Warner Music Group Corp. (WMG)

F4Q2010 Earnings Call Transcript

November 17, 2010 8:30 am ET

Executives

Jill Krutick – SVP, IR

Edgar Bronfman, Jr. – Chairman and CEO

Steve Macri – EVP and CFO

Analysts

Bishop Cheen – Wells Fargo

Marla Backer – Hudson Square

Richard Greenfield – BTIG

Laura Martin – Needham & Company

Jason Bazinet – Citi

Tuna Amobi – Standard & Poor's

Edward Atorino – Benchmark

Ian Whittaker – Liberum

Presentation

Operator

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Welcome to the Warner Music Group’s fourth quarter and fiscal year ended September 30, 2010 earnings conference call. At the request of Warner Music Group, today’s call is being recorded for replay purposes. And if you object, you may disconnect at any time. As a reminder, there will be a question-and-answer session following today’s presentation. (Operator instructions) Now I would like to turn today’s call over to your host, Ms. Jill Krutick, Senior Vice President of Investor Relations and Corporate Development. You may begin.

Jill Krutick

Thank you very much. Good morning, everyone. Welcome to Warner Music Group’s fiscal fourth quarter 2010 conference call. Both our earnings press release and the Form 10-K we filed this morning are available on our website. Today, Chairman and CEO, Edgar Bronfman, Jr. will update you on our business performance and strategy. Executive Vice President and CFO, Steve Macri, will discuss our quarterly financial results. And then Edgar, Steve, and Michael Fleisher, our Vice Chairman, Strategy and Operations, will take your questions.

Before Edgar’s comments, let me remind you that 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, plans, intends, beliefs, should and will, and variations of such words or similar expressions that predict or indicate future events or trends, or do not relate to historical matters, identify forward-looking statements.

Such statements include, but are not limited to, estimates of our future performance such as the success of future albums, projected digital sales increases and declines in physical sales, expected expansion of the digital music business, the success of strategic actions we are taking to accelerate our transformation as we redefine our role in the music industry, the impact general economic conditions may have on us, market share fluctuation, and our intentions to deploy our capital, including the level and effectiveness of future A&R investments.

All forward-looking statements are made as of today, and we disclaim any duty to update such statements. Our expectations, beliefs, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, and projections will result or be achieved.

Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties, and other factors that can cause actual results that differ materially from our expectations. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our earnings press release and Form 10-K and other SEC filings.

We plan to present certain non-GAAP results during this conference call. All of the revenue data we will provide on today's call will be on a constant currency basis. We have provided schedules reconciling these results to our GAAP results in our earnings press release posted on our website.

With that, let me turn it over to Edgar. Thank you.

Edgar Bronfman, Jr.

Thanks, Jill. Welcome, everyone. Thanks for joining us. This quarter caps a year of strong progress at Warner Music. As we reflect on fiscal 2010, we are proud of what we have accomplished. We remain focused on our core business of A&R marketing and promotion and have demonstrated exciting progress in our ability to encourage and sustain viable new business models.

We also delivered solid digital results, which in conjunction with our efforts to diversify our revenue mix, are helping us further transform our company. All the while, we have remained vigilant in managing costs and maintaining financial flexibility. Of course, we continue to face some significant challenges from the reported music industry transition. But as a company, we have continued to effectively manage the impact of those challenges.

Six years ago, when we purchased Warner Music, virtually all our Recorded Music revenue and a large part of our Music Publishing revenue were based upon the sale of CDs. We knew from the outset that in order to position ourselves for a return to growth, we needed to focus on accelerating and diversifying our revenue mix.

When we look at our business today, we can see the results of those efforts. In the quarter, our digital and non-traditional revenue grew to a combined nearly 40% of total revenue compared to essentially zero in 2004. This statistic represents a fundamental expansion of our business model that we’ve implemented and executed since Warner became a standalone company.

Our proactive approach to redefining our role in the industry has allowed us to outperform our recorded music competitors. In the five years from 2004 to 2009, Warner Music has gained four points of global revenue share in the sale of both physical and digital recorded music. But even with all we have done to transform our business, our results continue to be negatively impacted by the macro trends in recorded music.

This quarter, for example, our international and domestic Recorded Music revenue decreased 10% and 15% respectively. This makes our cost management strategy all the more important. We continue to fine tune our cost structure by simplifying business processes, reducing fixed costs, and converting other fixed costs into variable ones.

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