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May 08, 2008 at 06:30 AM EDT
Warner Music Group Corp. Reports Second-Quarter 2008 Results for the Period Ended March 31, 2008
Digital Revenue Increased 48% Year-Over-Year to $164 Million or 21% of Total Revenue; Company Acts to Increase Financial Flexibility

NEW YORK, NY -- (MARKET WIRE) -- 05/08/08 -- Warner Music Group Corp. (NYSE: WMG)

--  Total revenue of $800 million increased 2% from $784 million in the
    prior-year quarter, and declined nearly 4% on a constant-currency basis.

--  Digital revenue was $164 million, or 21% of total revenue, up 16%
    sequentially from $141 million in the first quarter of fiscal 2008 and up
    48% from $111 million in the prior-year quarter.

--  Operating income from continuing operations increased 47% to $28
    million from $19 million in the prior-year quarter. The prior-year quarter
    included $16 million of restructuring-related charges in connection with
    the company's fiscal 2007 realignment initiatives.

--  Operating income before depreciation and amortization (OIBDA) from
    continuing operations grew 20% to $96 million from $80 million in the prior-
    year quarter, which included the $16 million in restructuring-related
    charges.

--  Loss from continuing operations of $0.23 per diluted share increased
    from a loss of $0.19 per diluted share in the prior-year quarter.
    

Warner Music Group Corp. (NYSE: WMG) today announced its second-quarter 2008 financial results for the period ended March 31, 2008 and in an effort to increase its financial flexibility has suspended its previous policy of paying a regular quarterly dividend.

"Warner Music continues to outperform the industry and gain share in key markets, which is a testament to our commitment to investing in A&R and leading the recorded music industry's transition through innovation and creativity," said Edgar Bronfman, Jr., Warner Music Group's Chairman and CEO. "While an uncertain economic backdrop and evolving recorded music industry make a conservative approach to our balance sheet a prudent strategy, we remain excited about the long-term prospects for our business. In particular, we are gratified by WMG's excellent digital results this quarter, which highlight our leadership position in driving this critical segment of the music business."

Michael Fleisher, Warner Music Group's Executive Vice President and CFO, added, "We regularly evaluate our capital deployment strategy. Our Board and our management believe it is sensible to maximize capital flexibility, given the vagaries of both the economy and recorded music market, by suspending our dividend to build cash reserves and reduce net debt. This action will give us the freedom to maintain our level of A&R investment, while enhancing shareholder returns over time."

Second-Quarter Results

For the second quarter 2008, revenue grew 2.0% to $800 million from $784 million in the prior-year quarter, and fell 3.6% on a constant-currency basis. This performance was tempered by the ongoing transition in the recorded music industry characterized by a shift in consumption patterns from physical sales to new forms of digital music and the continued impact of digital piracy. Domestic revenue declined 13.8% while international revenue grew 19.9%, and grew 6.7% on a constant-currency basis. On a constant-currency basis, revenue grew in Europe, Asia-Pacific, Latin America and Canada.

Operating income from continuing operations grew 47.4% to $28 million from $19 million in the prior-year quarter and operating margin from continuing operations increased 1.1 percentage points to 3.5%. OIBDA from continuing operations increased 20.0% to $96 million from $80 million in the prior-year quarter and OIBDA margin from continuing operations grew 1.8 percentage points to 12.0%. Operating income, OIBDA, operating margin and OIBDA margin for the second quarter of fiscal 2007 reflected $16 million in restructuring-related charges in connection with the company's fiscal 2007 realignment initiatives.

Loss from continuing operations was $34 million, or $0.23 per diluted share for the quarter. Loss in the prior-year quarter was $27 million, or $0.19 per diluted share.

As of March 31, 2008, the company reported a cash balance of $249 million, total long-term debt of $2.27 billion and net debt (total long-term debt minus cash) of $2.0 billion.

For the quarter, net cash provided by operating activities was $132 million. Free Cash Flow (defined as cash flow from operations less capital expenditures and cash paid for investments) amounted to $99 million, compared to Free Cash Flow of $49 million in the comparable fiscal 2007 quarter. Unlevered After-Tax Cash Flow (defined as Free Cash Flow excluding cash interest paid) was $128 million, compared to Unlevered After-Tax Cash Flow of $73 million in the comparable fiscal 2007 quarter (see below for calculations and reconciliations of Free Cash Flow and Unlevered After-Tax Cash Flow).

Below is the business segment discussion for the quarter.

Recorded Music

Revenue from the company's Recorded Music business increased 0.6% from the prior-year quarter to $652 million, and was down 4.4% on a constant-currency basis. The decline in constant-currency revenue primarily reflected strength in Europe, Asia-Pacific, Latin America and Canada, more than offset by declines in domestic revenue. Year-over-year revenue increased in the international physical Recorded Music business and the global digital Recorded Music business on a constant-currency basis.

Recorded Music digital revenue of $155 million grew 47.6% over the prior-year quarter and represented 23.8% of total Recorded Music revenue. Domestic Recorded Music digital revenue amounted to $101 million or 34.0% of total domestic Recorded Music revenue. Digital sales strength was primarily driven by growth in global online downloads, and to a lesser extent mobile.

Major sellers in the quarter included titles from R.E.M., Simple Plan, Kobukuro, Nickelback and the Juno soundtrack. International Recorded Music revenue surged 22.4% from the prior-year quarter to $355 million, and rose 9.6% on a constant-currency basis, while domestic Recorded Music revenue slid 17.0% from the prior-year quarter to $297 million.

The constant-currency growth in international Recorded Music revenue in the quarter was the result of increases in the U.K., Germany, France and Japan. Gains in international revenue were attributable to improved local repertoire and international releases as compared to the prior-year quarter and a contribution from international touring and management businesses.

Year-over-year differences in the domestic Recorded Music business were due to the timing of releases and declines in the physical business, which are not currently being fully offset by growth in the digital business, though digital performance was quite strong. Retailers are more actively managing their inventory levels in response to the tougher economy and credit markets as well as the changing underlying demand for physical recorded music product.

Recorded Music operating income from continuing operations totaled $22 million in the quarter, up 69.2% from $13 million in the prior-year quarter, resulting in an operating margin from continuing operations of 3.4% compared to 2.0% in the prior-year quarter. Recorded Music OIBDA from continuing operations rose 27.3% to $70 million for the quarter, compared to $55 million in the prior-year quarter. Recorded Music OIBDA margin from continuing operations expanded 2.2 percentage points to 10.7% from the prior-year quarter. Recorded Music operating income, OIBDA, operating margin and OIBDA margin for the second quarter of fiscal 2007 reflected $15 million in Recorded Music restructuring-related charges in connection with the company's fiscal 2007 realignment initiatives.

Music Publishing

Music Publishing revenue in the quarter increased by 8.4% from the prior-year quarter to $155 million, and was flat on a constant-currency basis. Music Publishing revenue grew 4.9% domestically over the prior-year quarter, and grew 11.0% internationally, but declined 3.2% internationally on a constant-currency basis. Digital revenue from Music Publishing amounted to $9 million, representing 5.8% of total Music Publishing revenue for the quarter.

On a constant-currency basis, declines in mechanical revenue of 9.5% and in synchronization revenue of 4.5% were offset by a 50.0% increase in digital revenue and a 3.4% increase in performance revenue. Mechanical revenue weakness reflected the industry-wide decline in physical record sales. Synchronization revenue was negatively impacted by the Writers Guild of America strike.

Music Publishing operating income amounted to $36 million, down 5.3% from $38 million in the prior-year quarter, resulting in an operating margin of 23.2% down 3.3 percentage points from the prior-year quarter. Music Publishing OIBDA increased 1.9% to $54 million for the quarter, compared to $53 million in the prior-year quarter. Music Publishing OIBDA and OIBDA margin were flat year-over-year, excluding a $1 million favorable impact of foreign currency exchange rates.

Quarterly Dividend

The company today announced that it has discontinued its previous policy of paying a regular quarterly dividend. On February 29, 2008, the company paid its final quarterly dividend of $0.13 per share. The company currently intends to retain future earnings to build cash on the balance sheet and continue its successful A&R investment track record. Any future determination to pay dividends will be at the discretion of the company's Board of Directors and will depend on, among other things, the company's results of operations, cash requirements, financial condition, contractual restrictions and other factors the Board of Directors may deem relevant.

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

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

About Warner Music Group

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

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

This communication includes forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance. Words such as "estimates," "expects," "anticipates," "projects," "plans," "intends," "believes," "forecasts" and variations of such words or similar expressions that predict or indicate future events or trends, or that do not relate to historical matters, identify forward-looking statements. All forward-looking statements are made as of today, and we disclaim any duty to update such statements. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs and projections will result or be achieved. Investors should not rely on forward-looking statements, including statements regarding future trends in the music industry, our intentions to deploy our capital, including the level of and success of future A&R investments, and our intentions with respect to our dividend policy, because they are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from our expectations. Please refer to our Form 10-Q and our other filings with the U.S. Securities and Exchange Commission concerning factors that could cause actual results to differ materially from those described in our forward-looking statements.

Figure 1.  Warner Music Group Corp. - Consolidated Statement of Operations,
 Three and Six Months Ended 3/31/08 versus 3/31/07 (dollars in millions,
 except per share amounts)


                 Three     Three                Six       Six
                 Months    Months              Months    Months
                 Ended     Ended               Ended     Ended
                March 31, March 31,           March 31, March 31,
                  2008      2007    % Change    2008      2007    % Change
                --------  --------  --------  --------  --------  --------
              (unaudited)(unaudited)        (unaudited)(unaudited)

Revenues:       $    800  $    784        2%  $  1,789  $  1,712        4%
Costs and
 expenses:
Cost of
 revenues           (413)     (427)      (3%)     (958)     (935)       2%
Selling,
 general and
 administrative
 expenses           (304)     (275)      11%      (635)     (565)      12%
Other income           -         -        -          3         -        -
Restructuring
 costs                 -       (12)       -          -       (12)       -
Amortization of
 intangible
 assets              (55)      (51)       8%      (109)     (101)       8%
                --------  --------  --------  --------  --------  --------
Total costs and
 expenses       ($   772) ($   765)       1%  ($ 1,699) ($ 1,613)       5%
                --------  --------  --------  --------  --------  --------
Operating
 income from
 continuing
 operations     $     28  $     19       47%  $     90  $     99       (9%)
Interest
 expense, net        (47)      (45)       4%       (95)      (92)       3%
Equity in
 income of
 equity-method
 investees,net         -         -        -          1         -        -
Minority
 interest              -         -        -         (2)        -        -
Other expense,
 net                  (2)        -        -         (3)        -        -
                --------  --------  --------  --------  --------  --------
(Loss) income
 from
 continuing
 operations
 before income
 taxes          ($    21) ($    26)     (19%) ($     9) $      7        -
                --------  --------  --------  --------  --------  --------
Income tax
 expense             (13)       (1)       -        (23)      (16)      44%
                --------  --------  --------  --------  --------  --------
Loss from
 continuing
 operations     ($    34) ($    27)      26%  ($    32) ($     9)       -
Loss from
 discontinued
 operations,
 net of tax           (3)        -        -        (21)        -        -
                --------  --------  --------  --------  --------  --------
Net loss        ($    37) ($    27)      37%  ($    53) ($     9)       -
                ========  ========  ========  ========  ========  ========

Net loss per
 share:

Basic earnings
 per share:
Loss from
 continuing
 operations     ($  0.23) ($  0.19)           ($  0.22) ($  0.06)
Loss from
 discontinued
 operations     ($  0.02)        -            ($  0.14)        -
                --------  --------            --------  --------
Net loss        ($  0.25) ($  0.19)           ($  0.36) ($  0.06)
                ========  ========            ========  ========

Diluted
 earnings per
 share:
Loss from
 continuing
 operations     ($  0.23) ($  0.19)           ($  0.22) ($  0.06)
Loss from
 discontinued
 operations     ($  0.02)        -            ($  0.14)        -
                --------  --------            --------  --------
Net loss        ($  0.25) ($  0.19)           ($  0.36) ($  0.06)
                ========  ========            ========  ========

Weighted
 average
 shares
 outstanding:
Basic              147.9     145.9               147.5     145.4
                ========  ========            ========  ========
Diluted            147.9     145.9               147.5     145.4
                ========  ========            ========  ========



Figure 2.  Warner Music Group Corp. - Consolidated Balance Sheets as of
3/31/08 and 9/30/07 (dollars in millions)



                                      March 31,  September 30,
                                        2008         2007       % Change
                                     -----------  -----------  -----------
                                     (unaudited)  (unaudited)
 Assets:
 Current Assets
  Cash & cash equivalents            $       249  $       333         (25%)
  Accounts receivable, less
   allowances of $178 and $192               482          555         (13%)
  Inventories                                 61           58           5%
  Royalty advances (expected to be
   recouped w/in 1 year)                     200          176          14%
  Deferred tax assets                         49           40          23%
  Other current assets                        30           33          (9%)
                                     -----------  -----------  -----------
 Total Current Assets                $     1,071  $     1,195         (10%)
 Royalty advances (expected to be
  recouped after 1 year)                     242          216          12%
 Investments                                 182          146          25%
 Property, plant & equipment, net            128          133          (4%)
 Goodwill                                  1,074        1,065           1%
 Intangible assets subject to
  amortization, net                        1,651        1,632           1%
 Intangible assets not subject to
  amortization                               100          100           -
 Other assets                                 84           85          (1%)
                                     -----------  -----------  -----------
 Total Assets                        $     4,532  $     4,572           -
                                     ===========  ===========  ===========

 Liabilities & Shareholders'
  Deficit:
 Current Liabilities
  Accounts payable                   $       214  $       225          (5%)
  Accrued royalties                        1,268        1,226           3%
  Taxes & other withholdings                  26           33         (21%)
  Current portion of long-term debt           17           17           0%
  Dividend payable                             1           23         (96%)
  Other current liabilities                  358          358           -
                                     -----------  -----------  -----------
 Total current liabilities           $     1,884  $     1,882           -

 Long-term debt                            2,258        2,256           -
 Dividends payable                             -            1           -
 Deferred tax liabilities, net               250          244           2%
 Other noncurrent liabilities                243          225           8%
                                     -----------  -----------  -----------
 Total Liabilities                   $     4,635  $     4,608           1%

 Common stock                                  -            -           -
 Additional paid-in capital                  583          579           1%
 Accumulated deficit                        (683)        (614)         11%
 Accumulated other comprehensive
  income, net                                 (3)          (1)          -
                                     -----------  -----------  -----------
 Total Shareholders' Deficit         ($      103) ($       36)          -

Total Liabilities & Shareholders'    -----------  -----------  -----------
  Deficit                            $     4,532  $     4,572          (1%)
                                     ===========  ===========  ===========



Figure 3.  Warner Music Group Corp. - Summarized Statement of Cash Flows,
 Three and Six Months Ended 3/31/08 versus 3/31/07 (dollars in millions)


                              Three       Three        Six         Six
                              Months      Months      Months      Months
                              Ended       Ended       Ended       Ended
                            March 31,   March 31,   March 31,   March 31,
                               2008        2007        2008        2007
                            ----------  ----------  ----------  ----------
                            (unaudited) (unaudited) (unaudited) (unaudited)
Net cash provided by
 operating activities       $      132  $       70  $       96  $      107
Net cash used in investing
 activities                        (33)        (11)       (152)        (69)
Net cash used in financing
 activities                        (26)        (25)        (50)        (46)
Effect of foreign currency
 exchange rates on cash             16           1          22           3
                            ----------  ----------  ----------  ----------
Net increase (decrease) in
 cash                       $       89  $       35  ($      84) ($       5)
                            ==========  ==========  ==========  ==========

Supplemental Disclosures Regarding Non-GAAP Financial Information

OIBDA

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

Figure 4.  Warner Music Group Corp. - Reconciliation of OIBDA to Net
 Income, Three and Six Months Ended 3/31/08 versus 3/31/07 (dollars in
 millions)


                 Three     Three                Six       Six
                 Months    Months              Months    Months
                 Ended     Ended               Ended     Ended
                March 31, March 31,           March 31, March 31,
                  2008      2007    % Change    2008      2007    % Change
                --------  --------  --------  --------  --------  --------
              (unaudited)(unaudited)         (unaudited)(unaudited)

OIBDA           $     96  $     80       20%  $    225  $    220        2%
Depreciation
 expense             (13)      (10)      30%       (26)      (20)      30%
Amortization
 expense             (55)      (51)       8%      (109)     (101)       8%
                --------  --------  --------  --------  --------  --------
Operating
 income from
 continuing
 operations     $     28  $     19       47%  $     90  $     99       (9%)
Interest
 expense, net        (47)      (45)       4%       (95)      (92)       3%
Equity in
 income of
 equity-method
 investees,net         -         -        -          1         -        -
Minority
 interest              -         -        -         (2)        -        -
Other expense,
 net                  (2)        -        -         (3)        -        -
                --------  --------  --------  --------  --------  --------
(Loss) income
 from
 continuing
 operations
 before income
 taxes          ($    21) ($    26)     (19%) ($     9) $      7        -
                --------  --------  --------  --------  --------  --------
Income tax
 expense             (13)       (1)       -        (23)      (16)      44%
                --------  --------  --------  --------  --------  --------
Loss from
 continuing
 operations     ($    34) ($    27)      26%  ($    32) ($     9)       -
Loss from
 discontinued
 operations,
 net of tax           (3)        -        -        (21)        -        -
                --------  --------  --------  --------  --------  --------
Net loss        ($    37) ($    27)      37%  ($    53) ($     9)       -
                ========  ========  ========  ========  ========  ========

OIBDA margin
 from
 continuing
 operations         12.0%     10.2%               12.6%     12.9%
Operating
 income margin
 from
 continuing
 operations          3.5%      2.4%                5.0%      5.8%



Figure 5.  Warner Music Group Corp. - Reconciliation of Segment Operating
 Income to OIBDA, for the Three and Six Months ended 3/31/08 versus 3/31/07
 (dollars in millions)


                 Three     Three                Six       Six
                 Months    Months              Months    Months
                 Ended     Ended               Ended     Ended
                March 31, March 31,           March 31, March 31,
                  2008      2007    % Change    2008      2007    % Change
                --------  --------  --------  --------  --------  --------
              (unaudited)(unaudited)        (unaudited)(unaudited)
Total WMG
 Operating
 Income from
 Continuing
 Operations -
 GAAP           $      28 $      19      47%  $      90 $      99      (9%)
Depreciation
 and
 Amortization          68        61      11%        135       121      12%
                --------- --------- --------  --------- --------- --------
Total WMG OIBDA $      96 $      80      20%  $     225 $     220       2%
                ========= ========= ========  ========= ========= ========

Recorded Music
 Operating
 Income from
 Continuing
 Operations -
 GAAP           $      22 $      13      69%  $     111 $     112      (1%)
Depreciation
 and
 Amortization          48        42      14%         95        84      13%
                --------- --------- --------  --------- --------- --------
Recorded Music
 OIBDA          $      70 $      55      27%  $     206 $     196       5%
                ========= ========= ========  ========= ========= ========

Music
 Publishing
 Operating
 Income from
 Continuing
 Operations -
 GAAP           $      36 $      38      (5%) $      40 $      41      (2%)
Depreciation
 and
 Amortization          18        15      20%         35        31      13%
                --------- --------- --------  --------- --------- --------
Music
 Publishing
 OIBDA          $      54 $      53       2%  $      75 $      72       4%
                ========= ========= ========  ========= ========= ========

Constant Currency

As exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of results on a constant-currency basis in addition to reported results helps improve the ability to understand the company's operating results and evaluate our performance in comparison to prior periods. Constant-currency information compares results between periods as if exchange rates had remained constant period-over-period. We use results on a constant-currency basis as one measure to evaluate our performance. We calculate constant-currency by translating prior-year results at current year foreign currency exchange rates. However, a limitation of the use of the constant-currency results as a performance measure is that it does not reflect the $46 million, $34 million and $12 million favorable impact of exchange rates on our Total, Recorded Music and Music Publishing revenue, respectively, in the three months ended March 31, 2008 as compared to the prior-year quarter or the $100 million, $78 million and $23 million favorable impact of exchange rates on our Total, Recorded Music and Music Publishing revenue, respectively, in the six months ended March 31, 2008 as compared to the prior-year period. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a constant-currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and is not a measure of performance presented in accordance with GAAP.

Figure 6.  Warner Music Group Corp. - Revenue by Geography and Segment,
 Three and Six Months Ended 3/31/08 versus 3/31/07 As Reported and Constant
 Currency  (dollars in millions)


                  Three     Three     Three      Six       Six       Six
                  Months    Months    Months    Months    Months    Months
                  Ended     Ended     Ended     Ended     Ended     Ended
                  March     March     March     March     March     March
                   31,       31,       31,       31,       31,       31,
                  2008      2007      2007      2008      2007      2007
                --------  --------  --------  --------  --------  --------
                   As        As     Constant     As        As     Constant
                reported  reported      $     reported  reported      $
         (unaudited)(unaudited)(unaudited)(unaudited)(unaudited)(unaudited)

Revenue by Geography:
US revenue
 Recorded Music $    297  $    358  $    358  $    697  $    720  $    720
 Music Publishing     64        61        61       111       105       105

International
 revenue
 Recorded Music      355       290       324       805       728       806
 Music Publishing     91        82        94       188       171       194

Intersegment
 eliminations         (7)       (7)       (7)      (12)      (12)      (13)
                --------  --------  --------  --------  --------  --------
                $    800  $    784  $    830  $  1,789  $  1,712  $  1,812
                ========  ========  ========  ========  ========  ========


Revenue by Segment:
Recorded Music  $    652  $    648  $    682  $  1,502  $  1,448  $  1,526
Music Publishing     155       143       155       299       276       299
Intersegment
 eliminations         (7)       (7)       (7)      (12)      (12)      (13)
                --------  --------  --------  --------  --------  --------
Total Revenue   $    800  $    784  $    830  $  1,789  $  1,712  $  1,812
                ========  ========  ========  ========  ========  ========

Free Cash Flow

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

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

Unlevered After-Tax Cash Flow

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

Figure 7.  Warner Music Group Corp. - Calculation of Free Cash Flow and
 Unlevered After-Tax Cash Flow, Three and Six Months Ended 3/31/08 versus
 3/31/07 (dollars in millions)


                           Three        Three         Six          Six
                           Months       Months       Months       Months
                           Ended        Ended        Ended        Ended
                          March 31,    March 31,    March 31,    March 31,
                            2008         2007         2008         2007
                        ------------ ------------ -----------  ------------
                         (unaudited)  (unaudited) (unaudited)  (unaudited)
Net cash flow provided
 by operating
 activities             $        132 $         70 $        96  $        107
Less: Capital
 expenditures                     13            8          20            13
Less: Cash paid for
 investments, net,
 excluding short-term
 investments                      20           13         132            81
                        ------------ ------------ -----------  ------------
Free Cash Flow (a)      $         99 $         49 ($       56) $         13
                        ============ ============ ===========  ============


(a) - Free Cash Flow includes cash paid for interest as follows
      (in millions):


                           Three        Three         Six          Six
                           Months       Months       Months       Months
                           Ended        Ended        Ended        Ended
                          March 31,    March 31,    March 31,    March 31,
                            2008         2007         2008         2007
                        ------------ ------------ -----------  ------------
                         (unaudited)  (unaudited) (unaudited)   (unaudited)

   Free Cash Flow       $         99 $         49 ($       56) $         13
   Plus: Cash paid for
    interest                      29           24          80            73
                        ------------ ------------ -----------  ------------
   Unlevered After-Tax
    Cash Flow           $        128 $         73 $        24  $         86
                        ============ ============ ===========  ============

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Investor Contact:
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(212) 275-4790
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