While we were obviously disappointed with this acquisition and have since exited the business, we continue to believe that taking prudent risks to expand and enlarge our revenue opportunity is a far better strategy than standing still.

A&R, marketing and promotion remain our core business activity. Our success in these areas over time is best measured by our ability to outpace the market and grow our market share. In fact, we were the only music major to gain year-over-year U.S. album share in the December quarter, growing more than four percentage points to 20.4%. As previously mentioned, we also gained more U.S. album share than any of the music majors in calendar ’07.

For Warner Music, total U.S. album units sales including track equivalents rose 13.5% in the December quarter and, as I mentioned, improved 1% for calendar ’07. This stands in stark contrast to the industry, which was down 12% for the quarter and 9.5% for the year.

As difficult as the recorded music industry may be at the moment, we are transitioning to growth. Examples of this progress include the following: Amazon entered the digital music marketplace. In calendar ’07 on a year-over-year basis, U.S. digital album unit sales grew faster than U.S. digital track unit sales, 53% to 45%.

We saw weekly U.S. digital track sales post their usual holiday surge, rising about 160% in the final two weeks of December, from 16.6 million weekly digital track units to 43 million units, setting a higher benchmark for digital track sales in 2008.

And new music-enabled mobile device development continues at a rapid pace and the CES event was a testament to the significant investments being made by all the major technology and telecom players to create vastly improved product and user experiences.

For the December quarter and the 2007 calendar year, we gained album unit share in the U.S. year over year in four out of the top five musical genres, including top sellers, R&B, alternative, and hard music, based on releases from artists such as Josh Groban, Nickelback, Michael Buble, Led Zeppelin, and Linkin Park.

Josh Groban’s album Noel deserves a special mention. Selling 3.9 million albums in the U.S., Noel was the number one selling album for calendar 2007. Josh’s album broke Elvis Presley’s record set in 1957 for most weeks at number one for a holiday album.

The success of Noel helped to boost quarterly catalog sales for the artist albums by nearly 30% year over year. Success such as this can only come from the long-term collaboration of a talented artist and their record label. Congratulations to Josh and to Warner Brothers Records for having the vision, drive, and creativity to bring this album to market in a unique and exciting way.

In the December quarter, while our recorded music business has dramatically outperformed in the U.S., we’ve had mixed results internationally. Our U.K. business picked up compared to the prior year quarter, led by strong sales momentum for Michael Buble, Led Zeppelin, David Gray, and James Blunt.

In Japan, we had another good quarter but faced very tough prior year comparisons and we had soft performance in some of the key European markets and Latin America tied to market pressures.

One of our goals has been to drive the performance of our uniquely valuable Warner Chappell Music publishing business, the third-largest music publisher in the world as measured by market share. Warner Chappell, which enjoys a stable, diversified revenue stream from its extraordinary library, has delivered improved performance over the past year and has an aggressive agenda planned for the year ahead.

This was the fourth consecutive quarter of flat to rising revenue and OIBDA at Warner Chappell, notwithstanding the recent impact of the Writers Guild of America strike on our synchronization revenues. Going forward, we will strive to sustain and improve this performance despite the fact that diminishing CD sales will cause mechanical revenues to decline over time.

We have a multi-pronged plan to drive long-term growth at Warner Chappell. We will make the necessary content investments to support our growing production music business, new songwriter discovery, and catalog development. We will develop new exploitation opportunities to expand the value of our existing catalog. We will expand our leadership position in digital music by playing a key role in industry initiatives, platform development, and standard setting, such as our recent pan-European digital licensing effort. And we will broaden our international reach and deepen our global content offering.

As we implement the business strategies already mentioned, we’ve been shifting some internal roles and making selective external hires of seasoned executives, such as the recent hiring of Warner Chappell’s new Chief Financial Officer.

On the A&R front, this quarter Warner Chappell received a Grammy nomination for Song of the Year, “Hey There Delilah”, written by Tom Higginson for the Plain White T’s. Warner Chappell recently extended its administration agreement with Barry Gibb of the Bee Gees, who recently received the BMI Icons award honoring his group’s “unique and indelible influence on generations of music makers”.

Warner Chappell recently renewed its exclusive worldwide co-publishing deal with iconic band Green Day, who has been with Warner Chappell and Warner Brothers records for around 15 years and who have sold nearly 50 million albums globally.

And furthering our efforts over the last few quarters to reinvigorate our synchronization business, eight Super Bowl ads featured music from Warner Chappell and Rhino artists this year.

Warner Chappell has also signed a groundbreaking digital licensing agreement with Radiohead, a band that we have had a relationship with for over 15 years. These digital rights include mechanical, performance, synchronization, lyrics, master recording, image and likeness for their highly successful In Rainbows release.

As a result, potential rights users across the world will be able to secure licenses from one destination, a completely unique approach. We are delighted that Radiohead has selected Warner Music to carry the torch for their copyright in the digital space.

We look forward to updating you on Warner Chappell’s continued progress.

Now, before turning the call over to Michael, I just want to mention a couple of additional items. First, I wanted to touch on a recent policy development that may have ramifications for the music industry in the medium term.

A broad coalition from all corners of the music industry, including artists and rights-holders, has initiated a campaign in Washington to achieve equal payment standards for the use of recorded music -- excuse me, the use of recorded music content on various platforms. In today’s interactive environment, terrestrial radio no longer has the dominant promotional role for music sales that it once had. While most countries have already enacted a performance royalty for terrestrial radio, there are still five countries in the world in which broadcasters are not paying royalties to the recording industry for the use of our musical content. Those five countries are the United States, Rwanda, China, Iran, and North Korea.

To remedy the situation in the U.S., the Performance Rights Act was introduced in congress in December. The legislation’s goal is simple -- requiring those who profit from the use of music to pay for its use. We look forward to working to achieve the same fair standard in the U.S. that exists around the world.

And finally, we are gratified to see the French Government, together with rights-holders and the major Internet service providers, put together a groundbreaking agreement which takes a novel approach against Internet piracy. The group will establish an independent government body which will operate a system of warnings leading to the suspension or termination of Internet subscriptions used for illegal file sharing.

Under the terms of the agreement, access providers have committed to experimenting with technologies to filter out infringing content on their networks and content companies have agreed to work towards interoperability.

We see this as another important initiative in the war on Internet piracy.

Now I’d like to turn the call over to Michael for a run-through of our financials.

Michael D. Fleisher

Thank you, Edgar and good morning, everyone. Let me begin by covering some of our key financial highlights for the quarter.

Looking at the income statement for the three months ended December 31, 2007, we reported revenue of $989 million, which grew 7% from the same period last year, or 1% on a constant currency basis.

Our performance in the quarter clearly demonstrates that identifying the right creative talent and successfully bringing it to market can still generate improved revenue even in today’s marketplace.

Total constant currency quarterly revenue gains in the U.S. were partially offset by declines in the Asia-Pacific and Latin America regions and, to a lesser extent, in Europe.

Domestic revenue grew 10% while international revenue declined 6% on a constant currency basis.

Total quarterly digital revenue rose 41% to $141 million, or 14% of total revenue, up from $100 million or 11% of total revenue in the prior year quarter.

Digital revenue as a percentage of total revenue was down from 15% in the last two quarters, largely as a result of the disproportionately significant physical sales of Josh Groban’s Noel album, which had great holiday gift-giving appeal, as albums often do during that time of year.

Quarterly digital revenue rose sequentially by 9%, led by a strong global online performance and a lift in subscription revenue, which reflects a retroactive benefit of $4 million from the new U.S. satellite radio rates for recorded music.

Approximately 65% of our total digital revenue was generated in the U.S. and 35% in the rest of the world. Our worldwide digital revenue stands at about 60% online and 40% mobile. In the U.S., online remains a larger share of our digital business than mobile. Internationally, online and mobile are similarly sized.

Mobile remains soft as ringtone sales fell in the U.S. and were flat internationally in the quarter. New mobile products, such as ringback tones, full track downloads, and other more innovative offerings have yet to generate meaningful revenue.

As Edgar mentioned, we have seen an abundance of new mobile devices and more integrated music service offerings from handset manufacturers that should boost our mobile revenue over time.

Today’s recorded music business is challenged and it may take some time before it returns to growth. Nevertheless, we continue to develop our digital business and broaden our approach to the recorded music business in order to mitigate our exposure to current industry trends.

While transforming our business mix, we remain vigilant about managing our costs, even as we make the investments necessary to lay the foundation for our future growth. In the quarter, our operating income before depreciation and amortization, or OIBDA, fell 8% to $129 million. Our OIBDA margins contracted two percentage points to 13%, primarily due to tough comparisons against last year’s highly profitable results from two local artists in Japan, Ayaka and Kobukuro.

Other contributors were higher corporate costs associated with upgrading our IT infrastructure, including our financial reporting systems, and growth in our third-party distribution business.

In addition, the first quarter includes the G&A costs of some acquisitions that did not exist in the prior year quarter.

Let’s now look at our different business segments. Quarterly recorded music revenue grew 1% to $850 million on a constant currency basis, driven by releases from Josh Groban, Led Zeppelin, Michael Buble, Kobukuro, and James Blunt.

Constant currency quarterly revenue gains in the U.S., U.K., Germany, Canada, and the Asia-Pacific region outside of Japan offset declines in Japan, the rest of Europe, and Latin America.

Overall international recorded music revenue fell 7% on a constant currency basis, while domestic recorded music revenue rose 11% year over year, helped by strong holiday sales and an improved domestic release schedule.

Furthermore, declines in our international physical recorded music business were more than offset by year-over-year revenue increases in our domestic physical recorded music business and our global digital business. Recorded music digital revenue grew 42% from the prior year quarter to $132 million, or 16% of total recorded music revenue, up from 12% in the same period last year.

Domestic recorded music digital revenue amounted to $89 million, or 22% of total domestic recorded music revenue.

Quarterly recorded music OIBDA fell 4% to $136 million, with growth in the U.S. more than offset by declines internationally.

Let me move on to our music publishing business. In comparison to the same quarterly period in 2007, music publishing revenue of $144 million was flat on a constant currency basis. Music publishing revenue grew 7% domestically, led by strength in performance and digital revenue, offset by a 3% constant currency decline internationally.

Total music publishing revenue benefited from constant currency gains in digital revenue, offset by modest declines in both mechanical revenue and performance revenue.

Synchronization revenue was flat year over year as we felt the negative impact of the Writers Guild of America strike on the television production and filmed entertainment of our sync business.

Music publishing OIBDA was $21 million, up 11% from the prior year quarter, as we saw the benefits of a rising share of digital revenue.

As for our cash management and our balance sheet, we ended the quarter with a cash balance of $160 million. Total net debt amounted to approximately $2.1 billion, which reflects total debt less cash. Our cash and net debt balances reflect a timing related increase in net accounts receivable of around $70 million, all from accounts which are current, due to the back-end loaded holiday sales.

For the quarter, we had a negative free cash flow of $155 million, primarily due to the accounts receivable impact on working capital and investments made during the quarter. Our free cash flow is calculated by taking cash from operations of negative $36 million, less capital expenditures of $7 million, and net cash paid for investments of $112 million, which includes our Frank Sinatra investment discussed last quarter.

For the three months ended December 31, 2007, we had net cash taxes of $24 million and we had a tax provision of $10 million on a pretax loss of $6 million. Our tax expense includes income taxes accrued mainly outside the U.S. and withholding taxes paid to non-U.S. countries where we generate royalty income from sales of repertoire outside the U.S. Our taxes will fluctuate based on which jurisdiction’s income is generated overseas.

At December 31st, we had a U.S. tax loss carryover of $200 million and foreign tax credit carryovers of $56 million. These carryovers will be available to reduce our U.S. income taxes in future years.

For the quarter, we generated a net loss of $16 million, or $0.11 per diluted share, including an $18 million impairment charge, or $0.12 per diluted share, related to Bulldog Entertainment. As of January’s shutdown of the business, this will be accounted for as a discontinued operation.

On capital deployment, our board and management regularly evaluate our needs and determine how best to invest our capital to drive value for investors. Since November 2005, we have returned significant value to shareholders through regular quarterly dividends, about $80 million per year. In light of the current dividend yield and the state of the recorded music and credit markets, we engaged in a longer, more in-depth review of our dividend.

Given our commitment to return capital to shareholders, the board determined to continue the policy of paying a quarterly dividend in an amount not to exceed $80 million per year. We will continue to evaluate this issue on a quarterly basis and these announcements will be timed with our earnings announcements going forward.

As a result, our free cash flow will be used in three ways: one, continued support for any future dividends; two, investments in both A&R and transformational initiatives, including both digital opportunities and other accretive investments; and three, additional efforts to create value through efficient management of our balance sheet.

As Edgar mentioned, we will continue to invest in our transformation initiatives but the moves over this fiscal year should be on a smaller scale than the deals we concluded in 2007. Calendar year 2007 included some unusual deals, such as the increased minority stake in front line and our Frank Sinatra investment. There is always the possibility of a much larger transformative transaction in this dynamic marketplace but our current plans are focused on continuing to only add smaller businesses that help us gain the skills and capabilities we need for the future of our business.

As we have consistently said, we do not manage our business for any single quarter. We strive to release the right content at the right time, in an effort to maximize fiscal year profit potential and artist career development.

As a matter of policy, we do not provide financial guidance to the investment community, given the quarterly fluctuations from our music release schedule and associated marketing and promotional expenses are normal.

While recognizing the challenges ahead, we are confident in our future.

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

Edgar Bronfman

Thanks, Michael. Over the course of this upcoming year, we have an agenda that builds upon the progress of the past year. We plan to remain the most innovative, responsive, and nimble major music company. We will stay vigilant in managing costs and generating significant free cash flow, while transitioning the recorded music business back to a growth trajectory. We will continue to enhance the value and progress of our music publishing company, Warner Chappell. We will improve our digital leadership through innovative business models. We will broaden our partnerships with artists and our artists’ relationships with consumers to add new revenue streams from growing segments of the music business. We will expand our business models to take advantage of new opportunities resulting from the technological transformation of the music business, and we will increase market share while maximizing our margin potential.

Recognizing that there is a lot to be accomplished, we are confident that we have the right strategy in place and the right team to execute upon that strategy. Our goal is to drive shareholder value over the fiscal year and beyond as our transformation continues.

We look forward to answering your questions. Thank you and Operator, would you please open it up for Q&A?

Question-and-Answer Session


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

Bishop Cheen - Wachovia

Good morning. Thank you for taking the question. Just two questions: one, let me billboard them for you -- in your M&A priorities going forward, and I think the color you gave, Edgar, was things might not be as large in fiscal year ’08 as they were in ’07. You talked about transforming acquisitions and A&R acquisitions. Can you be a little more specific in the kinds of examples you would be looking for? Because we’ve all read about a number of opportunities out there.

And two, Michael, the cash seems to be a lot less than normal, about half of what it usually is at this kind of quarter and you talked about the $70 million A&R. Is the cash a lot less because you since January 1st, you’ve laid out cash on some acquisitions?

Michael D. Fleisher

Let me take your question to me first -- I think that there’s two impacts that are driving the cash balance of December 31st. One is the accounts receivable balance that I mentioned which really is primarily tied to Josh Groban and a bunch of other physical products that sold late in the quarter and therefore weren’t collected, where normally our big holiday physical ships are in the September/October timeframe and we collect them by the end of December.

We’ve also put out more cash over the course of ’07, as well as in the first quarter, for acquisitions and I think those are the two major drivers. If you normalize for those two, you get back to a positive cash flow for the quarter.

Bishop Cheen - Wachovia

Okay, and then on the types of strategic M&A targets you would be looking at, can you give us a little more color on that?

Edgar Bronfman

What I can say is what we said in the talk track, which is that we think this year it’s more about building upon the skills and the competencies necessary to expand our abilities to broaden our artists opportunities across a whole range of revenue streams.

You’ll recall and moving into or at least investing in the management business, we took a significant minority stake in the U.S.’ largest management company, Front Line, and in expanding our role in the whole world of name and likeness, we made a $50 million investment to the partners with the Sinatra estate in the exploitation of that great brand.

I don’t see that there are large opportunities this year. There are one or two that we always look at. Some of them have been in the papers and others no doubt will be in the papers, but in normal course, what we are seeing are things more in the range of something like an Artist Arena, small companies that do things that we don’t do that allow us to bring in skills and improve the services that we can offer to artists and the connections we can create for their fans.

Bishop Cheen - Wachovia

And any divestitures that you would look at that would seem to make sense for you?

Edgar Bronfman

We’re not currently looking at divesting any of our assets but we believe that we have some very valuable assets and our goal at the moment is to continue to increase their value.

Bishop Cheen - Wachovia

Thank you, Edgar.


The next question is from Doug Mitchelson of Deutsche Bank.

Doug Mitchelson - Deutsche Bank

Good morning. When can we expect the new Green Day, Metallica, and My Chemical Romance releases? And part two, is there anything that we should be aware of as far as economics for the upcoming release slate compared with last year?

Edgar Bronfman

I think in general what we’d say is as we look out over the ’08 release schedule, we don’t see a release schedule that should move the needle versus the ’07 release schedule either up or down. We think we’ve got a pretty similar sort of release schedule for ’08 to ’07. and so we couldn’t point you to either a number of major releases not coming or a number of major releases coming, so I think you should sort of think of our release schedule as being essentially a neutral factor of the year.

And as you know, we don’t predict the timing or the dates of when any particular artist will release.

Doug Mitchelson - Deutsche Bank

Okay. Thank you.


The next question is from Ingrid Chung from Goldman Sachs.

Glenn Vogelman - Goldman Sachs

Good morning This is Glenn [Vogelman] in for Ingrid. Over the last five quarters, I think you guys have increased market share I think four of those five quarters with the December quarter ’06 representing the only quarter where you were down year over year in U.S. market share. My question really is do you think this is reasonable to see market share increases to continue throughout fiscal ’08? And if you do, what do you think the Warner Music Group is doing in order to continue that trend? Thank you.

Edgar Bronfman

Market share is always a function of a combination of executive talent and management and the content that they have to work with in the marketplace. And so while market share is variable, what I’ll say is I have the executive talent and management is less variable. We have great executive talent and management and we have it at Warner Brothers Records, we have it at Atlantic Records, we have it at Rhino, we have it at our independent affiliated labels, including ADA and the group that we call ILG. And we have it at the senior-most level in our U.S. recorded music senior management.

So when you have teams that are as strong as ours are, I think it is reasonable that over time, we can continue to grow market share. Quarter by quarter, market share is always variable but if you look at what has happened in the four years since we took over the company, I believe our market share was in the 15 range when we took over four years ago. It’s now 20. That’s been a pretty consistent, although not perfectly consistent, growth story ever since. And I think it’s a tribute not to any one singular artist but to a great family of artists and to a strong executive team that knows how to do their A&R properly and market and promote artists in a particularly effective way.

Glenn Vogelman - Goldman Sachs

Thanks very much.


The next question is from Evan Wilson of Pacific Crest.

Evan Wilson - Pacific Crest Securities

Good morning. You mentioned lots of statistics concerning digital music in Q4. I was hoping you could comment on one more -- when Apple reported their quarter, they say iPod unit sales were up only 5% in calendar Q4. Do you think that’s a leading indicator for the demand for digital music and what do you think it says about where we are in the digital music cycle over all, especially considering they are still the vast majority of total sales?

Edgar Bronfman

I actually don’t think it’s a leading indicator and the reason I say that is, and I haven’t looked at the number, but if I combined the iPod sales with the iPhone sales, I think you’d see a much stronger number and I think the iPhone and what we’ve been saying, frankly, for a long time, which is that the mobile devices phones will ultimately morph and transform as the iPod I think probably likely will, in the sense that they will be mobile devices that will do multiple things rather than any one thing.

So as iPods become both music and video-enabled, and then jump to the iPhone, which is voice-enabled, I think you are going to see a plethora of increases in music capable and entertainment capable mobile devices.

I play off the fact that the very high-end Nokia N95 series, which was only introduced I think in the last few months, looks like it sold 5 million units. So there’s I think a lot coming in the mobile device space and Apple no doubt will continue to play a significant role in that I think increasingly competitive area.


The next question is from Richard Greenfield of Pali.

Richard Greenfield - Pali Research

Just a couple of questions; one, you made mention of how acquisitions had an impact on G&A as well as on your free cash flow in the quarter. I was wondering if you could give us a sense of on the organic 1% revenue growth that you reported on a constant currency basis, how much of that was acquisition driven?

Two, if you could just mention, you talked about the Frank Sinatra deal but I believe you also had at some point over the last couple of quarters a Led Zeppelin publishing rights deal. I was wondering if you could comment on the cost of that deal.

And then lastly, just if you could comment on the Bulldog Entertainment acquisition, how much from the standpoint of operating losses actually flowed through over the course of the last couple of quarters that won’t appear next year? Thanks.

Michael D. Fleisher

Thanks, Rich. In terms of the organic versus M&A growth, we don’t break that out. What I can say and sort of try and characterize it for you is that we would have clearly outperformed the market even if you take the M&A revenues out. But we are not going to break out that detail and the reason we don’t, by the way, is that in many cases, our M&A investments are hard to differentiate from our A&R investments, in that we are really buying content and talent and relationships.

On Led Zeppelin, we don’t comment on advances to particular artists and so we are not going to comment there.

Edgar Bronfman

And I think, Rich, just to add on Led Zeppelin, this is obviously one of the greatest bands in the history of modern music. We’ve had an association with them since the inception and we are very pleased to continue that and to continue that relationship on a publishing basis prior to the release of Mothership, their greatest hits package, which we felt would be a valuable contributor and has been a very successful release.

In terms of Bulldog, again we’re not going to break it out but all of the Bulldog operating losses have already passed through the P&L.

Richard Greenfield - Pali Research

And just to follow-up, why is Frank Sinatra broken out as a specific artist for publishing rights deal and not something like a Led Zeppelin or a Green Day?

Michael D. Fleisher

Frank Sinatra wasn’t a publishing rights deal. Frank Sinatra was an investment we made in buying half of their company and the scale of it and the nature of the acquisition and the partnership is one that we felt needed to be disclosed.

I think it’s also important to understand that sometimes the disclosure discussions, particularly in areas where we have a choice whether to disclose or not, are often dictated by the artists’ desires, and so we work closely with our artists to make sure that we are supporting them in the right way as well.

Richard Greenfield - Pali Research

Thanks so much.


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

Tuna Amobi - Standard & Poor’s

Thank you so much. I wanted to get an idea of what kind of traction you are seeing right now in the MVI interactive disk. I know there’s a couple of other competing next-gen formats out there, so I’m just trying to get a sense where you see the traction, what kind of affiliation or investments that you’ve made across these new formats and what kind of trends that you are seeing?

And separately, on the expanded rights, just trying to get a sense -- I know that you mentioned, Edgar, on some existing artist deals and I wanted to get a sense -- I’m sorry, new artist deals is what you mentioned. For existing artists, can you provide some color on how those conversations are going, whether you’ve seen, you anticipate any major wins in those areas? And what kind of outlook overall that you have in terms of how these expanded rights deals could ramp up on your revenue line. Thank you.

Edgar Bronfman

Tuna, let me answer your question on the MVI and more broadly on new formats. The MVI has been limited in its -- we’ve only released about 10 titles on MVI. We expect to more than double that number this year and I have to say, the initial response has been extremely positive.

For example, in the first week of the U.S. release of a young band that we’ve got call the Ben Sevenfold, MVI has accounted for more than 20% of the total unit sales. So we are seeing traction and we are getting very positive consumer reaction.

We also want to support the Sony initiative for the digital card that Sony BMG introduced. We think that could be potentially a very positive format as well, and particularly expand the retail availability of music by taking that format into non-traditional music outlets.

In addition, we are developing and we announced at Needham a new format for both online and particularly for the mobile space currently called CMX, which stands for connected music experience, which is an entirely new music product and I think you’ll see from us for sure, but I think also from the industry, continued innovation on formats as we seek to deliver to consumers a significantly broader, deeper experience in the digital world than was ever available to them in the analog world.

Much of our digital revenue today -- in fact, I would say all of it just about to date has merely been the transferring of an analog experience to a digital delivery system. The opportunity in the future is to go well beyond that and to create new products that would be unthinkable and impossible in an analog world and to create a much better, both user experience and a much tighter connection between artists and their fans. Those products will be coming. They won’t be coming tomorrow but they will for sure and they will be an important part of the industry’s return to growth.

With regard to the 360 rights, we are principally focused on signing new artists globally to 360 rights because quite frankly, that’s what we do, which is to run what I call a venture capital portfolio of artists. And in that venture capital portfolio, if we are going to make an investment, we want to share in the fruits of that investment and all the work that we participate in to bring growth to that particular artist.

In order to do that, of course, we have to make these modest investments in skills and competencies, so that the opportunity for the artist is as great as that opportunity might be elsewhere. We can’t ask for rights that we are unable to exploit and so we have to make those investments.

Where it comes to the more established area of our artist roster, we have individual discussions with artists. If there is an opportunity for us to add value and to do so at a reasonable economic price, we’ve engaged in those discussions. But as I said, our principal focus really is in changing our model and doing that across the new signing that we undertake on a global basis.

Tuna Amobi - Standard & Poor’s

Thank you.


The next question is from Andrew Finkelstein with Lehman Brothers.

Andrew Finkelstein - Lehman Brothers

Thanks for taking the question this morning. First, just a couple of housekeeping questions -- one, you guys mentioned the corporate expense jumped up in the quarter I think to 28 from running closer to 20. I was wondering, Michael, can you just tell us if we should expect a higher level of corporate through the year or if this was just the one quarter expense that pushed that number up?

And then, I was looking quickly through the Q just to see some more disclosure on the investments in the quarter and it talks about over $30 million of costs -- sorry, I forgot the description of it, around lala.com. So I was wondering if you could talk a little bit more about some of those other investments away from Frank Sinatra.

And then, just sort of a bigger picture question, looking out over the next year, you guys have made up a lot of ground on market share but the out-performance of the domestic numbers continues to sort of surprise. I’m just wondering what your view is on just continuing to outperform at that pace going forward. Thanks.

Michael D. Fleisher

Let me start with the corporate expense question. We don’t give guidance and we don’t forecast future numbers. Obviously the increases in those expenses that are from acquisitions showing up in a year-over-year way are going to be here to stay. The other place that we noted some of those increased costs were some IT investments. I don’t expect those to be long-term ongoing, so we are in the process of upgrading some important systems and I think we’ll continue to make some investments there over the next couple of quarters, but I don’t expect that to be a forever expense.

Edgar Bronfman

On the other investments, just to call out a couple, I would say we made an investment in a company called Lala. It was actually disclosed because it’s a related party transaction in that Lala, one of Lala’s major investors is a division of BEN Capital, also one of our investors. Lala we think has a very unique model in the online space, a very strong team and like BEN Capital, hope that it will deliver a significant amount of value, both in terms of value to its own shareholders but in our case, also value to the music industry by the promulgation of its business and its model.

Similarly, we have a significant interest in a very fast-growing, we think very interesting young company called iMEEM, which is one of the largest social networks in the United States, chiefly focused on music and music experience to drive its social networking. We think this investment also will be both extremely useful and helpful for the music industry generally, as well as being a significant value to our shareholders over time.

In terms of the out-performance in the U.S., Andrew, I already answered the question earlier. I think it has been a consistent out-performance for the four years since we’ve been here. It hasn’t been perfectly consistent, as there is quarterly variation, but the goal has been always to put together the best team of executive talent you can, who have the clearest idea of how to promote artists and which artists to promote, and to go into battle every day to do a better job for our artists and their fans than our competitors.

And we’ve done that for four years and we’ve increased market share I think on an annual basis each of those years and I think with the team that we have in place, there is no reason why we can’t continue to do that.

Andrew Finkelstein - Lehman Brothers

Okay, thanks.


The next question is from Andrew Rittenberry from Jennison.

Andrew Rittenberry - Jennison Associates

Thanks for taking the question. I guess this is a question for Michael. There’s some fear out there that the recorded music margins are going to fall off a cliff the next two to three years, and you have talked about it in the past on prior conference calls, but could you just walk us through the dynamics there, kind of update us on your latest thoughts and how you are going to manage around some of these issues, particularly in ’08 and ’09 and just give us your latest thoughts on that? Appreciate it.

Michael D. Fleisher

Sure, I’d be happy to, Andy. I guess I don’t -- we just don’t see anything in the trends that say that there is some giant fall-off in margins, especially when you look at the shift from physical to digital. So on its face, a digital sale has a better margin rate than a physical sale and we are obviously shifting this business pretty aggressively from physical to digital.

As you go through that transition, one of the things that’s really important is that you manage your costs very tightly and that you understand where all your costs are that are allocated against the physical business and you take them out of the business if that business goes away and that you carefully monitor your investments and the costs you are putting in against the digital business in order to make sure that, as best you can, you are managing the margin through that transition. I think we’ve shown pretty good capability over the last few years in both monitoring that and managing it.

And then in terms of -- the other side of this question is always sort of pricing pressure and I think the reality is we continue to see pricing pressure everywhere and we continue to hold the line. We think that we are one of the higher wholesale pricers out there in the marketplace because we don’t generally believe that dropping price increases volume, and so one of the ways you continue to get solid margin out of this business is making sure that you hold that line on pricing both in the physical and digital world and generate a sort of full sum wholesale price in order to get the highest margin both for us and our artists.

Edgar Bronfman

If I can just add one thing to what Michael said, I would point you to our efforts which are relatively unique on iTunes in terms of digital bundling. We sell many albums on iTunes in a bundled form where consumers can buy the album plus a ringtone and a video or with other added content. That bundling has been tremendously effective for consumers. Consumers buy those albums in great numbers and overall, we believe it has enhanced our margins on iTunes by over 25%.

So we simply, as Michael said, do not see the concern that you suggest is out there in the marketplace.

Andrew Rittenberry - Jennison Associates

Just one follow-up to that -- you announced the restructuring or a couple of restructurings the last couple of years, but the one announced in ’07, have you spent that money yet? Where are in the cycle of that, the latest restructuring and cost-cutting? I think you’re investing that into other opportunities, but can you remind us where we are in the lifecycle of that?

Michael D. Fleisher

I think we’re through the lifecycle, so the costs of executing on the restructuring have flowed through the P&L and the additional hiring that we were going to do against sort of replacing people with costs that are more focused on the future of the business has really been added to the P&L, so I don’t expect any sort of major differences from that going forward.

Andrew Rittenberry - Jennison Associates

Okay. Thanks a lot. Appreciate it.

Edgar Bronfman

Great. Thank you, everybody. Appreciate you being on the call. Thanks very much.

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