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Item 2. Management’s Discussion and Analysis

2021-05-04 compared with 2021-02-01 · 508 added, 213 removed, 454 unchanged (61% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our results of operations and financial condition with the unaudited interim financial statements included elsewhere in this Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2020 (the “Quarterly Report”).

“SAFE HARBOR” STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

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Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

Other risks, uncertainties and factors, including those discussed in the “Risk Factors” of this Quarterly Report and our Annual Report on Form 10-K, could cause our actual results to differ materially from those projected in any forward-looking statements we make.

You should read carefully the factors described in the “Risk Factors” section of this Quarterly Report and our Annual Report on Form 10-K to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.

Other risks, uncertainties and factors, including those discussed in the “Risk Factors” of our Quarterly Reports and our Annual Report on Form 10-K, could cause our actual results to differ materially from those projected in any forward-looking statements we make.

You should read carefully the factors described in the “Risk Factors” section of our Quarterly Reports and our Annual Report on Form 10-K to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.

Warner Music Group Corp.

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• Results of operations.

This section provides an analysis of our results of operations for the three months ended December 31, 2020 and December 31, 2019.

This section provides an analysis of our results of operations for the three and six months ended March 31, 2021 and March 31, 2020.

This analysis is presented on both a consolidated and segment basis.

• Financial condition and liquidity.

This section provides an analysis of our cash flows for the three months ended December 31, 2020 and December 31, 2019, as well as a discussion of our financial condition and liquidity as of December 31, 2020.

This section provides an analysis of our cash flows for the six months ended March 31, 2021 and March 31, 2020, as well as a discussion of our financial condition and liquidity as of March 31, 2021.

The discussion of our financial condition and liquidity includes recent debt financings and a summary of the key debt covenant compliance measures under our debt agreements.

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COVID-19 Pandemic

In January 2020, a new strain of coronavirus, COVID-19, was identified in Wuhan, China.

In January 2020, a new strain of coronavirus, COVID-19 (also referred to as “COVID”), was identified in Wuhan, China.

On March 11, 2020, the World Health Organization declared a global pandemic.

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However, the disruption from the COVID-19 pandemic has accelerated growth of other revenue streams such as fitness and interactive gaming (including augmented reality and virtual reality).

Our results of operations, cash flows and financial condition at and for the three months ended December 31, 2020 were adversely affected by the global pandemic, but direct costs recorded to OIBDA related to COVID-19 were not material.

Our results of operations, cash flows and financial condition at and for the three and six months ended March 31, 2021 were adversely affected by the global pandemic, but direct costs recorded to OIBDA related to COVID-19 were not material.

The Company recognized one-time charges of $13 million impacting OIBDA and a total of $18 million impacting net income for the three and six months ended March 31, 2020.

Initial Public Offering

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Going forward, our results of operations will include expenses associated with being a public company, including auditing, accounting and legal fees and expenses, investor relations expenses, increased directors’ fees and director and officer liability insurance costs, registrar and transfer agent fees and listing fees, as well as other expenses.

For the three months ended December 31, 2020, costs associated with being a public company were $4 million.

For the three and six months ended March 31, 2021, costs associated with being a public company were $3 million and $7 million, respectively.

Senior Management Free Cash Flow Plan

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We will continue to incur non-cash stock-based compensation expense for awards that were unvested as of the modification date of the Plan and awards issued under the Omnibus Incentive Plan.

We incurred non-cash stock-based compensation expense of $6 million and non-cash stock-based compensation benefit of $7 million for the three months ended December 31, 2020 and December 31, 2019, respectively.

We incurred non-cash stock-based compensation expense and other related expenses of $16 million and $167 million for the three months ended March 31, 2021 and March 31, 2020, respectively, and $22 million and $160 million for the six months ended March 31, 2021 and March 31, 2020, respectively.

RESULTS OF OPERATIONS

Three Months Ended December 31, 2020 Compared with Three Months Ended December 31, 2019

Three Months Ended March 31, 2021 Compared with Three Months Ended March 31, 2020

Consolidated Results

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For the Three Months Ended

December 31, 2020 vs.

March 31, 2021 vs.

2021 2020 $ Change % Change

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Total Revenues

Total revenues increased by $79 million, or 6%, to $1,335 million for the three months ended December 31, 2020 from $1,256 million for the three months ended December 31, 2019.

Total revenues increased by $179 million, or 17%, to $1,250 million for the three months ended March 31, 2021 from $1,071 million for the three months ended March 31, 2020.

The increase includes $37 million of favorable currency exchange fluctuations.

Prior to intersegment eliminations, Recorded Music and Music Publishing revenues represented 87% and 13% of total revenue for the three months ended December 31, 2020, respectively, and 86% and 14% of total revenue for the three months ended December 31, 2019.

Prior to intersegment eliminations, Recorded Music and Music Publishing revenues represented 85% and 15% of total revenue for both the three months ended March 31, 2021 and March 31, 2020, respectively.

Prior to intersegment eliminations, U.S.

and international revenues represented 43% and 57% of total revenues for the three months ended December 31, 2020, respectively, and 43% and 58% of total revenues for the three months ended December 31, 2019, respectively.

Total digital revenues after intersegment eliminations increased by $119 million, or 17%, to $825 million for the three months ended December 31, 2020 from $706 million for the three months ended December 31, 2019.

Total digital revenues represented 62% and 56% of consolidated revenues for the three months ended December 31, 2020 and December 31, 2019, respectively.

Prior to intersegment eliminations, total digital revenues for the three months ended December 31, 2020 were comprised of U.S.

revenues of $418 million and international revenues of $408 million, or 51% and 49% of total digital revenues, respectively.

Prior to intersegment eliminations, total digital revenues for the three months ended December 31, 2019 were comprised of U.S.

revenues of $380 million and international revenues of $326 million, or 54% and 46% of total digital revenues, respectively.

Recorded Music revenues increased by $77 million, or 7%, to $1,161 million for the three months ended December 31, 2020 from $1,084 million for the three months ended December 31, 2019.

and international revenues represented 45% and 55% of total revenues for the three months ended March 31, 2021, respectively, and 44% and 56% of total revenues for the three months ended March 31, 2020, respectively.

Total digital revenues after intersegment eliminations increased by $161 million, or 23%, to $860 million for the three months ended March 31, 2021 from $699 million for the three months ended March 31, 2020.

Total digital revenues represented 69% and 65% of consolidated revenues for the three months ended March 31, 2021 and March 31, 2020, respectively.

Prior to intersegment eliminations, total digital revenues for the three months ended March 31, 2021 were comprised of U.S.

revenues of $432 million and international revenues of $428 million, respectively or 50% of total digital revenues for each of U.S.

and international revenues.

Prior to intersegment eliminations, total digital revenues for the three months ended March 31, 2020 were comprised of U.S.

revenues of $351 million and international revenues of $349 million, respectively, or 50% of total digital revenues for each of U.S.

and international revenues.

Recorded Music revenues increased by $152 million, or 17%, to $1,059 million for the three months ended March 31, 2021 from $907 million for the three months ended March 31, 2020.

The increase includes $31 million of favorable currency exchange fluctuations.

Recorded Music revenues were $481 million and $453 million, or 41% and 42%, of consolidated Recorded Music revenues for the three months ended December 31, 2020 and December 31, 2019, respectively.

International Recorded Music revenues were $680 million and $631 million, or 59% and 58%, of consolidated Recorded Music revenues for the three months ended December 31, 2020 and December 31, 2019, respectively.

The overall increase in Recorded Music revenue was driven by increases in digital and licensing revenue, partially offset by decreases in physical and artist services and expanded-rights revenues.

Digital revenue increased by $94 million as a result of the continued growth in streaming services and strength of releases, which included carryover success from Dua Lipa, Ava Max, Hamilton, Cardi B, Ed Sheeran, and Roddy Ricch.

Revenue from streaming services grew by $103 million or 17% to $692 million for the three months ended December 31, 2020 from $589 million for the three months ended December 31, 2019.

Digital revenue growth was partially offset by decreases in digital download and other digital declines of $9 million to $35 million for the three months ended December 31, 2020 from $44 million for the three months ended December 31, 2019 due to the continued shift to streaming services.

Digital revenue was not materially impacted by COVID-19 in the quarter.

Licensing revenue increased by $1 million due to favorable foreign currency exchange rates.

Physical revenue decreased by $10 million primarily due to the impact of the COVID-19 business disruption resulting in lower physical sales and continued shift from physical revenue to digital revenue, partially offset by the success of new releases including Johnny Hallyday, Mariya Takeuchi, and Kim Hojoong, and favorable impact of foreign currency exchange rates of $7 million.

Artist services and expanded-rights revenue decreased by $8 million primarily due to a decrease in touring activity resulting from COVID-19 business interruption related tour postponements and cancellations, partially offset by higher direct-to-consumer merchandising revenue at EMP and the favorable impact of foreign currency exchange rates of $10 million.

Music Publishing revenues increased by $2 million, or 1%, to $175 million for the three months ended December 31, 2020 from $173 million for the three months ended December 31, 2019.

Music Publishing revenues were $91 million and $81 million, or 52% and 47%, of consolidated Music Publishing revenues for the three months ended December 31, 2020 and December 31, 2019, respectively.

International Music Publishing revenues were $84 million and $92 million or 48% and 53%, of consolidated Music Publishing revenues for the three months ended December 31, 2020 and December 31, 2019, respectively.

The overall increase in Music Publishing revenue was mainly driven by increases in digital revenue of $26 million, partially offset by decreases in performance revenue of $16 million, synchronization revenue of $3 million, and mechanical revenue of $4 million.

The increase in digital revenue is primarily due to increases in streaming revenue driven by the continued growth in streaming services and timing of new digital deals.

The decline in performance revenue and synchronization revenue is primarily driven by the impact from COVID-19.

The decline in mechanical revenue is driven by the continued market decline in physical revenue and the impact from COVID-19.

Recorded Music revenues were $469 million and $380 million, or 44% and 42%, of consolidated Recorded Music revenues for the three months ended March 31, 2021 and March 31, 2020, respectively.

International Recorded Music revenues were $590 million and $527 million, or 56% and 58%, of consolidated Recorded Music revenues for the three months ended March 31, 2021 and March 31, 2020, respectively.

The overall increase in Recorded Music revenue was driven by increases in digital, physical and artist services and expanded-rights revenues, partially offset by the decrease in licensing revenue.

Digital revenue increased by $130 million as a result of the continued growth in streaming services, including growth in emerging streaming platforms such as Facebook, TikTok, and Peloton, strength of releases including the current year release from Megan Thee Stallion as well as carryover success from Dua Lipa, Michael Bublé, Ed Sheeran, Ava Max, Hamilton Cast Recording, and Roddy Ricch.

Revenue from streaming services grew by $136 million, or 23%, to $722 million for the three months ended March 31, 2021 from $586 million for the three months ended March 31, 2020.

Digital revenue growth was partially offset by decreases in digital download and other digital declines of $6 million, or 15%, to $34 million for the three months ended March 31, 2021 from $40 million for the three months ended March 31, 2020 due to the continued shift to streaming services.

Physical revenue increased by $24 million primarily from higher online sales due to an increased demand for vinyl products, success of new releases including The Yellow Monkey in Japan, Neil Young, and Fleetwood Mac, as well as the favorable impact of foreign currency exchange rates of $5 million.

Artist services and expanded-rights revenue increased by $3 million primarily due to higher direct-to-consumer merchandising revenue at EMP and the favorable impact of foreign currency exchange rates of $7 million, partially offset by the decrease in touring activity resulting from COVID.

Licensing revenue decreased by $5 million mainly due to lower broadcast fees resulting from COVID, partially offset by increasing synchronization activity and favorable foreign currency exchange rates.

Music Publishing revenues increased by $26 million, or 16%, to $192 million for the three months ended March 31, 2021 from $166 million for the three months ended March 31, 2020.

Music Publishing revenues were $96 million and $87 million, or 50% and 52%, of consolidated Music Publishing revenues for the three months ended March 31, 2021 and March 31, 2020, respectively.

International Music Publishing revenues were $96 million and $79 million or 50% and 48%, of consolidated Music Publishing revenues for the three months ended March 31, 2021 and March 31, 2020, respectively.

The overall increase in Music Publishing revenue was mainly driven by increases in digital revenue of $30 million, synchronization revenue of $4 million, partially offset by decreases in performance revenue of $6 million and mechanical revenue of $3 million.

The increase in digital revenue of 41% to $104 million is primarily due to increases in streaming revenue driven by the continued growth in streaming services and timing of new digital deals.

The increase in synchronization revenue is attributable to higher motion picture and commercial income.

The decline in performance revenue is primarily driven by the impact from COVID and the decrease in mechanical revenue is driven by the continuing shift to streaming services.

Revenue by Geographical Location

revenue increased by $38 million, or 7%, to $572 million for the three months ended December 31, 2020 from $534 million for the three months ended December 31, 2019.

revenue increased by $98 million, or 21%, to $565 million for the three months ended March 31, 2021 from $467 million for the three months ended March 31, 2020.

Recorded Music revenue increased by $89 million, or 23%.

The primary driver was the increase of U.S.

Recorded Music digital revenue of $24 million driven by the continued growth in streaming services and an increase in U.S.

Recorded Music physical revenue of $6 million due to the success of new releases, partially offset by market decline due to the shift from physical to digital formats and the impact of COVID-19.

These increases were also partially offset by a decrease of U.S.

Recorded Music artist services and expanded-rights revenue of $2 million primarily driven by the impact of COVID-19 business interruptions, which resulted in tour postponements and cancellations and decreased physical retail and tour-related merchandising revenues.

Music Publishing revenue increased by $10 million, or 12%, to $91 million for the three months ended December 31, 2020 from $81 million for the three months ended December 31, 2019.

Recorded Music digital revenue of $70 million driven by the continued growth in streaming services.

Increases are also attributable to the increase in U.S.

Recorded Music physical revenue of $14 million from higher online sales due to an increased demand for vinyl products as well as the success of new releases including Neil Young.

Recorded Music artist services and expanded-rights revenue increased $5 million primarily driven by higher advertising revenues from a recent acquisition.

Music Publishing revenue increased by $9 million, or 10%, to $96 million for the three months ended March 31, 2021 from $87 million for the three months ended March 31, 2020.

This was primarily driven by the increase in U.S.

Music Publishing of $14 million in digital revenue due to the continued growth in streaming services and timing of new digital deals, partially offset by decreases in synchronization revenue and performance revenue of $2 million and $1 million, respectively, primarily due to the impact of COVID-19 as well as a decline in mechanical revenue of $1 million driven by the continued market decline in physical revenue.

International revenue increased by $41 million, or 6%, to $764 million for the three months ended December 31, 2020 from $723 million for the three months ended December 31, 2019.

Music Publishing of $11 million in digital revenue due to the continued growth in streaming services and timing of new digital deals.

The increase in synchronization revenue of $2 million is due to higher motion picture and commercial income.

Increases are partially offset by decreases in performance revenue of $3 million due to the impact of COVID as well as a decline in mechanical revenue of $1 million driven by the continuing shift to streaming services.

International revenue increased by $80 million, or 13%, to $686 million for the three months ended March 31, 2021 from $606 million for the three months ended March 31, 2020.

Excluding the favorable impact of foreign currency exchange rates, International revenue increased by $43 million, or 7%.

International Recorded Music revenue increased by $49 million primarily due to increases in digital revenue of $70 million and licensing revenue of $1 million, partially offset by decreases in physical revenue of $16 million and artist services and expanded-rights revenue of $6 million.

International Recorded Music revenue increased by $63 million primarily due to increases in digital revenue of $60 million and physical revenue of $10 million, partially offset by decreases in licensing revenue of $5 million and artist services and expanded-rights revenue of $2 million.

The increase in International Recorded Music digital revenue was due to continued growth in streaming services internationally.

International Recorded Music licensing revenue increased by $1 million due to favorable foreign currency exchange rates.

International Recorded Music physical revenue decreased by $16 million due to the continued shift from physical revenue to digital revenue and the impact of COVID-19, partially offset by the success of new releases, including Johnny Hallyday, Mariya Takeuchi, and Kim Hojoong, and favorable impact of foreign currency exchange rates.

International Recorded Music artist services and expanded-rights revenue decreased by $6 million primarily due to the impact of COVID-19 business interruptions, which resulted in tour postponements and cancellations, in contrast to strong touring in the prior year.

International Recorded Music physical revenue increased by $10 million due to the increased demand for vinyl products, success of new releases including The Yellow Monkey and favorable impact of foreign currency exchange rates.

International Recorded Music licensing revenue decreased by $5 million due to lower broadcast fees resulting from the impact of COVID, partially offset by favorable foreign currency exchange rates.

International Recorded Music artist services and expanded-rights revenue decreased by $2 million primarily due to the decrease in touring activity resulting from COVID.

This was offset by growth in EMP direct-to-consumer merchandise revenue and the favorable impact of foreign currency exchange rates of $7 million.

International Music Publishing revenue decreased from the prior-year quarter by $8 million, or 9%, to $84 million for the three months ended December 31, 2020.

This was primarily driven by decreases in performance revenue of $15 million, mechanical revenue of $3 million, and synchronization revenue of $1 million, partially offset by an increase in digital revenue of $12 million.

The decline in performance revenue and synchronization revenue is primarily driven by the impact from COVID-19.

The decline in mechanical revenue is driven by the continued market decline in physical revenue and the impact from COVID-19.

The increase in digital revenue is primarily due to increases in streaming revenue driven by the continued growth in streaming services and timing of new deals.

International Music Publishing revenue increased from the prior-year quarter by $17 million, or 22%, to $96 million for the three months ended March 31, 2021 from $79 million for the three months ended March 31, 2020.

This was primarily driven by the increase in digital revenue of $19 million and synchronization revenue of $2 million, partially offset by decreases in performance revenue of $3 million and mechanical revenue of $2 million.

The increase in digital revenue is primarily due to increases in streaming revenue driven by the continued growth in streaming services and timing of new digital deals.

Higher synchronization revenue is primarily driven by higher commercial income.

The decline in performance revenue is due to the impact from COVID and decrease in mechanical revenue is driven by the continuing shift to streaming services.

Cost of revenues

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For the Three Months Ended

December 31, 2020 vs.

March 31, 2021 vs.

2021 2020 $ Change % Change

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Total cost of revenues $ 623 $ 535 $ 88 16 %

Artist and repertoire costs increased by $14 million, to $425 million for the three months ended December 31, 2020 from $411 million for the three months ended December 31, 2019.

Artist and repertoire costs as a percentage of revenue decreased to 32% for the three months ended December 31, 2020 from 33% for the three months ended December 31, 2019.

The overall decrease as a percentage of revenue is due to revenue mix and timing of artist and repertoire investments within the Music Publishing segment.

Product costs increased by $7 million, to $261 million for the three months ended December 31, 2020 from $254 million for the three months ended December 31, 2019.

Product costs as a percentage of revenue remained constant at 20% for both the three months ended December 31, 2020 and the three months ended December 31, 2019.

Artist and repertoire costs increased by $59 million, to $419 million for the three months ended March 31, 2021 from $360 million for the three months ended March 31, 2020.

Artist and repertoire costs as a percentage of revenue remained constant at 34% for both the three months ended March 31, 2021 and March 31, 2020.

Product costs increased by $29 million, to $204 million for the three months ended March 31, 2021 from $175 million for the three months ended March 31, 2020.

Product costs as a percentage of revenue remained constant at 16% for both the three months ended March 31, 2021 and March 31, 2020.

Selling, general and administrative expenses

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For the Three Months Ended

December 31, 2020 vs.

March 31, 2021 vs.

2021 2020 $ Change % Change

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______________________________________

(1) Includes depreciation expense of $19 million and $24 million for the three months ended December 31, 2020 and December 31, 2019, respectively.

Total selling, general and administrative expense increased by $22 million, or 6%, to $401 million for the three months ended December 31, 2020 from $379 million for the three months ended December 31, 2019.

Expressed as a percentage of revenue, selling, general and administrative expense remained flat at 30% for both the three months ended December 31, 2020 and the three months ended December 31, 2019.

General and administrative expense increased by $17 million to $189 million for the three months ended December 31, 2020 from $172 million for the three months ended December 31, 2019.

The increase in general and administrative expense was mainly due to higher non-cash stock-based compensation expense of $13 million, public company related expenses totaling $4 million, and increased employee related costs, partially offset by a one-time charge in the prior year within depreciation expense of $10 million and lower overhead due to active cost management efforts.

Expressed as a percentage of revenue, general and administrative expense remained constant at 14% for both the three months ended December 31, 2020 and the three months ended December 31, 2019 due to the factors described above.

Selling and marketing expense increased by $5 million, or 3%, to $178 million for the three months ended December 31, 2020 from $173 million for the three months ended December 31, 2019.

Expressed as a percentage of revenue, selling and marketing expense decreased to 13% for the three months ended December 31, 2020 from 14% for the three months ended December 31, 2019 due to a decrease in spend as a percentage of revenue resulting from COVID-19 business disruption.

Distribution expense was $34 million for both the three months ended December 31, 2020 and the three months ended December 31, 2019.

Expressed as a percentage of revenue, distribution expense remained constant at 3% for both the three months ended December 31, 2020 and the three months ended December 31, 2019.

(1) Includes depreciation expense of $19 million and $14 million for the three months ended March 31, 2021 and for the three months ended March 31, 2020, respectively.

Total selling, general and administrative expense decreased by $120 million, or 22%, to $418 million for the three months ended March 31, 2021 from $538 million for the three months ended March 31, 2020.

Expressed as a percentage of revenue, selling, general and administrative expense decreased to 33% for the three months ended March 31, 2021 from 50% for the three months ended March 31, 2020.

This is primarily due to lower non-cash stock-based compensation and other related expenses of $151 million.

Excluding the expense associated with non-cash stock-based compensation and other related expenses, selling, general and administrative expense as a percentage of revenue decreased to 32% for the three months ended March 31, 2021 from 35% for the three months ended March 31, 2020.

General and administrative expense decreased by $134 million to $217 million for the three months ended March 31, 2021 from $351 million for the three months ended March 31, 2020.

The decrease in general and administrative expense was mainly due to lower non-cash stock-based compensation and other related expenses of $151 million, higher bad debt provisions taken in the prior year due to COVID and lower overhead due to active cost management efforts, partially offset by increased employee related costs.

Expressed as a percentage of revenue, general and administrative expense decreased to 17% for the three months ended March 31, 2021 from 33% for the three months ended March 31, 2020.

Excluding the expense associated with non-cash stock-based compensation and other related expenses, general and administrative expenses as a percentage of revenue decreased to 16% for the three months ended March 31, 2021 from 17% for the three months ended March 31, 2020 due to the factors described above.

Selling and marketing expense increased by $10 million, or 6%, to $176 million for the three months ended March 31, 2021 from $166 million for the three months ended March 31, 2020.

Expressed as a percentage of revenue, selling and marketing expense decreased to 14% for the three months ended March 31, 2021 from 15% for the three months ended March 31, 2020 due to a decrease in spend as a percentage of revenue resulting from COVID and ongoing cost management efforts.

Distribution expense was $25 million for the three months ended March 31, 2021 and $21 million the three months ended March 31, 2020.

Expressed as a percentage of revenue, distribution expense remained constant at 2% for both the three months ended March 31, 2021 and the three months ended March 31, 2020.

Reconciliation of Net Income Attributable to Warner Music Group Corp.

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For the Three Months Ended

December 31, 2020 vs.

March 31, 2021 vs.

2021 2020 $ Change % Change

Net income attributable to Warner Music Group Corp.

Net income (loss) attributable to Warner Music Group Corp.

$ 117 $ (74) $ 191 — %

Income attributable to noncontrolling interest — — — — %

Net income 99 122 (23) -19 %

Income tax expense 35 5 30 — %

Income before income taxes 134 127 7 6 %

Other expense 31 5 26 — %

Net income (loss) 117 (74) 191 — %

Income tax expense (benefit) 51 (12) 63 — %

Income (loss) before income taxes 168 (86) 254 — %

Other (income) expense (49) 4 (53) — %

Interest expense, net 32 33 (1) -3 %

Operating income 196 165 31 19 %

Operating income (loss) 151 (49) 200 — %

Amortization expense 58 47 11 23 %

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OIBDA $ 228 $ 12 $ 216 — %

OIBDA increased by $31 million to $267 million for the three months ended December 31, 2020 as compared to $236 million for the three months ended December 31, 2019 as a result of higher revenues, partially offset by higher cost of revenues and selling, general, and administrative expenses.

Expressed as a percentage of total revenue, OIBDA margin increased to 20% for the three months ended December 31, 2020 from 19% for the three months ended December 31, 2019.

OIBDA increased by $216 million to $228 million for the three months ended March 31, 2021 as compared to $12 million for the three months ended March 31, 2020 as a result of higher revenues and lower expense associated with non-cash stock-based compensation and other related expenses, partially offset by higher cost of revenues.

Expressed as a percentage of total revenue, OIBDA margin increased to 18% for the three months ended March 31, 2021 from 1% for the three months ended March 31, 2020.

Excluding the expense associated with non-cash stock-based compensation and other related expenses, OIBDA margin as a percentage of revenue increased to 20% for the three months ended March 31, 2021 from 17% for the three months ended March 31, 2020 due to revenue mix and lower overhead due to active cost management efforts.

Depreciation expense

Our depreciation expense decreased by $5 million, or 21%, to $19 million for the three months ended December 31, 2020 from $24 million for the three months ended December 31, 2019.

The decrease is primarily due to a one-time charge of $10 million representing the difference between the net book value of a building and its recoverable value.

The building was exited was part of our Los Angeles, California headquarters relocation.

This was partially offset by new assets placed into service.

Our depreciation expense increased by $5 million, or 36%, to $19 million for the three months ended March 31, 2021 from $14 million for the three months ended March 31, 2020.

The increase is primarily due to new assets placed into service.

Amortization expense

Our amortization expense increased by $5 million, or 11%, to $52 million for the three months ended December 31, 2020 from $47 million for the three months ended December 31, 2019.

The increase is primarily due to an increase in amortizable intangible assets related to the acquisition of music-related assets.

Operating income

Our operating income increased by $31 million to $196 million for the three months ended December 31, 2020 from $165 million for the three months ended December 31, 2019.

The increase in operating income was due to the factors that led to the increase in OIBDA.

Our amortization expense increased by $11 million, or 23%, to $58 million for the three months ended March 31, 2021 from $47 million for the three months ended March 31, 2020.

The increase is primarily due to an increase in amortizable intangible assets related to the recent acquisitions of music-related assets.

Operating income (loss)

Our operating income increased by $200 million to $151 million for the three months ended March 31, 2021 from operating loss of $49 million for the three months ended March 31, 2020.

The increase in operating income was due to the factors that led to the increase in OIBDA, partially offset by higher depreciation and amortization as noted above.

Interest expense, net

Our interest expense, net, decreased to $31 million for the three months ended December 31, 2020 from $33 million for the three months ended December 31, 2019 due to lower interest rates resulting from debt refinancing, partially offset by the issuance of the new senior secured notes.

Other expense

Other expense for the three months ended December 31, 2020 primarily includes foreign currency loss on our Euro-denominated debt of $41 million, aggregate realized and unrealized losses on hedging activity of $5 million, and currency exchange losses on our intercompany loans of $2 million, partially offset by an unrealized gain of $14 million on the mark-to-market of an equity method investment.

This compares to foreign currency loss on our Euro-denominated debt of $12 million and aggregate realized and unrealized losses on hedging activity of $4 million, partially offset by currency exchange gains on our intercompany loans of $11 million for the three months ended December 31, 2019.

Income tax expense

Our income tax expense increased by $30 million to $35 million for the three months ended December 31, 2020 from $5 million for the three months ended December 31, 2019.

The change of $30 million in income tax expense primarily relates to the release of a valuation allowance on foreign tax credits of $33 million during the three months ended December 31, 2019.

For the three months ended December 31, 2020, income tax expense is partially offset by a $4 million benefit related to the impact of excess tax benefits on our long term incentive plan.

Net income decreased by $23 million to $99 million for the three months ended December 31, 2020 from $122 million for the three months ended December 31, 2019 as a result of the factors described above.

Our interest expense, net, decreased to $32 million for the three months ended March 31, 2021 from $33 million for the three months ended March 31, 2020 due to lower interest rates resulting from debt refinancing, partially offset by a higher principal balance due to the issuance of the additional 3.000% Senior Secured Notes due 2031 in November 2020.

Other (income) expense

Other income for the three months ended March 31, 2021 primarily includes foreign currency gains on our Euro-denominated debt of $33 million and unrealized gains of $18 million on the mark-to-market of equity investments, partially offset by currency exchange losses on our intercompany loans of $3 million.

This compares to unrealized losses of $10 million on the mark-to-market of an equity investment and a $5 million loss on investments, partially offset by foreign currency gains on our Euro-denominated debt of $6 million for the three months ended March 31, 2020.

Income tax expense (benefit)

Our income tax expense increased by $63 million to $51 million for the three months ended March 31, 2021 from a tax benefit of $12 million for the three months ended March 31, 2020.

The change of $63 million in income tax expense primarily relates higher pre-tax income during the three months ended March 31, 2021.

Net income (loss)

Net income increased by $191 million to $117 million for the three months ended March 31, 2021 from a net loss of $74 million for the three months ended March 31, 2020 as a result of the factors described above.

Noncontrolling interest

There was $1 million of income attributable to noncontrolling interest for the three months ended December 31, 2020 and $2 million for the three months ended December 31, 2019.

There was no income attributable to noncontrolling interest for both the three months ended March 31, 2021 and March 31, 2020.

Business Segment Results

1 unchanged sentence

For the Three Months Ended

December 31, 2020 vs.

March 31, 2021 vs.

2021 2020 $ Change % Change

12 unchanged sentences

Revenues 1,250 1,071 179 17 %

Operating income 196 165 31 19 %

Operating income (loss) 151 (49) 200 — %

OIBDA 228 12 216 — %

Recorded Music

Recorded Music revenue increased by $77 million, or 7%, to $1,161 million for the three months ended December 31, 2020 from $1,084 million for the three months ended December 31, 2019.

Recorded Music revenues were $481 million and $453 million, or 41% and 42%, of consolidated Recorded Music revenues for the three months ended December 31, 2020 and December 31, 2019, respectively.

The overall increase in Recorded Music revenue was mainly driven by increases in digital and licensing revenues, partially offset by decreases in physical and artist services and expanded-rights revenues, as described in the “Total Revenues” and “Revenue by Geographical Location” sections above.

Recorded Music revenue increased by $152 million, or 17%, to $1,059 million for the three months ended March 31, 2021 from $907 million for the three months ended March 31, 2020.

Recorded Music revenues were $469 million and $380 million, or 44% and 42%, of consolidated Recorded Music revenues for the three months ended March 31, 2021 and March 31, 2020, respectively.

The overall increase in Recorded Music revenue was mainly driven by increases in digital, physical, and artist services and expanded-rights revenues, partially offset by the decrease in licensing revenue as described in the “Total Revenues” and “Revenue by Geographical Location” sections above.

Cost of revenues

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December 31, 2020 vs.

March 31, 2021 vs.

2021 2020 $ Change % Change

2 unchanged sentences

Total cost of revenues $ 499 $ 439 $ 60 14 %

Recorded Music cost of revenues increased by $26 million, or 5%, to $574 million for the three months ended December 31, 2020 from $548 million for the three months ended December 31, 2019.

Expressed as a percentage of Recorded Music revenue, Recorded Music artist and repertoire costs remained constant at 27% for both the three months ended December 31, 2020 and December 31, 2019.

Expressed as a percentage of Recorded Music revenue, Recorded Music product costs decreased to 22% for the three months ended December 31, 2020 from 23% for the three months ended December 31, 2019.

The decrease in product costs relates to revenue mix due to lower physical and artist services and expanded-rights revenues.

Recorded Music cost of revenues increased by $60 million, or 14%, to $499 million for the three months ended March 31, 2021 from $439 million for the three months ended March 31, 2020.

Expressed as a percentage of Recorded Music revenue, Recorded Music artist and repertoire costs decreased to 28% for the three months ended March 31, 2021 from 29% for the three months ended March 31, 2020.

The decrease is primarily attributable to lower artist related costs due to revenue mix.

Expressed as a percentage of Recorded Music revenue, Recorded Music product costs remained constant at 19% for both the three months ended March 31, 2021 and March 31, 2020.

Selling, general and administrative expense

1 unchanged sentence

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December 31, 2020 vs.

March 31, 2021 vs.

2021 2020 $ Change % Change

4 unchanged sentences

______________________________________

(1) Includes depreciation expense of $13 million and $21 million for the three months ended December 31, 2020 and for the three months ended December 31, 2019, respectively.

Recorded Music selling, general and administrative expense increased by $15 million, or 5%, to $331 million for the three months ended December 31, 2020 from $316 million for the three months ended December 31, 2019.

The increase in general and administrative expense was primarily due to higher non-cash stock-based compensation expense of $8 million and increase in employee related costs, partially offset by a one-time charge in the prior year within depreciation expense of $10 million representing the difference between the net book value of a building and its recoverable value, and lower overhead due to active cost management efforts.

(1) Includes depreciation expense of $13 million and $10 million for the three months ended March 31, 2021 and March 31, 2020, respectively.

Recorded Music selling, general and administrative expense decreased by $64 million, or 16%, to $338 million for the three months ended March 31, 2021 from $402 million for the three months ended March 31, 2020.

The decrease in general and administrative expense was primarily due to lower non-cash stock-based compensation and other related expenses of $94 million, higher bad debt provisions taken in the prior year due to COVID, partially offset by increased employee related costs.

The increase in selling and marketing expense was primarily due to increased variable marketing spend primarily at EMP, which drove higher direct-to-consumer merchandising revenue.

Distribution expense remained flat.

Expressed as a percentage of Recorded Music revenue, Recorded Music selling, general and administrative expense remained flat at 29% for both the three months ended December 31, 2020 and the three months ended December 31, 2019.

Excluding non-cash stock-based compensation expense, selling, general and administrative expense as a percentage of Recorded Music revenue decreased to 28% for the three months ended December 31, 2020 from 29% for the three months ended December 31, 2019 due to the factors described above.

The increase in distribution expense was primarily due to revenue mix.

Expressed as a percentage of Recorded Music revenue, Recorded Music selling, general and administrative expense decreased to 32% for the three months ended March 31, 2021 from 44% for the three months ended March 31, 2020.

This is primarily due to lower non-cash stock-based compensation and other related expenses of $94 million and lower selling and marketing spend as a percentage of Recorded Music revenue.

Excluding non-cash stock-based compensation expense and other related expenses, selling, general and administrative expense as a percentage of Recorded Music revenue decreased to 31% for the three months ended March 31, 2021 from 33% for the three months ended March 31, 2020 due to the factors described above.

Operating income and OIBDA

1 unchanged sentence

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December 31, 2020 vs.

March 31, 2021 vs.

2021 2020 $ Change % Change

2 unchanged sentences

OIBDA $ 235 $ 76 $ 159 — %

Recorded Music OIBDA increased by $28 million, or 12%, to $269 million for the three months ended December 31, 2020 from $241 million for the three months ended December 31, 2019 as a result of higher revenues and lower costs.

Expressed as a percentage of Recorded Music revenue, Recorded Music OIBDA margin increased to 23% for the three months ended December 31, 2020 from 22% for the three months ended December 31, 2019.

Recorded Music operating income increased by $32 million to $223 million for the three months ended December 31, 2020 from $191 million for the three months ended December 31, 2019 due to the factors that led to the increase in Recorded Music OIBDA noted above.

Recorded Music OIBDA increased by $159 million to $235 million for the three months ended March 31, 2021 from $76 million for the three months ended March 31, 2020 as a result of higher revenues and lower non-cash stock-based compensation and other related expenses of $94 million, partially offset by higher costs of revenue.

Expressed as a percentage of Recorded Music revenue, Recorded Music OIBDA margin increased to 22% for the three months ended March 31, 2021 from 8% for the three months ended March 31, 2020.

Excluding the expense associated with non-cash stock-based compensation and other related expenses, OIBDA margin increased to 23% for the three months ended March 31, 2021 from 20% for the three months ended March 31, 2020 due to revenue mix, impact from a recent acquisition and lower selling, general and administrative expenses as a percentage of total Recorded Music revenue.

Recorded Music operating income increased by $148 million to $184 million for the three months ended March 31, 2021 from $36 million for the three months ended March 31, 2020 due to the factors that led to the increase in Recorded Music OIBDA noted above, partially offset by higher depreciation from new assets placed into service and an increase in amortizable intangible assets related to the recent acquisitions of music-related assets.

Music Publishing

Music Publishing revenues increased by $2 million, or 1%, to $175 million for the three months ended December 31, 2020 from $173 million for the three months ended December 31, 2019.

Music Publishing revenues were $91 million and $81 million, or 52% and 47%, of consolidated Music Publishing revenues for the three months ended December 31, 2020 and December 31, 2019, respectively.

International Music Publishing revenues were $84 million and $92 million, or 48% and 53%, of consolidated Music Publishing revenues for the three months ended December 31, 2020 and December 31, 2019, respectively.

The overall increase in Music Publishing revenue was mainly driven by digital revenue growth, partially offset by lower performance, synchronization, and mechanical revenues as described in the “Total Revenues” and “Revenue by Geographical Location” sections above.

Music Publishing revenues increased by $26 million, or 16%, to $192 million for the three months ended March 31, 2021 from $166 million for the three months ended March 31, 2020.

Music Publishing revenues were $96 million and $87 million, or 50% and 52%, of consolidated Music Publishing revenues for the three months ended March 31, 2021 and March 31, 2020,

respectively.

International Music Publishing revenues were $96 million and $79 million, or 50% and 48%, of consolidated Music Publishing revenues for the three months ended March 31, 2021 and March 31, 2020, respectively.

The overall increase in Music Publishing revenue was mainly driven by digital and synchronization revenue growth, partially offset by lower performance and mechanical revenues as described in the “Total Revenues” and “Revenue by Geographical Location” sections above.

Cost of revenues

1 unchanged sentence

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December 31, 2020 vs.

March 31, 2021 vs.

2021 2020 $ Change % Change

1 unchanged sentence

Total cost of revenues $ 125 $ 98 $ 27 28 %

Music Publishing cost of revenues decreased by $5 million, or 4%, to $113 million for the three months ended December 31, 2020 from $118 million for the three months ended December 31, 2019.

Expressed as a percentage of Music Publishing revenue, Music Publishing cost of revenues decreased to 65% for the three months ended December 31, 2020 from 68% for the three months ended December 31, 2019.

This decrease is primarily attributable to revenue mix and timing of artist and repertoire investments.

Music Publishing cost of revenues increased by $27 million, or 28%, to $125 million for the three months ended March 31, 2021 from $98 million for the three months ended March 31, 2020.

Expressed as a percentage of Music Publishing revenue, Music Publishing cost of revenues increased to 65% for the three months ended March 31, 2021 from 59% for the three months ended March 31, 2020.

This increase is primarily attributable to revenue mix and the t iming of a non-recurring benefit in the prior-year quarter.

Selling, general and administrative expense

1 unchanged sentence

For the Three Months Ended

December 31, 2020 vs.

March 31, 2021 vs.

2021 2020 $ Change % Change

3 unchanged sentences

______________________________________

(1) Includes depreciation expense of $2 million and $1 million for the three months ended December 31, 2020 and the three months ended December 31, 2019, respectively.

Music Publishing selling, general and administrative expense increased to $25 million for the three months ended December 31, 2020 from $23 million for the three months ended December 31, 2019.

Expressed as a percentage of Music Publishing revenue, Music Publishing selling, general and administrative expense increased to 14% for the three months ended December 31, 2020 from 13% for the three months ended December 31, 2019 mainly due to higher employee-related costs and higher depreciation expense.

(1) Includes depreciation expense of $1 million for both the three months ended March 31, 2021 and March 31, 2020.

Music Publishing selling, general and administrative expense increased by $4 million or 19% to $25 million for the three months ended March 31, 2021 from $21 million for the three months ended March 31, 2020.

Expressed as a percentage of Music Publishing revenue, Music Publishing selling, general and administrative expense remained flat at 13% for both the three months ended March 31, 2021 and March 31, 2020.

Operating income and OIBDA

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December 31, 2020 vs.

March 31, 2021 vs.

2021 2020 $ Change % Change

2 unchanged sentences

OIBDA $ 43 $ 48 $ (5) -10 %

Music Publishing OIBDA increased by $6 million, or 18%, to $39 million for the three months ended December 31, 2020 from $33 million for the three months ended December 31, 2019.

Expressed as a percentage of Music Publishing revenue, Music Publishing OIBDA margin increased to 22% for the three months ended December 31, 2020 from 19% for the three months ended December 31, 2019.

The increase was primarily due to the increase in revenue and the timing of artist and repertoire investments.

Music Publishing operating income increased by $4 million to $18 million for the three months ended December 31, 2020 from $14 million for the three months ended December 31, 2019 due to the factors that led to the increase in Music Publishing OIBDA noted above.

Music Publishing OIBDA decreased by $5 million, or 10%, to $43 million for the three months ended March 31, 2021 from $48 million for the three months ended March 31, 2020.

Expressed as a percentage of Music Publishing revenue, Music Publishing OIBDA margin decreased to 22% for the three months ended March 31, 2021 from 29% for the three months ended March 31, 2020.

The decrease was primarily due to revenue mix and the t iming of a non-recurring benefit in the prior-year quarter .

Music Publishing operating income decreased by $8 million to $22 million for the three months ended March 31, 2021 from $30 million for the three months ended March 31, 2020 due to the factors that led to the decrease in Music Publishing OIBDA noted above.

Corporate Expenses and Eliminations

Our operating loss from corporate expenses and eliminations increased by $5 million for the three months ended December 31, 2020 to $45 million from $40 million for the three months ended December 31, 2019, which primarily includes an increase in non-cash stock-based compensation expense of $5 million, public company related expenses totaling $4 million, and

higher employee related costs, partially offset by a decline in management fees of $3 million and lower overhead due to active cost management efforts.

Our OIBDA loss from corporate expenses and eliminations increased by $3 million for the three months ended December 31, 2020 to $41 million from $38 million for the three months ended December 31, 2019 due to the operating loss factors noted above.

Our operating loss from corporate expenses and eliminations decreased by $60 million for the three months ended March 31, 2021 to $55 million from $115 million for the three months ended March 31, 2020, which primarily includes the decrease in non-cash stock-based compensation and other related expenses of $58 million, decline in management fees of $3 million and lower overhead due to active cost management efforts, partially offset by higher employee related costs.

Our OIBDA loss from corporate expenses and eliminations decreased by $62 million for the three months ended March 31, 2021 to $50 million from $112 million for the three months ended March 31, 2020 due to the operating loss factors noted above.

RESULTS OF OPERATIONS

Six Months Ended March 31, 2021 Compared with Six Months Ended March 31, 2020

Consolidated Results

Our revenues were composed of the following amounts (in millions):

For the Six Months Ended

March 31, 2021 vs.

2021 2020 $ Change % Change

Revenue by Type

Digital $ 1,483 $ 1,259 $ 224 18 %

Physical 292 278 14 5 %

Total Digital and Physical 1,775 1,537 238 15 %

Artist services and expanded-rights 298 303 (5) -2 %

Licensing 147 151 (4) -3 %

Total Recorded Music 2,220 1,991 229 12 %

Performance 65 87 (22) -25 %

Digital 203 147 56 38 %

Mechanical 23 30 (7) -23 %

Synchronization 71 70 1 1 %

Other 5 5 — — %

Total Music Publishing 367 339 28 8 %

Intersegment eliminations (2) (3) 1 -33 %

Total Revenues $ 2,585 $ 2,327 $ 258 11 %

Revenue by Geographical Location

Recorded Music $ 950 $ 833 $ 117 14 %

Music Publishing 187 168 19 11 %

1,137 1,001 136 14 %

International Recorded Music 1,270 1,158 112 10 %

International Music Publishing 180 171 9 5 %

Total International 1,450 1,329 121 9 %

Intersegment eliminations (2) (3) 1 -33 %

Total Revenues $ 2,585 $ 2,327 $ 258 11 %

Total Revenues

Total revenues increased by $258 million to $2,585 million for the six months ended March 31, 2021 from $2,327 million for the six months ended March 31, 2020.

The increase includes $67 million of favorable currency exchange fluctuations.

Prior to intersegment eliminations, Recorded Music and Music Publishing revenues represented 86% and 14% of total revenues for the six months ended March 31, 2021, respectively, and 85% and 15% of total revenues for the six months ended March 31, 2020, respectively.

Prior to intersegment eliminations, U.S.

and international revenues represented 44% and 56% for the six months ended March 31, 2021, respectively, and 43% and 57% for the six months ended March 31, 2020, respectively.

Total digital revenues after intersegment eliminations increased by $280 million, or 20%, to $1,685 million for the six months ended March 31, 2021 from $1,405 million for the six months ended March 31, 2020.

Total digital revenues represented 65% and 60% of consolidated revenues for the six months ended March 31, 2021 and March 31, 2020, respectively.

Prior to intersegment eliminations, total digital revenues for the six months ended March 31, 2021 were comprised of U.S.

revenues of $850 million and international revenues of $836 million, or 50% of total digital revenues for each of U.S.

and international revenues.

Prior to intersegment eliminations, total digital revenues for the six months ended March 31, 2020 were comprised of U.S.

revenues of $731 million and international revenues of $675 million, or 52% and 48% of total digital revenues, respectively.

Recorded Music revenues increased by $229 million, or 12%, to $2,220 million for the six months ended March 31, 2021 from $1,991 million for the six months ended March 31, 2020.

The increase includes $58 million of favorable currency exchange fluctuations.

Recorded Music revenues were $950 million and $833 million, or 43% and 42%, of consolidated Recorded Music revenues for the six months ended March 31, 2021 and March 31, 2020, respectively.

International Recorded Music revenues were $1,270 million and $1,158 million, or 57% and 58%, of consolidated Recorded Music revenues for the six months ended March 31, 2021 and March 31, 2020, respectively.

The overall increase in Recorded Music revenue was driven by increases in digital and physical revenues, partially offset by decreases in artist services and expanded-rights and licensing revenues.

Digital revenue increased by $224 million as a result of the continued growth in streaming services, including growth in emerging streaming platforms such as Facebook, TikTok, and Peloton as well as strength of releases from Dua Lipa, Ed Sheeran, Ava Max, Hamilton Cast Recording, Michael Bublé, Cardi B and Roddy Ricch.

Revenue from streaming services grew by $239 million to $1,414 million for the six months ended March 31, 2021 from $1,175 million for the six months ended March 31, 2020.

Digital revenue growth was partially offset by digital download and other digital declines of $15 million, or 18%, to $69 million for the six months ended March 31, 2021 from $84 million for the six months ended March 31, 2020 due to the continued shift to streaming services.

Physical revenue increased by $14 million primarily from higher online sales due to an increased demand for vinyl products, success of new releases including Johnny Hallyday, Mariya Takeuchi, Tom Petty, Kim Hojoong in Korea, and The Yellow Monkey in Japan as well as the favorable impact of foreign currency exchange rates of $12 million.

Artist services and expanded-rights revenue decreased by $5 million primarily due to a decrease in touring activity resulting from the impact of COVID, partially offset by higher direct-to-consumer merchandising revenue at EMP and the favorable impact of foreign currency exchange rates of $17 million.

Licensing revenue decreased by $4 million due to the impact of COVID, partially offset by favorable foreign currency exchange rates.

Music Publishing revenues increased by $28 million, or 8%, to $367 million for the six months ended March 31, 2021 from $339 million for the six months ended March 31, 2020.

Music Publishing revenues were $187 million and $168 million, or 51% and 50%, of consolidated Music Publishing revenues for the six months ended March 31, 2021 and March 31, 2020, respectively.

International Music Publishing revenues were $180 million and $171 million, or 49% and 50%, of Music Publishing revenues for the six months ended March 31, 2021 and March 31, 2020, respectively.

The overall increase in Music Publishing revenue was mainly driven by increases in digital revenue of $56 million and synchronization revenue of $1 million, partially offset by decreases in performance revenue of $22 million and mechanical revenue of $7 million.

The increase in digital revenue is primarily due to increases in streaming revenue driven by the continued growth in streaming services and timing of new digital deals.

The increase in synchronization revenue is attributable to higher motion picture and commercial income and favorable foreign currency exchange rates, partially offset by the impact from COVID.

The decline in performance revenue is primarily driven by the impact of COVID.

The decline in mechanical revenue is driven by the continuing shift to streaming services and the impact from COVID.

Revenue by Geographical Location

revenue increased by $136 million, or 14%, to $1,137 million for the six months ended March 31, 2021 from $1,001 million for the six months ended March 31, 2020.

Recorded Music revenue increased by $117 million, or 14%.

The primary driver was the increase of U.S.

Recorded Music digital revenue of $94 million driven by the continued growth in streaming services.

Streaming revenue increased by $99 million, partially offset by $5 million of digital download and other digital declines.

Increases are also attributable to the increase in U.S.

Recorded Music physical revenue, which increased by $20 million from higher online sales due to an increased demand for vinyl products as well as the success of new releases including Tom Petty.

Recorded Music artist services and expanded-rights revenue increased by $3 million primarily driven by higher advertising revenues from a recent acquisition.

Music Publishing revenue increased by $19 million to $187 million for the six months ended March 31, 2021 from $168 million for the six months ended March 31, 2020.

This was primarily driven by the increase in U.S.

Music Publishing of $25 million in digital revenue due to the continued growth in streaming services and timing of new digital deals, partially offset by decreases in performance revenue of $4 million due to the impact of COVID, as well as a decline in mechanical revenue of $2 million from the continuing shift to streaming services.

International revenue increased by $121 million to $1,450 million for the six months ended March 31, 2021 from $1,329 million for the six months ended March 31, 2020.

Excluding the favorable impact of foreign currency exchange rates, International revenue increased by $54 million or 4%.

International Recorded Music revenue increased by $112 million primarily due to increases in digital revenue of $130 million, partially offset by decreases in artist services and expanded-rights revenue of $8 million, physical revenue of $6 million and licensing revenue of $4 million.

The increase in International Recorded Music digital revenue was due to continued growth in streaming services internationally, partially offset by a decline in digital downloads.

International Recorded Music artist services and expanded-rights revenue decreased primarily due to the decrease in touring activity resulting from the impact of COVID.

This was offset by growth in EMP direct-to consumer merchandise revenue and the favorable impact of foreign currency exchange rates of $17 million.

International Recorded Music physical revenue decreased by $6 million due to the impact of COVID,

partially offset by the success of new releases, including Johnny Hallyday, Mariya Takeuchi, and Kim Hojoong and favorable impact of foreign currency exchange rates.

International Recorded Music licensing revenue decreased by $4 million primarily due to the impact of COVID, partially offset by favorable foreign currency exchange rates.

International Music Publishing revenue increased by $9 million, or 5%, to $180 million for the six months ended March 31, 2021 from $171 million for the six months ended March 31, 2020.

This was primarily driven by increases in digital revenue of $31 million and synchronization revenue of $1 million, partially offset by decreases in performance revenue of $18 million and mechanical revenue of $5 million.

The increase in digital revenue is primarily due to the increases in streaming revenue driven by the continued growth in streaming services and timing of new digital deals.

Higher synchronization revenue is driven by higher commercial income and favorable foreign currency exchange rates, partially offset by the impact of COVID.

The decline in performance revenue is due to the impact of COVID and decrease in mechanical revenue is driven by the continuing shift to streaming services.

Cost of revenues

Our cost of revenues was composed of the following amounts (in millions):

For the Six Months Ended

March 31, 2021 vs.

2021 2020 $ Change % Change

Artist and repertoire costs $ 844 $ 771 $ 73 9 %

Product costs 465 429 36 8 %

Total cost of revenues $ 1,309 $ 1,200 $ 109 9 %

Artist and repertoire costs increased by $73 million, to $844 million for the six months ended March 31, 2021 from $771 million for the six months ended March 31, 2020.

Artist and repertoire costs as a percentage of revenue remained constant at 33% for both the six months ended March 31, 2021 and March 31, 2020.

Product costs increased by $36 million, to $465 million for the six months ended March 31, 2021 from $429 million for the six months ended March 31, 2020.

Product costs as a percentage of revenue remained constant at 18% for the six months ended March 31, 2021 and March 31, 2020.

Selling, general and administrative expenses

Our selling, general and administrative expenses were composed of the following amounts (in millions):

For the Six Months Ended

March 31, 2021 vs.

2021 2020 $ Change % Change

General and administrative expense (1) $ 406 $ 523 $ (117) -22 %

Selling and marketing expense 354 339 15 4 %

Distribution expense 59 55 4 7 %

Total selling, general and administrative expense $ 819 $ 917 $ (98) -11 %

______________________________________

(1) Includes depreciation expense of $38 million for both the six months ended March 31, 2021 and March 31, 2020.

Total selling, general and administrative expense decreased by $98 million, or 11%, to $819 million for the six months ended March 31, 2021 from $917 million for the six months ended March 31, 2020.

Expressed as a percentage of revenue, selling, general and administrative expense decreased to 32% for the six months ended March 31, 2021 from 39% for the six months ended March 31, 2020.

This is primarily due to the decreased expense associated with non-cash stock-based compensation and other related expenses of $138 million.

Excluding non-cash stock-based compensation and other related expenses, selling, general and administrative expense as a percentage of revenue decreased to 31% for the six months ended March 31, 2021 from 33% for the six months ended March 31, 2020.

General and administrative expense decreased by $117 million to $406 million for the six months ended March 31, 2021 from $523 million for the six months ended March 31, 2020.

The decrease in general and administrative expense was mainly due to lower expense associated with non-cash stock-based compensation and other related expenses of $138 million and lower overhead due to active cost management efforts, partially offset by increased employee related costs.

Expressed as a percentage of revenue, general and administrative expense decreased to 16% for the six months ended March 31, 2021 from 22% for the six months ended March 31, 2020.

Excluding non-cash stock-based compensation and other related expenses, general and administrative expense as a percentage of revenue decreased to 15% for the six months ended March 31, 2021 from 16% for the six months ended March 31, 2020 due to the factors described above.

Selling and marketing expense increased by $15 million, or 4%, to $354 million for the six months ended March 31, 2021 from $339 million for the six months ended March 31, 2020.

Expressed as a percentage of revenue, selling and marketing expense decreased to 14% for the six months ended March 31, 2021 from 15% for the six months ended March 31, 2020 due to a decrease in spend as a percentage of revenue resulting from COVID and ongoing cost management efforts.

Distribution expense increased by $4 million, or 7%, to $59 million for the six months ended March 31, 2021 from $55 million for the six months ended March 31, 2020.

Expressed as a percentage of revenue, distribution expense remained constant at 2% for both the six months ended March 31, 2021 and March 31, 2020.

Reconciliation of Net Income Attributable to Warner Music Group Corp.

and Operating Income to Consolidated OIBDA

As previously described, we use OIBDA as our primary measure of financial performance.

The following table reconciles operating income to OIBDA, and further provides the components from net income attributable to Warner Music Group Corp.

to operating income for purposes of the discussion that follows (in millions):

For the Six Months Ended

March 31, 2021 vs.

2021 2020 $ Change % Change

Net income attributable to Warner Music Group Corp.

$ 215 $ 46 $ 169 — %

Income attributable to noncontrolling interest 1 2 (1) -50 %

Net income 216 48 168 — %

Income tax expense (benefit) 86 (7) 93 — %

Income before income taxes 302 41 261 — %

Other (income) expense (18) 9 (27) — %

Interest expense, net 63 66 (3) -5 %

Operating income 347 116 231 — %

Amortization expense 110 94 16 17 %

Depreciation expense 38 38 — — %

OIBDA $ 495 $ 248 $ 247 100 %

OIBDA increased by $247 million to $495 million for the six months ended March 31, 2021 as compared to $248 million for the six months ended March 31, 2020 as a result of higher revenues and lower expense associated with non-cash stock-based compensation and other related expenses, partially offset by higher cost of revenues.

Expressed as a percentage of total revenue, OIBDA margin increased to 19% for the six months ended March 31, 2021 from 11% for the six months ended March 31, 2020.

Excluding the expense associated with non-cash stock-based compensation and other related expenses, OIBDA margin as a percentage of revenue increased to 20% for the six months ended March 31, 2021 from 18% for the six March 31, 2020 from revenue mix and lower overhead due to active cost management efforts.

Depreciation expense

Our depreciation expense remained flat at $38 million for both the six months ended March 31, 2021 and the six months ended March 31, 2020.

This is due to new assets placed into service, partially offset by a one-time charge of $10 million representing the difference between the net book value of a building and its recoverable value in the prior year.

Amortization expense

Our amortization expense increased by $16 million, or 17%, to $110 million for the six months ended March 31, 2021 from $94 million for the six months ended March 31, 2020.

The increase is primarily due to an increase in amortizable intangible assets related to the acquisition of music-related assets.

Operating income

Our operating income increased by $231 million to $347 million for the six months ended March 31, 2021 from operating income of $116 million for the six months ended March 31, 2020.

The increase in operating income was due to the factors that led to the increase in OIBDA, partially offset by an increase in amortizable intangible assets related to the acquisition of music-related assets.

Interest expense, net

Our interest expense, net, decreased to $63 million for the six months ended March 31, 2021 from $66 million for the six months ended March 31, 2020 due to lower interest rates resulting from debt refinancing, partially offset by a higher principal balance due to the issuance of senior secured notes.

Other (income) expense

Other income for the six months ended March 31, 2021 primarily includes unrealized gains of $32 million on the mark-to-market of equity investments, partially offset by foreign currency losses on our Euro-denominated debt of $8 million and currency exchange losses on our intercompany loans of $5 million.

This compares to unrealized losses of $10 million on the mark-to-market of an equity method investment, the loss on our Euro-denominated debt of $6 million and $5 million relating to a loss on investments, partially offset by currency exchange gains on our intercompany loans of $12 million for the six months ended March 31, 2020.

Income tax expense (benefit)

Our income tax expense increased by $93 million to $86 million for the six months ended March 31, 2021 from a tax benefit of $7 million for the six months ended March 31, 2020.

The change of $93 million in income tax expense primarily relates to the higher pre-tax income partially offset by a $4 million benefit related to the impact of excess tax benefits on our long term incentive plan during the six months ended March 31, 2021.

For the six months ended March 31, 2020, income tax benefit is higher as a result of the release of a valuation allowance of foreign tax credits of $33 million.

Net income increased by $168 million to $216 million for the six months ended March 31, 2021 from $48 million for the six months ended March 31, 2020 as a result of the factors described above.

Noncontrolling interest

There was $1 million of income attributable to noncontrolling interest for the six months ended March 31, 2021 and $2 million of income attributable to noncontrolling interest for the six months ended March 31, 2020.

Business Segment Results

Revenues, operating income (loss) and OIBDA by business segment were as follows (in millions):

For the Six Months Ended

March 31, 2021 vs.

2021 2020 $ Change % Change

Recorded Music

Revenues $ 2,220 $ 1,991 $ 229 12 %

Operating income 407 227 180 79 %

OIBDA 504 317 187 59 %

Music Publishing

Revenues 367 339 28 8 %

Operating income 40 44 (4) -9 %

OIBDA 82 81 1 1 %

Corporate expenses and eliminations

Revenue eliminations (2) (3) 1 -33 %

Operating loss (100) (155) 55 -35 %

OIBDA loss (91) (150) 59 -39 %

Revenues 2,585 2,327 258 11 %

Operating income 347 116 231 — %

OIBDA 495 248 247 100 %

Recorded Music

Recorded Music revenue increased by $229 million, or 12%, to $2,220 million for the six months ended March 31, 2021 from $1,991 million for the six months ended March 31, 2020.

Recorded Music revenues were $950 million and $833 million, or 43% and 42%, of consolidated Recorded Music revenues for the six months ended March 31, 2021 and March 31, 2020, respectively.

The overall increase in Recorded Music revenue was mainly driven by increases in digital and physical revenues, partially offset by declines in artist services and expanded-rights and licensing revenues, as described in the “Total Revenues” and “Revenue by Geographical Location” sections above.

Cost of revenues

Recorded Music cost of revenues was composed of the following amounts (in millions)

For the Six Months Ended

March 31, 2021 vs.

2021 2020 $ Change % Change

Artist and repertoire costs $ 608 $ 558 $ 50 9 %

Product costs 465 429 36 8 %

Total cost of revenues $ 1,073 $ 987 $ 86 9 %

Recorded Music cost of revenues increased by $86 million, or 9%, to $1,073 million for the six months ended March 31, 2021 from $987 million for the six months ended March 31, 2020.

Expressed as a percentage of Recorded Music revenue, Recorded Music artist and repertoire costs decreased to 27% for the six months ended March 31, 2021 from 28% for the six months ended March 31, 2020.

The decrease is primarily attributable to lower artist-related costs due to revenue mix.

Expressed as a percentage of Recorded Music revenue, Recorded Music product costs decreased to 21% for the six months ended March 31, 2021 from 22% for the six months ended March 31, 2020.

The decrease in product costs relates to revenue mix from lower artist services and expanded-rights revenue.

Selling, general and administrative expense

Recorded Music selling, general and administrative expenses were composed of the following amounts (in millions):

For the Six Months Ended

March 31, 2021 vs.

2021 2020 $ Change % Change

General and administrative expense (1) $ 263 $ 332 $ (69) -21 %

Selling and marketing expense 347 331 16 5 %

Distribution expense 59 55 4 7 %

Total selling, general and administrative expense $ 669 $ 718 $ (49) -7 %

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(1) Includes depreciation expense of $26 million and $31 million for the six months ended March 31, 2021 and March 31, 2020, respectively.

Recorded Music selling, general and administrative expense decreased by $49 million, or 7%, to $669 million for the six months ended March 31, 2021 from $718 million for the six months ended March 31, 2020.

The decrease in general and administrative expense was primarily due to lower non-cash stock-based compensation and other related expenses of $86 million and lower overhead due to active cost management efforts, partially offset by increased employee related costs.

The increase in selling and marketing expense was primarily due to increased variable marketing spend on higher revenues and new releases.

The increase in distribution expense was primarily due to revenue mix.

Expressed as a percentage of Recorded Music revenue, Recorded Music selling, general and administrative expense decreased to 30% for the six months ended March 31, 2021 from 36% for the six months ended March 31, 2020 primarily due to lower non-cash stock-based compensation and other related expenses of $86 million and lower selling and marketing spend as a percentage of Recorded Music revenue.

Excluding non-cash stock-based compensation and other related expenses, selling, general and administrative expense as a percentage of Recorded Music revenue decreased to 30% for the six months ended March 31, 2021 from 31% for the six months ended March 31, 2020 due to the factors described above.

Operating income and OIBDA

Recorded Music OIBDA included the following amounts (in millions):

For the Six Months Ended

March 31, 2021 vs.

2021 2020 $ Change % Change

Operating income $ 407 $ 227 $ 180 79 %

Depreciation and amortization 97 90 7 8 %

OIBDA $ 504 $ 317 $ 187 59 %

Recorded Music OIBDA increased by $187 million, or 59%, to $504 million for the six months ended March 31, 2021 from $317 million for the six months ended March 31, 2020 as a result of higher revenues and lower non-cash stock-based compensation and other related expenses of $86 million, partially offset by higher costs of revenue.

Expressed as a percentage of Recorded Music revenue, Recorded Music OIBDA margin increased to 23% for the six months ended March 31, 2021 from 16% for the six months ended March 31, 2020.

Excluding non-cash stock-based compensation and other related expenses, OIBDA, as a percentage of Recorded Music revenue, increased to 23% for the six months ended March 31, 2021 from 21% for the six months ended March 31, 2020 due to revenue mix, impact from a recent acquisition and lower costs of revenue and selling, general and administrative expenses as a percentage of total Recorded Music revenue.

Recorded Music operating income increased by $180 million to $407 million for the six months ended March 31, 2021 from $227 million for the six months ended March 31, 2020 due to the factors that led to the increase in Recorded Music OIBDA noted above, partially offset by an increase in amortizable intangible assets related to the acquisition of music-related assets.

Music Publishing

Music Publishing revenues increased by $28 million, or 8%, to $367 million for the six months ended March 31, 2021 from $339 million for the six months ended March 31, 2020.

Music Publishing revenues were $187 million and $168 million, or 51% and 50%, of consolidated Music Publishing revenues for the six months ended March 31, 2021 and March 31, 2020, respectively.

International Music Publishing revenues were $180 million and $171 million, or 49% and 50%, of consolidated Music Publishing revenues for the six months ended March 31, 2021 and March 31, 2020, respectively.

Cost of revenues

Music Publishing cost of revenues were composed of the following amounts (in millions):

For the Six Months Ended

March 31, 2021 vs.

2021 2020 $ Change % Change

Artist and repertoire costs $ 238 $ 216 $ 22 10 %

Total cost of revenues $ 238 $ 216 $ 22 10 %

Music Publishing cost of revenues increased by $22 million, or 10%, to $238 million for the six months ended March 31, 2021 from $216 million for the six months ended March 31, 2020.

Expressed as a percentage of Music Publishing revenue, Music Publishing cost of revenues increased to 65% for the six months ended March 31, 2021 from 64% for the six months ended March 31, 2020, primarily attributable to revenue mix.

Selling, general and administrative expense

Music Publishing selling, general and administrative expenses were comprised of the following amounts (in millions):

For the Six Months Ended

March 31, 2021 vs.

2021 2020 $ Change % Change

General and administrative expense (1) $ 49 $ 43 $ 6 14 %

Selling and marketing expense 1 1 — — %

Total selling, general and administrative expense $ 50 $ 44 $ 6 14 %

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(1) Includes depreciation expense of $3 million and $2 million for the six months ended March 31, 2021 and March 31, 2020, respectively.

Music Publishing selling, general and administrative expense increased to $50 million for the six months ended March 31, 2021 from $44 million for the six months ended March 31, 2020 due to higher employee-related and restructuring costs.

Expressed as a percentage of Music Publishing revenue, Music Publishing selling, general and administrative expense increased to 14% for the six months ended March 31, 2021 from 13% for the six months ended March 31, 2020 due to factors described above.

Operating income and OIBDA

Music Publishing OIBDA included the following amounts (in millions):

For the Six Months Ended

March 31, 2021 vs.

2021 2020 $ Change % Change

Operating income $ 40 $ 44 $ (4) -9 %

Depreciation and amortization 42 37 5 14 %

OIBDA $ 82 $ 81 $ 1 1 %

Music Publishing OIBDA increased by $1 million, or 1%, to $82 million for the six months ended March 31, 2021 from $81 million for the six months ended March 31, 2020.

Expressed as a percentage of Music Publishing revenue, Music Publishing OIBDA margin decreased to 22% for the six months ended March 31, 2021 from 24% for the six months ended March 31, 2020.

The decrease was primarily due to revenue mix and higher selling, general and administrative expenses.

Music Publishing operating income decreased by $4 million to $40 million for the six months ended March 31, 2021 from $44 million operating income for the six months ended March 31, 2020 largely due to the factors that led to the decrease in Music Publishing OIBDA noted above, partially offset by an increase in amortizable intangible assets related to the acquisition of music-related assets.

Corporate Expenses and Eliminations

Our operating loss from corporate expenses and eliminations decreased by $55 million to $100 million for the six months ended March 31, 2021 from $155 million for the six months ended March 31, 2020 which primarily includes the decrease in non-cash stock-based compensation and other related expenses of $53 million, decline in management fees of $6 million and lower overhead due to active cost management efforts, partially offset by higher employee related costs and public company related expenses.

Our OIBDA loss from corporate expenses and eliminations decreased by $59 million to $91 million for the six months ended March 31, 2021 from $150 million for the six months ended March 31, 2020 due to the operating loss factors noted above.

FINANCIAL CONDITION AND LIQUIDITY

Financial Condition at December 31, 2020

At December 31, 2020, we had $3.387 billion of debt (which is net of $31 million of deferred financing costs), $566 million of cash and equivalents (net debt of $2.821 billion, defined as total debt, less cash and equivalents and deferred financing costs) and $16 million of Warner Music Group Corp.

Financial Condition at March 31, 2021

At March 31, 2021, we had $3.354 billion of debt (which is net of $31 million of deferred financing costs), $588 million of cash and equivalents (net debt of $2.766 billion, defined as total debt, less cash and equivalents and deferred financing costs) and $57 million of Warner Music Group Corp.

This compares to $3.104 billion of debt (which is net of $29 million of deferred financing costs), $553 million of cash and equivalents (net debt of $2.551 billion) and $63 million of Warner Music Group Corp.

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The following table summarizes our historical cash flows (in millions).

The financial data for the three months ended December 31, 2020 and December 31, 2019 are unaudited and have been derived from our consolidated interim financial statements included elsewhere herein.

Three Months Ended

The financial data for the six months ended March 31, 2021 and March 31, 2020 are unaudited and have been derived from our consolidated interim financial statements included elsewhere herein.

Six Months Ended

Cash provided by (used in):

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Operating Activities

Cash provided by operating activities was $169 million for the three months ended December 31, 2020 as compared with cash provided by operating activities of $78 million for the three months ended December 31, 2019.

The $91 million increase in cash provided by operating activities was primarily due to an increase in OIBDA, a decrease in cash interest payments, and timing of working capital.

Cash provided by operating activities was $319 million for the six months ended March 31, 2021 as compared with cash provided by operating activities of $164 million for the six months ended March 31, 2020.

The $155 million increase in cash provided by operating activities was primarily due to an increase in OIBDA and the timing of working capital, which includes continued A&R investment.

Investing Activities

Cash used in investing activities was $343 million for the three months ended December 31, 2020 as compared with cash used in investing activities of $32 million for the three months ended December 31, 2019.

The $343 million of cash used in investing activities in the three months ended December 31, 2020 consisted of $1 million relating to investments, $18 million relating to capital expenditures and $324 million to acquire music publishing rights and recorded music catalogs, a portion of which was debt-financed.

The $32 million of cash used in investing activities in the three months ended December 31, 2019 consisted of $6 million relating to investments, $15 million relating to capital expenditures and $11 million to acquire music publishing rights.

Cash used in investing activities was $404 million for the six months ended March 31, 2021 as compared with cash used in investing activities of $51 million for the six months ended March 31, 2020.

The $404 million of cash used in investing activities in the six months ended March 31, 2021 consisted of $39 million relating to investments, $38 million relating to capital expenditures and $327 million to acquire music related assets, a portion of which was debt-financed.

The $51 million of cash used in investing activities in the six months ended March 31, 2020 consisted of $5 million relating to investments, $28 million relating to capital expenditures and $18 million to acquire music publishing rights and recorded music catalogs.

Financing Activities

Cash provided by financing activities was $178 million for the three months ended December 31, 2020 as compared with cash used in financing activities of $207 million for the three months ended December 31, 2019.

The $178 million of cash provided by financing activities for the three months ended December 31, 2020 consisted of proceeds from debt issuance of $244 million which was used to fund investments, partially offset by dividends paid of $62 million, distributions to noncontrolling interest holders of $1 million and deferred financing costs of $3 million.

The $207 million of cash used in financing activities for the three months ended December 31, 2019 consisted of dividends paid of $206 million and distributions to noncontrolling interest holders of $1 million.

Cash provided by financing activities was $114 million for the six months ended March 31, 2021 as compared with cash used in financing activities of $245 million for the six months ended March 31, 2020.

The $114 million of cash provided by financing activities for the six months ended March 31, 2021 consisted of proceeds from debt issuance of $244 million which was used to fund investments, partially offset by dividends paid of $125 million, distributions to noncontrolling interest holders of $1 million and deferred financing costs of $4 million.

The $245 million of cash used in financing activities for the six months ended March 31, 2020 consisted of dividends paid of $244 million, which included a special cash dividend of $206 million, and distributions to noncontrolling interest holders of $1 million.

Our primary sources of liquidity are the cash flows generated from our subsidiaries’ operations, available cash and equivalents and funds available for drawing under our Revolving Credit Facility.

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We believe that our primary sources of liquidity will be sufficient to support our existing operations over the next twelve months.

In August 2019, we announced that we were beginning a financial transformation initiative to upgrade our information technology and finance infrastructure over the next two years, including related systems and processes, for which we currently expect upfront costs to be approximately $120 million, which includes capital expenditures of approximately $40 million to $50 million (approximately half of which was incurred in the 2020 fiscal year and the remainder of which is largely expected to be incurred in the 2021 fiscal year).

There has been a slight delay in the timing of the transformation initiative as a result of COVID-19 business interruption but it is still expected to be completed in the next fiscal year.

Annualized run-rate savings from the financial transformation initiative are expected to be between approximately $35 million and $40 million once fully implemented.

We are continuing our financial transformation initiative, launched in August 2019, to upgrade our information technology and finance infrastructure, including related systems and processes, for which we currently expect upfront costs to be approximately $130 million, which includes capital expenditures of approximately $40 million to $50 million.

There has been a slight delay in the timing of the transformation initiative as a result of COVID lasting over a year, but it is still expected to be delivered in fiscal 2022.

Annualized run-rate savings from the financial transformation initiative are expected to be between approximately $35 million and $40 million once fully implemented starting in fiscal 2023.

We expect that our primary sources of liquidity will be sufficient to fund these expenditures.

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Since Access acquired us in 2011, we have sought to extend the maturity dates on our outstanding indebtedness, reduce interest expense and improve our debt ratings.

For example, our S&P corporate credit rating has improved from B in 2017 to BB in 2020 with a stable outlook, and our Moody’s corporate family rating has improved from B1 in 2016 to Ba3 in 2020.

In addition, our weighted-average interest rate on our outstanding indebtedness has decreased from 10.5% in 2011 to 3.7% as of December 31, 2020.

Our nearest-term maturity date is in 2026 following effectiveness of the Senior Term Loan Credit Agreement Amendment in January 2021.

For example, our S&P corporate credit rating improved from B in 2017 to BB in 2020 with a stable outlook, and our Moody’s corporate family rating improved from B1 in 2016 to Ba3 in 2020.

In addition, our weighted-average interest rate on our outstanding indebtedness has decreased from 10.5% in 2011 to 3.7% as of March 31, 2021.

Our nearest-term maturity date is in 2026.

Our weighted-average interest rate was further reduced to 3.4% after the effectiveness of the Increase Supplement and 5.500% Senior Notes Redemption.

Subject to market conditions, we expect to continue to take opportunistic steps to extend our maturity dates and reduce related interest expense.

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Interest on the Additional Notes will accrue at the rate of 3.000% per annum and will be payable semi-annually in arrears on February 15 and August 15, commencing on February 15, 2021.

Acquisition Corp.

had the option to repurchase all or a portion of the Additional Notes at any time on one or more occasions on or prior to the fifth business day after December 18, 2020 (the “Special Optional Redemption Election Date”), but did not exercise its option to repurchase.

The Additional Notes were not initially fungible with the 3.000% Senior Secured Notes issued on August 12, 2020 (the “Original Notes”).

Following the Special Optional Redemption Election Date, Acquisition Corp.

caused the Additional Notes to bear the same CUSIP and ISIN numbers as the Original Notes (the “CUSIP Merger Event”).

Following the CUSIP Merger Event, the Additional Notes have identical terms as (other than the issue date and the issue price), and are fungible with, and treated as a single series of senior secured debt securities with, the Original Notes.

The proceeds of the issuance and sale of the aforementioned Additional Notes, in conjunction with cash on hand, were used to fund the acquisition of music-related assets for aggregate cash consideration of $338 million.

The Additional Notes have identical terms as (other than the issue date and the issue price) and are fungible with, and treated as a single series of senior secured debt securities with, the 3.000% Senior Secured Notes issued on August 12, 2020 (the “Original Notes”).

The net proceeds of the issuance and sale of the aforementioned Additional Notes of $241 million, in conjunction with cash on hand, were used to fund the acquisition of music-related assets for aggregate cash consideration of $338 million.

Senior Term Loan Facility

On January 20, 2021, Acquisition Corp.

entered into an amendment (the “Senior Term Loan Credit Agreement Amendment”) to the credit agreement, dated November 1, 2012 (as amended by the amendments dated as of May 9, 2013, July 13, 2016, November 21, 2016, May 22, 2017, December 6, 2017 and June 7, 2018), among Acquisition Corp., the guarantors party thereto, the lenders party thereto and Credit Suisse AG, as administrative agent, governing the Senior Term Loan Facility with Credit Suisse AG, as administrative agent, and the other financial institutions and lenders from time to time party thereto (the “Senior Term Loan Credit Agreement”).

The Senior Term Loan Credit Agreement Amendment (among other changes) (i) extends the maturity date of its outstanding term loans from November 1, 2023 to January 20, 2028 and (ii) removes a number of negative covenants limiting the ability of Acquisition Corp.

to take various actions.

The remaining negative covenants are limited to restrictions on liens, restrictions on fundamental changes and change of control, and are in a form substantially similar to the negative covenants in the 2.750% Senior Secured Notes due 2028, 3.875% Senior Secured Notes due 2030 and 3.000% Senior Secured Notes due 2031.

Senior Term Loan Facility Increase Supplement and Redemption of 5.500% Senior Notes due 2026

On March 8, 2021, Acquisition Corp.

entered into an Increase Supplement (the “Increase Supplement”), dated as of March 8, 2021, among Acquisition Corp., the guarantors party thereto, WMG Holdings Corp., Credit Suisse AG, Cayman Islands Branch, as increasing lender, and Credit Suisse AG, as administrative agent, to the Senior Term Loan Credit Agreement, whereby prior to April 22, 2021 and subject to the satisfaction of certain conditions, Acquisition Corp.

may borrow additional term loans in an amount up to $325 million for an aggregate principal amount outstanding under the Senior Term Loan Credit Agreement of up to $1,145 million.

The Increase Supplement was entered into to provide for the redemption of Acquisition Corp.’s 5.500% Senior Notes due 2026 (the “5.500% Notes”).

On April 14, 2021, Acquisition Corp.

borrowed additional term loans in an amount of $325 million under the Increase Supplement.

Following such borrowing, there was an aggregate principal amount outstanding under the Senior Term Loan Credit Agreement of $1,145 million.

See Note 15 to our unaudited interim consolidated financial statements included in Part I to this Quarterly Report.

On April 15, 2021, Acquisition Corp.

redeemed all of the outstanding 5.500% Notes.

The redemption price for the 5.500% Notes was approximately $343 million, equivalent to 102.750% of the principal amount of the 5.500% Notes, plus accrued but unpaid interest thereon to, but excluding, the redemption date, which was April 15, 2021.

See Note 15 to our unaudited interim consolidated financial statements included in Part I to this Quarterly Report.

Revolving Credit Facility

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entered into an amendment to the Revolving Credit Agreement (the “Second Amendment”) which, among other things, extended the final maturity of the Revolving Credit Facility from January 31, 2023 to April 3, 2025.

On March 1, 2021, Acquisition Corp.

entered into an amendment (the “Revolving Credit Agreement Amendment”) to the Revolving Credit Agreement among Acquisition Corp., the several banks and other financial institutions party thereto and Credit Suisse AG, as administrative agent, governing Acquisition Corp.’s revolving credit facility with Credit Suisse AG, as administrative agent, and the other financial institutions and lenders from time to time party thereto.

The Revolving Credit Agreement Amendment (among other changes) adds certain exceptions and increases the leverage ratio below which Acquisition Corp.

can access certain baskets in connection with Acquisition Corp.’s negative covenants, including those related to incurrence of indebtedness, restricted payments and covenant suspension.

We expect Acquisition Corp.

to be able to suspend certain covenants set forth in the Revolving Credit Agreement based on the determination that the total indebtedness to EBITDA ratio is below the required threshold specified in the Revolving Credit Agreement.

Acquisition Corp.

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provided that, for each of clauses (i) and (ii), the applicable margin with respect to such loans is subject to adjustment upon achievement of certain leverage ratios as set forth in a leverage-based pricing grid in the Revolving Credit Agreement.

Based on the Senior Secured Indebtedness to EBITDA Ratio of 3.15x at December 31, 2020, the applicable margin for Eurodollar loans would be 1.625% instead of 1.875% and the applicable margin for ABR loans would be 0.625% instead of 0.875% in the case of 2020 Revolving Loans (as defined in the Revolving Credit Agreement).

Existing Debt as of December 31, 2020

As of December 31, 2020, our long-term debt, all of which was issued by Acquisition Corp., was as follows (in millions):

Based on the Senior Secured Indebtedness to EBITDA Ratio of 2.98x at March 31, 2021, the applicable margin for Eurodollar loans would be 1.375% instead of 1.875% and the applicable margin for ABR loans would be 0.375% instead of 0.875% in the case of 2020 Revolving Loans (as defined in the Revolving Credit Agreement).

Existing Debt as of March 31, 2021

As of March 31, 2021, our long-term debt, all of which was issued by Acquisition Corp., was as follows (in millions):

Revolving Credit Facility (a) $ —

Senior Term Loan Facility due 2023 (b) 815

3.625% Senior Secured Notes due 2026 (c) 545

2.750% Senior Secured Notes due 2028 (d) 392

3.875% Senior Secured Notes due 2030 (e) 529

3.000% Senior Secured Notes due 2031 (f) 784

5.500% Senior Notes due 2026 (g) 322

Total long-term debt, including the current portion (h) $ 3,387

Senior Term Loan Facility due 2028 820

3.625% Senior Secured Notes due 2026 (€445 face amount) 524

2.750% Senior Secured Notes due 2028 (€325 face amount) 383

3.875% Senior Secured Notes due 2030 535

3.000% Senior Secured Notes due 2031 800

5.500% Senior Notes due 2026 325

Total long-term debt, including the current portion $ 3,387

Issuance premium less unamortized discount and unamortized deferred financing costs (33)

Total long-term debt, including the current portion, net $ 3,354

______________________________________

(a) Reflects $300 million of commitments under the Revolving Credit Facility available at December 31, 2020, less letters of credit outstanding of approximately $10 million at December 31, 2020.

There were no loans outstanding under the Revolving Credit Facility at December 31, 2020.

(b) Principal amount of $820 million less unamortized discount of $1 million and unamortized deferred financing costs of $4 million at December 31, 2020.

On January 20, 2021, Acquisition Corp.

entered into an amendment of the credit agreement governing the Senior Term Loan Facility which, among other things, extends the maturity date of its outstanding term loans from November 1, 2023 to January 20, 2028 and removes a number of negative covenants limiting the ability of Acquisition Corp.

to take various actions.

See Note 15 to our unaudited interim consolidated financial statements included in Part I to this Quarterly Report.

Above amount represents the dollar equivalent of such note at December 31, 2020.

Principal amount of $543 million and an additional issuance premium of $7 million, less unamortized deferred financing costs of $5 million at December 31, 2020.

(d) Face amount of €325 million at December 31, 2020.

Above amount represents the dollar equivalent of such note at December 31, 2020.

Principal amount of $396 million less unamortized deferred financing costs of $4 million at December 31, 2020.

(e) Principal amount of $535 million less unamortized deferred financing costs of $6 million at December 31, 2020.

(f) Principal amount of $800 million at December 31, 2020 less unamortized discount of $7 million and unamortized deferred financing costs of $9 million at December 31, 2020.

On November 2, 2020, Acquisition Corp.

issued an additional $250 million in aggregate principal amount of its 3.000% Senior Secured Notes due 2031.

(g) Principal amount of $325 million less unamortized deferred financing costs of $3 million at December 31, 2020.

(h) Principal amount of debt of $3.419 billion and an additional issuance premium of $7 million, less unamortized discount of $8 million and unamortized deferred financing costs of $31 million at December 31, 2020.

(a) Reflects $300 million of commitments under the Revolving Credit Facility available at March 31, 2021, less letters of credit outstanding of approximately $10 million at March 31, 2021.

There were no loans outstanding under the Revolving Credit Facility at March 31, 2021.

For further discussion of our debt agreements, see “Liquidity” in the “Financial Condition and Liquidity” section of our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.

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Therefore, there can be no assurance that the Company will pay any dividends to holders of the Company’s common stock, or as to the amount of any such dividends.

On November 13, 2020, the Company’s board of directors declared a cash dividend of $0.12 per share on the Company’s Class A Common Stock and Class B Common Stock, as well as related payments under certain stock-based compensation plans, which was paid to stockholders on December 1, 2020.

The Company paid an aggregate of approximately $62 million in cash dividends to stockholders and participating security holders for the three months ended December 31, 2020.

On February 11, 2021, the Company’s board of directors declared a cash dividend of $0.12 per share on the Company’s Class A Common Stock and Class B Common Stock, as well as related payments under certain stock-based compensation plans, which was paid to stockholders on March 1, 2021.

The Company paid an aggregate of approximately $63 million and $125 million, or $0.12 and $0.24 per share, in cash dividends to stockholders and participating security holders for the three and six months ended March 31, 2021, respectively.

Covenant Compliance

The Company was in compliance with its covenants under its outstanding notes, the Revolving Credit Facility and the Senior Term Loan Facility as of December 31, 2020.

The Company was in compliance with its covenants under its outstanding notes, the Revolving Credit Facility and the Senior Term Loan Facility as of March 31, 2021.

On January 18, 2019, we delivered a notice to the trustee under the 2012 Secured Indenture and 2014 Unsecured Indenture changing the Fixed GAAP Date, as defined under the indentures, to October 1, 2018.

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Our ability to borrow funds under the Revolving Credit Facility may depend upon our ability to meet the leverage ratio test at the end of a fiscal quarter to the extent we have drawn a certain amount of revolving loans.

We expect Acquisition Corp.

EBITDA as defined in the Revolving Credit Facility is based on Consolidated Net Income (as defined in the Revolving Credit Facility), both of which terms differ from the terms “EBITDA” and “net income” as they are commonly used.

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The following is a reconciliation of net (loss) income, which is a U.S.

GAAP measure of our operating results, to Adjusted EBITDA as defined, for the most recently ended four fiscal quarters, or the twelve months ended December 31, 2020, for the twelve months ended December 31, 2019 and for the three months ended December 31, 2020 and December 31, 2019.

In addition, the reconciliation includes the calculation of the Senior Secured Indebtedness to Adjusted EBITDA ratio, which we refer to as the Leverage Ratio, under the Revolving Credit Agreement for the most recently ended four fiscal quarters, or the twelve months ended December 31, 2020.

GAAP measure of our operating results, to Adjusted EBITDA as defined, for the most recently ended four fiscal quarters, or the twelve months ended March 31, 2021, for the twelve months ended March 31, 2020 and for the three months ended March 31, 2021 and March 31, 2020.

The terms and related calculations are defined in the Revolving Credit Agreement.

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Twelve Months Ended

December 31, Three Months Ended

March 31, Three Months Ended

2021 2020 2021 2020

Net (Loss) Income $ (302) $ 153 $ 117 $ (74)

Income tax (benefit) expense 53 (36) 35 5

Income tax expense (benefit) 116 (97) 51 (12)

Interest expense, net 124 137 32 33

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(a) For the twelve months ended December 31, 2020, reflects a net loss incurred on the early extinguishment of our debt incurred as part of the June 2020 redemption of our 4.125% Senior Secured Notes and 4.875% Senior Secured Notes, the June 2020 tender for and the August 2020 redemption of the 5.000% Senior Secured Notes and the August 2020 partial repayment of the Senior Term Loan Facility.

For the twelve months ended December 31, 2019, reflects a net loss incurred on the early extinguishment of our debt incurred as part of the May 2019 redemption of the remaining 5.625% Secured Notes.

(a) For the twelve months ended March 31, 2021, reflects a net loss incurred on the early extinguishment of our debt incurred as part of the June 2020 redemption of our 4.125% Senior Secured Notes and 4.875% Senior Secured Notes, the June 2020 tender for and the August 2020 redemption of the 5.000% Senior Secured Notes and the August 2020 partial repayment of the Senior Term Loan Facility.

For the twelve months ended March 31, 2020, reflects a net loss incurred on the early extinguishment of our debt incurred as part of the May 2019 redemption of the remaining 5.625% Secured Notes.

(b) Reflects net gain on sale of securities and divestitures.

(d) Reflects losses from hedging activities and unrealized losses (gains) due to foreign exchange on our Euro-denominated debt and intercompany transactions.

(d) Reflects losses (gains) from hedging activities and unrealized losses (gains) due to foreign exchange on our Euro-denominated debt and intercompany transactions.

(e) Reflects management fees and related expenses paid to Access.

For the twelve months ended December 31, 2020, amounts include a one-time fee of $13 million related to termination of the management agreement with Access.

Prior to termination of the management agreement, the annual fee was equal to the greater of a base amount, equal to approximately $4 million for the twelve months ended December 31, 2020, and 1.5% of EBITDA (as defined in the indenture governing the redeemed Holdings 13.75% Senior Notes due 2019) of the Company for the applicable fiscal year, plus expenses.

(f) Reflects transaction costs, including qualifying IPO costs of $76 million for the twelve months ended December 31, 2020.

(g) Reflects costs associated with our transformation initiatives and IT system updates, which includes costs of $6 million and $27 million related to our finance transformation for the three and twelve months ended December 31, 2020, respectively, as well as $10 million and $24 million for the three and twelve months ended December 31, 2019, respectively.

For the twelve months ended March 31, 2021, amounts mainly include a one-time fee of $13 million related to termination of the management agreement with Access upon completion of the IPO in June 2020.

Prior to termination of the management agreement, the annual fee was equal to the greater of a base amount and 1.5% of EBITDA (as defined in the indenture governing the redeemed Holdings 13.75% Senior Notes due 2019) of the Company for the applicable fiscal year, plus expenses.

(f) Reflects transaction costs, including Senior Term Loan Credit Agreement Amendment fees of $3 million and qualifying IPO costs of $72 million for the twelve months ended March 31, 2021.

(g) Reflects costs associated with our transformation initiatives and IT system updates, which includes costs of $8 million and $25 million related to our finance transformation for the three and twelve months ended March 31, 2021, respectively, as well as $10 million and $31 million for the three and twelve months ended March 31, 2020, respectively.

(h) Reflects non-cash stock-based compensation expense related to the Warner Music Group Corp.

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(i) Reflects non-cash activity, including the unrealized losses (gains) on the mark-to-market of an equity method investment, investment losses (gains) and other non-cash impairments.

(j) Reflects expected savings resulting from transformation initiatives and pro forma impact of specified transactions for the three and twelve months ended December 31, 2020.

Certain of these costs savings initiatives and transactions were identified in the current quarter and as a result the proforma impact was not included in the three and twelve months ended September 30, 2020, the impact of which would have been approximately a $29 million increase in the previously reported quarters included in the twelve months ended December 31, 2020 Adjusted EBITDA.

(j) Reflects expected savings resulting from transformation initiatives and pro forma impact of specified transactions for the three and twelve months ended March 31, 2021.

Certain of these cost savings initiatives and transactions impacted quarters prior to the quarter during which they were identified within the last twelve-month period.

The pro forma impact of these

specified transactions and initiatives resulted in a $24 million increase in the twelve months ended March 31, 2021 Adjusted EBITDA.

(k) Reflects the principal balance of senior secured debt at Acquisition Corp.

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(l) Reflects the ratio of Senior Secured Indebtedness, including Revolving Credit Agreement Indebtedness, to Adjusted EBITDA.

This is calculated net of cash and equivalents of the Company as of December 31, 2020 not exceeding $250 million.

This is calculated net of cash and equivalents of the Company as of March 31, 2021 not exceeding $250 million.

If the outstanding aggregate principal amount of borrowings and drawings under letters of credit which have not been reimbursed under our Revolving Credit Facility is greater than $105 million at the end of a fiscal quarter, the maximum leverage ratio permitted under the Revolving Credit Facility is 5.00:1.00.

The Company’s Revolving Credit Facility does not impose any “leverage ratio” maintenance requirement on the Company when the aggregate principal amount of borrowings and drawings under letters of credit, which have not been reimbursed under the Revolving Credit Facility, is less than or equal to $105 million at the end of a fiscal quarter.

We expect Acquisition Corp.

Management believes that funds generated from our operations and borrowings under the Revolving Credit Facility and available cash and equivalents will be sufficient to fund our debt service requirements, working capital requirements and capital expenditure requirements for the foreseeable future.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis