Warner Music Group Corp. Reports Third Quarter 2008 Results for the Period Ended June 30, 2008
NEW YORK, NY, Aug 07, 2008 -- Warner Music Group Corp. (NYSE: WMG)
- Total revenue of $848 million increased 5% from $804 million in the
prior-year quarter, and declined 1% on a constant-currency basis.
- Digital revenue was $166 million, or 20% of total revenue, up 1%
sequentially from $164 million in the second quarter of fiscal 2008 and up
39% from $119 million in the prior-year quarter.
- Operating income from continuing operations increased 11% to $51
million from $46 million in the prior-year quarter. The prior-year quarter
included a net benefit of $6 million resulting from a $52 million benefit
related to our settlement with Bertelsmann AG regarding Napster, $38
million in expenses related to the company's fiscal 2007 realignment
initiatives and $8 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 grew 7% to $116 million from $108 million in the
prior-year quarter which included the net benefit of $6 million from the
Prior-Year Items.
- Loss from continuing operations of $0.06 per diluted share improved from a loss of $0.11 per diluted share in the prior-year quarter.
Warner Music Group Corp. (NYSE: WMG) today announced its third-quarter 2008 financial results for the period ended June 30, 2008.
"This quarter, we continued to outperform our competitors, even in the midst of a challenging recorded music environment," said Edgar Bronfman, Jr., Warner Music Group's Chairman and CEO. "We continue to advance our strategy to lead the recorded music industry's transition with new business models, key partnerships and successful A&R investments. As we transform the business to position it for future growth in an evolving industry, we remain focused on driving profitability and cash flow, while prudently managing capital and costs."
Michael Fleisher, Warner Music Group's Executive Vice President and CFO, added: "Benefits from the steps we've taken to increase our financial flexibility were evidenced this quarter by our building cash balance and rising quarterly year-over-year Free Cash Flow. Our capital deployment strategy designed to improve shareholder returns by conserving cash and sustaining A&R investment levels remains a priority."
Third-Quarter Results
For the third quarter 2008, revenue grew 5.5% to $848 million from $804 million in the prior-year quarter, and fell 1.1% on a constant-currency basis. This performance continues to reflect the ongoing transition in the recorded music industry characterized by a shift in consumption patterns from physical sales to new forms of digital music and the continued impact of digital piracy. Domestic revenue declined 6.5%. International revenue grew 17.2%, and grew 3.6% on a constant-currency basis. On a constant-currency basis, revenue grew in Europe and Canada.
Operating income from continuing operations grew 10.9% to $51 million from $46 million in the prior-year quarter and operating margin from continuing operations increased 0.3 percentage points to 6.0%. OIBDA from continuing operations increased 7.4% to $116 million from $108 million in the prior-year quarter and OIBDA margin from continuing operations grew 0.3 percentage points to 13.7%. Operating income, operating margin, OIBDA and OIBDA margin from continuing operations for the third quarter of fiscal 2007 reflected the net benefit of $6 million from the Prior-Year Items.
Loss from continuing operations was $9 million, or $0.06 per diluted share for the quarter, an improvement from a loss of $16 million, or $0.11 per diluted share in the prior-year quarter. The net benefit of $6 million from the Prior-Year Items amounted to $0.04 per diluted share.
The company reported a cash balance of $338 million as of June 30, 2008, an increase from the March 31, 2008 balance of $249 million, which rose from the December 31, 2007 balance of $160 million. As of June 30, 2008, the company reported total long-term debt of $2.27 billion and net debt (total long-term debt minus cash) of $1.93 billion.
For the quarter, net cash provided by operating activities was $89 million. Free Cash Flow (defined as cash flow from operations less capital expenditures and cash paid or received for investments) was $93 million, compared to Free Cash Flow of $57 million in the comparable fiscal 2007 quarter. Unlevered After-Tax Cash Flow (defined as Free Cash Flow excluding cash interest paid) was $140 million, compared to Unlevered After-Tax Cash Flow of $105 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 increased 5.1% from the prior-year quarter to $686 million, and was down 1.0% on a constant-currency basis. The decline in constant-currency revenue primarily reflected strength in Europe offset by declines in the U.S., Asia-Pacific and Latin America. Year-over-year revenue increased in the international physical Recorded Music business and the global digital Recorded Music business on a constant-currency basis.
Recorded Music digital revenue of $156 million grew 39.3% over the prior-year quarter and represented 22.7% of total Recorded Music revenue. Domestic Recorded Music digital revenue amounted to $101 million or 31.7% of total domestic Recorded Music revenue. Digital sales strength 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 Madonna, Disturbed, Plies, Luis Miguel and Frank Sinatra. International Recorded Music revenue climbed 19.2% from the prior-year quarter to $367 million, and rose 5.1% on a constant-currency basis, while domestic Recorded Music revenue fell 7.5% from the prior-year quarter to $319 million.
The constant-currency growth in international Recorded Music revenue in the quarter was the result of increases in the U.K., France and Germany. Gains in international revenue were attributable to improved local repertoire and international releases as compared to the prior-year quarter and a contribution from international touring and management businesses.
Year-over-year revenue differences in the domestic 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, domestic retailers have continued to more actively manage their inventory levels in response to the tougher economy and credit markets as well as the changing underlying demand for physical recorded music product.
Quarterly Recorded Music operating income remained flat at $66 million, resulting in an operating margin from continuing operations of 9.6% compared to 10.1% in the prior-year quarter. Recorded Music OIBDA from continuing operations remained flat at $110 million for the quarter. Recorded Music OIBDA margin from continuing operations contracted 0.8 percentage points to 16.0% from the prior-year quarter. Recorded Music operating income, OIBDA, operating margin and OIBDA margin from continuing operations for the third quarter of fiscal 2007 reflected a portion of the Prior-Year Items -- a $49 million benefit related to our settlement with Bertelsmann AG regarding Napster and $33 million in expenses related to the company's fiscal 2007 realignment initiatives.
Music Publishing
Music Publishing revenue in the quarter increased 7.0% from the prior-year quarter to $168 million, and was down 0.6% on a constant-currency basis. Music Publishing revenue was flat domestically, and grew 11.1% internationally, but declined 1.1% internationally on a constant-currency basis. Digital revenue from Music Publishing amounted to $10 million, representing 6.0% of total Music Publishing revenue.
On a constant-currency basis, the decline in mechanical revenue of 14.3% was largely offset by a 7.9% increase in performance revenue, a 6.3% rise in synchronization revenue, and a strong increase in digital revenue. Mechanical revenue weakness reflected the industry-wide decline in physical record sales.
Music Publishing operating income amounted to $15 million, down 16.7% from $18 million in the prior-year quarter, resulting in an operating margin of 8.9%, down 2.5 percentage points from the prior-year quarter. Music Publishing OIBDA was flat at $33 million for the quarter and OIBDA margin of 19.6% declined 1.4 percentage points from the prior-year quarter. Music Publishing operating income, OIBDA, operating margin and OIBDA margin for the third quarter of fiscal 2007 reflected a portion of the Prior-Year Items -- a $3 million benefit related to our settlement with Bertelsmann AG regarding Napster and $1 million in expenses related to the company's fiscal 2007 realignment initiatives.
Financial details for the third fiscal 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, 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, 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, there can be no assurance that management's expectations, beliefs and projections will result or be achieved. Investors should not rely on forward-looking statements, including statements regarding future trends in the music industry and our intentions to deploy our capital, including the level of and success of future A&R investments, 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-Q 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.
Figure 1. Warner Music Group Corp. - Consolidated Statement of Operations,
Three and Nine Months Ended 6/30/08 versus 6/30/07 (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, %
2008 2007 Change 2008 2007 Change
-------- -------- ------ -------- -------- ------
(unaudited)(unaudited) (unaudited)(unaudited)
Revenues: $ 848 $ 804 5% $ 2,637 $ 2,516 5%
Costs and expenses:
Cost of revenues (441) (429) 3% (1,399) (1,364) 3%
Selling, general and
administrative
expenses (300) (297) 1% (935) (862) 8%
Other income - 52 - 3 52 (94%)
Restructuring costs - (32) - - (44) -
Amortization of
intangible assets (56) (52) 8% (165) (153) 8%
-------- -------- ----- -------- -------- -----
Total costs and
expenses $ (797) $ (758) 5% $ (2,496) $ (2,371) 5%
-------- -------- ----- -------- -------- -----
Operating income from
continuing operations $ 51 $ 46 11% $ 141 $ 145 (3%)
Interest expense, net (43) (45) (4%) (138) (137) 1%
Minority interest (2) (2) - (4) (2) 100%
Other expense, net (2) (5) (60%) (4) (4) -
-------- -------- ----- -------- -------- -----
Income (loss) from
continuing operations
before income taxes $ 4 $ (5) - $ (5) $ 2 -
-------- -------- ----- -------- -------- -----
Income tax expense (13) (11) 18% (36) (27) 33%
-------- -------- ----- -------- -------- -----
Loss from continuing
operations $ (9) $ (16) (44%) $ (41) $ (25) 64%
Loss from discontinued
operations, net of tax - (1) - (21) (1) -
-------- -------- ----- -------- -------- -----
Net loss $ (9) $ (17) (47%) $ (62) $ (26) -
======== ======== ===== ======== ======== =====
Net loss per share:
Basic earnings per share:
Loss from continuing
operations $ (0.06) $ (0.11) $ (0.28) $ (0.17)
Loss from discontinued
operations - (0.01) (0.14) (0.01)
-------- -------- -------- --------
Net loss $ (0.06) $ (0.12) $ (0.42) $ (0.18)
======== ======== ======== ========
Diluted earnings per share:
Loss from continuing
operations $ (0.06) $ (0.11) $ (0.28) $ (0.17)
Loss from discontinued
operations - (0.01) (0.14) (0.01)
-------- -------- -------- --------
Net loss $ (0.06) $ (0.12) $ (0.42) $ (0.18)
======== ======== ======== ========
Weighted averages
shares outstanding:
Basic 148.9 146.9 148.0 145.9
======== ======== ======== ========
Diluted 148.9 146.9 148.0 145.9
======== ======== ======== ========
Figure 2. Warner Music Group Corp. - Consolidated Balance Sheets as of
6/30/08 and 9/30/07 (dollars in millions)
June 30, September 30,
2008 2007 % Change
----------- ----------- -----------
(unaudited) (audited)
Assets:
Current Assets
Cash & cash equivalents $ 338 $ 333 2%
Accounts receivable, less
allowances of $166 and $192 481 555 (13%)
Inventories 57 58 (2%)
Royalty advances (expected to be
recouped w/in 1 year) 192 176 9%
Deferred tax assets 38 40 (5%)
Other current assets 36 33 9%
----------- ----------- -----------
Total Current Assets $ 1,142 $ 1,195 (4%)
Royalty advances (expected to be
recouped after 1 year) 235 216 9%
Investments 166 146 14%
Property, plant & equipment, net 125 133 (6%)
Goodwill 1,072 1,065 1%
Intangible assets subject to
amortization, net 1,596 1,632 (2%)
Intangible assets not subject to
amortization 100 100 -
Other assets 83 85 (2%)
----------- ----------- -----------
Total Assets $ 4,519 $ 4,572 (1%)
=========== =========== ===========
Liabilities & Shareholders' Deficit:
Current Liabilities
Accounts payable $ 178 $ 225 (21%)
Accrued royalties 1,291 1,226 5%
Taxes & other withholdings 21 33 (36%)
Current portion of long-term debt 17 17 0%
Dividend payable 1 23 (96%)
Deferred Revenue 109 56 95%
Other current liabilities 275 302 (9%)
----------- ----------- -----------
Total current liabilities $ 1,892 $ 1,882 1%
Long-term debt 2,255 2,256 0%
Dividends payable - 1 -
Deferred tax liabilities, net 245 244 0%
Other noncurrent liabilities 226 225 0%
----------- ----------- -----------
Total Liabilities $ 4,618 $ 4,608 0%
Common stock - - -
Additional paid-in capital 586 579 1%
Accumulated deficit (692) (614) 13%
Accumulated other comprehensive
income, net 7 (1) -
----------- ----------- -----------
Total Shareholders' Deficit ($ 99) ($ 36) -
----------- ----------- -----------
Total Liabilities & Shareholders'
Deficit $ 4,519 $ 4,572 (1%)
=========== =========== ===========
Figure 3. Warner Music Group Corp. - Summarized Statement of Cash Flows,
Three and Nine Months Ended 6/30/08 versus 6/30/07 (dollars in millions)
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, % June 30, June 30, %
2008 2007 Change 2008 2007 Change
-------- -------- ------ -------- -------- ------
(unaudited)(unaudited) (unaudited)(unaudited)
Net cash provided by
operating activities $ 89 $ 90 (1%) $ 185 $ 197 (6%)
Net cash provided by
(used) in investing
activities 4 (33) - (148) (102) 45%
Net cash used in
financing activities (5) (24) (79%) (55) (70) (21%)
Effect of foreign
currency exchange
rates on cash 1 1 0% 23 4 -
-------- -------- ----- -------- -------- -----
Net increase in cash $ 89 $ 34 - $ 5 $ 29 (83%)
======== ======== ===== ======== ======== =====
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 and impairment of goodwill (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").
Figure 4. Warner Music Group Corp. - Reconciliation of OIBDA to Net Loss,
Three and Nine Months Ended 6/30/08 versus 6/30/07 (dollars in millions)
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, % June 30, June 30, %
2008 2007 Change 2008 2007 Change
-------- -------- ------ -------- -------- ------
(unaudited)(unaudited) (unaudited)(unaudited)
OIBDA $ 116 $ 108 7% $ 341 $ 328 4%
Depreciation expense (9) (10) (10%) (35) (30) 17%
Amortization expense (56) (52) 8% (165) (153) 8%
-------- -------- ----- -------- -------- -----
Operating income from
continuing
operations $ 51 $ 46 11% $ 141 $ 145 (3%)
Interest expense, net (43) (45) (4%) (138) (137) 1%
Minority interest (2) (2) - (4) (2) -
Other expense, net (2) (4) - (4) (4) -
-------- -------- ----- -------- -------- -----
Income (Loss) from
continuing
operations before
income taxes $ 4 $ (5) - ($ 5) $ 2 -
-------- -------- ----- -------- -------- -----
Income tax expense (13) (11) 18% (36) (27) 33%
-------- -------- ----- -------- -------- -----
Loss from continuing
operations $ (9) $ (16) (44%) $ (41) $ (25) 64%
Loss from
discontinued
operations, net of
tax - (1) - (21) (1) -
-------- -------- ----- -------- -------- -----
Net loss $ (9) $ (17) (47%) $ (62) $ (26) -
======== ======== ===== ======== ======== =====
OIBDA margin from
continuing
operations 13.7% 13.4% 12.9% 13.0%
Operating income
margin from
continuing
operations 6.0% 5.7% 5.3% 5.8%
Figure 5. Warner Music Group Corp. - Reconciliation of Segment Operating
Income to OIBDA, for the Three and Nine Months ended 6/30/08 versus 6/30/07
(dollars in millions)
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, % June 30, June 30, %
2008 2007 Change 2008 2007 Change
-------- -------- ------ -------- -------- ------
(unaudited)(unaudited) (unaudited)(unaudited)
Total WMG Operating
Income from
Continuing
Operations- GAAP $ 51 $ 46 11% $ 141 $ 145 (3%)
Depreciation and
Amortization 65 62 5% 200 183 9%
-------- -------- ----- -------- -------- -----
Total WMG OIBDA $ 116 $ 108 7% $ 341 $ 328 4%
======== ======== ===== ======== ======== =====
Recorded Music
Operating Income
from Continuing
Operations- GAAP $ 66 $ 66 0% $ 177 $ 178 (1%)
Depreciation and
Amortization (44) (44) 0% (139) (128) 9%
-------- -------- ----- -------- -------- -----
Recorded Music OIBDA $ 110 $ 110 0% $ 316 $ 306 3%
======== ======== ===== ======== ======== =====
Music Publishing
Operating Income
from Continuing
Operations - GAAP $ 15 $ 18 (17%)$ 55 $ 59 (7%)
Depreciation and
Amortization (18) (15) 20% (53) (46) 15%
-------- -------- ----- -------- -------- -----
Music Publishing
OIBDA $ 33 $ 33 0% $ 108 $ 105 3%
======== ======== ===== ======== ======== =====
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 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 translating prior-year results at 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 $53 million, $40 million and $12 million favorable impact of exchange rates on our Total, Recorded Music and Music Publishing revenue, respectively, in the three months ended June 30, 2008 as compared to the prior-year quarter or the $153 million, $118 million and $35 million favorable impact of exchange rates on our Total, Recorded Music and Music Publishing revenue, respectively, in the nine months ended June 30, 2008 as compared to the prior-year period. 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 6. Warner Music Group Corp. - Revenue by Geography and Segment,
Three and Nine Months Ended 6/30/08 versus 6/30/07 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,
2008 2007 2007 2008 2007 2007
---------- ---------- --------- ---------- --------- ----------
As As Constant As As Constant
reported reported $ reported reported $
(unaudited)(unaudited)(unaudited)(unaudited)(unaudited)(unaudited)
Revenue by
Geography:
US revenue
Recorded
Music $ 319 $ 345 $ 345 $ 1,016 $ 1,065 $ 1,065
Music
Publishing 58 58 58 169 162 162
International
revenue
Recorded
Music 367 308 349 1,172 1,036 1,154
Music
Publishing 110 99 111 298 271 306
Intersegment
eliminations (6) (6) (6) (18) (18) (18)
-------- --------- -------- --------- -------- ---------
Total
Revenue $ 848 $ 804 $ 857 $ 2,637 $ 2,516 $ 2,669
======== ========= ======== ========= ======== =========
Revenue by
Segment:
Recorded
Music $ 686 $ 653 $ 694 $ 2,188 $ 2,101 $ 2,219
Music
Publishing 168 157 169 467 433 468
Intersegment
eliminations (6) (6) (6) (18) (18) (18)
-------- --------- -------- --------- -------- ---------
Total
Revenue $ 848 $ 804 $ 857 $ 2,637 $ 2,516 $ 2,669
======== ========= ======== ========= ======== =========
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 our 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 -- "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 Ended 6/30/08 versus
6/30/07 (dollars in millions)
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------- ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net cash flow provided
by operating
activities $ 89 $ 90 $ 185 $ 197
Less: Capital
expenditures 6 8 26 21
Less: Net cash paid
(received) for
investments, net,
excluding short-term
investments (10) 25 122 106
----------- ------------ ------------ ------------
Free Cash Flow (a) $ 93 $ 57 $ 37 $ 70
=========== ============ ============ ============
(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,
2008 2007 2008 2007
----------- ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Free Cash Flow $ 93 $ 57 $ 37 $ 70
Plus: Cash paid for
interest 47 48 127 121
----------- ------------ ------------ ------------
Unlevered After-Tax
Cash Flow $ 140 $ 105 $ 164 $ 191
=========== ============ ============ ============
NEW YORK, NY, May 08, 2008 -- Warner Music Group Corp. (NYSE: WMG)
- Total revenue of $800 million increased 2% from $784 million in the
prior-year quarter, and declined nearly 4% on a constant-currency basis.
- Digital revenue was $164 million, or 21% of total revenue, up 16%
sequentially from $141 million in the first quarter of fiscal 2008 and up
48% from $111 million in the prior-year quarter.
- Operating income from continuing operations increased 47% to $28
million from $19 million in the prior-year quarter. The prior-year quarter
included $16 million of restructuring-related charges in connection with
the company's fiscal 2007 realignment initiatives.
- Operating income before depreciation and amortization (OIBDA) from
continuing operations grew 20% to $96 million from $80 million in the prior-
year quarter, which included the $16 million in restructuring-related
charges.
- Loss from continuing operations of $0.23 per diluted share increased from a loss of $0.19 per diluted share in the prior-year quarter.
Warner Music Group Corp. (NYSE: WMG) today announced its second-quarter 2008 financial results for the period ended March 31, 2008 and in an effort to increase its financial flexibility has suspended its previous policy of paying a regular quarterly dividend.
"Warner Music continues to outperform the industry and gain share in key markets, which is a testament to our commitment to investing in A&R and leading the recorded music industry's transition through innovation and creativity," said Edgar Bronfman, Jr., Warner Music Group's Chairman and CEO. "While an uncertain economic backdrop and evolving recorded music industry make a conservative approach to our balance sheet a prudent strategy, we remain excited about the long-term prospects for our business. In particular, we are gratified by WMG's excellent digital results this quarter, which highlight our leadership position in driving this critical segment of the music business."
Michael Fleisher, Warner Music Group's Executive Vice President and CFO, added, "We regularly evaluate our capital deployment strategy. Our Board and our management believe it is sensible to maximize capital flexibility, given the vagaries of both the economy and recorded music market, by suspending our dividend to build cash reserves and reduce net debt. This action will give us the freedom to maintain our level of A&R investment, while enhancing shareholder returns over time."
Second-Quarter Results
For the second quarter 2008, revenue grew 2.0% to $800 million from $784 million in the prior-year quarter, and fell 3.6% on a constant-currency basis. This performance was tempered by the ongoing transition in the recorded music industry characterized by a shift in consumption patterns from physical sales to new forms of digital music and the continued impact of digital piracy. Domestic revenue declined 13.8% while international revenue grew 19.9%, and grew 6.7% on a constant-currency basis. On a constant-currency basis, revenue grew in Europe, Asia-Pacific, Latin America and Canada.
Operating income from continuing operations grew 47.4% to $28 million from $19 million in the prior-year quarter and operating margin from continuing operations increased 1.1 percentage points to 3.5%. OIBDA from continuing operations increased 20.0% to $96 million from $80 million in the prior-year quarter and OIBDA margin from continuing operations grew 1.8 percentage points to 12.0%. Operating income, OIBDA, operating margin and OIBDA margin for the second quarter of fiscal 2007 reflected $16 million in restructuring-related charges in connection with the company's fiscal 2007 realignment initiatives.
Loss from continuing operations was $34 million, or $0.23 per diluted share for the quarter. Loss in the prior-year quarter was $27 million, or $0.19 per diluted share.
As of March 31, 2008, the company reported a cash balance of $249 million, total long-term debt of $2.27 billion and net debt (total long-term debt minus cash) of $2.0 billion.
For the quarter, net cash provided by operating activities was $132 million. Free Cash Flow (defined as cash flow from operations less capital expenditures and cash paid for investments) amounted to $99 million, compared to Free Cash Flow of $49 million in the comparable fiscal 2007 quarter. Unlevered After-Tax Cash Flow (defined as Free Cash Flow excluding cash interest paid) was $128 million, compared to Unlevered After-Tax Cash Flow of $73 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 increased 0.6% from the prior-year quarter to $652 million, and was down 4.4% on a constant-currency basis. The decline in constant-currency revenue primarily reflected strength in Europe, Asia-Pacific, Latin America and Canada, more than offset by declines in domestic revenue. Year-over-year revenue increased in the international physical Recorded Music business and the global digital Recorded Music business on a constant-currency basis.
Recorded Music digital revenue of $155 million grew 47.6% over the prior-year quarter and represented 23.8% of total Recorded Music revenue. Domestic Recorded Music digital revenue amounted to $101 million or 34.0% of total domestic Recorded Music revenue. Digital sales strength was primarily driven by growth in global online downloads, and to a lesser extent mobile.
Major sellers in the quarter included titles from R.E.M., Simple Plan, Kobukuro, Nickelback and the Juno soundtrack. International Recorded Music revenue surged 22.4% from the prior-year quarter to $355 million, and rose 9.6% on a constant-currency basis, while domestic Recorded Music revenue slid 17.0% from the prior-year quarter to $297 million.
The constant-currency growth in international Recorded Music revenue in the quarter was the result of increases in the U.K., Germany, France and Japan. Gains in international revenue were attributable to improved local repertoire and international releases as compared to the prior-year quarter and a contribution from international touring and management businesses.
Year-over-year differences in the domestic Recorded Music business were due to the timing of releases and declines in the physical business, which are not currently being fully offset by growth in the digital business, though digital performance was quite strong. Retailers are more actively managing their inventory levels in response to the tougher economy and credit markets as well as the changing underlying demand for physical recorded music product.
Recorded Music operating income from continuing operations totaled $22 million in the quarter, up 69.2% from $13 million in the prior-year quarter, resulting in an operating margin from continuing operations of 3.4% compared to 2.0% in the prior-year quarter. Recorded Music OIBDA from continuing operations rose 27.3% to $70 million for the quarter, compared to $55 million in the prior-year quarter. Recorded Music OIBDA margin from continuing operations expanded 2.2 percentage points to 10.7% from the prior-year quarter. Recorded Music operating income, OIBDA, operating margin and OIBDA margin for the second quarter of fiscal 2007 reflected $15 million in Recorded Music restructuring-related charges in connection with the company's fiscal 2007 realignment initiatives.
Music Publishing
Music Publishing revenue in the quarter increased by 8.4% from the prior-year quarter to $155 million, and was flat on a constant-currency basis. Music Publishing revenue grew 4.9% domestically over the prior-year quarter, and grew 11.0% internationally, but declined 3.2% internationally on a constant-currency basis. Digital revenue from Music Publishing amounted to $9 million, representing 5.8% of total Music Publishing revenue for the quarter.
On a constant-currency basis, declines in mechanical revenue of 9.5% and in synchronization revenue of 4.5% were offset by a 50.0% increase in digital revenue and a 3.4% increase in performance revenue. Mechanical revenue weakness reflected the industry-wide decline in physical record sales. Synchronization revenue was negatively impacted by the Writers Guild of America strike.
Music Publishing operating income amounted to $36 million, down 5.3% from $38 million in the prior-year quarter, resulting in an operating margin of 23.2% down 3.3 percentage points from the prior-year quarter. Music Publishing OIBDA increased 1.9% to $54 million for the quarter, compared to $53 million in the prior-year quarter. Music Publishing OIBDA and OIBDA margin were flat year-over-year, excluding a $1 million favorable impact of foreign currency exchange rates.
Quarterly Dividend
The company today announced that it has discontinued its previous policy of paying a regular quarterly dividend. On February 29, 2008, the company paid its final quarterly dividend of $0.13 per share. The company currently intends to retain future earnings to build cash on the balance sheet and continue its successful A&R investment track record. Any future determination to pay dividends will be at the discretion of the company's Board of Directors and will depend on, among other things, the company's results of operations, cash requirements, financial condition, contractual restrictions and other factors the Board of Directors may deem relevant.
Financial details for the second fiscal 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, 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, 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, there can be no assurance that management's expectations, beliefs and projections will result or be achieved. Investors should not rely on forward-looking statements, including statements regarding future trends in the music industry, our intentions to deploy our capital, including the level of and success of future A&R investments, and our intentions with respect to our dividend policy, 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-Q 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.
Figure 1. Warner Music Group Corp. - Consolidated Statement of Operations,
Three and Six Months Ended 3/31/08 versus 3/31/07 (dollars in millions,
except per share amounts)
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
2008 2007 % Change 2008 2007 % Change
-------- -------- -------- -------- -------- --------
(unaudited)(unaudited) (unaudited)(unaudited)
Revenues: $ 800 $ 784 2% $ 1,789 $ 1,712 4%
Costs and
expenses:
Cost of
revenues (413) (427) (3%) (958) (935) 2%
Selling,
general and
administrative
expenses (304) (275) 11% (635) (565) 12%
Other income - - - 3 - -
Restructuring
costs - (12) - - (12) -
Amortization of
intangible
assets (55) (51) 8% (109) (101) 8%
-------- -------- -------- -------- -------- --------
Total costs and
expenses ($ 772) ($ 765) 1% ($ 1,699) ($ 1,613) 5%
-------- -------- -------- -------- -------- --------
Operating
income from
continuing
operations $ 28 $ 19 47% $ 90 $ 99 (9%)
Interest
expense, net (47) (45) 4% (95) (92) 3%
Equity in
income of
equity-method
investees,net - - - 1 - -
Minority
interest - - - (2) - -
Other expense,
net (2) - - (3) - -
-------- -------- -------- -------- -------- --------
(Loss) income
from
continuing
operations
before income
taxes ($ 21) ($ 26) (19%) ($ 9) $ 7 -
-------- -------- -------- -------- -------- --------
Income tax
expense (13) (1) - (23) (16) 44%
-------- -------- -------- -------- -------- --------
Loss from
continuing
operations ($ 34) ($ 27) 26% ($ 32) ($ 9) -
Loss from
discontinued
operations,
net of tax (3) - - (21) - -
-------- -------- -------- -------- -------- --------
Net loss ($ 37) ($ 27) 37% ($ 53) ($ 9) -
======== ======== ======== ======== ======== ========
Net loss per
share:
Basic earnings
per share:
Loss from
continuing
operations ($ 0.23) ($ 0.19) ($ 0.22) ($ 0.06)
Loss from
discontinued
operations ($ 0.02) - ($ 0.14) -
-------- -------- -------- --------
Net loss ($ 0.25) ($ 0.19) ($ 0.36) ($ 0.06)
======== ======== ======== ========
Diluted
earnings per
share:
Loss from
continuing
operations ($ 0.23) ($ 0.19) ($ 0.22) ($ 0.06)
Loss from
discontinued
operations ($ 0.02) - ($ 0.14) -
-------- -------- -------- --------
Net loss ($ 0.25) ($ 0.19) ($ 0.36) ($ 0.06)
======== ======== ======== ========
Weighted
average
shares
outstanding:
Basic 147.9 145.9 147.5 145.4
======== ======== ======== ========
Diluted 147.9 145.9 147.5 145.4
======== ======== ======== ========
Figure 2. Warner Music Group Corp. - Consolidated Balance Sheets as of
3/31/08 and 9/30/07 (dollars in millions)
March 31, September 30,
2008 2007 % Change
----------- ----------- -----------
(unaudited) (unaudited)
Assets:
Current Assets
Cash & cash equivalents $ 249 $ 333 (25%)
Accounts receivable, less
allowances of $178 and $192 482 555 (13%)
Inventories 61 58 5%
Royalty advances (expected to be
recouped w/in 1 year) 200 176 14%
Deferred tax assets 49 40 23%
Other current assets 30 33 (9%)
----------- ----------- -----------
Total Current Assets $ 1,071 $ 1,195 (10%)
Royalty advances (expected to be
recouped after 1 year) 242 216 12%
Investments 182 146 25%
Property, plant & equipment, net 128 133 (4%)
Goodwill 1,074 1,065 1%
Intangible assets subject to
amortization, net 1,651 1,632 1%
Intangible assets not subject to
amortization 100 100 -
Other assets 84 85 (1%)
----------- ----------- -----------
Total Assets $ 4,532 $ 4,572 -
=========== =========== ===========
Liabilities & Shareholders'
Deficit:
Current Liabilities
Accounts payable $ 214 $ 225 (5%)
Accrued royalties 1,268 1,226 3%
Taxes & other withholdings 26 33 (21%)
Current portion of long-term debt 17 17 0%
Dividend payable 1 23 (96%)
Other current liabilities 358 358 -
----------- ----------- -----------
Total current liabilities $ 1,884 $ 1,882 -
Long-term debt 2,258 2,256 -
Dividends payable - 1 -
Deferred tax liabilities, net 250 244 2%
Other noncurrent liabilities 243 225 8%
----------- ----------- -----------
Total Liabilities $ 4,635 $ 4,608 1%
Common stock - - -
Additional paid-in capital 583 579 1%
Accumulated deficit (683) (614) 11%
Accumulated other comprehensive
income, net (3) (1) -
----------- ----------- -----------
Total Shareholders' Deficit ($ 103) ($ 36) -
Total Liabilities & Shareholders' ----------- ----------- -----------
Deficit $ 4,532 $ 4,572 (1%)
=========== =========== ===========
Figure 3. Warner Music Group Corp. - Summarized Statement of Cash Flows,
Three and Six Months Ended 3/31/08 versus 3/31/07 (dollars in millions)
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
2008 2007 2008 2007
---------- ---------- ---------- ----------
(unaudited) (unaudited) (unaudited) (unaudited)
Net cash provided by
operating activities $ 132 $ 70 $ 96 $ 107
Net cash used in investing
activities (33) (11) (152) (69)
Net cash used in financing
activities (26) (25) (50) (46)
Effect of foreign currency
exchange rates on cash 16 1 22 3
---------- ---------- ---------- ----------
Net increase (decrease) in
cash $ 89 $ 35 ($ 84) ($ 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 and impairment of goodwill (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").
Figure 4. Warner Music Group Corp. - Reconciliation of OIBDA to Net
Income, Three and Six Months Ended 3/31/08 versus 3/31/07 (dollars in
millions)
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
2008 2007 % Change 2008 2007 % Change
-------- -------- -------- -------- -------- --------
(unaudited)(unaudited) (unaudited)(unaudited)
OIBDA $ 96 $ 80 20% $ 225 $ 220 2%
Depreciation
expense (13) (10) 30% (26) (20) 30%
Amortization
expense (55) (51) 8% (109) (101) 8%
-------- -------- -------- -------- -------- --------
Operating
income from
continuing
operations $ 28 $ 19 47% $ 90 $ 99 (9%)
Interest
expense, net (47) (45) 4% (95) (92) 3%
Equity in
income of
equity-method
investees,net - - - 1 - -
Minority
interest - - - (2) - -
Other expense,
net (2) - - (3) - -
-------- -------- -------- -------- -------- --------
(Loss) income
from
continuing
operations
before income
taxes ($ 21) ($ 26) (19%) ($ 9) $ 7 -
-------- -------- -------- -------- -------- --------
Income tax
expense (13) (1) - (23) (16) 44%
-------- -------- -------- -------- -------- --------
Loss from
continuing
operations ($ 34) ($ 27) 26% ($ 32) ($ 9) -
Loss from
discontinued
operations,
net of tax (3) - - (21) - -
-------- -------- -------- -------- -------- --------
Net loss ($ 37) ($ 27) 37% ($ 53) ($ 9) -
======== ======== ======== ======== ======== ========
OIBDA margin
from
continuing
operations 12.0% 10.2% 12.6% 12.9%
Operating
income margin
from
continuing
operations 3.5% 2.4% 5.0% 5.8%
Figure 5. Warner Music Group Corp. - Reconciliation of Segment Operating
Income to OIBDA, for the Three and Six Months ended 3/31/08 versus 3/31/07
(dollars in millions)
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
2008 2007 % Change 2008 2007 % Change
-------- -------- -------- -------- -------- --------
(unaudited)(unaudited) (unaudited)(unaudited)
Total WMG
Operating
Income from
Continuing
Operations -
GAAP $ 28 $ 19 47% $ 90 $ 99 (9%)
Depreciation
and
Amortization 68 61 11% 135 121 12%
--------- --------- -------- --------- --------- --------
Total WMG OIBDA $ 96 $ 80 20% $ 225 $ 220 2%
========= ========= ======== ========= ========= ========
Recorded Music
Operating
Income from
Continuing
Operations -
GAAP $ 22 $ 13 69% $ 111 $ 112 (1%)
Depreciation
and
Amortization 48 42 14% 95 84 13%
--------- --------- -------- --------- --------- --------
Recorded Music
OIBDA $ 70 $ 55 27% $ 206 $ 196 5%
========= ========= ======== ========= ========= ========
Music
Publishing
Operating
Income from
Continuing
Operations -
GAAP $ 36 $ 38 (5%) $ 40 $ 41 (2%)
Depreciation
and
Amortization 18 15 20% 35 31 13%
--------- --------- -------- --------- --------- --------
Music
Publishing
OIBDA $ 54 $ 53 2% $ 75 $ 72 4%
========= ========= ======== ========= ========= ========
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 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 translating prior-year results at 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 $46 million, $34 million and $12 million favorable impact of exchange rates on our Total, Recorded Music and Music Publishing revenue, respectively, in the three months ended March 31, 2008 as compared to the prior-year quarter or the $100 million, $78 million and $23 million favorable impact of exchange rates on our Total, Recorded Music and Music Publishing revenue, respectively, in the six months ended March 31, 2008 as compared to the prior-year period. 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 is not a measure of performance presented in accordance with GAAP.
Figure 6. Warner Music Group Corp. - Revenue by Geography and Segment,
Three and Six Months Ended 3/31/08 versus 3/31/07 As Reported and Constant
Currency (dollars in millions)
Three Three Three Six Six Six
Months Months Months Months Months Months
Ended Ended Ended Ended Ended Ended
March March March March March March
31, 31, 31, 31, 31, 31,
2008 2007 2007 2008 2007 2007
-------- -------- -------- -------- -------- --------
As As Constant As As Constant
reported reported $ reported reported $
(unaudited)(unaudited)(unaudited)(unaudited)(unaudited)(unaudited)
Revenue by Geography:
US revenue
Recorded Music $ 297 $ 358 $ 358 $ 697 $ 720 $ 720
Music Publishing 64 61 61 111 105 105
International
revenue
Recorded Music 355 290 324 805 728 806
Music Publishing 91 82 94 188 171 194
Intersegment
eliminations (7) (7) (7) (12) (12) (13)
-------- -------- -------- -------- -------- --------
$ 800 $ 784 $ 830 $ 1,789 $ 1,712 $ 1,812
======== ======== ======== ======== ======== ========
Revenue by Segment:
Recorded Music $ 652 $ 648 $ 682 $ 1,502 $ 1,448 $ 1,526
Music Publishing 155 143 155 299 276 299
Intersegment
eliminations (7) (7) (7) (12) (12) (13)
-------- -------- -------- -------- -------- --------
Total Revenue $ 800 $ 784 $ 830 $ 1,789 $ 1,712 $ 1,812
======== ======== ======== ======== ======== ========
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 our 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 -- "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 Six Months Ended 3/31/08 versus
3/31/07 (dollars in millions)
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
2008 2007 2008 2007
------------ ------------ ----------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net cash flow provided
by operating
activities $ 132 $ 70 $ 96 $ 107
Less: Capital
expenditures 13 8 20 13
Less: Cash paid for
investments, net,
excluding short-term
investments 20 13 132 81
------------ ------------ ----------- ------------
Free Cash Flow (a) $ 99 $ 49 ($ 56) $ 13
============ ============ =========== ============
(a) - Free Cash Flow includes cash paid for interest as follows
(in millions):
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
2008 2007 2008 2007
------------ ------------ ----------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Free Cash Flow $ 99 $ 49 ($ 56) $ 13
Plus: Cash paid for
interest 29 24 80 73
------------ ------------ ----------- ------------
Unlevered After-Tax
Cash Flow $ 128 $ 73 $ 24 $ 86
============ ============ =========== ============
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