Warner Music Group Corp. Reports Third-Quarter Results for the Period Ended June 30, 2007

08/07/07
Digital Revenue Rises to 15% of Total Revenue
NEW YORK, NY, Aug 07, 2007 -- Warner Music Group Corp. (NYSE: WMG)

  • Total revenue of $804 million for the third quarter of fiscal 2007 decreased 2% from the prior-year quarter, or 5% on a constant-currency basis.
  • Digital revenue increased to $119 million, or 15% of total revenue in the quarter, up 29% from $92 million in the prior-year quarter and up 7% sequentially from $111 million in the second quarter of fiscal 2007.
  • Operating income increased to $45 million in the quarter compared to $28 million in the prior-year quarter. Adjusted to exclude $38 million in expenses related to the company's realignment initiatives, a $52 million benefit related to our settlement with Bertelsmann AG regarding Napster and $8 million in expenses incurred in connection with the potential acquisition of EMI Group plc (see "Non-Recurring Items" below), operating income for the quarter increased 39% to $39 million.
  • Operating income before depreciation and amortization (OIBDA) increased to $107 million from $86 million in the prior-year quarter. Adjusted to exclude Non-Recurring Items, OIBDA for the quarter increased 17% to $101 million.
  • Net loss increased to $0.12 per diluted share in the quarter from a net loss of $0.10 per diluted share in the prior-year quarter. Adjusted to exclude Non-Recurring Items, net loss per diluted share in the quarter was $0.20.

    Warner Music Group Corp. (NYSE: WMG) today announced its third-quarter financial results for the period ended June 30, 2007.

    "We are transforming Warner Music Group to a music-based content company with a more comprehensive approach to participating in artist revenue streams to drive our long-term success," said Edgar Bronfman, Jr., Warner Music Group's Chairman and CEO. "Despite a challenging industry environment, we achieved several milestones this quarter which validate our A&R strategy. According to sales data released this quarter, our global market share for calendar year 2006 improved, moving us up to the third-largest global recorded music company. We also reached a WMG 10-year record for U.S. album share for both the quarter and first half of 2007."

    Michael Fleisher, Warner Music Group's Executive Vice President and CFO, added: "Given our ongoing focus on financial discipline, our realignment initiatives announced last quarter remain on track for total one-time restructuring and implementation charges in the range of $65 million to $80 million by the completion of our fiscal year 2007."

    Third-Quarter Results

    For the third quarter of fiscal 2007, revenue slipped 2% to $804 million from $822 million in the same period last year, or 5% on a constant-currency basis. This decline was driven by a challenging Recorded Music industry environment as the shift in consumption patterns from physical sales to new forms of digital music continues. Declines in our physical Recorded Music revenue were only partially offset by increases in Music Publishing and digital Recorded Music revenue. Domestic revenue was down 1% while international revenue declined 4%, or 9% on a constant-currency basis.

    Operating income for the quarter rose to $45 million from $28 million in the prior-year quarter and operating margin was up 2.2 percentage points to 5.6%. Adjusted to exclude Non-Recurring Items, operating income for the quarter rose 39% to $39 million and operating margin was up 1.5 percentage points to 4.9%.

    OIBDA for the quarter rose to $107 million from $86 million in the prior-year quarter and OIBDA margin increased 2.8 percentage points to 13.3%. Adjusted to exclude Non-Recurring Items, OIBDA for the quarter grew 17% to $101 million and OIBDA margin widened 2.1 percentage points to 12.6%. The increase in OIBDA margin this quarter reflected cost-management initiatives and a more profitable revenue mix. In addition, we realized a temporary benefit from our previously announced realignment plan as we continue to make investments focused on new business initiatives.

    Net loss was $17 million, or $0.12 per diluted share, for the quarter. Adjusted to exclude Non-Recurring Items, net loss was $29 million, or $0.20 per diluted share, for the quarter. Net loss in the third quarter of fiscal 2006 was $14 million, or $0.10 per diluted share.

    The company reported a cash balance of $396 million, total long-term debt of $2.3 billion and net debt (total long-term debt minus cash) of $1.9 billion, all as of June 30, 2007.

    For the quarter, net cash provided by operating activities was $90 million compared to $18 million in the comparable fiscal 2006 quarter. Free Cash Flow (calculated by taking cash flow from operations less capital expenditures and cash paid or received for investments) was $57 million, compared to ($33) million in the comparable fiscal 2006 quarter. Unlevered After-Tax Cash Flow (calculated by excluding cash interest paid from Free Cash Flow) was $105 million, which includes net cash from the Non-Recurring Items, compared to Unlevered After-Tax Cash Flow of $14 million in the comparable fiscal 2006 quarter (see below for complete definitions and calculations of "Free Cash Flow," "Unlevered After-Tax Cash Flow" and "Non-Recurring Items").

    Below is the business segment discussion for the quarter.

    Recorded Music

    Revenue for the company's Recorded Music business decreased 4% from the prior-year quarter to $653 million, and declined 6% on a constant-currency basis. Contributing significantly to this decline was challenging market conditions which resulted in softer sales in the U.K., France and Canada. This was offset in part by improvements in Japan and Spain, which were helped by strength in sales of local repertoire. Recorded Music digital revenue of $112 million grew 27% over the prior-year quarter and represented 17% of total Recorded Music revenue. Domestic Recorded Music digital revenue was $77 million, or 22% of total domestic Recorded Music revenue.

    Major sellers in the quarter included titles from Linkin Park, Michael Buble, T.I., The Traveling Wilburys and The White Stripes. Domestic Recorded Music revenue was $345 million in the quarter, down 1% from the prior-year quarter, while international Recorded Music revenue was $308 million, off 7% from the prior-year quarter, or 12% on a constant-currency basis largely due to market conditions.

    Recorded Music operating income totaled $65 million in the quarter, up from $52 million in the prior-year quarter, resulting in an operating margin of 10.0% compared to 7.7% in the prior-year quarter. Adjusted to exclude $33 million in expenses related to the company's realignment initiatives and a $49 million benefit related to our settlement with Bertelsmann AG regarding Napster (see "Non-Recurring Items" below), operating income for the quarter fell 6% to $49 million and operating margin was 7.5%.

    Recorded Music OIBDA was $109 million for the quarter, compared to $92 million in the prior-year quarter, resulting in an OIBDA margin of 16.7% compared to 13.6% in the prior-year quarter. Adjusted to exclude Non-Recurring Items, Recorded Music OIBDA was essentially flat year-over-year at $93 million for the quarter. Recorded Music OIBDA margin was 14.2%, up 0.6 percentage points from the prior-year quarter. The OIBDA margin and operating margin improvements in the quarter reflected continued cost-containment efforts and temporary benefits as we continue to make investments in conjunction with our previously announced realignment plan.

    Music Publishing

    Music Publishing revenue in the quarter increased by 5% from the prior-year quarter to $157 million, an increase of 1% on a constant-currency basis. Revenue benefits were primarily linked to an improvement in digital and synchronization revenue. Digital revenue from Music Publishing was $8 million, which represented 5% of total Music Publishing revenue for the quarter.

    On a constant-currency basis, performance revenue was flat year-over-year, while synchronization revenue increased 5% and digital revenue rose 40%. Mechanical revenue declined slightly year-over-year.

    Music Publishing operating income doubled to $18 million in the quarter from $9 million in the prior-year quarter. Music Publishing operating margin was 11.5% compared to 6.0% in the prior-year quarter. Adjusted to exclude $1 million in expenses related to the company's realignment initiatives and a $3 million benefit related to our settlement with Bertelsmann AG regarding Napster (see "Non-Recurring Items" below), operating income for the quarter grew 78% to $16 million and operating margin was 10.2%.

    Music Publishing OIBDA was $33 million for the quarter, up 44% from $23 million in the prior-year quarter. Music Publishing OIBDA margin was 21.0%. Adjusted to exclude Non-Recurring Items, Music Publishing OIBDA rose 35% to $31 million for the quarter and Music Publishing OIBDA margin was 19.7%, up 4.4 percentage points from the prior-year quarter. The Music Publishing OIBDA margin and operating margin improvements in the quarter were largely the result of a more profitable revenue mix, as well as the timing of artist spending and royalty reconciliations.

    Financial details for the third quarter of fiscal 2007 can be found in the company's quarterly report on 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.

    Non-Recurring Items

    On May 8, 2007, the company announced a realignment plan to implement changes intended to better align the company's workforce with the changing nature of the music industry and to improve financial flexibility by

    consolidating and streamlining the structure of the company's businesses. Approximately $38 million of non-recurring costs were incurred in the third quarter of fiscal 2007, consisting of $32 million in restructuring costs and $6 million in non-recurring severance and IT outsourcing related charges reflected in selling, general and administrative expenses. Of the $38 million of non-recurring costs, $33 million were incurred by the Recorded Music division, $1 million were incurred by the Music Publishing division and $4 million were corporate costs. This quarter's restructuring and severance charges related primarily to redirecting resources to growth areas of the company's businesses and eliminating duplicative positions.

    On April 24, 2007, the company and Bertelsmann AG jointly announced a settlement of contingent claims held by the company relating to Bertelsmann AG's relationship with Napster in 2000-2001. The settlement covers the resolution of the related legal claims against Bertelsmann AG by the company's Recorded Music and Music Publishing businesses. As part of the settlement, the company received $110 million, which was allocated 90% to Recorded Music and 10% to Music Publishing. Net of amounts payable to artists and songwriters, the company recorded other income of $52 million in the third quarter of fiscal 2007 related to this settlement. Of the $52 million, $49 million went to the Recorded Music division and $3 million went to the Music Publishing division. The balance of the $110 million, or $58 million, is being shared with our recording artists and songwriters.

    In the third quarter of fiscal 2007, the company expensed $8 million in costs associated with the potential acquisition of EMI Group plc, all at the corporate level.

    These Non-Recurring Items had a related tax benefit of $6 million.

    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, Lava, 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.

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

    This communication includes forward-looking statements that reflect our current views 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, management's expectations, beliefs and projections may not 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 the company's annual report on Form 10-K, its quarterly reports on Form 10-Q and its other filings with the Securities and Exchange Commission concerning factors that could cause actual results to differ materially from those described in our forward-looking statements.

    Figure 1.  Warner Music Group Corp. - Consolidated Statement of Operations,
    Three and Nine Months Ended 6/30/07 versus 6/30/06 (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,    %
                            2007     2006   Change     2007     2006   Change
                          -------  -------  -------  -------  -------  -------
                       (unaudited)(unaudited)     (unaudited)(unaudited)
    Revenues:             $   804  $   822     (2%)  $ 2,516  $ 2,662     (5%)
    Costs and expenses:
    Cost of revenues         (429)    (445)       4%  (1,364)  (1,384)       1%
    Selling, general and
     administrative
     expenses                (298)    (301)       1%    (863)    (918)       6%
    Other income               52        -        -       52        -        -
    Restructuring costs       (32)       -        -      (44)       -        -
    Amortization of
     intangible assets        (52)     (48)    (8%)     (153)    (143)    (7%)
                          -------  -------  -------  -------  -------  -------
    Total costs and
     expenses             ($  759) ($  794)       4% ($2,372) ($2,445)       3%
                          -------  -------  -------  -------  -------  -------
    Operating income      $    45  $    28       61% $   144  $   217    (34%)
    Interest expense, net     (45)     (45)       0%    (137)    (135)    (1%)
    Equity in gains of
     equity-method
     investees, net             1        -        -        1        1        0%
    Minority interest          (2)       -        -       (2)       -        -
    Other (expense)
     income, net               (5)       1        -       (5)       3        -
                          -------  -------  -------  -------  -------  -------
    Net (loss) income
     before income taxes  ($    6) ($   16)      63% $     1  $    86    (99%)
    Income tax (expense)
     benefit                  (11)       2        -      (27)     (38)      29%
                          -------  -------  -------  -------  -------  -------
    Net (loss) income     ($   17) ($   14)   (21%)  ($   26) $    48   (154%)
                          =======  =======  =======  =======  =======  =======
    Net (loss) income per share:
    Basic                 ($ 0.12) ($ 0.10)          ($ 0.18) $  0.34
                          =======  =======           =======  =======
    Diluted               ($ 0.12) ($ 0.10)          ($ 0.18) $  0.32
                          =======  =======           =======  =======
    Weighted average
     shares outstanding:
    Basic                   146.9    143.7             145.9    142.3
                          =======  =======           =======  =======
    Diluted                 146.9    143.7             145.9    150.8
                          =======  =======           =======  =======
    Figure 2.  Warner Music Group Corp. - Consolidated Balance Sheets as of
    6/30/2007 and 9/30/06 (dollars in millions)
                                            June 30,    September 30,    %
                                              2007          2006      Change
                                          ------------  ------------  -------
                                          (unaudited)     (audited)
     Assets:
     Current Assets
        Cash & cash equivalents           $        396  $        367        8%
        Short-term investments                       -            18     (100%)
        Accounts receivable, less
         allowances of $197 and $207               522           585      (11%)
        Inventories                                 65            59       10%
        Royalty advances (expected to be
         recouped w/in 1 year)                     195           191        2%
        Deferred tax assets                         33            45      (27%)
        Other current assets                        58            35       66%
                                          ------------  ------------  -------
     Total Current Assets                 $      1,269  $      1,300       (2%)
     Royalty advances (expected to be
      recouped after 1 year)                       239           207       15%
     Investments                                    30            25       20%
     Property, plant & equipment, net              133           146       (9%)
     Goodwill                                    1,049           929       13%
     Intangible assets subject to
      amortization, net                          1,639         1,711       (4%)
     Intangible assets not subject to
      amortization                                 100           100        0%
     Other assets                                   95           102       (7%)
                                          ------------  ------------  -------
     Total Assets                         $      4,554  $      4,520        1%
                                          ============  ============  =======
     Liabilities & Shareholders' Equity:
     Current Liabilities
        Accounts payable                  $        178  $        209      (15%)
        Accrued royalties                        1,263         1,142       11%
        Taxes & other withholdings                  14            32      (56%)
        Current portion of long-term debt           17            17        0%
        Dividend payable                            22            22        0%
        Other current liabilities                  335           377      (11%)
                                          ------------  ------------  -------
     Total current liabilities            $      1,829  $      1,799        2%
     Long-term debt                       $      2,253  $      2,239        1%
     Dividends payable                               1             3      (67%)
     Deferred tax liabilities, net                 257           197       30%
     Other noncurrent liabilities                  237           224        6%
                                          ------------  ------------  -------
     Total Liabilities                    $      4,577  $      4,462        3%
     Common stock                                    -             -        -
     Additional paid-in capital                    576           567        2%
     Accumulated deficit                          (600)         (516)      16%
     Accumulated other comprehensive
      income, net                                    1             7      (86%)
                                          ------------  ------------  -------
     Total Shareholders' Deficit          $        (23) $         58     (140%)
                                          ------------  ------------  -------
     Total Liabilities & Shareholders'
      Deficit                             $      4,554  $      4,520        1%
                                          ============  ============  =======
    Figure 3.  Warner Music Group Corp. - Summarized Statement of Cash Flows,
    Three and Nine Months Ended 6/30/07 versus 6/30/06 (dollars in millions)
                               Three   Three            Nine    Nine
                               Months  Months          Months  Months
                               Ended   Ended           Ended   Ended
                                June    June            June    June
                                 30,     30,     %       30,     30,     %
                                2007    2006   Change   2007    2006   Change
                               ------  ------  ------  ------  ------  ------
                               (unau-  (unau-          (unau-  (unau-
                               dited)  dited)          dited)  dited)
    Net cash provided by
     operating activities      $   90  $   18       -  $  197  $  223     (12%)
    Net cash used in
     investing activities         (33)    (51)    (35%)  (102)   (142)    (28%)
    Net cash used in financing
     activities                   (24)    (23)      4%    (70)    (68)      3%
    Effect of foreign currency
     exchange rates on cash         1       3     (67%)     4       5     (20%)
                               ------  ------  ------  ------  ------  ------
    Net increase (decrease) in
     cash                      $   34  $  (53)      -  $   29  $   18      61%
                               ======  ======  ======  ======  ======  ======
    
    

    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 the company's 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").

    Figure 4.  Warner Music Group Corp. - Reconciliation of OIBDA to Net
    Income, Three and Nine Months Ended 6/30/07 versus 6/30/06 (dollars in
    millions)
                               Three   Three            Nine    Nine
                               Months  Months          Months  Months
                               Ended   Ended           Ended   Ended
                                June    June            June    June
                                 30,     30,     %       30,     30,     %
                                2007    2006   Change   2007    2006   Change
                               ------  ------  ------  ------  ------  ------
                               (unau-  (unau-          (unau-  (unau-
                               dited)  dited)          dited)  dited)
    OIBDA                      $  107  $   86      24% $  327  $  392     (17%)
    Depreciation expense          (10)    (10)      0%    (30)    (32)      6%
    Amortization expense          (52)    (48)     (8%)  (153)   (143)     (7%)
                               ------  ------  ------  ------  ------  ------
    Operating income           $   45  $   28      61% $  144  $  217     (34%)
    Interest expense, net         (45)    (45)      0%   (137)   (135)     (1%)
    Equity in gains of
     equity-method investees,
     net                            1       -       -       1       1       0%
    Minority interest              (2)      -       -      (2)      -       -
    Other income, net              (5)      1       -      (5)      3       -
                               ------  ------  ------  ------  ------  ------
    Loss (income) before
     income taxes              $   (6) $  (16)    (63%)$    1  $   86     (99%)
    Income tax (expense)
     benefit                      (11)      2       -     (27)    (38)     29%
                               ------  ------  ------  ------  ------  ------
    Net (loss) income          $  (17) $  (14)    (21%)$  (26) $   48    (154%)
                               ======  ======  ======  ======  ======  ======
    OIBDA Margin                 13.3%   10.5%           13.0%   14.7%
    Operating Income Margin       5.6%    3.4%            5.7%    8.2%
    
    

    Adjusted Results

    In the third quarter, Non-Recurring Items consisted of restructuring-related charges, a settlement with Bertelsmann AG and costs associated with the potential acquisition of EMI Group plc.

    Restructuring-related charges included approximately $32 million in restructuring costs and $6 million in non-recurring severance and other charges reflected in selling, general and administrative expenses. Of the $38 million of non-recurring costs, $33 million were incurred by the Recorded Music division, $1 million were incurred by the Music Publishing division and $4 million were corporate costs. This quarter's restructuring and severance charges related primarily to the redirecting of resources to growth areas of the company's businesses and eliminating duplicative positions.

    The settlement with Bertelsmann AG covers the resolution of the Napster related legal claims against Bertelsmann AG by the company's Recorded Music and Music Publishing businesses. As part of the settlement, the company received $110 million, which it allocated 90% to Recorded Music and 10% to Music Publishing. Net of amounts payable to artists and songwriters, the company recorded other income of $52 million in the third quarter of fiscal 2007 related to this settlement. Of the $52 million, $49 million went to the Recorded Music division and $3 million went to the Music Publishing division. The balance of the $110 million, or $58 million, is being shared with our recording artists and songwriters.

    The company expensed $8 million in costs associated with the potential acquisition of EMI Group plc, all at the corporate level.

    These Non-Recurring Items had a related tax benefit of $6 million.

    Such charges relate to specific events and do not reflect ongoing operations of the business. In addition, while we have had and expect to have ongoing settlements of claims to enforce our intellectual property rights, the size and timing of such settlements impact our period to period comparisons. Therefore, the company is also presenting results excluding these items. We consider these adjusted results to be an important indicator of the operational strengths and performance of our businesses, including the ability to provide free cash flow to service debt. However, a limitation of the use of these adjusted amounts as performance measures is that they do not reflect the charges noted or the proceeds received from the settlement and, therefore, do not necessarily represent funds available for discretionary use, and are not necessarily measures of the company's ability to fund its cash needs. Accordingly, these adjusted amounts should be considered in addition to, not as a substitute for, operating income, net income (loss), EPS and other measures of financial performance reported in accordance with GAAP.

    Figure 5.  Warner Music Group Corp. - Reconciliation of GAAP Operating
    Income to Non-GAAP Adjusted OIBDA, for the Three and Nine Months ended
    6/30/07 versus 6/30/06 (dollars in millions)
                               Three   Three            Nine    Nine
                               Months  Months          Months  Months
                               Ended   Ended           Ended   Ended
                                June    June            June    June
                                 30,     30,     %       30,     30,     %
                                2007    2006   Change   2007    2006   Change
                               ------  ------- ------  ------  ------- ------
                               (unau-  (unau-         (unau-  (unau-
                                dited)  dited)         dited)  dited)
    Total WMG Operating Income
     - GAAP                    $   45  $    28     61% $  144  $   217    (34%)
    Depreciation and
     Amortization                  62       58     (7%)   183      175     (5%)
                               ------  ------- ------  ------  ------- ------
    Total WMG OIBDA            $  107  $    86     24% $  327  $   392    (17%)
    EMI acquisition-related
     costs                          8        -      -       8        -      -
    Settlement income             (52)       -      -     (52)       -      -
    Restructuring costs            32        -      -      44        -      -
    Non-recurring severance
     and other costs                6        -      -      10        -      -
                               ------  ------- ------  ------  ------- ------
    Total WMG OIBDA Excluding
     Non-Recurring Items       $  101  $    86     17% $  337  $   392    (14%)
                               ======  ======= ======  ======  ======= ======
    Recorded Music Operating
     Income - GAAP             $   65  $    52     25% $  177  $   258    (31%)
    Depreciation and
     Amortization                  44       40    (10%)   128      121     (6%)
                               ------  ------- ------  ------  ------- ------
    Recorded Music OIBDA       $  109  $    92     18% $  305  $   379    (20%)
    Settlement income             (49)       -      -     (49)       -      -
    Restructuring costs            30        -      -      41        -      -
    Non-recurring severance
     and other costs                3        -      -       7        -      -
                               ------  ------- ------  ------  ------- ------
    Recorded Music OIBDA
     Excluding Non-Recurring
     Items                     $   93  $    92      1% $  304  $   379    (20%)
                               ======  ======= ======  ======  ======= ======
    Music Publishing Operating
     Income - GAAP             $   18  $     9    100% $   59  $    47     26%
    Depreciation and
     Amortization                  15       14     (7%)    46       44     (5%)
                               ------  ------- ------  ------  ------- ------
    Music Publishing OIBDA     $   33  $    23     43% $  105  $    91     15%
                               ======  ======= ======  ======  ======= ======
    Settlement income              (3)       -      -      (3)       -      -
    Restructuring costs             1        -      -       1        -      -
                               ------  ------- ------  ------  ------- ------
    Music Publishing OIBDA
     Excluding Non-Recurring
     Items                     $   31  $    23     35% $  103  $    91     13%
                               ======  ======= ======  ======  ======= ======
    Figure 6.  Warner Music Group Corp. - Reconciliation of GAAP Operating
    Income to Non-GAAP Adjusted Operating Income, for the Three and Nine
    Months ended 6/30/07 versus 6/30/06 (dollars in millions)
                      Three      Three              Nine       Nine
                      Months     Months             Months     Months
                      Ended      Ended              Ended      Ended
                    June 30,   June 30,     %     June 30,   June 30,     %
                      2007       2006     Change    2007       2006     Change
                    ---------  ---------- ------  ---------  ---------- ------
                   (unaudited)(unaudited)        (unaudited) (unaudited)
    Total WMG
     Operating
     Income - GAAP  $      45  $       28     61% $     144  $      217   (34%)
    EMI
     acquisition-
     related costs          8           -      -          8           -     -
    Settlement
     income               (52)          -      -        (52)          -     -
    Restructuring
     costs                 32           -      -         44           -     -
    Non-recurring
     severance and
     other costs            6           -      -         10           -     -
                    ---------  ---------- ------  ---------  ---------- -----
    Total WMG
     Operating
     Income
     Excluding
     Non-Recurring
     Items                 39          28     39%       154         217   (29%)
                    =========  ========== ======  =========  ========== =====
    Recorded Music
     Operating
     Income - GAAP  $      65  $       52     25% $     177  $      258   (31%)
    Settlement
     income               (49)          -      -        (49)          -     -
    Restructuring
     costs                 30           -      -         41           -     -
    Non-recurring
     severance and
     other costs            3           -      -          7           -     -
                    ---------  ---------- ------  ---------  ---------- -----
    Recorded Music
     Operating
     Income
     Excluding
     Non-Recurring
     Items          $      49  $       52     (6%)$     176  $      258   (32%)
                    =========  ========== ======  =========  ========== =====
    Music
     Publishing
     Operating
     Income - GAAP  $      18  $        9    100% $      59  $       47     26%
    Settlement
     income                (3)          -      -         (3)          -      -
    Restructuring
     costs                  1           -      -          1           -      -
                    ---------  ---------- ------  ---------  ---------- ------
    Music
     Publishing
     Operating
     Income
     Excluding
     Non-Recurring
     Items          $      16  $        9     78% $      57  $       47     21%
                    =========  ========== ======  =========  ========== ======
    Figure 7.  Warner Music Group Corp. -- Reconciliation of GAAP to Non-GAAP
    Net Income (Loss) and Earnings Per Share for the Three and Nine Months
    ended 6/30/07 versus 6/30/06 (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,
                                   2007        2006        2007        2006
                                ----------  ----------  ----------  -----------
                                (unaudited) (unaudited) (unaudited) (unaudited)
    Net Income (loss):
    Net (loss) income - GAAP     $     (17)  $     (14)  $     (26) $        48
    EMI acquisition-related
     costs                               8           -           8            -
    Settlement income                  (52)          -         (52)           -
    Restructuring costs                 32           -          44            -
    Non-recurring severance and
     other costs                         6           -          10            -
    Tax effect on non-recurring
     items                              (6)          -         (10)           -
                                ----------  ----------  ----------  -----------
    Net (loss) income -
     Excluding Non-Recurring
     Items                       $     (29)  $     (14)  $     (26) $        48
                                ==========  ==========  ==========  ===========
    Earnings Per Share:
    EPS - GAAP                   $   (0.12)  $   (0.10)  $   (0.18) $      0.32
    EMI acquisition-related
     costs                            0.05           -        0.05            -
    Settlement income                (0.35)          -       (0.36)           -
    Restructuring costs               0.22           -        0.30            -
    Non-recurring severance and
     other costs                      0.04           -        0.07            -
    Tax effect on non-recurring
     items                           (0.04)          -       (0.07)           -
                                ----------  ----------  ----------  -----------
    Diluted EPS- Excluding
     Non-Recurring Items         $   (0.20)  $   (0.10)  $   (0.18) $      0.32
                                ==========  ==========  ==========  ===========
    
    

    Constant Currency

    As 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 the company's operating results and evaluate its 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. However, a limitation of the use of the constant-currency results as a performance measure is that it does not reflect the $24 million, $19 million and $5 million favorable impact of exchange rates on our Total, Recorded Music and Music Publishing revenue, respectively, in the three months ended June 30, 2007 compared to the comparable prior-year three months and the $88 million, $68 million and $20 million unfavorable impact of exchange rates on our Total, Recorded Music and Music Publishing revenue, respectively, in the nine months ended June 30, 2007. 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 measures of performance presented in accordance with GAAP.

    Figure 8.  Warner Music Group Corp. - Reconciliation of GAAP Operating
    Income to Non-GAAP Adjusted OIBDA, Constant Currency for the Three and
    Nine Months ended 6/30/07 versus 6/30/06 (dollars in millions)
                    Three      Three               Nine       Nine
                    Months     Months              Months     Months
                    Ended      Ended               Ended      Ended
                  June 30,   June 30,      %       June 30,  June 30,    %
                    2007       2006     Change     2007       2006     Change
                  ---------  ---------- -------  ---------  ---------- -------
                      As                             As
                  reported   Constant $          reported   Constant $
                 (unaudited)(unauditeed)        (unaudited)(unaudited)
    Total WMG
     Operating
     Income -
     GAAP         $      45  $       28      61% $     144  $      225    (36%)
    Depreciation
     and
     Amortization $      62          58      (7%)$     183         177     (3%)
                  ---------  ---------- -------  ---------  ---------- ------
    Total WMG
     OIBDA        $     107  $       86      24% $     327  $      402    (19%)
    EMI
     acquisition-
     related
     costs                8           -                  8           -
    Settlement
     income             (52)          -                (52)          -
    Restructuring
     costs               32           -       -         44           -      -
    Non-recurring
     severance
     and other
     costs                6           -       -         10           -      -
                  ---------  ---------- -------  ---------  ---------- ------
    Total WMG
     OIBDA
     Excluding
     Non-
     Recurring
     Items        $     101  $       86      17% $     337  $      402    (16%)
                  =========  ========== =======  =========  ========== ======
    Recorded
     Music
     Operating
     Income -
     GAAP         $      65  $       53      23% $     177  $      265    (33%)
    Depreciation
     and
     Amortization $      44          41      (7%)$     128         123     (4%)
                  ---------  ---------- -------  ---------  ---------- ------
    Recorded
     Music OIBDA  $     109  $       94      16% $     305  $      388    (21%)
    Settlement
     income             (49)          -                (49)          -
    Restructuring
     costs               30           -       -         41           -      -
    Non-recurring
     severance
     and other
     costs                3           -       -          7           -      -
                  ---------  ---------- -------  ---------  ---------- ------
    Recorded
     Music OIBDA
     Excluding
     Non-
     Recurring
     Items        $      93  $       94      (1%)$     304  $      388    (22%)
                  =========  ========== =======  =========  ========== ======
    Music
     Publishing
     Operating
     Income -
     GAAP         $      18  $        9     100% $      59  $       48     23%
    Depreciation
     and
     Amortization $      15          15       0% $      46          46      0%
                  ---------  ---------- -------  ---------  ---------- ------
    Music
     Publishing
     OIBDA        $      33  $       24      38% $     105  $       94     12%
                  =========  ========== =======  =========  ========== ======
    Settlement
     income              (3)          -       -         (3)          -      -
    Restructuring
     costs                1           -       -          1           -      -
                  ---------  ---------- -------  ---------  ---------- ------
    Music
     Publishing
     OIBDA
     Excluding
     Non-
     Recurring
     Items               31          24      29%       103          94     10%
                  =========  ========== =======  =========  ========== ======
    Figure 9.  Warner Music Group Corp. - Revenue by Geography, Three and Nine
    Months Ended 6/30/07 versus 6/30/06 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,
                  2007      2006       2006       2007      2006       2006
                --------  ---------  ---------  --------  ---------  ---------
                   As         As     Constant      As         As     Constant
                reported  reported       $      reported  reported       $
             (unaudited)(unaudited)(unaudited)(unaudited)(unaudited)(unaudited)
    Revenue by
     Geography:
    US revenue  $    403  $     406  $     406  $  1,227  $   1,282  $   1,282
      Recorded
       Music         345        347        347     1,065      1,115      1,115
      Music
       Publishing     58         59         59       162        167        167
    International
     revenue         407        422        446     1,307      1,402      1,490
      Recorded
       Music         308        331        350     1,036      1,159      1,227
      Music
       Publishing     99         91         96       271        243        263
    Intersegment
     elimin-
     ations     ($     6) ($      6) ($      6) ($    18) ($     22) ($     22)
                --------  ---------  ---------  --------  ---------  ---------
                $    804  $     822  $     846  $  2,516  $   2,662  $   2,750
                ========  =========  =========  ========  =========  =========
    Revenue by
     Segment:
    Recorded
     Music      $    653  $     678  $     697  $  2,101  $   2,274  $   2,342
    Music
     Publishing      157        150        155       433        410        430
    Intersegment
     elimin-
     ations           (6)        (6)        (6)      (18)       (22)       (22)
                --------  ---------  ---------  --------  ---------  ---------
    Total
     Revenue    $    804  $     822  $     846  $  2,516  $   2,662  $   2,750
                ========  =========  =========  ========  =========  =========
    
    

    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 ongoing 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 the company to other companies in our industry.

    As 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. As 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 - "Net 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 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 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 10.  Warner Music Group Corp. - Calculation of Free Cash Flow and
    Unlevered After-Tax Cash Flow, Three and Nine Months Ended 6/30/07 versus
    6/30/06 (dollars in millions)
                               Three        Three         Nine         Nine
                              Months       Months       Months       Months
                               Ended        Ended        Ended        Ended
                              June 30,     June 30,     June 30,     June 30,
                                2007         2006         2007         2006
                            ------------ -----------  ------------ ------------
                            (unaudited)  (unaudited)  (unaudited)  (unaudited)
    Net cash flow provided
     by operating
     activities             $         90 $        18  $        197 $        223
    Less: Capital
     expenditures                      8           6            21           18
    Less: Cash paid for
     investments, net,
     excluding short-term
     investments                      25          45           106           95
                            ------------ -----------  ------------ ------------
    Free Cash Flow (a) (b)
     (c)                    $         57 ($       33) $         70 $        110
                            ============ ===========  ============ ============
    (a) - Free Cash Flow includes $21 million and $24 million cash paid for
          non-recurring restructuring and other related charges for the three
          months and nine months ended June 30, 2007, respectively
    (b) - Free Cash Flow includes $110 million received related to the
          settlement with Bertlesmann
    (c) - Free Cash Flow includes cash paid for interest as follows
          (in millions):
                               Three        Three         Six          Six
                              Months       Months       Months       Months
                               Ended        Ended        Ended        Ended
                              June 30,     June 30,     June 30,     June 30,
                                2007         2006         2007         2006
                            ------------ -----------  ------------ ------------
                            (unaudited)  (unaudited)  (unaudited)  (unaudited)
       Free Cash Flow       $         57 ($       33) $         70 $        110
       Plus: Cash paid for
        interest                      48          47           121          118
                            ------------ -----------  ------------ ------------
       Unlevered After-Tax
        Cash Flow           $        105 $        14  $        191 $        228
                            ============ ===========  ============ ============
    
    

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