Warner Music Group Corp. Reports Results for the 2009 Fiscal Third Quarter Ended June 30, 2009

08/06/09
Digital Revenue Grows to $175 Million; Cash Balance of $345 Million
NEW YORK, NY, Aug 06, 2009 (MARKETWIRE via COMTEX) -- Warner Music Group Corp. (NYSE: WMG)

  • Total revenue of $769 million decreased 9% from the prior-year quarter, or 2% on a constant-currency basis.
  • Digital revenue was $175 million, or 23% of total revenue in the quarter, up 1% sequentially from $173 million in the second quarter of fiscal 2009 and up 5% from $166 million in the prior-year quarter. On a constant-currency basis, digital revenue grew 11% from the prior-year quarter and 2% sequentially.
  • Operating income from continuing operations declined 51% to $25 million compared to $51 million in the prior-year quarter.
  • Operating income before depreciation and amortization (OIBDA) fell 22% to $90 million from $116 million in the prior-year quarter.
  • Loss from continuing operations was ($0.25) per diluted share compared to a loss from continuing operations of ($0.06) per diluted share in the prior-year quarter. Interest expense this quarter included $18 million, or $0.12 per diluted share, of previously unamortized deferred financing fees related to the company's senior secured credit facility. These fees were written off in the current quarter when the company repaid the credit facility in full in connection with its senior secured bond offering.

    Warner Music Group Corp. (NYSE: WMG) today announced its third-quarter financial results for the period ended June 30, 2009.

    "At a time when quarterly results are pressured by the macroeconomic downturn and the industry transition, we remain focused on prudently positioning ourselves to benefit when those pressures abate -- by actively creating a new recorded music business model to diversify our revenue mix," said Edgar Bronfman, Jr., Warner Music Group's Chairman and CEO. "We are making good progress on that effort. For example, we now have comprehensive expanded-rights agreements with more than half of our active global artist roster."

    "We substantially improved our financial flexibility with our recent bond offering and debt pay-down and will continue to manage our balance sheet conservatively in the current climate," said Steve Macri, Warner Music Group's Executive Vice President and CFO. "Our 2009 fiscal year remains back-end weighted towards the fourth quarter, due to the timing of releases."

    For the quarter, revenue declined 9.3% to $769 million from $848 million in the prior-year quarter, and was down 2.0% on a constant-currency basis. This performance primarily reflected the company's fiscal fourth quarter-weighted release schedule, general economic pressures and the transition from physical sales to digital sales in the recorded music industry. Domestic revenue declined 10.3% while international revenue decreased 8.2%, but grew 5.3% on a constant-currency basis due primarily to an increase in revenue from the company's European concert promotion business. Revenue growth in the U.K., France, Italy and Canada was offset by weakness in Japan and Latin America. Digital revenue of $175 million grew 5.4% over the prior-year quarter, or 10.8% on a constant-currency basis. Digital revenue grew 1.2% sequentially from the second quarter of fiscal 2009, or 2.3% on a constant-currency basis, and represented 22.8% of total revenue for the quarter.

    Operating income from continuing operations fell 51.0% to $25 million from $51 million in the prior-year quarter and operating margin from continuing operations was down 2.8 percentage points to 3.3%. OIBDA decreased 22.4% to $90 million from $116 million in the prior-year quarter and OIBDA margin declined 2.0 percentage points to 11.7% from 13.7% as the effects of company-wide cost-management efforts were more than offset by declines in Japan related to the recession and the timing of releases in that territory.

    Loss from continuing operations was $37 million, or ($0.25) per diluted share, for the quarter, compared with a loss from continuing operations of $9 million, or ($0.06) per diluted share, in the prior-year quarter. Interest expense this quarter included $18 million, or $0.12 per diluted share, of previously unamortized deferred financing fees related to the company's senior secured credit facility. These fees were written off in the current quarter when the company repaid the credit facility in full.

    The company reported a cash balance of $345 million as of June 30, 2009. On May 28, 2009, the company completed a $1.1 billion senior secured bond offering, the proceeds from which, along with $335 million of existing cash, were used to retire the company's senior secured credit facility, which had a maturity date of February 28, 2011. The June 30, 2009 cash balance reflects the impact of this refinancing, which has increased the company's financial flexibility by, among other things, pushing out the company's earliest debt maturities from 2011 to 2014 and eliminating financial maintenance tests from its debt covenants. As of June 30, 2009, the company reported total long-term debt of $1.94 billion and net debt (total long-term debt minus cash) of $1.59 billion.

    For the quarter, net cash provided by operating activities was $11 million compared to $89 million in the prior-year quarter. The decline in operating cash flow was largely related to the decrease in deferred revenue from the company's European concert promotion business. Free Cash Flow (defined as cash flow from operations less capital expenditures and cash paid or received for investments) was $11 million, compared to $93 million in the comparable fiscal 2008 quarter. Unlevered After-Tax Cash Flow (defined as Free Cash Flow excluding cash interest paid) was $54 million, compared to $140 million in the comparable fiscal 2008 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 8.3% from the prior-year quarter to $629 million, and was down 1.6% on a constant-currency basis. The decline in constant-currency revenue primarily reflected strength in parts of Europe and Canada, driven largely by carry-over sales of domestic product, and sales of local repertoire in France, Germany, the U.K. and Italy, offset by weakness in the U.S., Japan and Latin America.

    The timing of releases, continued contracting global demand for physical product by retailers and soft economic conditions negatively impacted Recorded Music physical revenue. The decline in physical revenue was partially offset by improved digital and other revenue, primarily due to an increase in revenue from the company's European concert promotion business. Major sellers in the quarter included Green Day, Eric Clapton and Steve Winwood, Michael Buble, Rob Thomas, Paolo Nutini and Jason Mraz.

    International Recorded Music revenue decreased 6.0% from the prior-year quarter to $345 million, but grew 7.8% on a constant-currency basis, while domestic Recorded Music revenue fell 11.0% from the prior-year quarter to $284 million. International Recorded Music revenue was bolstered by revenue from the company's European concert promotion business.

    Recorded Music digital revenue of $163 million grew 4.5% over the prior-year quarter, or 8.7% on a constant-currency basis, and represented 25.9% of total Recorded Music revenue, compared with 22.7% in the prior-year quarter. Domestic Recorded Music digital revenue amounted to $105 million, or 37.0% of total domestic Recorded Music revenue, compared with 31.7% in the prior-year quarter. Year-over-year digital revenue growth was driven by increased global online downloads.

    Quarterly Recorded Music operating income from continuing operations fell 39.4% to $40 million, resulting in an operating margin from continuing operations of 6.4% compared to 9.6% in the prior-year quarter. Recorded Music OIBDA fell 21.8% to $86 million for the quarter. Recorded Music OIBDA margin contracted 2.4 percentage points from the prior-year quarter to 13.7%. The decline in Recorded Music OIBDA margin was largely driven by declines in Japan related to the recession and the timing of releases in that territory. Japan is typically a higher-margin territory because of the government-regulated pricing of recorded music product.

    Music Publishing

    Music Publishing revenue fell 12.5% from the prior-year quarter to $147 million, and declined 4.5% on a constant-currency basis. Music Publishing revenue declined 6.9% domestically and was down 15.5% internationally, or 3.1% internationally on a constant-currency basis. Digital revenue from Music Publishing grew 60.0% to $16 million, and was up 100.0% on a constant-currency basis, representing 10.9% of total Music Publishing revenue.

    On a constant-currency basis, the decline in mechanical revenue of 20.4% and performance revenue of 6.5% was partially offset by a 20.8% increase in synchronization revenue and the 100.0% increase in digital revenue. The rise in synchronization revenue on a constant-currency basis was due in part to the timing of licensing revenue. Revenue declines primarily reflected recessionary pressures and the effects of the industry-wide decrease in physical sales on mechanical revenue.

    Music Publishing operating income from continuing operations of $10 million was down 33.3% from the prior-year quarter, resulting in an operating margin from continuing operations of 6.8%, down 2.1 percentage points from the prior-year quarter. Music Publishing OIBDA declined 18.2% to $27 million and Music Publishing OIBDA margin of 18.4% decreased 1.2 percentage points from the prior-year quarter due primarily to recessionary pressures and the timing of royalty payments.

    Financial details for the quarter can be found in the company's current Form 10-Q, filed today with the Securities and Exchange Commission.

    This morning, management will be hosting a conference call to discuss the results at 8:30 A.M. EDT. The call will be webcast on www.wmg.com.

    About Warner Music Group

    Warner Music Group became the only stand-alone music company to be publicly traded in the United States in May 2005. With its broad roster of new stars and legendary artists, Warner Music Group is home to a collection of the best-known record labels in the music industry including Asylum, Atlantic, Bad Boy, Cordless, East West, Elektra, Nonesuch, Reprise, Rhino, Roadrunner, Rykodisc, Sire, Warner Bros. and Word. Warner Music International, a leading company in national and international repertoire, operates through numerous international affiliates and licensees in more than 50 countries. Warner Music Group also includes Warner/Chappell Music, one of the world's leading music publishers, with a catalog of more than one million copyrights worldwide.

    "Safe Harbor" Statement under Private Securities Litigation Reform Act of 1995

    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," "anticipates," "projects," "plans," "intends," "believes," "forecasts" and variations of such words or similar expressions that predict or indicate future events or trends, or that do not relate to historical matters, identify forward-looking statements. 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, we cannot assure you 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 could cause actual results to differ materially from our expectations. Please refer to our Form 10-K, Form 10-Qs and our other filings with the U.S. Securities and Exchange Commission concerning factors that could cause actual results to differ materially from those described in our forward-looking statements.

    We maintain an Internet site at www.wmg.com. We use our website as a channel of distribution of material company information. Financial and other material information regarding Warner Music Group is routinely posted on and accessible at http://investors.wmg.com. In addition, you may automatically receive email alerts and other information about Warner Music Group by enrolling your email by visiting the "email alerts" section at http://investors.wmg.com. Our website and the information posted on it or connected to it shall not be deemed to be incorporated by reference into this communication.

    Figure 1.  Warner Music Group Corp. - Consolidated Statements of
    Operations, Three and Nine Months 6/30/09 versus 6/30/08 (dollars in
    millions, except per share amounts)
                   Three      Three                Nine       Nine
                   Months     Months              Months     Months
                   Ended      Ended               Ended      Ended
                  June 30,   June 30,            June 30,   June 30,
                    2009       2008    % Change    2009       2008    % Change
                  ---------  ---------  ------   ---------  ---------  ------
                 (unaudited)(unaudited)         (unaudited)(unaudited)
    Revenues:     $     769  $     848      (9%) $   2,315  $   2,637     (12%)
    Costs and
     expenses:
    Cost of
     revenues          (431)      (441)     (2%)    (1,254)    (1,399)    (10%)
    Selling,
     general and
     administrat-
     ive expenses      (258)      (300)    (14%)      (811)      (935)    (13%)
    Other income          -          -       -           -          3       -
    Amortization
     of intangible
     assets             (55)       (56)     (2%)      (169)      (165)      2%
                  ---------  ---------  ------   ---------  ---------  ------
    Total costs
     and expenses $    (744) $    (797)     (7%) $  (2,234) $  (2,496)    (10%)
                  ---------  ---------  ------   ---------  ---------  ------
    Operating
     income from
     continuing
     operations   $      25  $      51     (51%) $      81  $     141     (43%)
    Interest
     expense, net       (61)       (43)     42%       (146)      (138)      6%
    Minority
     interest            (1)        (2)    (50%)         6         (4)      -
    Other income
     (expense), net       4         (2)      -           7         (4)      -
                  ---------  ---------  ------   ---------  ---------  ------
    (Loss) income
     from continuing
     operations
     before
     income taxes $     (33) $       4       -   $     (52) $      (5)      -
                  ---------  ---------  ------   ---------  ---------  ------
    Income tax
     expense             (4)       (13)    (69%)       (30)       (36)    (17%)
                  ---------  ---------  ------   ---------  ---------  ------
    Loss from
     continuing
     operations   $     (37) $      (9)      -   $     (82) $     (41)    100%
    Loss from
     discontinued
     operations,
     net of tax           -          -       -           -        (21)      -
                  ---------  ---------  ------   ---------  ---------  ------
    Net loss      $     (37) $      (9)      -   $     (82) $     (62)     32%
                  =========  =========  ======   =========  =========  ======
    Net loss per
     share:
    Basic
     earnings per
     share:
    Loss from
     continuing
     operations   $   (0.25) $   (0.06)          $   (0.55) $   (0.28)
    Loss from
     discontinued
     operations           -          -                   -      (0.14)
                  ---------  ---------           ---------  ---------
    Net loss      $   (0.25) $   (0.06)          $   (0.55) $   (0.42)
                  =========  =========           =========  =========
    Diluted
     earnings per
     share:
    Loss from
     continuing
     operations   $   (0.25) $   (0.06)          $   (0.55) $   (0.28)
    Loss from
     discontinued
     operations           -          -                   -      (0.14)
                  ---------  ---------           ---------  ---------
    Net loss      $   (0.25) $   (0.06)          $   (0.55) $   (0.42)
                  =========  =========           =========  =========
    Weighted
     averages
     shares
     outstanding:
    Basic             149.5      148.9               149.4      148.0
                  =========  =========           =========  =========
    Diluted           149.5      148.9               149.4      148.0
                  ---------  ---------           ---------  ---------
    Figure 2.  Warner Music Group Corp. - Consolidated Balance Sheets as of
    6/30/09 and 09/30/08 (dollars in millions)
                                 June 30, 2009   September 30, 2008  % Change
                               ----------------- ------------------  --------
                                  (unaudited)         (audited)
     Assets:
     Current Assets
       Cash & cash equivalents $             345  $             411       (16%)
       Accounts receivable,
        less allowances of
        $129 and $159                        398                538       (26%)
       Inventories                            50                 57       (12%)
       Royalty advances
        (expected to be
        recouped w/in 1 year)                172                174        (1%)
       Deferred tax assets                    30                 30         -
       Other current assets                   54                 38        42%
                               -----------------  -----------------  --------
     Total Current Assets      $           1,049  $           1,248       (16%)
     Royalty advances
      (expected to be recouped
      after 1 year)                          210                212        (1%)
     Investments                              19                155       (88%)
     Property, plant &
      equipment, net                          98                117       (16%)
     Goodwill                              1,094              1,085         1%
     Intangible assets subject
      to amortization, net                 1,353              1,539       (12%)
     Intangible assets not
      subject to amortization                100                100         -
     Other assets                             66                 70        (6%)
                               -----------------  -----------------  --------
     Total Assets              $           3,989  $           4,526       (12%)
                               =================  =================  ========
     Liabilities & Shareholders'
      Deficit:
     Current Liabilities
       Accounts payable        $             170  $             219       (22%)
       Accrued royalties                   1,192              1,189         -
       Taxes & other
        withholdings                          12                 16       (25%)
       Current portion of
        long-term debt                         -                 17         -
       Deferred revenue                      109                117        (7%)
       Other current
        liabilities                          246                313       (21%)
                               -----------------  -----------------  --------
     Total Current Liabilities $           1,729  $           1,871        (8%)
     Long-term debt                        1,935              2,242       (14%)
     Deferred tax liabilities,
      net                                    235                237        (1%)
     Other noncurrent
      liabilities                            232                262       (11%)
                               -----------------  -----------------  --------
     Total Liabilities         $           4,131  $           4,612       (10%)
     Common stock                              -                  -         -
     Additional paid-in
      capital                                598                590         1%
     Accumulated deficit                    (768)              (686)       12%
     Accumulated other
      comprehensive income, net               28                 10         -
                               -----------------  -----------------  --------
     Total Shareholders'
      Deficit                  $            (142) $             (86)       65%
                               -----------------  -----------------  --------
     Total Liabilities &
      Shareholders' Deficit    $           3,989  $           4,526       (12%)
                               -----------------  -----------------  --------
    Figure 3.  Warner Music Group Corp. - Summarized Statements of Cash Flows,
    Three and Nine Months 6/30/09 versus 6/30/08 (dollars in millions)
                    Three      Three                Nine       Nine
                    Months     Months              Months     Months
                    Ended      Ended               Ended      Ended
                   June 30,   June 30,            June 30,   June 30,
                     2009       2008    % Change    2009       2008    % Change
                   ---------  ---------  ------   ---------  ---------  ------
                  (unaudited)(unaudited)         (unaudited)(unaudited)
    Net cash
     provided by
     operating
     activities    $      11  $      89     (88%) $     198  $     185       7%
    Net cash
     provided by
     (used in)
     investing
     activities            -          4       -          98       (148)      -
    Net cash used
     in financing
     activities         (335)        (5)      -        (343)       (55)      -
    Effect of
     foreign
     currency
     exchange
     rates on cash        11          1       -         (19)        23       -
                   ---------  ---------  ------   ---------  ---------  ------
    Net (decrease)
     increase in
     cash          $    (313) $      89       -   $     (66) $       5       -
                   ---------  ---------  ------   ---------  ---------  ------
    
    

    Supplemental Disclosures Regarding Non-GAAP Financial Information

    OIBDA

    We evaluate our operating performance based on several factors, including our primary financial measure of operating income before non-cash depreciation of tangible assets and non-cash amortization of intangible assets (which we refer to as OIBDA). We consider OIBDA to be an important indicator of the operational strengths and performance of our businesses, and believe the presentation of OIBDA helps improve the ability to understand the company's operating performance and evaluate our performance in comparison to comparable periods. However, a limitation of the use of OIBDA as a performance measure is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenue in our businesses. Accordingly, OIBDA should be considered in addition to, not as a substitute for, operating income, net income (loss) and other measures of financial performance reported in accordance with accounting principles generally accepted in the U.S. ("GAAP"). In addition, OIBDA, as we calculate it, may not be comparable to similarly titled measures employed by other companies.

    Figure 4.  Warner Music Group Corp. - Reconciliation of OIBDA to Net Loss,
    Three and Nine Months 6/30/09 versus 6/30/08 (dollars in millions)
                   Three      Three                Nine       Nine
                   Months     Months              Months     Months
                   Ended      Ended               Ended      Ended
                  June 30,   June 30,            June 30,   June 30,
                    2009       2008    % Change    2009       2008    % Change
                  ---------  ---------  ------   ---------  ---------  ------
                 (unaudited)(unaudited)         (unaudited)(unaudited)
    OIBDA         $      90  $     116     (22%) $     277  $     341     (19%)
    Depreciation
     expense            (10)        (9)     11%        (27)       (35)    (23%)
    Amortization
     expense            (55)       (56)     (2%)      (169)      (165)      2%
                  ---------  ---------  ------   ---------  ---------  ------
    Operating
     income from
     continuing
     operations   $      25  $      51     (51%) $      81  $     141     (43%)
    Interest
     expense, net       (61)       (43)     42%       (146)      (138)      6%
    Minority
     interest            (1)        (2)    (50%)         6         (4)      -
    Other income
     (expense), net       4         (2)      -           7         (4)      -
                  ---------  ---------  ------   ---------  ---------  ------
    (Loss) income
     from
     continuing
     operations
     before
     income taxes $     (33) $       4       -   $     (52) $      (5)      -
                  ---------  ---------  ------   ---------  ---------  ------
    Income tax
     expense             (4)       (13)    (69%)       (30)       (36)    (17%)
                  ---------  ---------  ------   ---------  ---------  ------
    Loss from
     continuing
     operations   $     (37) $      (9)      -   $     (82) $     (41)    100%
    Loss from
     discontinued
     operations,
     net of tax           -          -       -           -        (21)      -
                  ---------  ---------  ------   ---------  ---------  ------
    Net loss      $     (37) $      (9)      -   $     (82) $     (62)     32%
                  =========  =========  ======   =========  =========  ======
    OIBDA margin       11.7%      13.7%               12.0%      12.9%
    Operating
     income
     margin from
     continuing
     operations         3.3%       6.0%                3.5%       5.3%
    Figure 5.  Warner Music Group Corp. - Reconciliation of Segment Operating
    Income to OIBDA, Three and Nine Months 6/30/09 versus 6/30/08 (dollars in
    millions)
                   Three      Three                Nine       Nine
                   Months     Months              Months     Months
                   Ended      Ended               Ended      Ended
                  June 30,   June 30,            June 30,   June 30,
                    2009       2008    % Change    2009       2008    % Change
                  ---------  ---------  ------   ---------  ---------  ------
                 (unaudited)(unaudited)         (unaudited)(unaudited)
    Total WMG
     Operating
     Income from
     Continuing
     Operations-
     GAAP         $      25  $      51     (51%) $      81  $     141     (43%)
    Depreciation
     and
     Amortization        65         65       0%        196        200      (2%)
                  ---------  ---------  ------   ---------  ---------  ------
    Total WMG
     OIBDA        $      90  $     116     (22%) $     277  $     341     (19%)
                  =========  =========  ======   =========  =========  ======
    Recorded
     Music
     Operating
     Income from
     Continuing
     Operations-
     GAAP         $      40  $      66     (39%) $     103  $     177     (42%)
    Depreciation
     and
     Amortization        46         44       5%        137        139      (1%)
                  ---------  ---------  ------   ---------  ---------  ------
    Recorded
     Music OIBDA  $      86  $     110     (22%) $     240  $     316     (24%)
                  =========  =========  ======   =========  =========  ======
    Music
     Publishing
     Operating
     Income from
     Continuing
     Operations -
     GAAP         $      10  $      15     (33%) $      51  $      55      (7%)
    Depreciation
     and
     Amortization        17         18      (6%)        51         53      (4%)
                  ---------  ---------  ------   ---------  ---------  ------
    Music
     Publishing
     OIBDA        $      27  $      33     (18%) $     102  $     108      (6%)
                  ---------  ---------  ------   ---------  ---------  ------
    
    

    Constant Currency

    Because exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of results on a constant-currency basis in addition to reported results helps improve the ability to understand our operating results and evaluate our performance in comparison to prior periods. Constant-currency information compares results between periods as if exchange rates had remained constant period over period. We use results on a constant-currency basis as one measure to evaluate our performance. We calculate constant currency by calculating prior-year results using current-year foreign currency exchange rates. However, a limitation of the use of the constant-currency results as a performance measure is that it does not reflect the $63 million, $47 million, $14 million and $8 million unfavorable impact of exchange rates on our Total, Recorded Music, Music Publishing and Digital revenue, respectively, in the three months ended June 30, 2009 compared to the comparable prior-year quarter. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a constant-currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not a measure of performance presented in accordance with GAAP.

    Figure 6.  Warner Music Group Corp. - Revenue by Geography and Segment,
    Three and Nine Months 6/30/09 versus 6/30/08 as Reported and Constant
    Currency (dollars in millions)
                Three      Three      Three       Nine       Nine       Nine
                Months     Months     Months     Months     Months     Months
                Ended      Ended      Ended      Ended      Ended      Ended
               June 30,   June 30,   June 30,   June 30,   June 30,   June 30,
                 2009       2008       2008       2009       2008       2008
               --------   --------   --------   --------   --------   --------
                  As         As      Constant      As         As      Constant
               reported   reported       $      reported   reported       $
             (unaudited)(unaudited)(unaudited)(unaudited)(unaudited)(unaudited)
    Revenue by
     Geography:
    US revenue
      Recorded
       Music   $    284   $    319   $    319   $    867   $  1,016   $  1,016
      Music
       Publishing    54         58         58        159        169        169
    International
     revenue
      Recorded
       Music        345        367        320      1,048      1,172      1,041
      Music
       Publishing    93        110         96        257        298        260
    Intersegment
     eliminations    (7)        (6)        (8)       (16)       (18)       (20)
               --------   --------   --------   --------   --------   --------
    Total
     Revenue   $    769   $    848   $    785   $  2,315   $  2,637   $  2,466
               ========   ========   ========   ========   ========   ========
    Revenue by
     Segment:
    Recorded
     Music     $    629   $    686   $    639   $  1,915   $  2,188   $  2,057
    Music
     Publishing     147        168        154        416        467        429
    Intersegment
     eliminations    (7)        (6)        (8)       (16)       (18)       (20)
               --------   --------   --------   --------   --------   --------
    Total
     Revenue   $    769   $    848   $    785   $  2,315   $  2,637   $  2,466
               ========   ========   ========   ========   ========   ========
               --------   --------   --------   --------   --------   --------
    Total
     Digital
     Revenue   $    175   $    166   $    158   $    519   $    471   $    454
               --------   --------   --------   --------   --------   --------
    
    

    Free Cash Flow

    Free cash flow reflects our cash flow provided by operating activities less capital expenditures and cash paid or received for investments. We use free cash flow, among other measures, to evaluate our operating performance. Management believes free cash flow provides investors with an important perspective on the cash available to service debt, make strategic acquisitions and investments, fund ongoing operations and working capital needs and pay any regular quarterly dividends. As a result, free cash flow is a significant measure of our ability to generate long-term value. It is useful for investors to know whether this ability is being enhanced or degraded as a result of our operating performance. We believe the presentation of free cash flow is relevant and useful for investors because it allows investors to view performance in a manner similar to the method used by management. In addition, free cash flow is also a primary measure used externally by our investors and analysts for purposes of valuation and comparing the operating performance of our company to other companies in our industry.

    Because free cash flow is not a measure of performance calculated in accordance with GAAP, free cash flow should not be considered in isolation of, or as a substitute for, net income (loss) as an indicator of operating performance or cash flow provided by operating activities as a measure of liquidity. Free cash flow, as we calculate it, may not be comparable to similarly titled measures employed by other companies. In addition, free cash flow does not necessarily represent funds available for discretionary use and is not necessarily a measure of our ability to fund our cash needs. Because free cash flow deducts capital expenditures and cash paid or received for investments from "cash flow provided by operating activities" (the most directly comparable GAAP financial measure), users of this information should consider the types of events and transactions that are not reflected. We provide below a reconciliation of free cash flow to the most directly comparable amount reported under GAAP -- "cash flow provided by operating activities."

    Unlevered After-Tax Cash Flow

    Free cash flow includes cash paid for interest. We also review our cash flow adjusted for cash paid for interest, a measure we call unlevered after-tax cash flow. Management believes this measure provides investors with an additional important perspective on our cash generation ability. We consider unlevered after-tax cash flow to be an important indicator of the performance of our businesses and believe the presentation is relevant and useful for investors because it allows investors to view performance in a manner similar to the method used by management. A limitation of the use of this measure is that it does not reflect the charges for cash interest and, therefore, does not necessarily represent funds available for discretionary use, and is not necessarily a measure of the company's ability to fund its cash needs. Accordingly, this measure should be considered in addition to, not as a substitute for, net cash flow provided by operating activities and other measures of liquidity reported in accordance with GAAP.

    Figure 7.  Warner Music Group Corp. - Calculation of Free Cash Flow and
    Unlevered After-Tax Cash Flow, Three and Nine Months 6/30/09 versus 6/30/08
    (dollars in millions)
                                Three        Three         Nine        Nine
                                Months       Months       Months      Months
                                Ended        Ended        Ended       Ended
                               June 30,     June 30,     June 30,    June 30,
                                 2009         2008         2009        2008
                             -----------  -----------  -----------  -----------
                             (unaudited)  (unaudited)  (unaudited)  (unaudited)
    Net cash flow provided
     by operating activities $        11  $        89  $       198  $       185
    Less: Capital
     expenditures                      6            6           15           26
    Less: Net cash paid for
     (received from)
     investments                      (6)         (10)        (113)         122
                             -----------  -----------  -----------  -----------
    Free Cash Flow (a)       $        11  $        93  $       296  $        37
                             ===========  ===========  ===========  ===========
    (a) - Free Cash Flow
     includes cash paid for
     interest as follows (in
     millions):
                                Three        Three         Nine         Nine
                                Months       Months       Months       Months
                                Ended        Ended        Ended        Ended
                               June 30,     June 30,     June 30,     June 30,
                                 2009         2008         2009         2008
                             -----------  -----------  -----------  -----------
                             (unaudited)  (unaudited)  (unaudited)  (unaudited)
       Free Cash Flow        $        11  $        93  $       296  $        37
       Plus: Cash paid for
        interest                      43           47          109          127
                             -----------  -----------  -----------  -----------
       Unlevered After-Tax
        Cash Flow            $        54  $       140  $       405  $       164
                             -----------  -----------  -----------  -----------
    
    

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    Media Contact:
    Will Tanous
    (212) 275-2244
    Email Contact

    Investor Contact:
    Jill Krutick
    (212) 275-4790
    Email Contact

    SOURCE: Warner Music Group