Warner Music Group Corp. (WMG) could be a solid choice for investors given its recent upgrade to a Zacks Rank #2 (Buy). An upward trend in earnings estimates -- one of the most powerful forces impacting stock prices -- has triggered this rating change.The Zacks rating relies solely on a company's changing earnings picture. It tracks EPS estimates for the current and following years from the sell-side analysts covering the stock through a consensus measure -- the Zacks Consensus Estimate.Since a changing ear ...

NEW YORK, Jan. 08, 2024 (GLOBE NEWSWIRE) -- Warner Music Group Corp. will release its financial results on Thursday, February 8, 2024, for the first quarter ended December 31, 2023, and will hold an earnings conference call that morning at 8:30 a.m. ET. To access the conference call, please register here. Once registered, you will receive an email with the dial-in number along with your personalized pin needed to join the call. We suggest you call in 10 minutes prior to the start time. If you do not anticip ...

[Special Note Regarding Forward-Looking Statements](index=4&type=section&id=SPECIAL%20NOTE%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) [Forward-Looking Statements and Risks](index=4&type=section&id=Forward-Looking%20Statements%20and%20Risks) This section highlights that the Annual Report contains forward-looking statements, identifiable by specific terms, which are subject to known and unknown risks and uncertainties, cautioning that actual performance may differ materially from expectations - Forward-looking statements are identified by terms like 'believes,' 'expects,' 'may,' 'will,' 'plans,' and 'estimates,' and cover areas such as market competition, talent development, music monetization, capital deployment, digital music growth, cost reduction, and piracy[13](index=13&type=chunk) - Actual performance and outcomes may differ materially from forward-looking statements due to known and unknown risks and uncertainties, many of which are beyond the company's control[14](index=14&type=chunk) - Inability to compete successfully in highly competitive markets[15](index=15&type=chunk) - Challenges in identifying, signing, and retaining recording artists and songwriters, and the impact of superstar releases[15](index=15&type=chunk) - Slower growth in streaming adoption and revenue[15](index=15&type=chunk) - Dependence on a limited number of digital music services and their influence on pricing[15](index=15&type=chunk) - Risks associated with non-U.S. operations, including limited legal protections for intellectual property and currency fluctuations[17](index=17&type=chunk) - Threats from digital piracy and intellectual property litigation[17](index=17&type=chunk) - Impact of substantial leverage on capital raising and debt obligations[17](index=17&type=chunk) - Concentration of control with Access due to dual-class stock structure[17](index=17&type=chunk) [Summary Risk Factors](index=7&type=section&id=SUMMARY%20RISK%20FACTORS) [Key Business Risks](index=7&type=section&id=Key%20Business%20Risks) This section provides a concise overview of the primary risks facing the company, including challenges in talent acquisition and retention, evolving digital business models, regulatory rate limitations, market demand fluctuations, and the impact of its substantial leverage and dual-class stock structure - Ability to identify, sign, and retain recording artists and songwriters, and the impact of superstar releases[19](index=19&type=chunk) - Development of a successful digital business model and expanded-rights deals[19](index=19&type=chunk) - Revenue subject to rate regulation by governmental entities or third-party collecting societies[19](index=19&type=chunk) - Dependence on popular demand for artists/music and timely delivery of content[19](index=19&type=chunk) - Slower growth in streaming adoption and revenue[19](index=19&type=chunk) - Reliance on a limited number of digital music services and their pricing influence[19](index=19&type=chunk) - Risks in non-U.S. operations, including intellectual property protection and capital repatriation[19](index=19&type=chunk) - Intense competition in recorded music and music publishing industries[19](index=19&type=chunk) - Threats from digital piracy and cybersecurity[19](index=19&type=chunk) - Potential loss of catalog rights under the U.S. Copyright Act[19](index=19&type=chunk) - Substantial leverage and limited influence of Class A Common Stockholders due to dual-class structure[19](index=19&type=chunk) [PART I](index=8&type=section&id=PART%20I) [ITEM 1. Business](index=8&type=section&id=ITEM%201.%20Business) This section provides an overview of Warner Music Group Corp. (WMG), a leading global music entertainment company, detailing its structure, history, competitive strengths, growth strategies, and operations across its Recorded Music and Music Publishing segments - WMG is a major music entertainment company, operating through iconic record labels (e.g., Atlantic, Warner Records) and its global music publishing business, Warner Chappell Music, which represents over 150,000 songwriters and composers[26](index=26&type=chunk) - Access Industries, LLC, WMG's controlling stockholder, holds approximately **98% of total combined voting power** and **73% of economic interest**, making WMG a 'controlled company' under NASDAQ standards[25](index=25&type=chunk) Fiscal Year 2023 Revenue by Business Segment | Business Segment | Revenue (Fiscal 2023) | % of Total Revenues | | :----------------- | :-------------------- | :------------------ | | Recorded Music | $4.955 billion | 82% | | Music Publishing | $1.088 billion | 18% | [Introduction](index=8&type=section&id=Introduction) Warner Music Group Corp. (WMG) was formed in 2003 and operates as a holding company, with its primary business conducted through WMG Acquisition Corp., one of the world's major music entertainment companies - WMG was formed on November 21, 2003, and operates as a holding company, with its business primarily conducted through WMG Acquisition Corp[21](index=21&type=chunk)[22](index=22&type=chunk) [Our Company](index=8&type=section&id=Our%20Company) WMG is a leading global music entertainment company, home to iconic record labels and a vast music publishing catalog, focusing on identifying, developing, and marketing talent in a digital-first environment - WMG's core business involves identifying, signing, developing, and marketing extraordinary talent to cut through the noise of high-volume music releases on digital platforms[28](index=28&type=chunk) - The company was an early adopter of streaming, becoming the first major music entertainment company to report streaming as its largest source of recorded music revenue in 2016, and continues to explore new monetization opportunities in evolving digital ecosystems[29](index=29&type=chunk)[30](index=30&type=chunk) [Our History](index=10&type=section&id=Our%20History) WMG's history dates back to 1811, evolving through key acquisitions and strategic expansions, including being taken private by Access in 2011 and going public again in 2020, with a focus on A&R investment and global reach - WMG's origins trace back to 1811, with significant milestones including the acquisition of Atlantic Records (1967) and Elektra Records (1970), and the formation of Warner Chappell Music (1987)[31](index=31&type=chunk)[32](index=32&type=chunk)[33](index=33&type=chunk) - Since Access's acquisition in 2011, WMG has pursued strategies of revenue growth, increased operating margins, and cash flow, backed by investments in A&R, global expansion, streaming expertise, and diversification into other music-based revenue streams[35](index=35&type=chunk) - Key acquisitions include Parlophone Label Group (2013) to strengthen European presence and direct-to-audience businesses like EMP Merchandising, Songkick, and UPROXX to diversify revenue streams[36](index=36&type=chunk) [Industry Overview](index=10&type=section&id=Industry%20Overview) The music entertainment industry is experiencing global growth, primarily driven by digital consumption and streaming, with increasing consumer engagement across demographics and new platforms, while regulatory developments positively impact royalty rates for rightsholders - Global consumers spent an average of **20.1 hours listening to music each week** in 2022, with short-form video, livestreaming, and in-game experiences driving new opportunities[38](index=38&type=chunk) - The music publishing industry generated **$8.1 billion in global revenue** in 2022, a **17.7% increase** from 2021, with digital royalties accounting for approximately **59%** and performance royalties for **18%**[53](index=53&type=chunk)[54](index=54&type=chunk) - The Music Modernization Act (MMA) in the U.S. improved digital music licensing and royalty payments for pre-1972 sound recordings[58](index=58&type=chunk) - The Copyright Royalty Board (CRB) significantly increased mechanical royalty rates for streaming musical compositions from **10.5% in 2018 to 15.1% in 2022**, and further escalated rates to **15.35% by 2027**[59](index=59&type=chunk)[60](index=60&type=chunk)[61](index=61&type=chunk) - The European Union Copyright Directive aims to ensure fair remuneration for rightsholders when music is shared online by user-uploaded content services[63](index=63&type=chunk) Global Recorded Music Revenue (2022) | Category | Revenue (2022) | % of Total Revenue | | :--------------------------- | :------------- | :----------------- | | Streaming | $17.6 billion | 67% | | Physical | ~ $4.6 billion | ~17.5% | | Performance Rights | | ~9.4% | | Downloads and other digital | | ~3.6% | | Synchronization | | ~2.4% | [Our Competitive Strengths](index=16&type=section&id=Our%20Competitive%20Strengths) WMG's competitive strengths include its strong position to benefit from streaming growth, established international presence, differentiated platform of scale, core capabilities in talent development, robust financial profile, experienced leadership, and expertise in strategic acquisitions - WMG is well-positioned for streaming growth, with recorded music streaming revenue growing at a **CAGR of 16%** from fiscal year 2018 to 2022, and streaming becoming the largest source of recorded music revenue in 2016[64](index=64&type=chunk) - The company has an established presence in over **70 countries**, with a focus on developing local talent and expanding its global footprint through organic A&R and acquisitions in emerging markets like China, MENA, and South Africa[66](index=66&type=chunk)[67](index=67&type=chunk) - WMG boasts a strong financial profile, with as-reported revenues growing at a **7% CAGR** from FY2021-FY2023, and generating **$439 million in net income** and **$1,311 million in Adjusted EBITDA** in fiscal year 2023[71](index=71&type=chunk) - The leadership team, including CEO Robert Kyncl and CFO Bryan Castellani, brings diverse experience to drive business strategy, complemented by Access Industries' strategic direction and M&A expertise[72](index=72&type=chunk) [Our Growth Strategies](index=17&type=section&id=Our%20Growth%20Strategies) WMG's growth strategies focus on attracting and developing talent, expanding in high-growth streaming markets, investing in local music in nascent markets, embracing commercial innovation with new digital partners (including AI), and pursuing strategic acquisitions to enhance its asset portfolio and capabilities - Attract, develop, and retain established and emerging recording artists and songwriters, leveraging A&R technology like Sodatone for talent scouting[74](index=74&type=chunk) - Focus on growth markets to capitalize on incremental streaming penetration in both developed (e.g., U.S., Germany) and emerging markets (e.g., China, Brazil)[75](index=75&type=chunk) - Expand global presence by investing in local music and establishing creative hubs in nascent markets like MENA and South Africa[76](index=76&type=chunk) - Embrace commercial innovation by partnering with new digital distributors (e.g., Apple, YouTube, TikTok) and exploring AI's benefits for artists and monetization[77](index=77&type=chunk) - Pursue strategic acquisitions to enhance asset portfolio and drive long-term growth, as exemplified by the acquisition of 300 Entertainment and investments in artist services capabilities[78](index=78&type=chunk) [Recorded Music](index=19&type=section&id=Recorded%20Music) The Recorded Music business, accounting for **82% of consolidated revenues** in FY2023, focuses on discovering, developing, marketing, distributing, and licensing music, operating through major labels and diversifying into expanded-rights deals to broaden revenue streams - Recorded Music generated **$4.955 billion in revenue** in fiscal 2023, representing **82% of total revenues**[27](index=27&type=chunk)[79](index=79&type=chunk) - The business includes major labels (Atlantic, Warner Records, Elektra Music Group, 300 Elektra Entertainment), catalog marketing (Rhino Entertainment), and a global network of subsidiaries and licensees[80](index=80&type=chunk)[82](index=82&type=chunk)[83](index=83&type=chunk) - WMG has diversified into expanded-rights deals, partnering with artists in areas like touring, merchandising, and sponsorships, to broaden revenue streams and enhance artist relationships[86](index=86&type=chunk) [A&R](index=21&type=section&id=A%26R) WMG's A&R strategy focuses on identifying and developing commercially successful recording artists across all genres and geographies, leveraging experienced executives and a strong reputation to build a diverse and enduring catalog - WMG's A&R strategy is centered on identifying and contracting with commercially successful recording artists across all music genres and major geographies, attributing success to experienced global A&R executives and strong relationships in the artistic community[87](index=87&type=chunk)[88](index=88&type=chunk) - The company efficiently sustains sales of its catalog releases with lesser marketing spend compared to new releases, and maximizes catalog value through re-releases, box sets, and marketing legacy artists via Rhino Entertainment[89](index=89&type=chunk)[90](index=90&type=chunk) [Recording Artists' Contracts](index=22&type=section&id=Recording%20Artists%27%20Contracts) Recording contracts define the commercial relationship, granting WMG rights to artists' music in exchange for royalties and advances, with many new contracts being expanded-rights deals that share in ancillary revenues - Recording artists' contracts define WMG's rights to use music, with artists receiving royalties based on sales and usage, and upfront recoupable advances[91](index=91&type=chunk) - Contracts for new artists typically grant ownership for the full copyright term or a long-term exclusive license, while established artists often have higher advances and royalty rates for fixed-period exclusive licenses[91](index=91&type=chunk)[92](index=92&type=chunk) - Many current recording contracts are 'expanded-rights deals,' allowing WMG to share in revenues from touring, merchandising, sponsorships, and other ancillary activities[93](index=93&type=chunk) [Sales and Digital Distribution](index=22&type=section&id=Sales%20and%20Digital%20Distribution) WMG generates revenue from new and catalog releases across digital (streaming, downloads) and physical (CDs, vinyl) formats, partnering with a broad range of digital music services and expecting higher contribution margins from digital sales due to lower per-unit costs - WMG generates revenues from new releases and its catalog through digital formats (streaming, downloads) and physical formats (CDs, vinyl)[97](index=97&type=chunk) - The company partners with major digital music services like Amazon, Apple, Deezer, Spotify, Tencent Music, and YouTube for digital distribution[98](index=98&type=chunk) - Digital sales generally yield a higher contribution margin than physical sales due to the absence of manufacturing, distribution, inventory, and return costs[98](index=98&type=chunk) [Music Publishing](index=23&type=section&id=Music%20Publishing) Music Publishing, representing **18% of consolidated revenues** in FY2023, focuses on acquiring and licensing musical compositions, with Warner Chappell Music managing over one million compositions and generating royalties from various uses - Music Publishing generated **$1.088 billion in revenue** in fiscal 2023, representing **18% of total revenues**[27](index=27&type=chunk)[102](index=102&type=chunk) - Warner Chappell Music owns or controls rights to over **one million musical compositions** from more than **150,000 songwriters and composers**, spanning diverse genres[103](index=103&type=chunk) - **Performance Royalties:** Earned from public broadcast (TV, radio), live performances, and public venue play[104](index=104&type=chunk) - **Digital Royalties:** From streaming and download services, and digital performance[104](index=104&type=chunk) - **Mechanical Royalties:** From physical sales (vinyl, CDs) and statutory rates for digital uses[106](index=106&type=chunk) - **Synchronization Royalties:** From use in films, TV, commercials, video games, and merchandise[107](index=107&type=chunk) [Music Publishing Royalties](index=23&type=section&id=Music%20Publishing%20Royalties) Music publishers, including Warner Chappell Music, collect royalties from various sources for the use of musical compositions, with rates often set by statutory bodies or industry negotiations, and a portion paid to songwriters - In the U.S., mechanical royalty rates are set by the U.S. Copyright Act, and public performance income is administered by performing rights organizations (e.g., ASCAP, BMI)[105](index=105&type=chunk) - U.S. mechanical royalties for physical formats and permanent digital downloads are **12.0 cents per song per unit** or **2.31 cents per minute** (whichever is greater) in 2023, with annual inflation adjustments[106](index=106&type=chunk) - The headline mechanical royalty rate for interactive streaming in the U.S. is **15.1% of revenue in 2023**, escalating to **15.35% by 2027**[106](index=106&type=chunk) [Our Recording Artist and Songwriter Value Proposition](index=26&type=section&id=Our%20Recording%20Artist%20and%20Songwriter%20Value%20Proposition) WMG aims to be the best music entertainment company by attracting and nurturing exceptional talent, offering comprehensive creative and commercial services, expanding monetization opportunities, and ensuring transparency in royalty reporting and intellectual property protection - WMG's strategy is to attract and develop talent with long-term potential, investing in new music while maintaining commitment to individual artists and songwriters[113](index=113&type=chunk)[117](index=117&type=chunk) - The company provides extensive creative partnership through A&R executives and a network of collaborators, along with global marketing and promotional firepower across digital music services, social media, radio, and traditional media[118](index=118&type=chunk)[119](index=119&type=chunk)[120](index=120&type=chunk) - WMG expands monetization opportunities beyond traditional album/single sales to artist services (merchandise, e-commerce, touring) and diverse music publishing uses (performance, digital, synchronization, sheet music), supported by technology and data insights for transparent royalty reporting and IP protection[121](index=121&type=chunk)[122](index=122&type=chunk)[124](index=124&type=chunk) [Competition](index=28&type=section&id=Competition) WMG operates in highly competitive recorded music and music publishing industries, competing with major companies like Universal Music Group and Sony Music Entertainment, as well as independent players and artists/songwriters who self-distribute, with competition based on marketing, artist/songwriter signings, and technological development - WMG competes in highly competitive recorded music and music publishing industries based on marketing efforts and the ability to sign and retain recording artists and songwriters[126](index=126&type=chunk) - The recorded music business also faces competition from artists who self-distribute and companies in other industries (e.g., Spotify) that sign direct deals, as well as alternative forms of entertainment[145](index=145&type=chunk) Global Market Share (2022) | Company | Recorded Music Market Share | Music Publishing Market Share | | :---------------------- | :-------------------------- | :---------------------------- | | Universal Music Group | ~31% | ~23% | | Sony Music Entertainment| ~23% | ~25% | | Warner Music Group | ~16% | ~12% | [Intellectual Property](index=28&type=section&id=Intellectual%20Property) WMG's business relies heavily on copyright protection for sound recordings and musical compositions, with varying terms of protection globally, and the company actively lobbies for stronger copyright laws and protects its valuable trademarks - Copyright protection for 'works made for hire' in the U.S. generally lasts **95 years from publication** or **120 years from creation**, while other works last for the life of the author plus **70 years**[130](index=130&type=chunk) - The MMA extended federal copyright protection to U.S. sound recordings created prior to February 15, 1972, with terms varying but at least **95 years**, and up to **February 15, 2067** for those published between 1957 and 1972[130](index=130&type=chunk) - WMG considers its trademarks (e.g., Atlantic, Warner Chappell) valuable assets and endeavors to register them globally, actively monitoring and protecting against infringement, dilution, or harm[136](index=136&type=chunk) [Human Capital](index=30&type=section&id=Human%20Capital) As of September 30, 2023, WMG employed approximately **5,900 people worldwide**, committed to cultivating a diverse and inclusive culture and investing in employee career growth through various development opportunities - As of September 30, 2023, WMG employed approximately **5,900 persons worldwide**[138](index=138&type=chunk) - The company is dedicated to cultivating a culture of belonging, supporting employee growth and thriving through learning, mentoring, coaching, and development programs[139](index=139&type=chunk) [ITEM 1A. Risk Factors](index=32&type=section&id=ITEM%201A.%20Risk%20Factors) This section details significant risks that could adversely affect WMG's business, financial condition, and results of operations, spanning operational challenges, intellectual property protection, financial leverage, and corporate governance issues - The company's financial results are highly dependent on its ability to identify, sign, and retain successful recording artists and songwriters, and the commercial acceptance of their music[146](index=146&type=chunk) - WMG is substantially dependent on a limited number of digital music services (Spotify, Google/YouTube, Apple accounted for **~41% of total revenue in FY2023**) for online distribution and marketing, giving them significant influence over pricing and playlist curation[148](index=148&type=chunk) - WMG's substantial leverage (**$3.964 billion net debt** as of Sep 30, 2023) could limit its ability to raise additional capital, react to economic changes, and meet debt obligations, with restrictive covenants in debt agreements[187](index=187&type=chunk)[188](index=188&type=chunk)[196](index=196&type=chunk) [Risks Related to Our Operations](index=32&type=section&id=Risks%20Related%20to%20Our%20Operations) Operational risks include intense competition, challenges in talent acquisition and retention, potential slowdowns in streaming growth, dependence on a few digital distributors, and adverse impacts from international operations, alongside risks from technological developments, executive retention, and rate regulation - Inability to compete successfully in highly competitive markets, including competition from self-distributing artists and new industry entrants[145](index=145&type=chunk)[147](index=147&type=chunk) - Adverse effects if streaming adoption or revenue growth slows or levels off[148](index=148&type=chunk) - Dependence on a limited number of digital music services for online distribution and marketing, which can influence pricing and royalty calculations[150](index=150&type=chunk) - Exposure to trends, developments, and events in foreign countries, including limited IP protection, capital repatriation restrictions, and unfavorable currency exchange rates[154](index=154&type=chunk) - Geopolitical conflicts (e.g., Russia-Ukraine, Israel-Gaza) can disrupt operations, increase costs, and adversely affect results in affected territories[155](index=155&type=chunk) - Inability to attract and retain executive officers and key personnel could impair effective operations[159](index=159&type=chunk) - Significant portion of revenue is subject to rate regulation by government entities or third-party collecting societies, potentially limiting profitability[160](index=160&type=chunk) [Risks Related to Intellectual Property and Data Security](index=40&type=section&id=Risks%20Related%20to%20Intellectual%20Property%20and%20Data%20Security) Risks in this area include the failure to obtain, maintain, protect, and enforce intellectual property rights, potential involvement in costly litigation, the ongoing adverse impact of digital piracy (including AI-generated music), and significant threats from cybersecurity breaches - Failure to obtain, maintain, protect, and enforce trademarks, copyrights, and other intellectual property rights could harm the business and brand recognition[174](index=174&type=chunk) - Involvement in intellectual property litigation can be costly, divert management resources, and potentially lead to monetary damages or loss of IP use[176](index=176&type=chunk) - Digital piracy, including 'stream-ripping' and organized industrial piracy, continues to negatively impact music revenues, with AI-generated music introducing new IP infringement challenges[177](index=177&type=chunk)[179](index=179&type=chunk) - Security breaches through cyber-attacks or other incidents could damage reputation, incur substantial costs, lead to litigation, and adversely affect financial condition[182](index=182&type=chunk)[183](index=183&type=chunk) - Evolving data privacy laws and regulations (e.g., CCPA, CPRA, GDPR) may increase compliance burdens, operational costs, or limit business activities, with potential for monetary penalties[184](index=184&type=chunk)[185](index=185&type=chunk) [Risks Related to Our Leverage](index=42&type=section&id=Risks%20Related%20to%20Our%20Leverage) WMG's substantial leverage poses risks such as difficulty in raising additional capital, increased vulnerability to economic downturns, significant cash flow allocation to debt service, and limitations on operational flexibility due to restrictive covenants, with its ability to generate sufficient cash or refinance debt dependent on various factors beyond its control Consolidated Indebtedness (September 30, 2023) | Metric | Amount (in millions) | | :----------------------------------------- | :------------------- | | Total consolidated indebtedness, net | $3,964 | | Available under Revolving Credit Facility | $298 | - High leverage increases vulnerability to economic conditions and interest rate risks, requiring a substantial portion of cash flow for debt service[188](index=188&type=chunk)[190](index=190&type=chunk) - Debt agreements contain restrictive covenants limiting activities like creating liens, incurring additional debt, paying dividends, and making investments, which could be reinstated if leverage ratios exceed thresholds[191](index=191&type=chunk)[194](index=194&type=chunk) - As a holding company, WMG depends on subsidiaries' ability to transfer funds, which can be restricted by covenants or other factors[196](index=196&type=chunk) - Inability to generate sufficient cash flow or refinance debt could force reductions in investments, capital expenditures, or dividends, or require asset sales[203](index=203&type=chunk) [Risks Related to Our Controlling Stockholder](index=46&type=section&id=Risks%20Related%20to%20Our%20Controlling%20Stockholder) Access Industries, as the controlling stockholder, holds significant voting power (**98%**) and economic interest (**73%**), enabling it to control corporate decisions and potentially create conflicts of interest with other stockholders, as its consent is required for certain corporate actions and it may pursue business interests that do not align with other stockholders - Access Industries controls approximately **98% of the total combined voting power** and **73% of the economic interest**, allowing it to control director elections and outcomes of corporate transactions[210](index=210&type=chunk) - Access's prior written consent is required for significant corporate and business actions, including mergers, acquisitions, dispositions, changes in capital stock, and debt issuances, until its ownership falls below **10% of outstanding common stock**[210](index=210&type=chunk)[217](index=217&type=chunk) - Conflicts of interest may arise as Access and its affiliates may pursue business interests or acquisitions that compete with WMG or are detrimental to other stockholders[219](index=219&type=chunk) - WMG's amended and restated certificate of incorporation allows Access and its affiliates to pursue corporate opportunities without offering them to WMG, unless specifically offered to a director/officer in their WMG capacity[219](index=219&type=chunk) [Risks Related to Our Common Stock](index=49&type=section&id=Risks%20Related%20to%20Our%20Common%20Stock) The dual-class stock structure, with Class B Common Stock holding **20 votes per share**, concentrates voting control with Access, limiting other stockholders' influence and potentially depressing the Class A Common Stock's trading price, while future sales by existing stockholders or additional equity/debt issuances could also cause price declines and dilution - The dual-class structure (Class A: **1 vote/share**, Class B: **20 votes/share**) concentrates voting control with Access (**98% of total combined voting power**), limiting other stockholders' influence on corporate matters[222](index=222&type=chunk) - The dual-class structure may depress the trading price of Class A Common Stock and prevent its inclusion in certain indices (e.g., S&P 500), potentially leading to less active trading and negative commentary from stockholder advisory firms[225](index=225&type=chunk) - Future sales of substantial amounts of Class A Common Stock by existing stockholders, or the perception of such sales, could cause the stock price to decline[226](index=226&type=chunk) - Issuance of additional Class A, Class B, or other equity/debt securities in the future could result in substantial dilution to existing stockholders[230](index=230&type=chunk) - The market price of Class A Common Stock may be volatile due to industry conditions, economic factors, changes in consumer preferences, regulatory changes, litigation, and actions by large stockholders[231](index=231&type=chunk) - Anti-takeover provisions in corporate documents and Delaware law could discourage, delay, or prevent a change of control, potentially limiting stockholders from realizing a premium[237](index=237&type=chunk) [ITEM 1B. Unresolved Staff Comments](index=56&type=section&id=ITEM%201B.%20Unresolved%20Staff%20Comments) There are no unresolved staff comments from the SEC [ITEM 2. Properties](index=56&type=section&id=ITEM%202.%20Properties) WMG's principal executive offices are in New York, NY, under a long-term lease, and its Los Angeles headquarters are in the Ford Factory Building, with other owned and leased facilities globally considered adequate for current business needs - WMG's principal executive offices are located at 1633 Broadway, New York, NY, under a long-term lease ending July 31, 2029[248](index=248&type=chunk) - The company also leases office space in Los Angeles, California, serving as its headquarters there, with an initial term expiring April 30, 2030[248](index=248&type=chunk) - WMG owns other properties and leases facilities worldwide, which are deemed adequate for current business needs[248](index=248&type=chunk) [ITEM 3. Legal Proceedings](index=56&type=section&id=ITEM%203.%20Legal%20Proceedings) WMG is involved in various litigation and regulatory proceedings in the normal course of business, with accruals made for probable and estimable losses, though the outcome of ongoing proceedings and potential future litigation cannot be predicted with certainty and could adversely impact the company's brand value and financial results - WMG is involved in various litigation and regulatory proceedings as part of its normal business operations[249](index=249&type=chunk) - Accruals are established for probable and estimable losses, but the amount of reasonably possible loss in excess of current accruals cannot be estimated due to typical litigation uncertainties[249](index=249&type=chunk) - Litigation, regardless of outcome, could adversely impact WMG's brand value, incur defense costs, divert management resources, and materially affect results of operations for a given reporting period[249](index=249&type=chunk) [ITEM 4. Mine Safety Disclosures](index=56&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) This item is not applicable to Warner Music Group Corp [PART II](index=57&type=section&id=PART%20II) [ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=57&type=section&id=ITEM%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) This section provides information on WMG's common stock market, shareholder matters, and dividend policy, noting that its Class A Common Stock trades on Nasdaq while Class B is not publicly listed, and the dividend policy aims for quarterly cash dividends subject to board discretion and debt covenants - WMG's Class A Common Stock trades on the Nasdaq stock market under the symbol 'WMG' since June 3, 2020; Class B Common Stock is not publicly listed[253](index=253&type=chunk) - As of November 15, 2023, there were approximately **15 stockholders of record** for Class A Common Stock and **8 for Class B Common Stock**[254](index=254&type=chunk) - The company intends to pay quarterly cash dividends, but declaration is at the board's discretion, dependent on financial condition, earnings, liquidity, and contractual restrictions, including debt covenants that are currently suspended but could be reinstated[255](index=255&type=chunk)[256](index=256&type=chunk) [ITEM 6. [Reserved]](index=58&type=section&id=ITEM%206.%20%5BReserved%5D) This item is reserved and contains no information [ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=59&type=section&id=ITEM%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides a detailed analysis of WMG's financial condition and results of operations for the fiscal year ended September 30, 2023, covering revenue trends, cost structures, profitability metrics, cash flows, liquidity, debt capital structure, and critical accounting policies - WMG's total revenues increased by **$118 million (2%)** to **$6,037 million** in FY2023, despite unfavorable currency exchange fluctuations of **$111 million** and the prior year including an additional week and a copyright settlement[288](index=288&type=chunk) - OIBDA increased by **$69 million (7%)** to **$1,122 million** in FY2023, with the OIBDA margin rising to **19%** from **18%** in FY2022, driven by higher revenues, lower selling, general and administrative expenses, and a **$41 million gain on divestiture**, partially offset by restructuring costs[327](index=327&type=chunk) - Net income decreased by **$116 million** to **$439 million** in FY2023, primarily due to foreign currency losses on Euro-denominated debt and higher interest expense, partially offset by increased operating income[340](index=340&type=chunk)[346](index=346&type=chunk) [Introduction](index=59&type=section&id=Introduction) This introduction outlines the structure of the Management's Discussion and Analysis (MD&A) section, which provides insights into WMG's financial condition, changes, and operational results, defining key non-GAAP financial measures used for performance evaluation - The MD&A section provides an understanding of WMG's financial condition, changes in financial condition, and results of operations, supplementing the consolidated financial statements[265](index=265&type=chunk) - OIBDA (Operating Income before Depreciation and Amortization) is a primary financial measure used to evaluate operational strengths and performance, though it does not reflect periodic costs of capitalized assets[265](index=265&type=chunk) - Constant-currency presentation is used to compare revenue and OIBDA between periods, adjusting for foreign exchange rate fluctuations to better understand operating results[266](index=266&type=chunk) [Business Overview](index=60&type=section&id=Business%20Overview) WMG is a leading global music entertainment company with two main operations: Recorded Music and Music Publishing, with recent events including a fiscal year-end change, a restructuring plan, executive transition costs, and the impact of the Russia-Ukraine conflict - WMG's business is classified into Recorded Music (artist discovery, marketing, distribution, licensing) and Music Publishing (acquiring and licensing musical compositions)[267](index=267&type=chunk) - **Fiscal Year End Change:** Starting FY2023, the company transitioned to a calendar quarter-end reporting, resulting in **365 days for FY2023** compared to **371 days for FY2022**[280](index=280&type=chunk)[281](index=281&type=chunk) - **Restructuring Plan:** In March 2023, WMG announced a plan to reduce headcount by approximately **270 people (4% of overall headcount)**, incurring **$40 million in severance costs** in FY2023, with expected annualized savings of **$50 million in FY2024**[282](index=282&type=chunk)[283](index=283&type=chunk) - **Executive Transition Costs:** Incurred approximately **$7 million in FY2023** for severance related to the departure of the CEO and CFO, plus **$13 million in non-cash stock-based compensation**[284](index=284&type=chunk)[285](index=285&type=chunk) - **Russia-Ukraine Conflict:** Operations in Russia were suspended on March 10, 2022, which, while not material, could adversely affect results if the conflict escalates[286](index=286&type=chunk) [Results of Operations](index=67&type=section&id=Results%20of%20Operations) WMG's consolidated revenues increased by **2%** in FY2023 to **$6,037 million**, driven by Music Publishing's **14% growth**, offsetting a slight decrease in Recorded Music, while OIBDA grew by **7%** to **$1,122 million**, improving the OIBDA margin to **19%**, though net income decreased by **21%** to **$439 million** due to foreign currency losses and higher interest expenses Consolidated Revenues (in millions) | Metric | FY2023 | FY2022 | FY2021 | 2023 vs. 2022 ($ Change) | 2023 vs. 2022 (% Change) | 2022 vs. 2021 ($ Change) | 2022 vs. 2021 (% Change) | | :-------------- | :------ | :------ | :------ | :----------------------- | :----------------------- | :----------------------- | :----------------------- | | Total Revenues | $6,037 | $5,919 | $5,301 | $118 | 2% | $618 | 12% | | Recorded Music | $4,955 | $4,966 | $4,544 | $(11) | —% | $422 | 9% | | Music Publishing| $1,088 | $958 | $761 | $130 | 14% | $197 | 26% | | Total Digital | $3,989 | $3,866 | $3,539 | $123 | 3% | $327 | 9% | Consolidated OIBDA and Net Income (in millions) | Metric | FY2023 | FY2022 | FY2021 | 2023 vs. 2022 ($ Change) | 2023 vs. 2022 (% Change) | | :-------------------------------------- | :----- | :----- | :----- | :----------------------- | :----------------------- | | OIBDA | $1,122 | $1,053 | $915 | $69 | 7% | | Net income attributable to WMG Corp. | $430 | $551 | $304 | $(121) | -22% | - Cost of revenues increased by **3%** to **$3,177 million** in FY2023, primarily due to higher product costs from increased third-party distributed label revenue[308](index=308&type=chunk) - Selling, general and administrative expenses decreased by **2%** to **$1,826 million** in FY2023, driven by lower variable marketing spend and restructuring savings, despite higher employee-related costs and technology investments[316](index=316&type=chunk)[317](index=317&type=chunk) - Interest expense, net, increased to **$141 million** in FY2023 due to a higher principal balance and interest rates[338](index=338&type=chunk) - Other expense (income) shifted from a **$151 million income** in FY2022 to a **$36 million expense** in FY2023, mainly due to foreign currency losses on Euro-denominated debt[340](index=340&type=chunk) [Consolidated Results](index=67&type=section&id=Consolidated%20Results) Consolidated results show a **2% revenue increase** in FY2023, reaching **$6,037 million**, despite unfavorable currency impacts, with digital revenues growing **3%** driven by streaming, while OIBDA increased by **7%**, but net income decreased by **21%** due to foreign currency losses and higher interest expenses Revenue by Type (in millions) | Revenue by Type | FY2023 | FY2022 | FY2021 | | :-------------------------- | :----- | :----- | :----- | | Digital | $3,322 | $3,305 | $3,105 | | Physical | $507 | $563 | $549 | | Artist services & expanded-rights | $744 | $767 | $599 | | Licensing | $382 | $331 | $291 | | **Total Recorded Music** | **$4,955** | **$4,966** | **$4,544** | | Performance | $173 | $159 | $122 | | Digital (Music Publishing) | $669 | $563 | $436 | | Mechanical | $63 | $50 | $49 | | Synchronization | $167 | $172 | $144 | | Other (Music Publishing) | $16 | $14 | $10 | | **Total Music Publishing** | **$1,088** | **$958** | **$761** | | Intersegment eliminations | $(6) | $(5) | $(4) | | **Total Revenues** | **$6,037** | **$5,919** | **$5,301** | Revenue by Geographical Location (in millions) | Geographical Location | FY2023 | FY2022 | FY2021 | | :------------------------ | :----- | :----- | :----- | | U.S. Recorded Music | $2,184 | $2,231 | $1,985 | | U.S. Music Publishing | $582 | $513 | $378 | | **Total U.S.** | **$2,766** | **$2,744** | **$2,363** | | International Recorded Music| $2,771 | $2,735 | $2,559 | | International Music Publishing| $506 | $445 | $383 | | **Total International** | **$3,277** | **$3,180** | **$2,942** | | Intersegment eliminations | $(6) | $(5) | $(4) | | **Total Revenues** | **$6,037** | **$5,919** | **$5,301** | Consolidated Costs and Expenses (in millions) | Metric | FY2023 | FY2022 | FY2021 | | :-------------------------------------- | :----- | :----- | :----- | | Artist and repertoire costs | $1,998 | $1,960 | $1,780 | | Product costs | $1,179 | $1,120 | $962 | | **Total cost of revenues** | **$3,177** | **$3,080** | **$2,742** | | General and administrative expense | $991 | $939 | $870 | | Selling and marketing expense | $710 | $792 | $738 | | Distribution expense | $125 | $131 | $113 | | **Total selling, general & admin expense**| **$1,826** | **$1,862** | **$1,721** | | Restructuring | $40 | $0 | $0 | | Amortization expense | $245 | $263 | $229 | | Net gain on divestiture | $41 | $0 | $0 | | Operating income | $790 | $714 | $609 | | Loss on extinguishment of debt | $4 | $0 | $22 | | Interest expense, net | $141 | $125 | $122 | | Other (expense) income, net | $36 | $(151) | $9 | | Income tax expense | $170 | $185 | $149 | | Net income | $439 | $555 | $307 | | Income attributable to noncontrolling interest | $9 | $4 | $3 | [Business Segment Results](index=80&type=section&id=Business%20Segment%20Results) Recorded Music revenues slightly decreased by **0%** in FY2023 to **$4,955 million**, impacted by foreign currency and a lighter release schedule, but OIBDA increased by **6%** to **$1,080 million**, while Music Publishing revenues grew significantly by **14%** to **$1,088 million**, with OIBDA increasing by **27%** to **$293 million**, driven by digital and performance revenue growth, and corporate expenses and eliminations saw an increased operating loss due to technology investments and executive transition costs Segment Revenues, Operating Income, and OIBDA (in millions) | Segment | FY2023 Revenues | FY2023 Operating Income | FY2023 OIBDA | | :---------------------------- | :-------------- | :---------------------- | :----------- | | Recorded Music | $4,955 | $875 | $1,080 | | Music Publishing | $1,088 | $200 | $293 | | Corporate expenses & eliminations | $(6) | $(285) | $(251) | | **Total** | **$6,037** | **$790** | **$1,122** | - Recorded Music revenue decreased by **$11 million (0%)** in FY2023, primarily due to unfavorable currency exchange rates (**$99 million impact**), decreases in physical and artist services/expanded-rights revenues, partially offset by growth in licensing and digital revenues[290](index=290&type=chunk)[291](index=291&type=chunk)[351](index=351&type=chunk)[352](index=352&type=chunk) - Music Publishing revenue increased by **$130 million (14%)** in FY2023, driven by digital revenue growth (**$106 million, 19%**), performance revenue (**$14 million**), and mechanical revenue (**$13 million**), partially offset by a decrease in synchronization revenue[292](index=292&type=chunk)[293](index=293&type=chunk)[373](index=373&type=chunk)[374](index=374&type=chunk) - Corporate expenses and eliminations operating loss increased by **$64 million** to **$285 million** in FY2023, mainly due to incremental technology investments, higher depreciation, legal expenses from a prior year copyright settlement, increased non-cash stock-based compensation, and executive transition costs[388](index=388&type=chunk) [Financial Condition and Liquidity](index=88&type=section&id=Financial%20Condition%20and%20Liquidity) WMG's financial condition at September 30, 2023, shows **$3.964 billion in net debt** and **$641 million in cash**, with cash provided by operating activities decreasing by **7%** to **$687 million**, while cash used in investing activities decreased significantly to **$300 million**, and the company believes its liquidity sources are sufficient for the foreseeable future despite ongoing financial transformation costs Financial Condition (in millions) | Metric | September 30, 2023 | September 30, 2022 | | :---------------------- | :----------------- | :----------------- | | Total consolidated indebtedness, net | $3,964 | $3,732 | | Cash and equivalents | $641 | $584 | | Net debt | $3,323 | $3,148 | | WMG Corp. equity | $307 | $152 | Cash Flows (in millions) | Activity | FY2023 | FY2022 | FY2021 | | :---------------------- | :----- | :----- | :----- | | Operating activities | $687 | $742 | $638 | | Investing activities | $(300) | $(824) | $(638) | | Financing activities | $(325) | $188 | $(61) | - Cash provided by operating activities decreased by **$55 million (7%)** in FY2023, primarily due to timing of working capital, higher cash interest payments, and higher cash taxes[396](index=396&type=chunk) - Cash used in investing activities decreased to **$300 million** in FY2023, from **$824 million** in FY2022, mainly due to lower investments and acquisitions of businesses and music-related assets[399](index=399&type=chunk) - Cash used in financing activities was **$325 million** in FY2023, including **$340 million in dividends paid** and **$133 million for deferred acquisition consideration**, partially offset by proceeds from term loan facilities[403](index=403&type=chunk) - WMG's debt capital structure includes a **$1,295 million Senior Term Loan Facility** (due 2028) and various Senior Secured Notes totaling **$2,689 million** (maturing 2028-2031), with a weighted-average interest rate of **4.1%** at September 30, 2023[409](index=409&type=chunk)[410](index=410&type=chunk) - The company is undergoing a financial transformation initiative to upgrade IT and finance infrastructure, with expected upfront costs of **$235 million** and annualized run-rate savings of **$35-40 million**[450](index=450&type=chunk) [Contractual and Other Obligations](index=102&type=section&id=Contractual%20and%20Other%20Obligations) WMG's aggregate contractual obligations at September 30, 2023, totaled **$5,750 million**, primarily consisting of Senior Secured Notes, Senior Term Loan Facility, and operating lease liabilities, with significant off-balance sheet commitments to artists and songwriters contingent on future music delivery Firm Commitments and Outstanding Debt (in millions) | Obligation | Less than 1 year | 1-3 years | 3-5 years | After 5 years | Total | | :---------------------------------------- | :--------------- | :-------- | :-------- | :------------ | :---- | | Senior Secured Notes | $0 | $0 | $343 | $2,346 | $2,689| | Interest on Senior Secured Notes | $85 | $170 | $170 | $164 | $589 | | Senior Term Loan Facility | $0 | $0 | $1,295 | $0 | $1,295| | Interest on Senior Term Loan Facility | $97 | $163 | $100 | $0 | $360 | | Term Loan Mortgage | $0 | $0 | $0 | $18 | $18 | | Interest on Term Loan Mortgage | $1 | $2 | $2 | $3 | $8 | | Operating leases | $56 | $104 | $98 | $104 | $362 | | Artist, songwriter & co-publisher commitments | $383 | * | * | * | $383 | | Minimum funding commitments & other obligations | $18 | $27 | $1 | $0 | $46 | | **Total firm commitments & outstanding debt** | **$640** | **$466** | **$2,009**| **$2,635** | **$5,750**| - Off-balance sheet aggregate firm commitments to recording artists, songwriters, and publishers approximated **$383 million** at September 30, 2023, contingent on future music delivery and generally cancellable[469](index=469&type=chunk) [Critical Accounting Policies and Estimates](index=103&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section outlines WMG's critical accounting policies and estimates, which require significant management judgment, covering business combinations, goodwill and intangible asset impairment testing, revenue recognition, and accounting for royalty costs and advances - **Business Combinations:** Involves significant judgment in allocating acquisition costs to identifiable net assets and goodwill based on estimated fair values, future cash flows, and discount rates[471](index=471&type=chunk)[472](index=472&type=chunk) - **Goodwill and Other Intangible Assets:** Annually tested for impairment using fair value measurement techniques; WMG had **$1.993 billion in goodwill** and **$149 million in indefinite-lived intangible assets** as of September 30, 2023, with no impairment noted in fiscal 2023[473](index=473&type=chunk)[475](index=475&type=chunk)[476](index=476&type=chunk) - **Revenue Recognition:** For Recorded Music, digital revenues are recognized based on usage reports, with minimum guarantees assessed for shortfall/breakage; for Music Publishing, royalties are recognized when sales/usage occurs, estimated using historical data when reports are unavailable[477](index=477&type=chunk)[478](index=478&type=chunk)[479](index=479&type=chunk) - **Royalty Costs and Royalty Advances:** Royalty costs are based on negotiated rates; advances to artists/songwriters are capitalized if deemed recoverable from future royalties, with recoverability assessed based on artist popularity, sales history, and commercial acceptability[481](index=481&type=chunk)[482](index=482&type=chunk) [ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk](index=105&type=section&id=ITEM%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) WMG is exposed to market risks from foreign currency exchange rates and interest rates, which it manages using foreign exchange contracts and interest rate swaps, though not all exposures are hedged, and inflationary pressures could also adversely affect operating results - **Foreign Currency Risk:** WMG has transactional exposures from foreign currency exchange rate changes, particularly on unremitted or future royalties and license fees; it may use foreign exchange currency derivatives (forward contracts) to manage this risk, focusing on major currencies like EUR, GBP, JPY, CAD, SEK, AUD, BRL, KRW, and NOK[485](index=485&type=chunk)[486](index=486&type=chunk) - **Interest Rate Risk:** As of September 30, 2023, WMG had **$4.002 billion in principal debt**, with **33% variable-rate** and **67% fixed-rate**; an interest rate swap effectively converted a portion of variable-rate debt to fixed, resulting in **80% of total debt** being effectively fixed-rate, and a **25 basis point change** in interest rates could impact the fair value of fixed-rate debt by approximately **$32-33 million**[487](index=487&type=chunk)[488](index=488&type=chunk) - **Inflation Risk:** Inflationary factors, such as increases in overhead costs, could adversely affect operating results if WMG is unable to fully offset higher costs through price increases[488](index=488&type=chunk) [ITEM 8. Financial Statements and Supplementary Data](index=106&type=section&id=ITEM%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents WMG's audited consolidated financial statements for the fiscal year ended September 30, 2023, including balance sheets, statements of operations, comprehensive income, cash flows, and equity, along with detailed notes and reports from the independent registered public accounting firm - The consolidated financial statements, including balance sheets, statements of operations, comprehensive income, cash flows, and equity, are presented in accordance with U.S. GAAP[492](index=492&type=chunk) - KPMG LLP, the independent registered public accounting firm, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of September 30, 2023[492](index=492&type=chunk)[493](index=493&type=chunk)[503](index=503&type=chunk) - A critical audit matter identified was the sufficiency of audit evidence over Recorded Music digital revenue, due to the high volume of royalty transactions and multiple IT applications involved[498](index=498&type=chunk)[499](index=499&type=chunk) [Reports of Independent Registered Public Accounting Firm](index=107&type=section&id=Reports%20of%20Independent%20Registered%20Public%20Accounting%20Firm) KPMG LLP provided an unqualified opinion on WMG's consolidated financial statements for the three-year period ended September 30, 2023, confirming fair presentation in conformity with U.S. GAAP, and also expressed an unqualified opinion on the effectiveness of the company's internal control over financial reporting - KPMG LLP audited WMG's consolidated financial statements and expressed an unqualified opinion, stating they present fairly the financial position and results of operations in conformity with U.S. GAAP[492](index=492&type=chunk) - KPMG LLP also issued an unqualified opinion on the effectiveness of WMG's internal control over financial reporting as of September 30, 2023[493](index=493&type=chunk) - The evaluation of the sufficiency of audit evidence for Recorded Music digital revenue was identified as a critical audit matter due to the high volume of transactions and complex IT systems involved[498](index=498&type=chunk)[499](index=499&type=chunk) [Consolidated Balance Sheets](index=110&type=section&id=Consolidated%20Balance%20Sheets) The consolidated balance sheets show WMG's financial position as of September 30, 2023, with total assets of **$8,545 million**, an increase from **$7,828 million** in 2022, driven by higher cash and equivalents, accounts receivable, and intangible assets, alongside increases in accrued royalties and long-term debt Consolidated Balance Sheet Highlights (in millions) | Metric | September 30, 2023 | September 30, 2022 | | :---------------------------- | :----------------- | :----------------- | | **Assets** | | | | Cash and equivalents | $641 | $584 | | Accounts receivable, net | $1,120 | $984 | | Royalty advances | $1,101 | $875 | | Goodwill | $1,993 | $1,920 | | Intangible assets subject to amortization, net | $2,353 | $2,239 | | Total assets | $8,545 | $7,828 | | **Liabilities & Equity** | | | | Accounts payable | $300 | $268 | | Accrued royalties | $2,219 | $1,918 | | Long-term debt | $3,964 | $3,732 | | Total liabilities | $8,115 | $7,660 | | Total Warner Music Group Corp. equity | $307 | $152 | | Total equity | $430 | $168 | [Consolidated Statements of Operations](index=111&type=section&id=Consolidated%20Statements%20of%20Operations) The consolidated statements of operations show WMG's financial performance for the fiscal years ended September 30, 2023, 2022, and 2021, with FY2023 revenue increasing to **$6,037 million** and operating income rising to **$790 million**, but net income attributable to WMG Corp. decreasing to **$430 million** due to higher interest expense and other non-operating expenses Consolidated Statements of Operations Highlights (in millions, except per share data) | Metric | FY2023 | FY2022 | FY2021 | | :-------------------------------------- | :----- | :----- | :----- | | Revenue | $6,037 | $5,919 | $5,301 | | Total costs and expenses | $(5,288)| $(5,205)| $(4,692)| | Net gain on divestiture | $41 | $0 | $0 | | Operating income | $790 | $714 | $609 | | Loss on extinguishment of debt | $(4) | $0 | $(22) | | Interest expense, net | $(141) | $(125) | $(122) | | Other (expense) income, net | $(36) | $151 | $(9) | | Income before income taxes | $609 | $740 | $456 | | Income tax expense | $(170) | $(185) | $(149) | | Net income | $439 | $555 | $307 | | Net income attributable to WMG Corp. | $430 | $551 | $304 | | Class A – Basic and Diluted EPS | $0.82 | $1.06 | $0.58 | | Class B – Basic and Diluted EPS | $0.82 | $1.06 | $0.58 | [Consolidated Statements of Comprehensive Income](index=112&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) The consolidated statements of comprehensive income detail WMG's total comprehensive income, which includes net income and other comprehensive income (loss) items not recognized in net income, with FY2023 total comprehensive income at **$464 million**, primarily driven by net income and positive foreign currency adjustments Consolidated Statements of Comprehensive Income Highlights (in millions) | Metric | FY2023 | FY2022 | FY2021 | | :-------------------------------------- | :----- | :----- | :----- | | Net income | $439 | $555 | $307 | | Other comprehensive income (loss), net of tax: | | | | | Foreign currency adjustment, net | $36 | $(184) | $7 | | Deferred (loss) gain on derivative financial instruments | $(12) | $30 | $12 | | Minimum pension liability | $1 | $9 | $1 | | Total comprehensive income | $464 | $410 | $327 | | Comprehensive income attributable to WMG Corp. | $455 | $406 | $324 | [Consolidated Statements of Cash Flows](index=113&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) The consolidated statements of cash flows show WMG's cash generation and usage across operating, investing, and financing activities, with FY2023 net cash provided by operating activities at **$687 million**, cash used in investing activities at **$300 million**, and cash used in financing activities at **$325 million**, resulting in a net increase of **$57 million** in cash and equivalents Consolidated Statements of Cash Flows Highlights (in millions) | Activity | FY2023 | FY2022 | FY2021 | | :---------------------- | :----- | :----- | :----- | | Net cash provided by operating activities | $687 | $742 | $638 | | Net cash used in investing activities | $(300) | $(824) | $(638) | | Net cash (used in) provided by financing activities | $(325) | $188 | $(61) | | Net increase (decrease) in cash and equivalents | $57 | $85 | $(54) | | Cash and equivalents at end of period | $641 | $584 | $499 | [Consolidated Statements of Equity](index=115&type=section&id=Consolidated%20Statements%20of%20Equity) The consolidated statements of equity detail changes in WMG's equity components, with total equity increasing to **$430 million** in FY2023 from **$168 million** in FY2022, driven by net income and noncontrolling interest acquisitions, partially offset by dividends paid Consolidated Statements of Equity Highlights (in millions) | Metric | September 30, 2023 | September 30, 2022 | | :-------------------------------------- | :----------------- | :----------------- | | Class A common stock | $0 | $0 | | Class B common stock | $1 | $1 | | Additional paid-in capital | $2,015 | $1,975 | | Accumulated deficit | $(1,387) | $(1,477) | | Accumulated other comprehensive loss, net | $(322) | $(347) | | Total Warner Music Group Corp. equity | $307 | $152 | | Noncontrolling interest | $123 | $16 | | Total equity | $430 | $168 | [Notes to Consolidated Financial Statements](index=117&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The Notes to Consolidated Financial Statements provide detailed disclosures on WMG's accounting policies, financial instruments, debt, equity, and other significant financial information, covering business description, summary of accounting policies, earnings per share, revenue recognition, acquisitions, comprehensive income, property, plant and equipment, leases, goodwill and intangible assets, debt, income taxes, employee benefit plans, restructuring, equity, related party transactions, commitments and contingencies, derivative financial instruments, segment information, additional financial information, and fair value measurements [1. Description of Business](index=117&type=section&id=1.%20Description%20

Financial Data and Key Metrics Changes - In Q4 2023, total revenue grew by 5% and adjusted OIBDA increased by 18%, with a margin expansion of 230 basis points [12][22] - For the full year, revenue surpassed $6 billion for the first time, growing by 4% and adjusted OIBDA by 10%, with a margin expansion of 120 basis points [12][50] - Operating cash flow conversion was 56% of adjusted OIBDA for the full year, aligning with the target of 50% to 60% over a multiyear period [68] Business Line Data and Key Metrics Changes - Recorded Music revenue grew by 2%, with streaming revenue increasing by 4% for the full year [50] - In Q4, subscription streaming revenue grew by approximately 10%, while ad-supported revenue increased by 7% [23] - Music Publishing revenue grew by 15%, driven by strength across all revenue lines, with digital revenue increasing by 19% and streaming revenue by 26% [24][25] Market Data and Key Metrics Changes - The music ecosystem is experiencing healthy growth drivers, with price increases across major DSPs and evolving royalty models [20] - India has seen a significant increase in recorded music revenue, doubling over the last five years, with a growth rate of 48% in 2022 [45] Company Strategy and Development Direction - The company is focused on a two-pronged approach: price optimization and leveraging technology to enhance growth [16][17] - There is a commitment to invest more heavily in A&R and marketing in 2024 to ensure the success of new releases [28] - The strategy includes expanding local talent development in emerging markets like India and enhancing distribution partnerships [44][45] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the music industry's growth, emphasizing the importance of creativity and technology in shaping the future [39][37] - The company is confident about its momentum heading into fiscal 2024, supported by a strong release slate and industry tailwinds [12][20] Other Important Information - The company plans to file its Form 10-K during the week of November 20, 2023 [6] - A financial transformation program is on track to roll out later this fiscal year, expected to yield annualized savings of $35 million to $40 million once fully implemented [26][27] Q&A Session All Questions and Answers Question: How does the company balance investment in A&R versus technology? - The company is committed to self-funding technology investments while creating a flywheel effect that supports growth and margin expansion [71] Question: Can you discuss streaming growth as you head into fiscal '24? - Management is focused on sustained improvements and is optimistic about the streaming growth trajectory, supported by a strong release slate [73][74] Question: What is the margin expansion target for the year? - The target remains at 100 basis points on an organic basis, excluding BMG impacts, with gradual improvements expected throughout the year [77] Question: Can you provide an update on the AI feature announced with YouTube? - The company is excited about the collaboration with YouTube and emphasizes responsible engagement with partners to shape the future of AI in the music industry [78][79] Question: What is the outlook for ad-supported revenue? - The ad-supported revenue is expected to improve, with a stronger performance anticipated in the streaming space compared to the broader advertising market [103]

Financial Data and Key Metrics Changes - Total revenue grew by 10% and adjusted OIBDA increased by 18%, with margins growing by 140 basis points year-on-year [59][88] - Recorded Music revenue increased by 9%, while streaming revenue grew by 7%, reflecting double-digit growth in subscription revenue and modest growth in ad-supported revenue [59][89] - Music Publishing revenue grew by 16%, driven by strong streaming growth of 28% [60][92] Business Line Data and Key Metrics Changes - Recorded Music adjusted OIBDA increased by 16% with a margin of 20.6%, an increase of 130 basis points compared to the prior year quarter [91] - Music Publishing adjusted OIBDA increased by 32% to $74 million with a margin increasing by 310 basis points to 26.1% [93] - Artist services and expanded rights revenue increased by 14% due to higher content promotion and merchandising revenue [89] Market Data and Key Metrics Changes - The Latin division performed well, with Myke Towers reaching 1 on Spotify Global Top 50 and Yng Lvcas achieving significant chart success [62] - Emerging streaming platforms, including TikTok, Meta, and Peloton, contributed to the ad-supported revenue growth [59][90] - The overall ad-supported revenue showed sequential improvement, moving back towards growth [125] Company Strategy and Development Direction - The company is focused on diversifying revenue streams and strengthening services in the publishing business [67] - There is an emphasis on innovation around audience segmentation and price optimization in the streaming market [22][24] - The financial transformation program is being rolled out in waves, with expected annualized run rate savings of $35 million to $40 million once fully implemented [94] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the operating environment, noting a more positive outlook for growth drivers [42] - The company anticipates continued improvement in results and is focused on margin growth for fiscal 2024 [97] - There is a belief that the market can bear further price increases in subscription services, with expectations for a more regular cadence of such increases [73] Other Important Information - The company has successfully launched components of its financial transformation program in select territories [94] - The cash balance as of June 30 was $600 million, with total debt of approximately $4 billion [96] - The company is actively managing costs, including marketing, to improve margins [37][110] Q&A Session Summary Question: Can you provide insights on the impact of recent price increases by DSPs? - Management expects to see the full impact of price increases reflected in fiscal 2024, not in Q4 2023 [36] Question: What is the status of the financial transformation program? - The program is live in several markets, with benefits expected to roll in modestly in 2024 and more robustly in 2026 [18][94] Question: How is the company addressing the challenges and opportunities presented by AI? - The company is engaged with distribution partners and generative AI engines, ensuring artists have a choice in how AI is used in their music [30][32] Question: Can you elaborate on the TikTok agreement and its implications? - The agreement is designed to ensure fairness across all distributors and opens new growth drivers as TikTok rolls out subscription services [120][121] Question: What are the expectations for emerging streaming platform revenue growth? - Emerging streaming revenue continues to grow nicely, with expectations for improvement in both emerging and traditional ad-supported categories [125]

Part I. Financial Information [Item 1. Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents the unaudited condensed consolidated financial statements for Warner Music Group Corp. as of June 30, 2023, and for the three and nine-month periods then ended [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of June 30, 2023, total assets were $8.150 billion, a slight increase from $7.828 billion at September 30, 2022, primarily driven by higher accounts receivable and long-term debt Condensed Consolidated Balance Sheets (in millions) | | June 30, 2023 | September 30, 2022 | | :--- | :--- | :--- | | **Total current assets** | $2,317 | $2,139 | | **Total assets** | $8,150 | $7,828 | | **Total current liabilities** | $3,290 | $3,368 | | **Long-term debt** | $3,988 | $3,732 | | **Total liabilities** | $7,851 | $7,660 | | **Total equity** | $299 | $168 | [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) For the three months ended June 30, 2023, revenue was $1.564 billion, up from $1.432 billion in the prior-year period, with net income stable at $124 million Statements of Operations Highlights (in millions, except per share data) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | **Revenue** | $1,564 | $1,432 | $4,451 | $4,422 | | **Operating Income** | $189 | $146 | $578 | $551 | | **Net Income** | $124 | $125 | $285 | $405 | | **Net Income attributable to WMG** | $122 | $124 | $278 | $403 | | **Diluted EPS (Class A & B)** | $0.23 | $0.24 | $0.53 | $0.77 | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended June 30, 2023, net cash provided by operating activities was $349 million, while net cash used in investing activities significantly decreased to $104 million due to lower acquisition spending Cash Flow Summary for Nine Months Ended June 30 (in millions) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | **Net cash provided by operating activities** | $349 | $336 | | **Net cash used in investing activities** | $(104) | $(763) | | **Net cash (used in) provided by financing activities** | $(233) | $280 | | **Net increase (decrease) in cash** | $16 | $(154) | | **Cash and equivalents at end of period** | $600 | $345 | [Notes to Condensed Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) The notes provide detailed information on the company's accounting policies and financial results, including business description, revenue recognition, debt structure, and a recent restructuring plan - The company's business is divided into two main operations: Recorded Music (discovery, development, marketing, and sale of music) and Music Publishing (generating revenue from the use of musical compositions)[24](index=24&type=chunk)[25](index=25&type=chunk)[26](index=26&type=chunk) - In March 2023, the company announced a restructuring plan involving a **4% headcount reduction** (approx. **270 people**), expecting to incur **$41 million in severance costs**[70](index=70&type=chunk) - Total long-term debt as of June 30, 2023, was approximately **$4.0 billion**, with the company engaging in several debt-related transactions to replace LIBOR with SOFR-based rates[52](index=52&type=chunk)[58](index=58&type=chunk)[59](index=59&type=chunk) Revenue Disaggregation for Nine Months Ended June 30 (in millions) | Segment/Type | 2023 | 2022 | | :--- | :--- | :--- | | **Recorded Music** | | | | Digital | $2,445 | $2,475 | | Physical | $377 | $440 | | Artist services & expanded-rights | $555 | $563 | | Licensing | $287 | $244 | | **Total Recorded Music** | **$3,664** | **$3,722** | | **Music Publishing** | | | | Digital | $477 | $404 | | Performance | $130 | $119 | | Mechanical | $46 | $37 | | Synchronization | $126 | $133 | | **Total Music Publishing** | **$790** | **$704** | | **Total Revenues** | **$4,451** | **$4,422** | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial performance and condition, detailing segment performance, cost structures, and liquidity management - Management uses OIBDA (operating income before depreciation and amortization) as a key performance indicator, with **Q3 2023 OIBDA increasing 18% to $275 million** and the margin improving to **18%**[116](index=116&type=chunk)[157](index=157&type=chunk) - A restructuring plan announced in March 2023 is expected to generate pre-tax cost savings of approximately **$19 million in fiscal 2023** and **$48 million on an annualized basis in fiscal 2024**[133](index=133&type=chunk)[134](index=134&type=chunk) - The company's financial transformation initiative, launched in 2019, is ongoing with expected upfront costs of **$235 million** and annualized run-rate savings of **$35-$40 million** once fully implemented[249](index=249&type=chunk) [Results of Operations - Three Months Ended June 30, 2023](index=37&type=section&id=Results%20of%20Operations%20-%20Three%20Months%20Ended%20June%2030%2C%202023) For the third quarter of fiscal 2023, total revenues increased by 9% to $1.564 billion, driven by growth in both Recorded Music and Music Publishing segments Q3 2023 vs Q3 2022 Revenue by Type (in millions) | Revenue Type | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | **Recorded Music** | $1,282 | $1,189 | 8% | | **Music Publishing** | $283 | $245 | 16% | | **Total Revenues** | $1,564 | $1,432 | 9% | - Recorded Music streaming revenue grew **6% to $822 million**, benefiting from a stronger release schedule and recovery in ad-supported revenue[144](index=144&type=chunk) - Music Publishing digital revenue increased **26%**, driven by growth in streaming, digital deal renewals, and a **$9 million revenue true-up**[146](index=146&type=chunk) Q3 2023 vs Q3 2022 OIBDA by Segment (in millions) | Segment | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | **Recorded Music OIBDA** | $261 | $224 | 17% | | **Music Publishing OIBDA** | $73 | $57 | 28% | | **Total OIBDA** | $275 | $233 | 18% | [Results of Operations - Nine Months Ended June 30, 2023](index=48&type=section&id=Results%20of%20Operations%20-%20Nine%20Months%20Ended%20June%2030%2C%202023) For the nine months ended June 30, 2023, total revenues increased 1% to $4.451 billion, with operating income rising 5% to $578 million, aided by a divestiture gain offsetting restructuring costs Nine Months 2023 vs 2022 Revenue by Type (in millions) | Revenue Type | Nine Months 2023 | Nine Months 2022 | % Change | | :--- | :--- | :--- | :--- | | **Recorded Music** | $3,664 | $3,722 | -2% | | **Music Publishing** | $790 | $704 | 12% | | **Total Revenues** | $4,451 | $4,422 | 1% | - Recorded Music revenue was negatively impacted by a lighter release schedule, an extra week in the prior year, and a market-related slowdown in ad-supported streaming revenue[190](index=190&type=chunk) - Music Publishing revenue growth was driven by an **18% increase in digital revenue** and a **9% increase in performance revenue**, reflecting continued growth in streaming and recovery from COVID disruptions[192](index=192&type=chunk) - A pre-tax gain of **$41 million** from the sale of certain sound recording rights was recorded, which was offset by **$41 million in restructuring costs**[204](index=204&type=chunk)[203](index=203&type=chunk) [Financial Condition and Liquidity](index=60&type=section&id=Financial%20Condition%20and%20Liquidity) As of June 30, 2023, the company had $600 million in cash and equivalents and $3.988 billion in debt, with sufficient liquidity for the next twelve months Financial Condition (in billions) | Metric | June 30, 2023 | September 30, 2022 | | :--- | :--- | :--- | | **Cash and equivalents** | $0.600 | $0.584 | | **Total debt (net)** | $3.988 | $3.732 | | **Net debt** | $3.388 | $3.148 | - The company's weighted-average interest rate on debt was **4.1%** as of June 30, 2023, with the nearest-term debt maturity in 2028[250](index=250&type=chunk) - On May 10, 2023, the board declared a cash dividend of **$0.16 per share**, with total dividends paid in the nine months ended June 30, 2023, amounting to **$251 million**[260](index=260&type=chunk)[261](index=261&type=chunk) Adjusted EBITDA Reconciliation for Twelve Months Ended June 30, 2023 (in millions) | Metric | Amount | | :--- | :--- | | Net Income | $435 | | Income tax expense | $149 | | Interest expense, net | $136 | | Depreciation and amortization | $335 | | Other Adjustments (Restructuring, etc.) | $94 | | **Adjusted EBITDA** | **$1,260** | [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=67&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to market risks from foreign currency exchange rates, interest rates, and inflation, using foreign exchange forward contracts and interest rate swaps to manage these exposures - The company uses foreign currency forward contracts to manage exposure on major currencies, holding contracts for the sale of **$172 million** and purchase of **$98 million** of foreign currencies as of June 30, 2023[274](index=274&type=chunk) - Of the **$4.028 billion** in total debt, **$1.314 billion** is variable-rate, with an interest rate swap effectively fixing the rate on a portion, resulting in **80% of total debt being effectively fixed-rate**[276](index=276&type=chunk) [Item 4. Controls and Procedures](index=68&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes in internal control over financial reporting during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures are effective at a reasonable assurance level[283](index=283&type=chunk) - No changes occurred during the three months ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[284](index=284&type=chunk) Part II. Other Information [Item 1. Legal Proceedings](index=69&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various claims and legal proceedings arising in the ordinary course of business, which management does not expect to have a material adverse effect on its financial condition - While litigation has inherent uncertainties, the company does not currently expect pending legal matters to have a material adverse impact on its financial condition or operations[286](index=286&type=chunk) [Item 1A. Risk Factors](index=69&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2022 - No material changes to risk factors from the Annual Report on Form 10-K for the fiscal year ended September 30, 2022, are reported[287](index=287&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=69&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This item is not applicable for the reporting period - Not applicable[288](index=288&type=chunk) [Item 3. Defaults Upon Senior Securities](index=69&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable for the reporting period - Not applicable[289](index=289&type=chunk) [Item 4. Mine Safety Disclosures](index=69&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable for the reporting period - Not applicable[290](index=290&type=chunk) [Item 5. Other Information](index=69&type=section&id=Item%205.%20Other%20Information) This item is not applicable for the reporting period - Not applicable[291](index=291&type=chunk) [Item 6. Exhibits](index=70&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including amendments to credit agreements, an indemnification agreement, and officer certifications - Exhibits filed include amendments to the Senior Term Loan Credit Agreement, CEO and CFO certifications, and XBRL data files[294](index=294&type=chunk)

Financial Data and Key Metrics Changes - Total revenue grew by 5% and adjusted OIBDA increased by 8% in Q2 2023 [7][37] - Recorded Music revenue increased by 3% while Streaming revenue grew by 2% [7] - Music Publishing revenue saw impressive growth of 15% [7][40] - Adjusted OIBDA margin improved to 20.4% compared to 19.8% in the prior-year quarter [37] Business Line Data and Key Metrics Changes - Recorded Music revenue grew by 2.5%, with streaming revenue increasing by 2.2% [38] - Physical revenue increased by 1%, while artist services and expanded rights revenue decreased by 4% [39] - Music Publishing digital revenue grew by 18%, and performance revenue increased by 29% [40][41] - Music Publishing adjusted OIBDA increased by 25% to $76 million, with a margin of 29.6% [41] Market Data and Key Metrics Changes - Sub-Saharan Africa was the fastest-growing recorded music market in 2022, increasing by 35% [19] - China and MENA markets grew by 28% and 24% respectively, with Warner Music Group outperforming in these regions [20] - Latin America saw a growth of 26%, with efforts underway to enhance market share [20][21] Company Strategy and Development Direction - The company is reallocating resources to enhance technology use to empower artists and songwriters [12][13] - A 4% workforce reduction was announced, expected to yield annual savings of $49 million [14][42] - The focus is on long-term success through technology and music as twin engines of growth [15][17] - The company aims to capitalize on emerging markets and fast-growing genres, particularly dance music [22][23] Management's Comments on Operating Environment and Future Outlook - Management acknowledged challenges in the recorded music segment but expressed optimism for the second half of 2023 due to a stronger release slate [9][11] - The company is focused on addressing both company-specific and industry-wide issues [9] - There is a recognition of the evolving music industry landscape, including risks and opportunities related to streaming and AI [12][30] Other Important Information - The company is experimenting with different streaming models and has seen successful price increases in subscription services [26][27] - Management emphasized the need for a reevaluation of the DSP model to better value high-profile artists [72][76] - The financial transformation program is on track to yield annualized savings of $35 million to $40 million once fully implemented [43] Q&A Session Summary Question: Insights on DSP pricing progression and impact on streaming revenue - Management is optimistic about potential price increases from Spotify and believes it could benefit all parties involved [49][50] - The second half of the fiscal year is expected to show improved results in Recorded Music and streaming revenue due to a stronger release slate [51] Question: Technology opportunities and efficiency potential - The company is focused on using technology to enhance efficiency and effectiveness across all business areas [55][56] - Management believes that the rise of local music and independent artists presents both challenges and opportunities for major labels [59][61] Question: Investments in tech capabilities and Warner Chappell growth - Increased investment in technology is expected, with a focus on reallocating resources for greater impact [62][64] - Warner Chappell is anticipated to continue strong growth, particularly in digital and streaming revenue [69] Question: Advertising market trends and impact on emerging platform deals - Management sees positive signs in the advertising market but remains cautious, expecting improvement in Q3 [78] Question: Future of the music business model - Management believes the current wholesale relationship with DSPs needs to change to better reflect the value of high-profile artists [72][76] - There is openness to exploring dual revenue stream models and other innovative pricing strategies [84][86]

PART I. FINANCIAL INFORMATION [ITEM 1. FINANCIAL STATEMENTS (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20%28Unaudited%29) Presents unaudited condensed consolidated financial statements, including balance sheets, operations, comprehensive income, cash flows, equity, and detailed notes [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets and equity increased, while liabilities also rose, primarily due to debt and accrued royalties | Metric | March 31, 2023 (in millions) | September 30, 2022 (in millions) | Change (in millions) | | :--------------------------------- | :----------------------------- | :------------------------------- | :------------------- | | Total Assets | $8,010 | $7,828 | $182 | | Total Liabilities | $7,744 | $7,660 | $84 | | Total Warner Music Group Corp. Equity | $252 | $152 | $100 | | Cash and equivalents | $601 | $584 | $17 | | Accounts receivable, net | $1,017 | $984 | $33 | | Goodwill | $1,960 | $1,920 | $40 | | Accrued royalties | $2,057 | $1,918 | $139 | | Long-term debt | $3,986 | $3,732 | $254 | | Deferred revenue | $311 | $423 | $(112) | [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Revenue increased slightly, but net income significantly decreased due to higher costs and expenses | Metric (in millions) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue | $1,399 | $1,376 | $2,887 | $2,990 | | Total costs and expenses | $(1,275) | $(1,210) | $(2,539) | $(2,585) | | Operating income | $124 | $166 | $389 | $405 | | Net income attributable to Warner Music Group Corp. | $34 | $92 | $156 | $279 | | Class A – Basic and Diluted EPS | $0.06 | $0.18 | $0.30 | $0.53 | | Class B – Basic and Diluted EPS | $0.06 | $0.18 | $0.30 | $0.53 | - Net income attributable to Warner Music Group Corp. decreased by **63%** for the three months ended March 31, 2023, and by **44%** for the six months ended March 31, 2023, compared to the prior year periods[12](index=12&type=chunk) [Condensed Consolidated Statements of Comprehensive Income](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) Total comprehensive income decreased, influenced by foreign currency adjustments and derivative financial instruments | Metric (in millions) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | | :------------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | $37 | $92 | $161 | $280 | | Foreign currency adjustment | $19 | $(25) | $91 | $(50) | | Deferred (loss) gain on derivative financial instruments | $(4) | $14 | $(5) | $21 | | Total comprehensive income attributable to Warner Music Group Corp. | $49 | $81 | $242 | $250 | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Operating cash flow increased, investing cash flow significantly decreased, and financing activities shifted to net cash usage | Metric (in millions) | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | Change (in millions) | | :------------------------------------ | :-------------------------- | :-------------------------- | :------------------- | | Net cash provided by operating activities | $203 | $173 | $30 | | Net cash used in investing activities | $(51) | $(649) | $598 | | Net cash (used in) provided by financing activities | $(143) | $363 | $(506) | | Cash and equivalents at end of period | $601 | $385 | $216 | - Cash used in investing activities decreased significantly by **$598 million**, primarily due to reduced investments and acquisitions and proceeds from divestitures[17](index=17&type=chunk) - Financing activities shifted from providing **$363 million** in cash to using **$143 million**, mainly due to higher payments for deferred consideration and dividends, and reduced debt issuance proceeds[17](index=17&type=chunk) [Condensed Consolidated Statements of Equity](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Equity) Total equity increased, driven by net income and other comprehensive income, partially offset by dividends | Metric (in millions) | Balance at Sep 30, 2022 | Net Income | Other Comprehensive Income | Dividends Paid | Stock-based Compensation | Balance at Mar 31, 2023 | | :--------------------------------- | :---------------------- | :--------- | :------------------------- | :------------- | :----------------------- | :---------------------- | | Total Warner Music Group Corp. Equity | $152 | $156 | $86 | $(167) | $25 | $252 | - The company paid **$0.32 per share** in dividends for the six months ended March 31, 2023[18](index=18&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Details business, accounting policies, financial instruments, and segment performance, with updates on fiscal year, restructuring, and debt - The company changed its fiscal year from a 52-53-week calendar to a reporting calendar ending on the last day of the calendar quarter, effective for the 2023 fiscal year. The prior year's six-month period included an additional week, contributing approximately **$73 million** in revenue, primarily from Recorded Music streaming[29](index=29&type=chunk)[30](index=30&type=chunk) - A restructuring plan was announced in March 2023, aiming to reduce headcount by approximately **270 people (4% of total headcount)**, incurring **$41 million** in severance costs. This is expected to generate **$20 million** in cost savings in FY23 and **$49 million** annually in FY24[70](index=70&type=chunk)[71](index=71&type=chunk)[138](index=138&type=chunk) - Executive transition costs for the former CEO and departing CFO amounted to approximately **$3 million** in severance, plus **$12 million** in non-cash stock-based compensation expense for the former CEO due to accelerated vesting[79](index=79&type=chunk)[141](index=141&type=chunk)[142](index=142&type=chunk) [Description of Business](index=11&type=section&id=Description%20of%20Business) Warner Music Group operates in Recorded Music and Music Publishing, focusing on artist development, marketing, and intellectual property - The company's business is classified into two fundamental operations: Recorded Music and Music Publishing[24](index=24&type=chunk) - Recorded Music involves discovering and developing artists, and marketing, promoting, distributing, selling, and licensing their music[25](index=25&type=chunk) - Music Publishing focuses on generating revenue from the use of musical compositions, promoting, placing, marketing, and administering the creative output of songwriters[26](index=26&type=chunk) [Summary of Significant Accounting Policies](index=11&type=section&id=Summary%20of%20Significant%20Accounting%20Policies) Interim financial statements follow U.S. GAAP, with a fiscal year-end change impacting comparability and recent ASU adoptions - Interim financial statements are prepared under U.S. GAAP for interim information, not full annual disclosures[27](index=27&type=chunk) - Effective for fiscal year 2023, the company changed its fiscal year end to September 30, from a modified 52-53-week calendar. The six months ended March 31, 2022, included an extra week, boosting revenue by approximately **$73 million**, primarily in Recorded Music streaming[29](index=29&type=chunk)[30](index=30&type=chunk) - The company adopted ASU 2020-04 and ASU 2021-01 regarding Reference Rate Reform (LIBOR transition) and is evaluating ASU 2023-01 for leases under common control, not expecting a material financial impact from the former[37](index=37&type=chunk)[38](index=38&type=chunk) [Earnings per Share](index=13&type=section&id=Earnings%20per%20Share) Basic and diluted EPS for both Class A and Class B common stock decreased for the three and six months ended March 31, 2023 | Metric | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income attributable to Warner Music Group Corp. | $34 | $92 | $156 | $279 | | Class A – Basic and Diluted EPS | $0.06 | $0.18 | $0.30 | $0.53 | | Class B – Basic and Diluted EPS | $0.06 | $0.18 | $0.30 | $0.53 | [Revenue Recognition](index=15&type=section&id=Revenue%20Recognition) Details revenue breakdown by segment and type, highlighting digital revenue and an increase in deferred revenue from fixed fees | Revenue Type (in millions) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | | :------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Digital | $796 | $804 | $1,599 | $1,674 | | Physical | $118 | $122 | $251 | $317 | | Artist services and expanded-rights | $131 | $141 | $337 | $373 | | Licensing | $98 | $80 | $195 | $169 | | Total Recorded Music | $1,143 | $1,147 | $2,382 | $2,533 | | Performance (Music Publishing) | $45 | $36 | $90 | $74 | | Digital (Music Publishing) | $146 | $127 | $295 | $260 | | Mechanical (Music Publishing) | $16 | $13 | $30 | $27 | | Synchronization (Music Publishing) | $46 | $50 | $85 | $92 | | Other (Music Publishing) | $4 | $4 | $7 | $6 | | Total Music Publishing | $257 | $230 | $507 | $459 | | Total Revenues | $1,399 | $1,376 | $2,887 | $2,990 | - Deferred revenue increased by **$225 million** during the six months ended March 31, 2023, from cash received for fixed fees and minimum guarantees[43](index=43&type=chunk) | Remaining Performance Obligations (in millions) | Rest of FY23 | FY24 | FY25 | Thereafter | Total | | :------------------------------------ | :----------- | :--- | :--- | :--------- | :---- | | Total | $350 | $450 | $6 | $2 | $808 | [Acquisition of 300 Entertainment](index=16&type=section&id=Acquisition%20of%20300%20Entertainment) The 300 Entertainment acquisition, finalized in December 2021, saw a minor goodwill adjustment in Q1 FY23 - The acquisition of 300 Entertainment was finalized for **$394 million**, with a net increase of approximately **$3 million** to goodwill during the three months ended December 31, 2022[46](index=46&type=chunk) [Comprehensive Income](index=16&type=section&id=Comprehensive%20Income) Changes in accumulated other comprehensive loss reflect foreign currency translation gains and deferred losses on derivatives | Component (in millions) | Balances at Sep 30, 2022 | Other Comprehensive Income (Loss) | Balances at Mar 31, 2023 | | :-------------------------------- | :----------------------- | :-------------------------------- | :----------------------- | | Foreign Currency Translation Loss | $(358) | $91 | $(267) | | Deferred (Losses) On Derivative Financial Instruments | $13 | $(5) | $8 | | Accumulated Other Comprehensive Loss, net | $(347) | $86 | $(261) | [Goodwill and Intangible Assets](index=16&type=section&id=Goodwill%20and%20Intangible%20Assets) Goodwill increased due to foreign currency and acquisitions, with no impairment indicators identified | Metric (in millions) | Balances at Sep 30, 2022 | Acquisitions | Other Adjustments (FX) | Balances at Mar 31, 2023 | | :------------------- | :----------------------- | :----------- | :--------------------- | :----------------------- | | Goodwill | $1,920 | $3 | $37 | $1,960 | | Intangible Asset Type (in millions) | March 31, 2023 (Net) | September 30, 2022 (Net) | | :---------------------------------- | :------------------- | :----------------------- | | Intangible assets subject to amortization | $2,232 | $2,239 | | Intangible assets not subject to amortization | $150 | $145 | | Total net intangible assets | $2,382 | $2,384 | - No indicators of goodwill impairment were identified during the current period[51](index=51&type=chunk) [Debt](index=17&type=section&id=Debt) Total long-term debt increased due to new facilities, with the weighted-average interest rate rising to 4.0% | Debt Type (in millions) | March 31, 2023 | September 30, 2022 | | :------------------------------------ | :------------- | :----------------- | | Senior Term Loan Facility due 2028 | $1,295 | $1,145 | | 2.750% Senior Secured Notes due 2028 | $354 | $318 | | 3.750% Senior Secured Notes due 2029 | $540 | $540 | | 3.875% Senior Secured Notes due 2030 | $535 | $535 | | 2.250% Senior Secured Notes due 2031 | $486 | $435 | | 3.000% Senior Secured Notes due 2031 | $800 | $800 | | Term Loan Mortgage | $19 | $0 | | Total long-term debt, net | $3,986 | $3,732 | - Acquisition Corp. borrowed an additional **$150 million** under the Senior Term Loan Facility in November 2022 to fund deferred payment obligations for prior acquisitions and for general corporate purposes[57](index=57&type=chunk) - A new **$19 million** Term Loan Mortgage, secured by real estate, was entered into in January 2023, bearing interest at 30-day SOFR plus 1.40%[58](index=58&type=chunk) - The Revolving Credit Agreement was amended in March 2023 to replace LIBOR-based rates with SOFR-based rates, with no material financial impact[59](index=59&type=chunk)[260](index=260&type=chunk) - The weighted-average interest rate of the company's total debt increased to **4.0%** at March 31, 2023, from **3.5%** at September 30, 2022[69](index=69&type=chunk) [Restructuring](index=21&type=section&id=Restructuring) A March 2023 restructuring plan involves headcount reductions and $41 million in severance costs, primarily in Recorded Music - A restructuring plan was announced in March 2023, targeting a **4% headcount reduction** (approx. **270 people**)[70](index=70&type=chunk) - Total non-recurring restructuring charges of **$41 million** for severance costs were incurred and recorded in the Recorded Music segment for the three and six months ended March 31, 2023[70](index=70&type=chunk)[71](index=71&type=chunk) [Commitments and Contingencies](index=21&type=section&id=Commitments%20and%20Contingencies) The company is involved in routine legal proceedings, not expecting a material adverse effect on its financials - The company is involved in ordinary course legal proceedings but does not expect a material adverse effect on its financial condition, cash flows, or results of operations[72](index=72&type=chunk) [Equity](index=21&type=section&id=Equity) Non-cash stock-based compensation expense includes significant amounts related to CEO separation and new CEO PSUs | Metric (in millions) | 3 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | | Total non-cash stock-based compensation expense | $21 | $35 | $30 | - **$12 million** of non-cash stock-based compensation expense was recognized for the former CEO's separation agreement due to accelerated vesting[79](index=79&type=chunk) - Approximately **$1 million** in non-cash stock-based compensation was recognized for market-based performance share units (PSUs) issued to the newly appointed CEO[80](index=80&type=chunk) [Income Taxes](index=23&type=section&id=Income%20Taxes) Income tax expense decreased due to lower pre-tax income, with the effective tax rate higher than statutory due to various factors | Metric (in millions) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | | :------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income tax expense | $21 | $34 | $69 | $109 | - The income tax expense is higher than the statutory rate of **21%** due to U.S. state and local taxes, withholding taxes, higher foreign income tax rates, and non-deductible executive compensation, partially offset by a deduction against foreign derived intangible income (FDII)[83](index=83&type=chunk)[84](index=84&type=chunk) [Derivative Financial Instruments](index=23&type=section&id=Derivative%20Financial%20Instruments) The company uses foreign currency forwards and interest rate swaps to manage market risks, with associated realized and unrealized losses - The company uses foreign currency forward exchange contracts and interest rate swaps to manage market risks[86](index=86&type=chunk) - As of March 31, 2023, outstanding foreign currency forward contracts included **$304 million** for sale and **$167 million** for purchase of foreign currencies[88](index=88&type=chunk) - A **$500 million** pay-fixed receive-variable interest rate swap was outstanding as of March 31, 2023, with **$8 million** of unrealized deferred gains[88](index=88&type=chunk) | Derivative Impact (in millions) | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | | :------------------------------------ | :-------------------------- | :-------------------------- | | Realized pre-tax losses (FX contracts) | $(2) | $3 (gains) | | Unrealized pre-tax losses (Interest rate swaps) | $(7) | $28 (gains) | [Segment Information](index=25&type=section&id=Segment%20Information) Performance is evaluated by Recorded Music and Music Publishing segments, with OIBDA trends detailed for both three and six-month periods | Segment Performance (3 Months Ended Mar 31, in millions) | 2023 | 2022 | % Change | | :--------------------------------------- | :--- | :--- | :------- | | Recorded Music Revenues | $1,143 | $1,147 | 0% | | Recorded Music Operating income | $151 | $189 | -20% | | Recorded Music OIBDA | $203 | $250 | -19% | | Music Publishing Revenues | $257 | $230 | 12% | | Music Publishing Operating income | $52 | $38 | 37% | | Music Publishing OIBDA | $75 | $61 | 23% | | Segment Performance (6 Months Ended Mar 31, in millions) | 2023 | 2022 | % Change | | :--------------------------------------- | :--- | :--- | :------- | | Recorded Music Revenues | $2,382 | $2,533 | -6% | | Recorded Music Operating income | $434 | $465 | -7% | | Recorded Music OIBDA | $540 | $580 | -7% | | Music Publishing Revenues | $507 | $459 | 10% | | Music Publishing Operating income | $101 | $70 | 44% | | Music Publishing OIBDA | $147 | $115 | 28% | [Additional Financial Information](index=26&type=section&id=Additional%20Financial%20Information) Details cash interest payments, income taxes paid, a divestiture gain, and declared cash dividends | Metric (in millions) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | | :------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Cash interest payments | $50 | $44 | $75 | $57 | | Income and withholding taxes paid | $72 | $37 | $117 | $66 | - A pre-tax gain of **$41 million** was recorded from the divestiture of certain sound recording rights during the six months ended March 31, 2023[100](index=100&type=chunk) - The company declared and paid a cash dividend of **$0.16 per share** in March 2023, totaling **$83 million** for the quarter and **$167 million** for the six months[103](index=103&type=chunk) [Fair Value Measurements](index=27&type=section&id=Fair%20Value%20Measurements) Fair value of financial instruments, including debt, is primarily determined using Level 2 inputs, with total debt fair value increasing | Financial Instrument (in millions) | March 31, 2023 Fair Value | September 30, 2022 Fair Value | | :--------------------------------- | :------------------------ | :-------------------------- | | Foreign Currency Forward Exchange Contracts (net) | $(4) | $0 | | Interest Rate Swap (net) | $11 | $18 | | Equity Investments with Readily Determinable Fair Value | $9 | $36 | | Total Debt (Fair Value) | $3,628 | $3,181 | - The fair value of the company's debt increased to **$3.628 billion** at March 31, 2023, from **$3.181 billion** at September 30, 2022[111](index=111&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=29&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Analyzes financial performance, condition, and liquidity, covering consolidated and segment results, and factors impacting operations [Introduction and Business Overview](index=29&type=section&id=Introduction%20and%20Business%20Overview) Overview of Warner Music Group's operations, key performance measures, and recent events like fiscal year change and restructuring - Warner Music Group Corp. is a major music entertainment company with two core operations: Recorded Music and Music Publishing[119](index=119&type=chunk)[123](index=123&type=chunk) - The company uses OIBDA (Operating Income Before Depreciation and Amortization) and constant currency measures to evaluate operating performance[121](index=121&type=chunk)[122](index=122&type=chunk) - Key revenue sources for Recorded Music include digital, physical, artist services & expanded-rights, and licensing. Music Publishing revenues come from digital, performance, mechanical, synchronization, and other sources[133](index=133&type=chunk)[136](index=136&type=chunk) - The fiscal year-end change for FY2023 means the six months ended March 31, 2022, included an extra week (27 vs. 26 weeks), contributing approximately **$73 million** in revenue, primarily from Recorded Music streaming[137](index=137&type=chunk) - A restructuring plan initiated in March 2023 aims to reduce headcount by approximately **270 people (4% of total)**, incurring **$41 million** in severance costs, with expected annual cost savings of **$49 million** in FY2024[138](index=138&type=chunk)[139](index=139&type=chunk)[140](index=140&type=chunk) - Executive transition costs, including severance and non-cash stock-based compensation, were approximately **$15 million** for the three and six months ended March 31, 2023, related to the former CEO and departing CFO[141](index=141&type=chunk)[142](index=142&type=chunk) - The company suspended operations in Russia on March 10, 2022, due to the Russia-Ukraine conflict, noting that Russian operations do not constitute a material portion of its business[143](index=143&type=chunk) [Results of Operations (Three Months Ended March 31, 2023 Compared with Three Months Ended March 31, 2022)](index=38&type=section&id=Results%20of%20Operations%20%28Three%20Months%20Ended%20March%2031%2C%202023%20Compared%20with%20Three%20Months%20Ended%20March%2031%2C%202022%29) Total revenues increased slightly, but consolidated OIBDA and net income decreased due to restructuring and higher expenses | Metric (in millions) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | $ Change | % Change | | :----------------------------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Total Revenues | $1,399 | $1,376 | $23 | 2% | | Recorded Music Revenues | $1,143 | $1,147 | $(4) | 0% | | Music Publishing Revenues | $257 | $230 | $27 | 12% | | Total Digital Revenues (after eliminations) | $942 | $931 | $11 | 1% | | Operating Income | $124 | $166 | $(42) | -25% | | OIBDA | $207 | $255 | $(48) | -19% | | Net income attributable to Warner Music Group Corp. | $34 | $92 | $(58) | -63% | - Total revenues increased by **2%** despite **$38 million** of unfavorable currency exchange fluctuations[146](index=146&type=chunk) - Consolidated OIBDA decreased by **19%** due to **$41 million** in restructuring costs, increased non-cash stock-based compensation, and executive transition costs[163](index=163&type=chunk) [Consolidated Results (Three Months)](index=38&type=section&id=Consolidated%20Results%20%28Three%20Months%29) Total revenues increased, but operating income and net income decreased due to higher costs and foreign currency losses | Metric (in millions) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | $ Change | % Change | | :----------------------------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Total Revenues | $1,399 | $1,376 | $23 | 2% | | Total Digital Revenues | $942 | $931 | $11 | 1% | | Cost of revenues | $721 | $697 | $24 | 3% | | Selling, general and administrative expenses | $452 | $444 | $8 | 2% | | Operating income | $124 | $166 | $(42) | -25% | | Net income attributable to Warner Music Group Corp. | $34 | $92 | $(58) | -63% | - General and administrative expense increased by **$24 million**, primarily due to **$14 million** in higher non-cash stock-based compensation (related to CEO separation) and **$3 million** in Executive Transition Costs[158](index=158&type=chunk) - Selling and marketing expense decreased by **$17 million**, or **9%**, due to lower variable marketing spend[159](index=159&type=chunk) - Other expense increased significantly to **$31 million**, primarily due to **$20 million** in foreign currency losses on Euro-denominated debt and **$13 million** in currency exchange losses on intercompany loans[168](index=168&type=chunk) [Business Segment Results (Three Months)](index=43&type=section&id=Business%20Segment%20Results%20%28Three%20Months%29) Recorded Music revenues were flat with decreased OIBDA, while Music Publishing revenues and OIBDA increased | Segment (3 Months Ended Mar 31, in millions) | 2023 Revenue | 2022 Revenue | % Change Revenue | 2023 OIBDA | 2022 OIBDA | % Change OIBDA | | :----------------------------------------- | :----------- | :----------- | :--------------- | :--------- | :--------- | :--------------- | | Recorded Music | $1,143 | $1,147 | 0% | $203 | $250 | -19% | | Music Publishing | $257 | $230 | 12% | $75 | $61 | 23% | - Recorded Music digital revenue decreased by **$8 million**, with streaming revenue down **$3 million** (impacted by **$20 million** unfavorable FX) due to a lighter release schedule and slowdown in ad-supported revenue. Licensing revenue increased by **$18 million**[149](index=149&type=chunk) - Music Publishing digital revenue increased by **$19 million (15%)**, driven by streaming growth and digital deal renewals. Performance revenue increased by **$9 million (25%)** due to timing of collection society payments and COVID recovery[151](index=151&type=chunk) - Recorded Music OIBDA decreased by **$47 million**, primarily due to **$41 million** in restructuring costs and revenue mix[180](index=180&type=chunk) - Music Publishing OIBDA increased by **$14 million** due to strong operating performance[187](index=187&type=chunk) [Results of Operations (Six Months Ended March 31, 2023 Compared with Six Months Ended March 31, 2022)](index=47&type=section&id=Results%20of%20Operations%20%28Six%20Months%20Ended%20March%2031%2C%202023%20Compared%20with%20Six%20Months%20Ended%20March%2031%2C%202022%29) Total revenues and consolidated OIBDA decreased, impacted by currency fluctuations, prior year's extra week, and restructuring | Metric (in millions) | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | $ Change | % Change | | :----------------------------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Total Revenues | $2,887 | $2,990 | $(103) | -3% | | Recorded Music Revenues | $2,382 | $2,533 | $(151) | -6% | | Music Publishing Revenues | $507 | $459 | $48 | 10% | | Total Digital Revenues (after eliminations) | $1,894 | $1,933 | $(39) | -2% | | Operating Income | $389 | $405 | $(16) | -4% | | OIBDA | $556 | $575 | $(19) | -3% | | Net income attributable to Warner Music Group Corp. | $156 | $279 | $(123) | -44% | - Total revenues decreased by **3%**, including a **$122 million** unfavorable impact from currency exchange fluctuations and the effect of an additional week in the prior year[193](index=193&type=chunk) - Consolidated OIBDA decreased by **3%**, impacted by lower revenues and **$41 million** in restructuring costs, partially offset by a **$41 million** net gain on divestiture[215](index=215&type=chunk) [Consolidated Results (Six Months)](index=47&type=section&id=Consolidated%20Results%20%28Six%20Months%29) Total revenues, operating income, and net income decreased, influenced by foreign currency and a divestiture gain | Metric (in millions) | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | $ Change | % Change | | :----------------------------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Total Revenues | $2,887 | $2,990 | $(103) | -3% | | Total Digital Revenues | $1,894 | $1,933 | $(39) | -2% | | Cost of revenues | $1,482 | $1,515 | $(33) | -2% | | Selling, general and administrative expenses | $892 | $941 | $(49) | -5% | | Operating income | $389 | $405 | $(16) | -4% | | Net income attributable to Warner Music Group Corp. | $156 | $279 | $(123) | -44% | - Selling and marketing expense decreased by **$43 million (11%)** due to lower variable marketing spend[210](index=210&type=chunk) - A net gain of **$41 million** on divestiture was recorded from the sale of certain sound recording rights[213](index=213&type=chunk) - Other expense increased to **$92 million**, primarily due to **$88 million** in foreign currency losses on Euro-denominated debt, contrasting with gains in the prior year[220](index=220&type=chunk) [Business Segment Results (Six Months)](index=55&type=section&id=Business%20Segment%20Results%20%28Six%20Months%29) Recorded Music revenues and OIBDA decreased, while Music Publishing revenues and OIBDA significantly increased | Segment (6 Months Ended Mar 31, in millions) | 2023 Revenue | 2022 Revenue | % Change Revenue | 2023 OIBDA | 2022 OIBDA | % Change OIBDA | | :----------------------------------------- | :----------- | :----------- | :--------------- | :--------- | :--------- | :--------------- | | Recorded Music | $2,382 | $2,533 | -6% | $540 | $580 | -7% | | Music Publishing | $507 | $459 | 10% | $147 | $115 | 28% | - Recorded Music digital revenue decreased by **$75 million**, with streaming revenue down **$59 million (4%)**, impacted by **$55 million** unfavorable FX, a lighter release schedule, and the additional week in the prior year[196](index=196&type=chunk) - Music Publishing digital revenue increased by **$35 million (13%)**, driven by streaming growth and digital deal renewals. Performance revenue increased by **$16 million (22%)** due to collection society payments and COVID recovery[198](index=198&type=chunk) - Recorded Music OIBDA decreased by **$40 million**, impacted by lower revenues and **$41 million** in restructuring costs, partially offset by the net gain on divestiture[233](index=233&type=chunk) - Music Publishing OIBDA increased by **$32 million** due to strong operating performance and favorable foreign currency exchange rates[242](index=242&type=chunk) [Financial Condition and Liquidity](index=60&type=section&id=Financial%20Condition%20and%20Liquidity) Net debt increased, operating cash flow improved, investing cash flow decreased, and financing activities shifted to net cash usage | Metric (in millions) | March 31, 2023 | September 30, 2022 | | :------------------- | :------------- | :----------------- | | Total debt (net) | $3,986 | $3,732 | | Cash and equivalents | $601 | $584 | | Net debt | $3,385 | $3,148 | | Cash Flow (in millions) | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | | :---------------------- | :-------------------------- | :-------------------------- | | Operating activities | $203 | $173 | | Investing activities | $(51) | $(649) | | Financing activities | $(143) | $363 | - The **$30 million** increase in cash provided by operating activities was primarily due to timing of A&R investments and other working capital movements[250](index=250&type=chunk) - Cash used in investing activities decreased by **$598 million**, mainly due to lower investments and acquisitions and proceeds from divestitures[251](index=251&type=chunk) - The company expects its primary liquidity sources to be sufficient for the next twelve months, including funding for a financial transformation initiative with upfront costs of approximately **$235 million** and expected annual run-rate savings of **$35-$40 million**[255](index=255&type=chunk)[256](index=256&type=chunk) - The weighted-average interest rate on outstanding indebtedness decreased from **10.5%** in 2011 to **4.0%** as of March 31, 2023[257](index=257&type=chunk) - The company was in compliance with all debt covenants under its outstanding notes, Revolving Credit Facility, and Senior Term Loan Facility as of March 31, 2023[265](index=265&type=chunk) | Adjusted EBITDA (in millions) | 12 Months Ended Mar 31, 2023 | 12 Months Ended Mar 31, 2022 | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | | :---------------------------- | :--------------------------- | :--------------------------- | :-------------------------- | :-------------------------- | | Adjusted EBITDA | $1,235 | $1,210 | $308 | $282 | | Senior Secured Indebtedness | $3,736 | N/A | N/A | N/A | | Leverage Ratio | 3.03x | N/A | N/A | N/A | [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=67&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Discusses exposure to foreign currency and interest rate risks, and strategies using derivatives, with hypothetical impact analysis - The company is exposed to foreign currency exchange rate risk and interest rate risk[278](index=278&type=chunk) - Foreign currency forward exchange contracts are used to manage foreign currency risk; a hypothetical **10%** U.S. dollar depreciation would decrease their fair value by **$14 million**[279](index=279&type=chunk)[280](index=280&type=chunk) - **80%** of the company's debt was effectively at a fixed rate as of March 31, 2023, through an interest rate swap, to manage interest rate risk on variable-rate debt[281](index=281&type=chunk) - A **25 basis point** increase in interest rates would hypothetically decrease the fair value of fixed-rate debt by approximately **$36 million**[282](index=282&type=chunk) - Inflation has not had a material effect on the business to date, but significant inflationary pressures could adversely affect results if not offset by price increases[283](index=283&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=68&type=section&id=Item%204.%20Controls%20and%20Procedures) Disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - The company's disclosure controls and procedures were deemed effective as of March 31, 2023, ensuring timely and accurate reporting[288](index=288&type=chunk) - No material changes in internal control over financial reporting occurred during the three months ended March 31, 2023[289](index=289&type=chunk) PART II. OTHER INFORMATION [ITEM 1. LEGAL PROCEEDINGS](index=69&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in routine legal proceedings, not expecting a material adverse effect on its financial condition or operations - The company is involved in routine legal proceedings and does not expect a material adverse effect on its financial condition or operations[291](index=291&type=chunk) [ITEM 1A. RISK FACTORS](index=69&type=section&id=Item%201A.%20Risk%20Factors) No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for FY2022 - No material changes to risk factors since the Annual Report on Form 10-K for FY2022[292](index=292&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=69&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Not applicable - Not applicable[293](index=293&type=chunk) [ITEM 3. DEFAULTS UPON SENIOR SECURITIES](index=69&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) Not applicable - Not applicable[294](index=294&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=69&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Not applicable - Not applicable[295](index=295&type=chunk) [ITEM 5. OTHER INFORMATION](index=69&type=section&id=Item%205.%20Other%20Information) Details the CFO succession plan, including severance, bonus eligibility, and RSU award for Eric Levin - The company is planning for the succession of its Chief Financial Officer, Eric Levin, whose employment will continue until January 15, 2024[296](index=296&type=chunk)[297](index=297&type=chunk) - Under the separation agreement, Mr. Levin will receive **$1,000,000** in cash severance, a **$57,602.57** net cash payment, eligibility for FY2023 and prorated FY2024 annual bonuses (target **$1,000,000** each), and a **$1,000,000** RSU award[298](index=298&type=chunk) [ITEM 6. EXHIBITS](index=70&type=section&id=Item%206.%20Exhibits) Lists key exhibits filed, including credit agreement amendments and executive separation agreements - Key exhibits include the Fourth Amendment to Credit Agreement, Employment Separation Agreement and Release for Stephen Cooper, and Mutual Separation Agreement and Release with Eric Levin[301](index=301&type=chunk) [Signatures](index=71&type=section&id=Signatures) The report was signed by the Chief Executive Officer and Chief Financial Officer on May 9, 2023 - The report was signed by Robert Kyncl (CEO) and Eric Levin (CFO) on May 9, 2023[306](index=306&type=chunk)

Warner Music Group Corp. (NASDAQ:WMG) Q1 2023 Earnings Conference Call February 9, 2023 8:30 AM ET Company Participants Kareem Chin - Head of IR Robert Kyncl - CEO Eric Levin - CFO Conference Call Participants Benjamin Black - Deutsche Bank Sebastiano Petti - JPMorgan Benjamin Swinburne - Morgan Stanley Rich Greenfield - LightShed Partners Matthew Thornton - Truist Securities Michael Morris - Guggenheim Partners Kutgun Maral - RBC Capital Markets Stephen Laszczyk - Goldman Sachs Operator Welcome to Warner M ...

Financial Performance - Total revenues decreased by $126 million, or 8%, to $1,488 million for the three months ended December 31, 2022, compared to $1,614 million for the same period in 2021 [121]. - Recorded Music revenues decreased by $147 million, or 11%, to $1,239 million for the three months ended December 31, 2022, from $1,386 million for the same period in 2021 [123]. - Digital revenues decreased by $67 million, including an unfavorable impact of foreign currency exchange rates of $37 million, for the three months ended December 31, 2022 [124]. - Streaming revenue decreased by $56 million, or 7%, to $780 million for the three months ended December 31, 2022, impacted by unfavorable foreign currency exchange rates of $35 million [124]. - Music Publishing revenues increased by $21 million, or 9%, to $250 million for the three months ended December 31, 2022, compared to $229 million for the same period in 2021 [125]. - U.S. Recorded Music revenues were $539 million for the three months ended December 31, 2022, down from $608 million in the same period in 2021 [123]. - International Recorded Music revenues were $700 million for the three months ended December 31, 2022, compared to $778 million for the same period in 2021 [123]. - Total digital revenues after intersegment eliminations decreased by $50 million, or 5%, to $952 million for the three months ended December 31, 2022 [122]. - Artist services and expanded-rights revenue decreased by $26 million due to lower direct-to-consumer merchandising revenue and advertising revenue [124]. - Licensing revenue increased by $8 million, driven by higher broadcast fees and synchronization revenue [124]. - U.S. revenue decreased by $51 million, or 7%, to $672 million, with U.S. Recorded Music revenue down by $69 million, or 11% [127]. - International revenue decreased by $75 million, or 8%, to $817 million, but increased by $9 million, or 1%, excluding the unfavorable impact of foreign currency exchange rates [128]. - Total cost of revenues decreased by $57 million, or 7%, to $761 million, with artist and repertoire costs down by $29 million, or 6% [129]. - Total selling, general and administrative expenses decreased by $57 million, or 11%, to $440 million, representing 30% of revenue [132]. - OIBDA increased by $29 million to $349 million, with an OIBDA margin increase to 23% from 20% [138]. - Operating income increased by $26 million to $265 million, attributed to lower revenues offset by reduced costs [141]. - Net income decreased by $64 million to $124 million, primarily due to lower pre-tax income [145]. - The company recorded a pre-tax gain of $41 million from the sale of certain sound recording rights [136]. - Amortization expense increased by $3 million, or 5%, to $63 million, mainly due to the acquisition of music-related assets [140]. - Recorded Music operating income increased by $7 million, or 3%, to $283 million for the three months ended December 31, 2022, compared to $276 million for the same period in 2021 [156]. - Music Publishing operating income increased by $17 million, or 53%, to $49 million for the three months ended December 31, 2022, compared to $32 million for the same period in 2021 [164]. - Recorded Music OIBDA increased by $7 million, or 2%, to $337 million for the three months ended December 31, 2022, compared to $330 million for the same period in 2021 [155]. - Music Publishing OIBDA increased by $18 million, or 33%, to $72 million for the three months ended December 31, 2022, compared to $54 million for the same period in 2021 [162]. Debt and Liquidity - At December 31, 2022, the company had $3.946 billion of debt and $720 million of cash and equivalents, resulting in net debt of $3.226 billion [168]. - Total long-term debt as of December 31, 2022, was $3,990 million, with a weighted-average interest rate reduced to 3.7% from 10.5% in 2011 [179][177]. - The company declared a cash dividend of $0.16 per share, totaling approximately $84 million paid to stockholders for the three months ended December 31, 2022 [183]. - The financial transformation initiative is expected to incur upfront costs of approximately $185 million, with anticipated annualized run-rate savings between $35 million and $40 million [176]. - The company’s S&P corporate credit rating improved from B in 2017 to BB+ in July 2021, indicating enhanced creditworthiness [177]. - As of December 31, 2022, the company had $300 million of commitments under the Revolving Credit Facility, with no loans outstanding [179]. - The company expects its primary sources of liquidity to be sufficient to support existing operations over the next twelve months [175]. - The company was in compliance with its covenants under its outstanding notes and credit facilities as of December 31, 2022 [184]. - The company believes that funds generated from operations and available cash will be sufficient to meet debt service and capital expenditure requirements for the foreseeable future [192]. - The company continues to evaluate opportunities for debt repayment, dividends, and equity repurchases based on market conditions and financial liquidity [192]. Market and Operational Strategy - Warner Music Group reported a significant increase in digital revenue, which is expected to continue driving growth in the music entertainment industry [110]. - The company has a catalog of over 1 million musical compositions, representing works by more than 100,000 songwriters and composers [104]. - Warner Music Group's Recorded Music business operates in over 70 countries, highlighting its extensive international reach [107]. - The company launched 300 Elektra Entertainment, combining the strengths of 300 Entertainment and Elektra Music Group, to enhance its market presence [106]. - The integration of digital content marketing into all business aspects is aimed at maximizing revenue streams from emerging technologies [110]. - Future growth is anticipated through the development of new distribution channels and formats in the digital music space [94]. - The company faces risks related to competition, digital piracy, and fluctuations in currency exchange rates that could impact its performance [96]. - The company is focused on reducing overhead expenditures and managing its cost structure to improve profitability [95]. Currency and Interest Rate Exposure - The company is exposed to foreign currency risk, with outstanding hedge contracts for the sale of $337 million and the purchase of $197 million of foreign currencies at fixed rates [195]. - A hypothetical 10% depreciation of the U.S. dollar against foreign currencies would decrease the fair value of foreign exchange forward contracts by $14 million [196]. - Interest rate swaps have been utilized to convert a portion of the $1.295 billion variable-rate debt to fixed rates, resulting in 88% of the company's debt effectively being at a fixed rate [197]. - Inflationary pressures have not materially affected the company's operations to date, but significant increases in costs could harm financial performance [199].