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Label News (more headlines) 11-26-2008

Warner Music Group Corp. Reports Fourth-Quarter And Full-Year Results For The Period Ended September 30, 2008

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* Digital revenue in the quarter grew 28% year over year to $167 million

* Total revenue of $854 million for the fourth quarter of 2008 decreased 1% from the prior-year quarter, or 5% on a constant-currency basis. Full-year 2008 revenue grew 3% to $3,491 million, and declined 2% on a constant-currency basis.

* Digital revenue was $167 million, or 20% of total revenue in the quarter, up from $166 million in the third quarter of fiscal 2008 and up 28% from $131 million in the prior-year quarter. Full-year 2008 digital revenue rose 39% to $639 million, or 18% of total revenue.

* Operating income from continuing operations declined 20% to $66 million in the quarter compared to $83 million in the prior-year quarter. The prior-year quarter included a net benefit of $7 million resulting from a $17 million benefit related to legal settlements, $9 million in expenses related to the company's fiscal 2007 realignment initiatives and $1 million in expenses incurred in connection with the potential acquisition of EMI Group plc (the "Prior-Quarter Items"). For full-year 2008, operating income from continuing operations was $207 million compared to $228 million in the prior year. The prior fiscal year included a net expense of $3 million resulting from a $69 million benefit related to legal settlements, $63 million in expenses related to the company's fiscal 2007 realignment initiatives and $9 million in expenses incurred in connection with the potential acquisition of EMI Group plc (the "Prior-Year Items").

* Operating income before depreciation and amortization (OIBDA) from continuing operations fell 8% to $134 million from $146 million in the prior-year quarter, which included the net benefit of $7 million from the Prior-Quarter Items. OIBDA from continuing operations in the fiscal year amounted to $475 million, up from $474 million in the prior year, which included the net expense of $3 million from the Prior-Year Items.

* Income from continuing operations was $0.04 per diluted share compared to income from continuing operations of $0.11 per diluted share in the prior-year quarter. Loss from continuing operations was $0.24 per diluted share in the fiscal year compared to a loss from continuing operations of $0.05 per diluted share in the prior year.

Warner Music Group Corp. announced its fourth-quarter and full-year financial results for the period ended September 30, 2008.

"WMG had a strong year, outperforming the industry, and sustaining revenue and OIBDA over the fiscal year, despite the challenging global recorded music and broader financial environments," said Edgar Bronfman, Jr., Warner Music Group's Chairman and CEO. "We remain confident in our ability to execute on our long-term goals, given that we continue to advance our strategy to lead the industry transformation by pursuing innovative business models, diversifying revenue streams and investing in A&R."

"The volatile global economy and timing of our release schedule may result in back-end weighted fiscal 2009 results," Steve Macri, Warner Music Group's Executive Vice President and CFO added. "From a balance sheet perspective, we're gratified to see the growth in our cash balance continue, further increasing our financial flexibility."

Fourth-Quarter Results
For the fourth quarter 2008, revenue declined 1.5% to $854 million from $867 million in the prior-year quarter, and was down 5.2% on a constant-currency basis. This performance reflects the ongoing transition in the recorded music industry characterized by a shift in consumption patterns from physical sales to new forms of digital music, the continued impact of digital piracy, and to a lesser extent, the company's proactive efforts to manage retailer inventories. Domestic revenue declined 5.4%. International revenue grew 3.7%, but declined 4.1% on a constant-currency basis. On a constant-currency basis, revenue grew in Japan and parts of Europe.

Operating income from continuing operations fell 20.5% to $66 million from $83 million in the prior-year quarter and operating margin from continuing operations was down 1.8 percentage points to 7.7%. OIBDA from continuing operations decreased 8.2% to $134 million from $146 million in the prior-year quarter and OIBDA margin from continuing operations declined 1.1 percentage points to 15.7%. Operating income, operating margin, OIBDA and OIBDA margin from continuing operations for the fourth quarter of fiscal 2007 reflect the net benefit of $7 million from the Prior-Quarter Items, as well as lower annual bonus compensation than in the current-year quarter.

Income from continuing operations was $6 million, or $0.04 per diluted share, for the quarter, down from income from continuing operations of $17 million, or $0.11 per diluted share, in the prior-year quarter. The net benefit of $7 million from the Prior-Quarter Items amounted to $0.04 per diluted share.

The company reported a cash balance of $411 million as of September 30, 2008, a 23% increase from the September 30, 2007 balance of $333 million. As of September 30, 2008, the company reported total long-term debt of $2.26 billion and net debt (total long-term debt minus cash) of $1.85 billion.

For the quarter, net cash provided by operating activities was $119 million compared to $105 million in the prior-year quarter. Free Cash Flow (defined as cash flow from operations less capital expenditures and cash paid or received for investments) was $100 million, compared to negative Free Cash Flow of $48 million in the comparable fiscal 2007 quarter. Unlevered After-Tax Cash Flow (defined as Free Cash Flow excluding cash interest paid) was $122 million, compared to negative Unlevered After-Tax Cash Flow of $33 million in the comparable fiscal 2007 quarter (see below for calculations and reconciliations of Free Cash Flow and Unlevered After-Tax Cash Flow).

Below is the business segment discussion for the quarter.

Recorded Music
Revenue from the company's Recorded Music business declined 3.7% from the prior-year quarter to $707 million, and was down 6.9% on a constant-currency basis. The decline in constant-currency revenue primarily reflects strength in Japan, France and Italy, offset by weakness in the U.S.

Recorded Music digital revenue of $156 million grew 25.8% over the prior-year quarter and represented 22.1% of total Recorded Music revenue. Domestic Recorded Music digital revenue amounted to $99 million or 27.2% of total domestic Recorded Music revenue. Strong digital revenue was primarily driven by growth in global online downloads, and to a lesser extent growth in international mobile.

Major sellers in the quarter included titles from Metallica, Kid Rock, T.I. and Mariya Takeuchi. International Recorded Music revenue was up 0.9% from the prior-year quarter to $343 million, but declined 6.0% on a constant-currency basis, while domestic Recorded Music revenue declined 7.6% from the prior-year quarter to $364 million.

Year-over-year revenue differences in the global Recorded Music business were due to the timing of releases and declines in the physical business, which are not currently being offset by growth in the digital business. In addition, the impact from the company's more active retailer inventory management as well as the changing underlying demand for physical recorded music product is evident in our results.

Quarterly Recorded Music operating income from continuing operations fell 22.2% to $56 million, resulting in an operating margin from continuing operations of 7.9% compared to 9.8% in the prior-year quarter. Recorded Music OIBDA from continuing operations fell 13.8% to $100 million for the quarter. Recorded Music OIBDA margin from continuing operations contracted 1.7 percentage points to 14.1% from the prior-year quarter. Recorded Music operating income, OIBDA, operating margin and OIBDA margin from continuing operations for the fourth quarter of fiscal 2007 reflect a portion of the Prior-Quarter Items -- a $12 million benefit related to legal settlements and $5 million in expenses related to the company's fiscal 2007 realignment initiatives. The margin contraction reflects higher third-party distribution costs partially offset by lower product costs from a shift to higher-margin digital products.

Music Publishing
Music Publishing revenue increased 13.9% from the prior-year quarter to $156 million, and was up 6.1% on a constant-currency basis. Music Publishing revenue grew 12.0% domestically and 14.9% internationally, and increased 3.3% internationally on a constant-currency basis. Digital revenue from Music Publishing grew 57.1% to $11 million, representing 7.1% of total Music Publishing revenue.

On a constant-currency basis, the decline in mechanical revenue of 5.6% was offset by a 31.0% increase in synchronization revenue, a 6.1% rise in performance revenue and the strong 57.1% increase in digital revenue. The increase in synchronization revenue was due in part to timing of receipts while mechanical revenue weakness reflects the industry-wide decline in physical record sales partially offset by a more stable performance by catalog offerings.

Music Publishing operating income amounted to $36 million, down 7.7% from $39 million in the prior-year quarter, resulting in an operating margin of 23.1%, down 5.4 percentage points from the prior-year quarter. Music Publishing OIBDA was essentially flat at $54 million compared to $55 million in the prior-year quarter and OIBDA margin of 34.6% declined 5.5 percentage points from the prior-year quarter. Music Publishing operating income, OIBDA, operating margin and OIBDA margin for the fourth quarter of fiscal 2007 reflects a portion of the Prior-Quarter Items -- a $3 million benefit related to a legal settlement and $1 million in expenses related to the company's fiscal 2007 realignment initiatives, as well as modest severance costs.

Full-Year Results
For the full year 2008, revenue grew 3.2% to $3,491 million from $3,383 million last year, and fell 2.2% on a constant-currency basis. Total revenue in 2008 was split 46% domestic and 54% international. Domestic revenue declined 3.9% over the prior year while international revenue climbed 10.3%, but fell 0.5% on a constant-currency basis. Total digital revenue rose 38.6% year over year to $639 million and was 65% domestic and 35% international. Digital revenue represented 18.3% of total revenue for the fiscal year compared to 13.6% in the prior fiscal year.

Operating income from continuing operations of $207 million decreased from $228 million in the last fiscal year and operating margin from continuing operations contracted 0.8 percentage points to 5.9%. OIBDA from continuing operations for the fiscal year amounted to $475 million, essentially flat against $474 million last year while OIBDA margin from continuing operations contracted by 0.4 percentage points to 13.6%. Operating income, operating margin, OIBDA and OIBDA margin from continuing operations for fiscal year 2007 reflect the net expense of $3 million from the Prior-Year Items, as well as lower annual bonus compensation than in the current year.

Loss from continuing operations for fiscal year 2008 was $35 million, or $0.24 per diluted share, compared to loss from continuing operations of $8 million, or $0.05 per diluted share, for the 2007 fiscal year.

This fiscal year, net cash provided by operating activities was $304 million compared to $302 million in fiscal year 2007. Free Cash Flow amounted to $137 million compared to Free Cash Flow of $22 million in the prior year. Unlevered After-Tax Cash Flow was $286 million, compared to $158 million in fiscal year 2007 (see below for calculations and reconciliations of Non-GAAP Free Cash Flow and Unlevered After-Tax Cash Flow). Free Cash Flow and Unlevered After-Tax Cash Flow for fiscal 2008 include the previously disclosed investment in Frank Sinatra Enterprises. Free Cash Flow and Unlevered After-Tax Cash Flow for fiscal 2007 include previously disclosed investments in Front Line Management and Roadrunner as well as $63 million in restructuring-related charges and $110 million in cash received from our settlement with Bertelsmann AG regarding Napster.

Below is the business segment discussion for the fiscal year.

Recorded Music
Recorded Music revenue grew 2.1% to $2,895 million, but declined 2.8% on a constant-currency basis over the prior year. Domestic Recorded Music revenue declined 5.4% from the prior year to $1,380 million while international Recorded Music revenue was up 10.1%, but was flat on a constant-currency basis. Recorded Music sales were challenged by the continued decline in physical sales that is not currently being offset by growth in the digital business. Recorded Music revenue was split 48% domestic and 52% international. Digital Recorded Music revenue grew 38.0% over the prior year to $599 million and represented 20.7% of total Recorded Music revenue for fiscal 2008, up from 15.3% in fiscal 2007. Domestic Recorded Music digital revenue amounted to $388 million, or 28.1% of total domestic Recorded Music revenue, up from $295 million or 20.2% of revenue in the prior year. Major sellers for the year were Josh Groban, Madonna, Led Zeppelin, Kobukuro and Michael Bublé.

Recorded Music operating income from continuing operations dropped 6.4% to $233 million for the year from $249 million last year and operating income margin from continuing operations contracted 0.7 percentage points to 8.0%. Recorded Music OIBDA from continuing operations fell 1.2% to $416 million for the year from $421 million last year and OIBDA margin from continuing operations declined 0.5 percentage points to 14.4%. Recorded Music operating income, OIBDA, operating margin and OIBDA margin from continuing operations for fiscal year 2007 reflect a portion of the Prior-Year Items -- a $61 million benefit related to legal settlements and $53 million in expenses related to the company's fiscal 2007 realignment initiatives.

Music Publishing
Music Publishing revenue increased 9.3% from the prior year to $623 million, and was up 1.3% on a constant-currency basis. Domestic Music Publishing revenue rose 6.1% over the prior year to $225 million while international revenue grew 11.2%, and slipped 1.2% on a constant-currency basis. Music Publishing revenue was split 36% domestic and 64% international.

Digital revenue from Music Publishing grew 48.1% over the prior year to $40 million and represented 6.4% of total Music Publishing revenue in fiscal 2008, up from 4.7% in fiscal 2007. On a constant-currency basis, a decline in mechanical revenue of 8.7% was offset by a 10.9% increase in synchronization revenue, a 4.5% rise in performance revenue and the strong 48.1% increase in digital revenue.

Music Publishing operating income declined 7.1% over the prior year to $91 million, yielding an operating margin of 14.6%, down 2.6 percentage points year over year. Music Publishing OIBDA was $162 million, up 1.3% from $160 million in the prior year, while OIBDA margin declined 2.1 percentage points to 26.0% due primarily to sales mix. Music Publishing operating income, OIBDA, operating margin and OIBDA margin for fiscal year 2007 reflect a portion of the Prior-Year Items -- a $3 million benefit related to legal settlements and $2 million in expenses related to the company's fiscal 2007 realignment initiatives.

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