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Item 2. Management’s Discussion and Analysis

2023-02-09 compared with 2022-08-09 · 199 added, 506 removed, 435 unchanged (62% 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 June 30, 2022 (the “Quarterly Report”).

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

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In addition, even if our results of operations, financial condition and cash flows, and the development of the market in which we operate, are consistent with the forward-looking statements contained in this Quarterly Report, those results or developments may not be indicative of results or developments in subsequent periods.

New factors emerge from time to time that may cause our business not to develop as we expect, and it is not possible for us to predict all of them.

New factors emerge from time to time that may cause our business not to develop as we expect, and it is not possible for us to accurately predict all of them.

Factors that could cause actual results and outcomes to differ from those reflected in forward-looking statements include, without limitation:

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• potential employment and withholding liabilities if our recording artists and songwriters are characterized as employees;

• any delays and difficulties in satisfying obligations incident to being a public company;

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All forward-looking statements made in this Quarterly Report are qualified by these cautionary statements.

assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise.

Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise.

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.

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• Results of operations.

This section provides an analysis of our results of operations for the three and nine months ended June 30, 2022 and June 30, 2021.

This section provides an analysis of our results of operations for the three months ended December 31, 2022 and December 31, 2021.

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 nine months ended June 30, 2022 and June 30, 2021, as well as a discussion of our financial condition and liquidity as of June 30, 2022.

This section provides an analysis of our cash flows for the three months ended December 31, 2022 and December 31, 2021, as well as a discussion of our financial condition and liquidity as of December 31, 2022.

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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Our renowned family of iconic record labels, including Atlantic Records, Warner Records, Elektra Records and Parlophone Records, is home to many of the world’s most popular and influential recording artists.

In addition, Warner Chappell Music, our global music publishing business, boasts an extraordinary catalog that includes timeless standards and contemporary hits, representing works by over 100,000 songwriters and composers, with a global collection of more than one million musical compositions.

In addition, Warner Chappell Music, our global music publishing business, boasts an extraordinary

catalog that includes timeless standards and contemporary hits, representing works by over 100,000 songwriters and composers, with a global collection of more than one million musical compositions.

We classify our business interests into two fundamental operations:

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In the United States, our Recorded Music business is conducted principally through our major record labels—Atlantic Records and Warner Records.

In October 2018, we launched Elektra Music Group in the United States as a standalone label group, which comprises the Elektra, Fueled by Ramen and Roadrunner labels, and in December 2021, we acquired 300 Entertainment and subsequently launched 300 Elektra Entertainment, or 3EE, a frontline label group that brings together the multi-genre power of 300 Entertainment and Elektra.

Our Recorded Music business also includes Rhino Entertainment, a division that specializes in marketing our recorded music catalog through compilations, reissuances of previously released music and video titles and releasing previously unreleased material from our vault.

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and various distribution centers and ventures operated internationally.

In addition to our music being sold in physical retail outlets, our music is also sold in physical form to online physical retailers, such as amazon.com, barnesandnoble.com and bestbuy.com, and distributed in digital form to an expanded universe of digital partners, including streaming services such as those of Amazon, Apple, Deezer, SoundCloud, Spotify, Tencent Music Entertainment Group and YouTube, radio services such as iHeart Radio and SiriusXM and other download services.

In addition to our music being sold in physical retail outlets, our music is also sold in physical form to online physical retailers, such as amazon.com, barnesandnoble.com and bestbuy.com, and distributed in digital form to an expanded universe of digital partners, including streaming services such as those of Amazon, Apple, Deezer, SoundCloud, Spotify, Tencent Music and YouTube, radio services such as iHeart Radio and SiriusXM and other download services.

We have integrated the marketing of digital content into all aspects of our business, including artists and repertoire (“A&R”) and distribution.

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Under these agreements, we provide services to and participate in recording artists’ activities outside the traditional recorded music business such as touring, merchandising and sponsorships.

We have built and acquired artist services capabilities and platforms for marketing and distributing this broader set of

music-related rights and participating more widely in the monetization of the artist brands we help create.

We have built and acquired artist services capabilities and platforms for marketing and distributing this broader set of music-related rights and participating more widely in the monetization of the artist brands we help create.

We believe that entering into expanded-rights deals and enhancing our artist services capabilities in areas such as merchandising, VIP ticketing, fan clubs, concert promotion and management has permitted us to diversify revenue streams and capitalize on other revenue opportunities.

This provides for improved long-term relationships with our recording artists and allows us to more effectively connect recording artists and fans.

provides for improved long-term relationships with our recording artists and allows us to more effectively connect recording artists and fans.

Recorded Music revenues are derived from four main sources:

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Fiscal Quarter End

The Company maintains a 52-53 week fiscal year ending on the last Friday in each reporting period.

The fiscal year ended September 30, 2022 includes 53 weeks, and the fiscal year ended September 30, 2021 included 52 weeks.

The additional week in fiscal year 2022 fell in the fiscal quarter ended December 31, 2021.

Accordingly, the results of operations for the nine months ended June 30, 2022 reflect 40 weeks compared to 39 weeks for the nine months ended June 30, 2021.

For the nine months ended June 30, 2022, the revenue benefit of the additional week was approximately $73 million, primarily reflected in Recorded Music streaming revenue.

Both the three months ended June 30, 2022 and June 30, 2021 include 13 weeks.

Prior to the start of the 2023 fiscal year, the Company maintained a 52-53 week fiscal year ending on the last Friday in each reporting period.

Starting with the 2023 fiscal year, the Company transitioned to a reporting calendar in which the reporting periods end on the last day of the calendar quarter.

The fiscal year ended September 30, 2022 included 53 weeks, with the additional week falling in the fiscal quarter ended December 31, 2021.

Accordingly, the results of operations for the three months ended December 31, 2021 reflect 14 weeks, or 98 days, compared to 92 days for the three months ended December 31, 2022.

For the three months ended December 31, 2021, the revenue benefit of the additional week was approximately $73 million, primarily reflected in Recorded Music streaming revenue.

Russia-Ukraine Conflict

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It is unclear how long the global pandemic will last due to the possibility of new variants and sub-variants, increases in infection rates and renewed government action to slow the spread of the virus, and as such, it cannot be predicted to what extent the global pandemic will continue to impact the demand for our music and related services.

Our results of operations, cash flows and financial condition at and for both the three and nine months ended June 30, 2022 and 2021 were adversely affected by the global pandemic despite a partial recovery starting in fiscal year 2021 as businesses began to reopen and concerts and other live music resumed.

For both the three and nine months ended June 30, 2022 and 2021, costs recognized by the Company attributable to COVID were not significant.

Our results of operations, cash flows and financial condition at and for both the three months ended December 31, 2022 and 2021 were adversely affected by the global pandemic despite a partial recovery starting in fiscal year 2021 as businesses began to reopen and concerts and other live music resumed.

For both the three months ended December 31, 2022 and 2021, costs recognized by the Company attributable to COVID were not significant.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2022 Compared with Three Months Ended June 30, 2021

Three Months Ended December 31, 2022 Compared with Three Months Ended December 31, 2021

Consolidated Results

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For the Three Months Ended

June 30, 2022 vs.

December 31, 2022 vs.

2022 2021 $ Change % Change

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Total Revenues

Total revenues increased by $92 million, or 7%, to $1,432 million for the three months ended June 30, 2022 from $1,340 million for the three months ended June 30, 2021.

Consistent with the prior two quarters, the quarter included the impact of a new deal with one of the Company’s digital partners affecting Recorded Music streaming revenue.

The increase includes $63 million of unfavorable currency exchange fluctuations.

Prior to intersegment eliminations, Recorded Music and Music Publishing revenues represented 83% and 17% of total revenue for the three months ended June 30, 2022, respectively, and 86% and 14% of total revenue for the three months ended June 30, 2021, respectively.

Total revenues decreased by $126 million, or 8%, to $1,488 million for the three months ended December 31, 2022 from $1,614 million for the three months ended December 31, 2021.

The prior-year quarter included an additional week, primarily reflected in Recorded Music streaming revenue.

The decrease includes $84 million of unfavorable currency exchange fluctuations.

Prior to intersegment eliminations, Recorded Music and Music Publishing revenues represented 83% and 17% of total revenue for the three months ended December 31, 2022, respectively, and 86% and 14% of total revenue for the three months ended December 31, 2021, respectively.

Prior to intersegment eliminations, U.S.

and international revenues represented 45% and 55% of total revenues for the three months ended June 30, 2022, respectively, and 44% and 56% of total revenues for the three months ended June 30, 2021, respectively.

Total digital revenues after intersegment eliminations increased by $16 million, or 2%, to $944 million for the three months ended June 30, 2022 from $928 million for the three months ended June 30, 2021.

Total streaming revenue increased 3% primarily driven by growth in Music Publishing of 30% which includes a benefit in the quarter of $17 million resulting from a July 1 remand ruling by the Copyright Royalty Board in Phonorecords III upholding higher percentage revenue of U.S.

mechanical royalty rates for 2018 to 2022 and reflects amounts expected to be paid (the “CRB Rate Benefit”).

Recorded Music streaming revenue decreased by 1% primarily due to an unfavorable impact of foreign currency exchanges rates of $28 million, the impact of the new deal with one of the Company’s digital partners and an $11 million catch-up payment from one of the Company’s digital partners that benefited the prior-year quarter (the “Catch-Up Payment”).

Total digital revenues represented 66% and 69% of consolidated revenues for the three months ended June 30, 2022 and June 30, 2021, respectively.

The decrease in digital revenues as a percentage of total revenue is due to the continued recovery of artist services and expanded-rights revenue, which was impacted by COVID in the prior-year quarter, as well as continued growth of performance revenue in the quarter.

Prior to intersegment eliminations, total digital revenues for the three months ended June 30, 2022 were composed of U.S.

and international revenues represented 45% and 55% of total revenues for each of the three months ended December 31, 2022 and December 31, 2021.

Total digital revenues after intersegment eliminations decreased by $50 million, or 5%, to $952 million for the three months ended December 31, 2022 from $1,002 million for the three months ended December 31, 2021.

Total streaming revenue decreased 4% with growth in Music Publishing of 13%, offset by a decline in Recorded Music streaming revenue of 7% which includes $35 million of unfavorable currency exchange fluctuations.

Total digital revenues represented 64% and 62% of consolidated revenues for the three months ended December 31, 2022 and December 31, 2021, respectively.

Prior to intersegment eliminations, total digital revenues for the three months ended December 31, 2022 were composed of U.S.

revenues of $484 million and international revenues of $468 million, or 51% and 49% of total digital revenues, respectively.

Prior to intersegment eliminations, total digital revenues for the three months ended June 30, 2021 were composed of U.S.

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

revenues of $514 million and international revenues of $489 million, or 51% and 49% of total digital revenues, respectively.

Recorded Music revenues increased by $37 million, or 3%, to $1,189 million for the three months ended June 30, 2022 from $1,152 million for the three months ended June 30, 2021.

The increase includes $56 million of unfavorable currency exchange fluctuations.

Recorded Music revenues were $515 million and $504 million, or 43% and 44% of consolidated Recorded Music revenues, for the three months ended June 30, 2022 and June 30, 2021, respectively.

International Recorded Music revenues were $674 million and $648 million, or 57% and 56% of consolidated Recorded Music revenues, for the three months ended June 30, 2022 and June 30, 2021, respectively.

The overall increase in Recorded Music revenue was driven by increases in artist services and expanded-rights and licensing revenue.

Artist services and expanded-rights revenue increased by $57 million primarily due to higher touring activity, which was disrupted by COVID in the prior-year quarter, partially offset by an unfavorable impact of foreign currency exchange rates of $11 million.

Licensing revenue increased by $1 million, mainly due to higher synchronization and other licensing revenue, partially offset by an unfavorable impact of foreign currency exchanges rates of $5 million.

Recorded Music revenues decreased by $147 million, or 11%, to $1,239 million for the three months ended December 31, 2022 from $1,386 million for the three months ended December 31, 2021.

The decrease includes $74 million of unfavorable currency exchange fluctuations.

Recorded Music revenues were $539 million and $608 million, or 44% of consolidated Recorded Music revenues for each of the three months ended December 31, 2022 and December 31, 2021.

International Recorded Music revenues were $700 million and $778 million, or 56% of consolidated Recorded Music revenues for each of the three months ended December 31, 2022 and December 31, 2021.

The overall decrease in Recorded Music revenue was driven by decreases in digital, physical and artist services and expanded-rights revenues.

Digital revenue decreased by $67 million, which includes an unfavorable impact of foreign currency exchanges rates of $37 million.

Revenue from streaming services decreased by $8 million, or 1%, to $773 million for the three months ended June 30, 2022 from $781 million for the three months ended June 30, 2021 and was impacted by unfavorable foreign currency exchange rates of $28 million, or 4%.

Adjusted for the impact of the new deal with one of the Company’s digital partners and the Catch-Up Payment of $11 million, Recorded Music streaming revenue was up 5%.

Streaming revenue reflects continued growth, which was affected by market-related slowdown in ad-supported revenue.

The quarter included current year releases from Ed Sheeran, Gunna and Jack Harlow as well as carryover success from Dua Lipa and Ed Sheeran.

Download and other digital revenues decreased by $6 million, or 18%, to $28 million for the three months ended June 30, 2022 from $34 million for the three months ended June 30, 2021 due to the continued shift to streaming services.

Physical revenue decreased by $7 million, primarily driven by an unfavorable impact of foreign currency exchange rates of $9 million, which offset higher sales due to the success of new releases in Asia.

Music Publishing revenues increased by $56 million, or 30%, to $245 million for the three months ended June 30, 2022 from $189 million for the three months ended June 30, 2021.

Music Publishing revenues were $137 million and $90 million, or 56% and 48% of consolidated Music Publishing revenues, for the three months ended June 30, 2022 and June 30, 2021, respectively.

International Music Publishing revenues were $108 million and $99 million, or 44% and 52% of consolidated Music Publishing revenues, for the three months ended June 30, 2022 and June 30, 2021, respectively.

The overall increase in Music Publishing revenue was mainly driven by increases in digital revenue of $31 million, or 27%, performance revenue of $18 million and synchronization revenue of $7 million, partially offset by a decrease in mechanical revenue of $3 million.

The increase in digital revenue is primarily due to increases in streaming revenue driven by the continued growth in streaming services, the CRB Rate Benefit and timing of new digital deals, partially offset by an unfavorable impact of foreign currency exchange rates of $4 million.

Revenue from streaming services grew by $32 million, or 30%, to $140 million for the three months ended June 30, 2022 from $108 million for the three months ended June 30, 2021.

Adjusted for the CRB Rate Benefit, streaming revenue increased by 14%.

Performance revenue increased as bars, restaurants, concerts and live events continued to recover from COVID disruption, partially offset by an unfavorable impact of foreign currency exchange rates of $2 million.

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

Mechanical revenue decreased primarily due to an unfavorable impact of foreign currency exchange rates of $2 million.

Revenue from streaming services decreased by $56 million, or 7%, to $780 million for the three months ended December 31, 2022 from $836 million for the three months ended December 31, 2021 and was impacted by unfavorable foreign currency exchange rates of $35 million, or 4%.

Streaming revenue reflects a lighter release schedule and the impact of the additional week in the prior-year quarter, as well as a market-related slowdown in ad-supported revenue.

The quarter included carryover success from Ed Sheeran, Dua Lipa, Lizzo and Zach Bryan.

Download and other digital revenues decreased by $11 million, or 32%, to $23 million for the three months ended December 31, 2022 from $34 million for the three months ended December 31, 2021 due to the continued shift to streaming services.

Physical revenue decreased by $62 million, driven by an unfavorable impact of foreign currency exchange rates of $14 million and a lighter release schedule.

Artist services and expanded-rights revenue decreased by $26 million due to an unfavorable impact of foreign currency exchange rates of $17 million, lower direct-to-consumer merchandising revenue at EMP and lower advertising revenue.

Licensing revenue increased by $8 million, due to higher broadcast fees, synchronization and other third-party licensing revenue, partially offset by an unfavorable impact of foreign currency exchanges rates of $6 million.

Music Publishing revenues increased by $21 million, or 9%, to $250 million for the three months ended December 31, 2022 from $229 million for the three months ended December 31, 2021.

Music Publishing revenues were $133 million and $115 million, or 53% and 50% of consolidated Music Publishing revenues, for the three months ended December 31, 2022 and December 31, 2021, respectively.

International Music Publishing revenues were $117 million and $114 million, or 47% and 50% of consolidated Music Publishing revenues, for the three months ended December 31, 2022 and December 31, 2021, respectively.

The overall increase in Music Publishing revenue was mainly driven by increases in digital revenue of $16 million, or 12%, and performance revenue of $7 million, partially offset by a decrease in synchronization revenue of $3 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, partially offset by an unfavorable impact of foreign currency exchange rates of $4 million.

Revenue from streaming services grew by $17 million, or 13%, to $146 million for the three months ended December 31, 2022 from $129 million for the three months ended December 31, 2021.

Performance revenue increased due to continued growth from bars, restaurants, concerts and live events, partially offset by an unfavorable impact of foreign currency exchange rates of $3 million.

The decrease in synchronization revenue is attributable to lower commercial licensing activity in the U.S.

and the timing of legal settlements.

Mechanical revenue remained constant due to an unfavorable impact of foreign currency exchange rates of $2 million, which offset higher sales.

Revenue by Geographical Location

revenue increased by $58 million, or 10%, to $652 million for the three months ended June 30, 2022 from $594 million for the three months ended June 30, 2021.

Recorded Music revenue increased by $11 million, or 2%.

The primary driver was the increase of U.S.

Recorded Music artist services and expanded-rights revenue of $13 million, driven by higher advertising and merchandising revenues.

The increase in licensing revenue of $4 million is due to higher synchronization and other licensing revenue.

Recorded Music digital revenue decreased by $5 million, or 1%, due to the impact of the new deal with one of the Company’s digital partners and the Catch-Up Payment, partially offset by the continued growth in streaming services.

Recorded Music streaming revenue decreased by $2 million, or 1%, and download and other digital decreased by $3 million.

Recorded Music physical revenue decreased by $1 million.

Music Publishing revenue increased by $47 million, or 52%, to $137 million for the three months ended June 30, 2022 from $90 million for the three months ended June 30, 2021.

revenue decreased by $51 million, or 7%, to $672 million for the three months ended December 31, 2022 from $723 million for the three months ended December 31, 2021.

Recorded Music revenue decreased by $69 million, or 11%.

The primary driver was the decrease of U.S.

Recorded Music digital revenue of $47 million, or 11%.

Recorded Music streaming revenue decreased by $42 million, or 10%, as a result of a lighter release schedule and the impact of the additional week in the prior-year quarter, as well as a market-related slowdown in ad-supported revenue.

Download and other digital decreased by $5 million.

Decreases are also attributable to lower U.S.

Recorded Music physical revenue of $20 million due to lighter release schedule.

Recorded Music artist services and expanded-rights revenue decreased by $5 million primarily driven by lower advertising revenue.

The increase in licensing revenue of $3 million is primarily due to higher other third-party licensing revenue.

Music Publishing revenue increased by $18 million, or 16%, to $133 million for the three months ended December 31, 2022 from $115 million for the three months ended December 31, 2021.

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

Music Publishing of $33 million in digital revenue due to the continued growth in streaming services, the CRB Rate Benefit and timing of new digital deals.

Music Publishing of $17 million in digital revenue due to the continued growth in streaming services and timing of new digital deals.

Music Publishing streaming revenue increased by $18 million, or 25%.

Performance revenue increased by $8 million driven by recovery from COVID disruption.

The increase in synchronization revenue of $5 million is due to higher television and commercial income.

Performance revenue increased by $5 million driven by continued growth from bars, restaurants, concerts and live events.

The decrease in synchronization revenue of $4 million is due to lower commercial licensing activity and the timing of legal settlements.

Mechanical revenue remained constant.

International revenue increased by $35 million, or 5%, to $782 million for the three months ended June 30, 2022 from $747 million for the three months ended June 30, 2021.

International revenue decreased by $75 million, or 8%, to $817 million for the three months ended December 31, 2022 from $892 million for the three months ended December 31, 2021.

Excluding the unfavorable impact of foreign currency exchange rates of $84 million, International revenue increased by $9 million, or 1%.

International Recorded Music revenue increased by $26 million primarily due to increases in artist services and expanded-rights revenue of $44 million, partially offset by decreases in digital revenue of $9 million, physical revenue of $6 million and licensing revenue of $3 million.

International Recorded Music artist services and expanded-rights revenue increased by $44 million reflecting an increase in concert promotion, which was disrupted by COVID in the prior-year quarter, partially offset by the unfavorable impact of foreign currency exchange rates of $11 million.

International Recorded Music digital revenue decreased due to a $6 million, or 2%, decrease in streaming revenue which was primarily driven by an unfavorable impact of foreign currency exchange rates of $28 million, the impact of the new deal with one of the Company’s digital partners and the Catch-Up Payment, which offset the continued growth in streaming services.

International Recorded Music physical revenue decreased by $6 million, primarily driven by an unfavorable impact of foreign currency exchange rates, which offset higher sales due to the success of new releases.

International Recorded Music licensing revenue decreased by $3 million primarily due to an unfavorable impact of foreign currency exchange rates, which offset higher synchronization and other licensing revenue.

International Music Publishing revenue increased from the prior-year quarter by $9 million, or 9%, to $108 million for the three months ended June 30, 2022 from $99 million for the three months ended June 30, 2021.

This was primarily driven by the increase in performance revenue of $10 million and synchronization revenue of $2 million, partially offset by the decrease in mechanical revenue of $3 million and digital revenue of $2 million.

Performance revenue increased driven by continued recovery from COVID disruption.

Higher synchronization revenue is primarily driven by higher commercial and television income.

Mechanical revenue decreased primarily due to an unfavorable impact of foreign currency exchange rates.

International Recorded Music revenue decreased by $78 million primarily due to decreases in physical revenue of $42 million, artist services and expanded-rights revenue of $21 million and digital revenue of $20 million, partially offset by an increase in licensing revenue of $5 million.

International Recorded Music physical revenue decreased by $42 million, primarily driven by an unfavorable impact of foreign currency exchange rates and lighter release schedule.

International Recorded Music artist services and expanded-rights revenue decreased by $21 million due to the unfavorable impact of foreign currency exchange rates of $17 million and lower direct-to-consumer merchandising revenue at EMP.

International Recorded Music digital revenue decreased due to a $14 million, or 3%, decrease in streaming revenue which was primarily driven by an unfavorable impact of foreign currency exchange rates of $35 million.

International Recorded Music licensing revenue increased by $5 million primarily due to higher broadcast fees and synchronization revenue, partially offset by an unfavorable impact of foreign currency exchange rates.

International Music Publishing revenue increased from the prior-year quarter by $3 million, or 3%, to $117 million for the three months ended December 31, 2022 from $114 million for the three months ended December 31, 2021.

This was primarily driven by the increase in performance revenue of $2 million and synchronization revenue of $1 million, partially offset by the decrease in digital revenue of $1 million.

Performance revenue increased driven by continued growth from bars, restaurants, concerts and live events.

Higher synchronization revenue is primarily driven by commercial licensing activity.

International Music Publishing streaming revenue decreased by $1 million, or 2%, driven by an unfavorable impact of foreign currency exchange rates of $4 million while download and other digital remained constant.

Mechanical revenue remained constant primarily due to an unfavorable impact of foreign currency exchange rates, which offset higher sales.

Cost of revenues

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For the Three Months Ended

June 30, 2022 vs.

December 31, 2022 vs.

2022 2021 $ Change % Change

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Total cost of revenues $ 761 $ 818 $ (57) -7 %

Artist and repertoire costs increased by $42 million, to $486 million for the three months ended June 30, 2022 from $444 million for the three months ended June 30, 2021.

Artist and repertoire costs as a percentage of revenue increased to 34% for the three months ended June 30, 2022 from 33% for the three months ended June 30, 2021, primarily due to revenue mix and an unfavorable impact of foreign currency exchange rates.

Product costs increased by $43 million, to $280 million for the three months ended June 30, 2022 from $237 million for the three months ended June 30, 2021.

Product costs as a percentage of revenue increased to 20% for the three months ended June 30, 2022 from 18% for the three months ended June 30, 2021.

The overall increase as a percentage of revenue is due to revenue mix, primarily increases in artist services and expanded rights revenue.

Artist and repertoire costs decreased by $29 million, to $464 million for the three months ended December 31, 2022 from $493 million for the three months ended December 31, 2021.

Artist and repertoire costs as a percentage of revenue remained constant at 31% for each of the three months ended December 31, 2022 and December 31, 2021.

Product costs decreased by $28 million, to $297 million for the three months ended December 31, 2022 from $325 million for the three months ended December 31, 2021.

Product costs as a percentage of revenue remained constant at 20% for each of the three months ended December 31, 2022 and December 31, 2021.

Selling, general and administrative expenses

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For the Three Months Ended

June 30, 2022 vs.

December 31, 2022 vs.

2022 2021 $ Change % Change

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______________________________________

(1) Includes depreciation expense of $18 million and $19 million for the three months ended June 30, 2022 and June 30, 2021, respectively.

Total selling, general and administrative expense increased by $14 million, or 3%, to $451 million for the three months ended June 30, 2022 from $437 million for the three months ended June 30, 2021.

Expressed as a percentage of revenue, total selling, general and administrative expense decreased to 31% for the three months ended June 30, 2022 from 33% for the three months ended June 30, 2021.

General and administrative expense increased by $2 million to $225 million for the three months ended June 30, 2022 from $223 million for the three months ended June 30, 2021.

The increase in general and administrative expense was mainly due to increased employee related costs, professional services, restructuring and the impact of acquisitions, partially offset by lower non-cash stock-based compensation and other related expenses of $8 million, as a result of equity awards becoming fully vested, and the impact of the mark-to-market adjustment of an earn-out liability related to an acquisition.

Expressed as a percentage of revenue, general and administrative expense decreased to 16% for the three months ended June 30, 2022 from 17% for the three months ended June 30, 2021.

Selling and marketing expense increased by $8 million, or 4%, to $198 million for the three months ended June 30, 2022 from $190 million for the three months ended June 30, 2021.

Expressed as a percentage of revenue, selling and marketing expense remained constant at 14% for each of the three months ended June 30, 2022 and June 30, 2021.

Distribution expense was $28 million for the three months ended June 30, 2022 and $24 million for the three months ended June 30, 2021.

Expressed as a percentage of revenue, distribution expense remained constant at 2% for each of the three months ended June 30, 2022 and June 30, 2021.

(1) Includes depreciation expense of $21 million for each of the three months ended December 31, 2022 and December 31, 2021.

Total selling, general and administrative expense decreased by $57 million, or 11%, to $440 million for the three months ended December 31, 2022 from $497 million for the three months ended December 31, 2021.

Expressed as a percentage of revenue, total selling, general and administrative expense decreased to 30% for the three months ended December 31, 2022 from 31% for the three months ended December 31, 2021.

General and administrative expense decreased by $21 million to $221 million for the three months ended December 31, 2022 from $242 million for the three months ended December 31, 2021.

The decrease in general and administrative expense was mainly due to lower non-cash stock-based compensation and other related expenses of $9 million, favorable movements in foreign currency exchange rates of $13 million and the impact of the additional week in the prior-year quarter.

Expressed as a percentage of revenue, general and administrative expense remained constant at 15% for each of the three months ended December 31, 2022 and December 31, 2021.

Selling and marketing expense decreased by $26 million, or 12%, to $188 million for the three months ended December 31, 2022 from $214 million for the three months ended December 31, 2021.

Expressed as a percentage of revenue, selling and marketing expense remained constant at 13% for each of the three months ended December 31, 2022 and December 31, 2021.

Distribution expense was $31 million for the three months ended December 31, 2022 and $41 million for the three months ended December 31, 2021.

Expressed as a percentage of revenue, distribution expense decreased to 2% for the three months ended December 31, 2022 from 3% for the three months ended December 31, 2021 due to lower physical and artist services and expanded-rights revenue.

Net gain on divestiture

During the three months ended December 31, 2022, the Company sold its interest in certain sound recording rights and recorded a pre-tax gain of $41 million, which was recorded as a net gain on divestiture in the accompanying condensed consolidated statement of operations.

Reconciliation of Net Income Attributable to Warner Music Group Corp.

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For the Three Months Ended

June 30, 2022 vs.

December 31, 2022 vs.

2022 2021 $ Change % Change

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Income before income taxes 172 263 (91) -35 %

Other (income) expense (50) 18 (68) — %

Other expense (income) 61 (54) 115 — %

Interest expense, net 32 30 2 7 %

Loss on extinguishment of debt — 12 (12) -100 %

Operating income 265 239 26 11 %

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OIBDA $ 349 $ 320 $ 29 9 %

OIBDA decreased by $8 million to $233 million for the three months ended June 30, 2022 as compared to $241 million for the three months ended June 30, 2021 as a result of higher revenues, more than offset by higher cost of revenues and selling, general and administrative expenses.

Expressed as a percentage of total revenue, OIBDA margin decreased to 16% for the three months ended June 30, 2022 from 18% for the three months ended June 30, 2021 primarily due to growth of lower margin revenue streams and an unfavorable impact of foreign currency exchange rates, partially offset by the impact of the mark-to-market adjustment of an earn-out liability related to an acquisition.

OIBDA increased by $29 million to $349 million for the three months ended December 31, 2022 as compared to $320 million for the three months ended December 31, 2021 as a result of lower revenues, offset by lower cost of revenues and selling, general and administrative expenses and the net gain on sale of the Company’s interest in certain sound recording rights.

Expressed as a percentage of total revenue, OIBDA margin increased to 23% for the three months ended December 31, 2022 from 20% for the three months ended December 31, 2021 primarily due to the net gain on sale of the Company’s interest in certain sound recording rights and the favorable impact of foreign currency exchange rates.

Excluding the net gain on sale of the Company’s interest in certain sound recording rights, as a percentage of revenue, OIBDA margin increased to 21% for the three months ended December 31, 2022 from 20% for the three months ended December 31, 2021.

Depreciation expense

Our depreciation expense decreased by $1 million, or 5%, to $18 million for the three months ended June 30, 2022 from $19 million for the three months ended June 30, 2021.

Our depreciation expense remained constant at $21 million for each of the three months ended December 31, 2022 and December 31, 2021.

Amortization expense

Our amortization expense increased by $9 million, or 15%, to $69 million for the three months ended June 30, 2022 from $60 million for the three months ended June 30, 2021.

Our amortization expense increased by $3 million, or 5%, to $63 million for the three months ended December 31, 2022 from $60 million for the three months ended December 31, 2021.

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

Operating income

Our operating income decreased by $16 million to $146 million for the three months ended June 30, 2022 from $162 million for the three months ended June 30, 2021.

The decrease in operating income was due to the factors that led to the decrease in OIBDA and higher amortization as noted above.

Loss on extinguishment of debt

There was no loss on extinguishment of debt for the three months ended June 30, 2022.

We recorded a loss on extinguishment of debt in the amount of $12 million for the three months ended June 30, 2021 which represents the premium paid on early redemption and unamortized deferred financing costs related to the redemption of the 5.500% Notes.

Our operating income increased by $26 million to $265 million for the three months ended December 31, 2022 from $239 million for the three months ended December 31, 2021.

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

Interest expense, net

Our interest expense, net, increased to $32 million for the three months ended June 30, 2022 from $30 million for the three months ended June 30, 2021 due to higher principal balance due to the issuance of senior secured notes to partially fund the acquisition of a business and music-related assets.

Other (income) expense

Other income for the three months ended June 30, 2022 primarily includes foreign currency gains on our Euro-denominated debt of $46 million and currency exchange gains on our intercompany loans of $5 million.

This compares to foreign currency losses on our Euro-denominated debt of $12 million and unrealized losses of $5 million on the mark-to-market of equity investments for the three months ended June 30, 2021.

Our interest expense, net, increased to $32 million for the three months ended December 31, 2022 from $30 million for the three months ended December 31, 2021 due to a higher principal balance due to the issuance of senior secured notes to partially fund the acquisition of a business and music-related assets.

Other expense (income)

Other expense for the three months ended December 31, 2022 primarily includes foreign currency losses on our Euro-denominated debt of $68 million and unrealized losses on hedging activity of $8 million, partially offset by currency exchange gains on our intercompany loans of $15 million.

This compares to foreign currency gains on our Euro-denominated debt of $31 million, unrealized gains of $8 million on the mark-to-market of equity investments, currency exchange gains on our intercompany loans of $6 million and unrealized gains on hedging activity of $4 million for the three months ended December 31, 2021.

Income tax expense

Our income tax expense decreased by $2 million to $39 million for the three months ended June 30, 2022 from $41 million for the three months ended June 30, 2021.

The decrease of $2 million in income tax expense is primarily due to the impact of the change in the U.K.

statutory tax rate recognized in the prior-year quarter which did not recur this quarter, partially offset by the impact of higher pre-tax income in the current-year quarter.

Net income increased by $64 million to $125 million for the three months ended June 30, 2022 from $61 million for the three months ended June 30, 2021 as a result of the factors described above.

Our income tax expense decreased by $27 million to $48 million for the three months ended December 31, 2022 from $75 million for the three months ended December 31, 2021.

The decrease of $27 million in income tax expense is primarily due to the impact of lower pre-tax income in the current-year quarter.

Net income decreased by $64 million to $124 million for the three months ended December 31, 2022 from $188 million for the three months ended December 31, 2021 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 June 30, 2022 and no income attributable to noncontrolling interest for the three months ended June 30, 2021.

There was $2 million of income attributable to noncontrolling interest for the three months ended December 31, 2022 and $1 million of income attributable to noncontrolling interest for the three months ended December 31, 2021.

Business Segment Results

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December 31, 2022 vs.

2022 2021 $ Change % Change

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Recorded Music

Recorded Music revenue increased by $37 million, or 3%, to $1,189 million for the three months ended June 30, 2022 from $1,152 million for the three months ended June 30, 2021.

Recorded Music revenues were $515 million and $504 million, or 43% and 44% of consolidated Recorded Music revenues, for the three months ended June 30, 2022 and June 30, 2021, respectively.

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

Recorded Music revenue decreased by $147 million, or 11%, to $1,239 million for the three months ended December 31, 2022 from $1,386 million for the three months ended December 31, 2021.

Recorded Music revenues were $539 million and $608 million, or 44% and 44% of consolidated Recorded Music revenues, for the three months ended December 31, 2022 and December 31, 2021, respectively.

International Recorded Music revenues were $700 million and $778 million, or 56% and 56% of consolidated Recorded Music revenues, for the three months ended December 31, 2022 and December 31, 2021, respectively.

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

Cost of revenues

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December 31, 2022 vs.

2022 2021 $ Change % Change

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Total cost of revenues $ 608 $ 668 $ (60) -9 %

Recorded Music cost of revenues increased by $46 million, or 8%, to $606 million for the three months ended June 30, 2022 from $560 million for the three months ended June 30, 2021.

Expressed as a percentage of Recorded Music revenue, Recorded Music artist and repertoire costs decreased to 27% for the three months ended June 30, 2022 from 28% for the three months ended June 30, 2021.

The decrease is primarily attributable to revenue mix.

Expressed as a percentage of Recorded Music revenue, Recorded Music product costs increased to 24% for the three months ended June 30, 2022 from 21% for the three months ended June 30, 2021.

The overall increase as a percentage of revenue primarily relates to revenue mix due to an increase in lower-margin artist services and expanded-rights revenue.

Recorded Music cost of revenues decreased by $60 million, or 9%, to $608 million for the three months ended December 31, 2022 from $668 million for the three months ended December 31, 2021.

Expressed as a percentage of Recorded Music revenue, Recorded Music artist and repertoire costs remained constant at 25% for each of the three months ended December 31, 2022 and December 31, 2021.

Expressed as a percentage of Recorded Music revenue, Recorded Music product costs increased to 24% for the three months ended December 31, 2022 from 23% for the three months ended December 31, 2021.

The overall increase as a percentage of revenue primarily relates to revenue mix due to higher third-party distributed label revenue.

Selling, general and administrative expense

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December 31, 2022 vs.

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______________________________________

(1) Includes depreciation expense of $12 million and $14 million for the three months ended June 30, 2022 and June 30, 2021, respectively.

Recorded Music selling, general and administrative expense increased by $15 million, or 4%, to $371 million for the three months ended June 30, 2022 from $356 million for the three months ended June 30, 2021.

The increase in general and administrative expense was primarily due to increased employee related costs, professional services, restructuring and the impact of acquisitions, partially offset by lower non-cash stock-based compensation and other related expenses of $3 million, as a result of equity awards becoming fully vested, and the impact of the mark-to-market adjustment of an earn-out liability related to an acquisition.

The increase in selling and marketing expense was primarily due to increased employee related costs and higher travel expenses as limited travel resumed.

The increase in distribution expense was primarily due to higher artist services and expanded-rights revenue.

Expressed as a percentage of Recorded Music revenue, Recorded Music selling, general and administrative expense remained constant at 31% for each of the three months ended June 30, 2022 and June 30, 2021.

(1) Includes depreciation expense of $13 million and $14 million for the three months ended December 31, 2022 and December 31, 2021, respectively.

Recorded Music selling, general and administrative expense decreased by $54 million, or 13%, to $348 million for the three months ended December 31, 2022 from $402 million for the three months ended December 31, 2021.

The decrease in general and administrative expense was primarily due to the favorable impact of foreign currency exchange rates and lower non-cash stock-based compensation and other related expenses of $3 million.

The decrease in selling and marketing expense was primarily due to lower variable marketing spend.

The decrease in distribution expense was primarily due to lower physical and artist services and expanded-rights revenue.

Expressed as a percentage of Recorded Music revenue, Recorded Music selling, general and administrative expense decreased to 28% for the three months ended December 31, 2022 from 29% for the three months ended December 31, 2021.

Net gain on divestiture

During the three months ended December 31, 2022, the Company sold its interest in certain sound recording rights and recorded a pre-tax gain of $41 million which was recorded as a net gain on divestiture in the accompanying condensed consolidated statement of operations.

Operating Income and OIBDA

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December 31, 2022 vs.

2022 2021 $ Change % Change

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OIBDA $ 337 $ 330 $ 7 2 %

Recorded Music OIBDA decreased by $26 million to $224 million for the three months ended June 30, 2022 from $250 million for the three months ended June 30, 2021 as a result of higher revenues, more than offset by higher costs of revenue and selling, general and administrative expenses.

Expressed as a percentage of Recorded Music revenue, Recorded Music OIBDA margin decreased to 19% for the three months ended June 30, 2022 from 22% for the three months ended June 30, 2021 primarily due to revenue mix due to the growth of lower-margin artist services revenue and an unfavorable impact of foreign currency exchange rates, partially offset by the impact of the mark-to-market adjustment of an earn-out liability related to an acquisition.

Recorded Music operating income decreased by $31 million to $166 million for the three months ended June 30, 2022 from $197 million for the three months ended June 30, 2021 due to the factors that led to the decrease in Recorded Music OIBDA noted above and an increase in amortizable intangible assets related to the acquisition of music-related assets.

Recorded Music OIBDA increased by $7 million to $337 million for the three months ended December 31, 2022 from $330 million for the three months ended December 31, 2021 as a result of lower revenues, offset by lower cost of revenue and selling, general and administrative expenses and the net gain on sale of the Company’s interest in certain sound recording rights.

Expressed as a percentage of Recorded Music revenue, Recorded Music OIBDA margin increased to 27% for the three months ended December 31, 2022 from 24% for the three months ended December 31, 2021 primarily due to the net gain on sale of the Company’s interest in certain sound recording rights and the favorable impact of foreign currency exchange rates.

Excluding the net gain on sale of the Company’s interest in certain sound recording rights, OIBDA as a percentage of Recorded Music revenue remained constant at 24% for each of the three months ended December 31, 2022 and December 31, 2021.

Recorded Music operating income increased by $7 million to $283 million for the three months ended December 31, 2022 from $276 million for the three months ended December 31, 2021 due to the factors that led to the increase in Recorded Music OIBDA noted above and lower depreciation, partially offset by an increase in amortizable intangible assets related to the acquisition of music-related assets.

Excluding the net gain on sale of the Company’s interest in certain sound recording rights, Recorded Music operating income decreased by $34 million to $242 million for the three months ended December 31, 2022 from $276 million for the three months ended December 31, 2021.

Music Publishing

Music Publishing revenues increased by $56 million, or 30%, to $245 million for the three months ended June 30, 2022 from $189 million for the three months ended June 30, 2021.

Music Publishing revenues were $137 million and $90 million, or 56% and 48% of consolidated Music Publishing revenues, for the three months ended June 30, 2022 and June 30, 2021, respectively.

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

Music Publishing revenues increased by $21 million, or 9%, to $250 million for the three months ended December 31, 2022 from $229 million for the three months ended December 31, 2021.

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

Cost of revenues

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December 31, 2022 vs.

2022 2021 $ Change % Change

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Total cost of revenues $ 154 $ 151 $ 3 2 %

Music Publishing cost of revenues increased by $40 million, or 33%, to $162 million for the three months ended June 30, 2022 from $122 million for the three months ended June 30, 2021.

Expressed as a percentage of Music Publishing revenue, Music Publishing cost of revenues increased to 66% for the three months ended June 30, 2022 from 65% for the three months ended June 30, 2021 primarily attributable to revenue mix and an unfavorable impact of foreign currency exchange rates.

Music Publishing cost of revenues increased by $3 million, or 2%, to $154 million for the three months ended December 31, 2022 from $151 million for the three months ended December 31, 2021.

Expressed as a percentage of Music Publishing revenue, Music Publishing cost of revenues decreased to 62% for the three months ended December 31, 2022 from 66% for the three months ended December 31, 2021, primarily attributable to revenue mix and the favorable impact of foreign currency exchange rates.

Selling, general and administrative expense

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General and administrative expense (1) $ 27 $ 25 $ 2 8 %

Total selling, general and administrative expense $ 27 $ 25 $ 2 8 %

______________________________________

(1) Includes depreciation expense of $1 million for both the three months ended June 30, 2022 and June 30, 2021.

Music Publishing selling, general and administrative expense increased by $2 million, or 8%, to $27 million for the three months ended June 30, 2022 from $25 million for the three months ended June 30, 2021.

Expressed as a percentage of Music Publishing revenue, Music Publishing selling, general and administrative expense decreased to 11% for the three months ended June 30, 2022 from 13% for the three months ended June 30, 2021.

Operating Income and OIBDA

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

For the Three Months Ended

June 30, 2022 vs.

2022 2021 $ Change % Change

Operating income $ 33 $ 21 $ 12 57 %

Depreciation and amortization 24 22 2 9 %

OIBDA $ 57 $ 43 $ 14 33 %

Music Publishing OIBDA increased by $14 million, or 33%, to $57 million for the three months ended June 30, 2022 from $43 million for the three months ended June 30, 2021.

Expressed as a percentage of Music Publishing revenue, Music Publishing OIBDA margin remained constant at 23% for each of the three months ended June 30, 2022 and June 30, 2021 primarily due to strong operating performance, offset by revenue mix and an unfavorable impact of foreign currency exchange rates.

Music Publishing operating income increased by $12 million to $33 million for the three months ended June 30, 2022 from $21 million for the three months ended June 30, 2021 due to the factors that led to the increase 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 $3 million for the three months ended June 30, 2022 to $53 million from $56 million for the three months ended June 30, 2021, which primarily includes lower non-cash stock-based compensation and other related expenses of $4 million as a result of equity awards becoming fully vested, partially offset by the increase in expenses related to transformation initiatives.

Our OIBDA loss from corporate expenses and eliminations decreased by $4 million for the three months ended June 30, 2022 to $48 million from $52 million for the three months ended June 30, 2021 due to the operating loss factors noted above.

RESULTS OF OPERATIONS

Nine Months Ended June 30, 2022 Compared with Nine Months Ended June 30, 2021

Consolidated Results

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

For the Nine Months Ended

June 30, 2022 vs.

2022 2021 $ Change % Change

Revenue by Type

Digital $ 2,475 $ 2,298 $ 177 8 %

Physical 440 422 18 4 %

Total Digital and Physical 2,915 2,720 195 7 %

Artist services and expanded-rights 563 431 132 31 %

Licensing 244 221 23 10 %

Total Recorded Music 3,722 3,372 350 10 %

Performance 119 92 27 29 %

Digital 404 316 88 28 %

Mechanical 37 36 1 3 %

Synchronization 133 105 28 27 %

Other 11 7 4 57 %

Total Music Publishing 704 556 148 27 %

Intersegment eliminations (4) (3) (1) 33 %

Total Revenues $ 4,422 $ 3,925 $ 497 13 %

Revenue by Geographical Location

Recorded Music $ 1,641 $ 1,454 $ 187 13 %

Music Publishing 369 277 92 33 %

2,010 1,731 279 16 %

International Recorded Music 2,081 1,918 163 8 %

International Music Publishing 335 279 56 20 %

Total International 2,416 2,197 219 10 %

Intersegment eliminations (4) (3) (1) 33 %

Total Revenues $ 4,422 $ 3,925 $ 497 13 %

Total Revenues

Total revenues increased by $497 million, or 13%, to $4,422 million for the nine months ended June 30, 2022 from $3,925 million for the nine months ended June 30, 2021.

Consistent with the prior two quarters, the current fiscal year included an additional week, primarily reflected in Recorded Music streaming revenue.

Additionally, the current period included the impact of a new deal with one of the Company’s digital partners affecting Recorded Music streaming revenue.

The increase includes $113 million of unfavorable currency exchange fluctuations.

Prior to intersegment eliminations, Recorded Music and Music Publishing revenues represented 84% and 16% of total revenues for the nine months ended June 30, 2022, respectively, and 86% and 14% of total revenues for the nine months ended June 30, 2021, respectively.

Prior to intersegment eliminations, U.S.

and international revenues represented 45% and 55% for the nine months ended June 30, 2022, respectively, and 44% and 56% for the nine months ended June 30, 2021, respectively.

Total digital revenues after intersegment eliminations increased by $264 million, or 10%, to $2,877 million for the nine months ended June 30, 2022 from $2,613 million for the nine months ended June 30, 2021.

Total streaming revenue increased 11% driven by growth across Recorded Music and Music Publishing, including revenue from emerging streaming platforms.

Total digital revenues represented 65% and 67% of consolidated revenues for the nine months ended June 30, 2022 and June 30, 2021, respectively.

Prior to intersegment eliminations, total digital revenues for the nine months ended June 30, 2022 were composed of U.S.

revenues of $1,457 million and international revenues of $1,422 million, or 51% and 49% of total digital revenues, respectively.

Prior to intersegment eliminations, total digital revenues for the nine months ended June 30, 2021 were composed of U.S.

$1,308 million and international revenues of $1,306 million, or 50% of total digital revenues for each of U.S.

and international revenues.

Recorded Music revenues increased by $350 million, or 10%, to $3,722 million for the nine months ended June 30, 2022 from $3,372 million for the nine months ended June 30, 2021.

The increase includes $100 million of unfavorable currency exchange fluctuations.

Recorded Music revenues were $1,641 million and $1,454 million, or 44% and 43% of consolidated Recorded Music revenues, for the nine months ended June 30, 2022 and June 30, 2021, respectively.

International Recorded Music revenues were $2,081 million and $1,918 million, or 56% and 57% of consolidated Recorded Music revenues, for the nine months ended June 30, 2022 and June 30, 2021, respectively.

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

Digital revenue increased by $177 million as a result of the continued growth in streaming services, including growth in emerging streaming platforms, strength of releases including current year releases from Ed Sheeran and Silk Sonic as well as carryover success from Dua Lipa, Ed Sheeran and Bruno Mars.

Revenue from streaming services grew by $190 million, or 9%, to $2,385 million for the nine months ended June 30, 2022 from $2,195 million for the nine months ended June 30, 2021.

Adjusted for the benefit of the additional week and the impact of the new deal with one of the Company’s digital partners, Recorded Music streaming revenue was up 11%.

Streaming revenue growth was partially offset by an unfavorable impact of foreign currency exchange rates of $50 million, or 3%, and a decline in download and other digital revenues of $13 million, or 13%, to $90 million for the nine months ended June 30, 2022 from $103 million for the nine months ended June 30, 2021 due to the continued shift to streaming services.

Artist services and expanded-rights revenue increased by $132 million primarily due to higher touring activity and merchandising revenue, both of which were disrupted by COVID in the prior year, partially offset by an unfavorable impact of foreign currency exchange rates of $22 million.

Licensing revenue increased by $23 million, mainly due to higher synchronization and other licensing revenue, partially offset by an unfavorable impact of foreign currency exchange rates of $8 million.

Physical revenue increased by $18 million, or 4%, primarily from higher sales due to the success of new releases and an increased demand for vinyl products, partially offset by an unfavorable impact of foreign currency exchange rates of $17 million.

Music Publishing revenues increased by $148 million, or 27%, to $704 million for the nine months ended June 30, 2022 from $556 million for the nine months ended June 30, 2021.

Music Publishing revenues were $369 million and $277 million, or 52% and 50% of consolidated Music Publishing revenues, for the nine months ended June 30, 2022 and June 30, 2021, respectively.

International Music Publishing revenues were $335 million and $279 million, or 48% and 50% of Music Publishing revenues, for the nine months ended June 30, 2022 and June 30, 2021, respectively.

The overall increase in Music Publishing revenue was mainly driven by increases in digital revenue of $88 million, or 28%, synchronization revenue of $28 million, performance revenue of $27 million and mechanical revenue of $1 million.

The increase in digital revenue is primarily due to increases in streaming revenue driven by the continued growth in streaming services, including emerging streaming platforms, the CRB Rate Benefit and timing of new digital deals, partially offset by a shift in the collection of certain writer’s share income from certain digital service providers.

This change has no impact of Music Publishing OIBDA, but results in a slight improvement to OIBDA margin.

Revenue from streaming services grew by $87 million, or 29%, to $391 million for the nine months ended June 30, 2022 from $304 million for the nine months ended June 30, 2021.

Adjusted for the CRB Rate Benefit of $17 million, streaming revenue increased by 23%.

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

Performance revenue increased as bars, restaurants, concerts and live events continued to recover from COVID disruption.

Mechanical revenue increased from strong physical sales.

Revenue by Geographical Location

revenue increased by $279 million, or 16%, to $2,010 million for the nine months ended June 30, 2022 from $1,731 million for the nine months ended June 30, 2021.

Recorded Music revenue increased by $187 million, or 13%.

The primary driver was the increase of U.S.

Recorded Music digital revenue of $89 million driven by the continued growth in streaming services.

Recorded Music streaming revenue increased by $97 million, or 9%, partially offset by $8 million of download and other digital declines.

Recorded Music artist services and expanded-rights revenue increased by $56 million, primarily driven by higher merchandising and advertising revenues.

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

Recorded Music physical revenue of $27 million from higher sales due to the success of new releases and an increased demand for vinyl products.

The increase in licensing revenue of $15 million is due to higher synchronization activity.

Music Publishing revenue increased by $92 million, or 33%, to $369 million for the nine months ended June 30, 2022 from $277 million for the nine months ended June 30, 2021.

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

Music Publishing of $60 million in digital revenue due to the continued growth in streaming services, including emerging streaming platforms, the CRB Rate Benefit and timing of new digital deals, partially offset by a shift in the collection of writer’s share of U.S.

digital performance income from certain digital service providers.

Music Publishing streaming revenue increased by $61 million, or 36%.

The increase in synchronization revenue of $19 million is due to higher commercial and television income.

Performance revenue increased by $10 million driven by recovery from COVID disruption and mechanical revenue increased by $1 million.

International revenue increased by $219 million, or 10%, to $2,416 million for the nine months ended June 30, 2022 from $2,197 million for the nine months ended June 30, 2021.

Excluding the unfavorable impact of foreign currency exchange rates, International revenue increased by $332 million, or 16%.

International Recorded Music revenue increased by $163 million primarily due to increases in digital revenue of $88 million, artist services and expanded-rights revenue of $76 million and licensing revenue of $8 million, partially offset by the decrease in physical revenue of $9 million.

International Recorded Music digital revenue increased due to a $93 million, or 8%, increase in streaming services, which was partially offset by an unfavorable impact of foreign currency exchange rates of $50 million.

International Recorded Music artist services and expanded-rights revenue increased by $76 million primarily due to an increase in concert promotion which was disrupted by COVID in the prior year, partially offset by the unfavorable impact of foreign currency exchange rates of $22 million.

International Recorded Music licensing revenue increased by $8 million due to other licensing revenue and synchronization revenue, partially offset by the unfavorable impact of foreign currency exchange rates.

International Recorded Music physical revenue decreased by $9 million, primarily driven by an unfavorable impact of foreign currency exchange rates, which offset higher sales.

International Music Publishing revenue increased by $56 million, or 20%, to $335 million for the nine months ended June 30, 2022 from $279 million for the nine months ended June 30, 2021.

This was primarily driven by the increase in digital revenue of $28 million, performance revenue of $17 million and synchronization revenue of $9 million.

International Music Publishing streaming revenue increased by $26 million, or 19%.

Performance revenue increased as businesses continued to recover from COVID disruption.

Higher synchronization revenue is primarily driven by higher television and commercial income.

Mechanical revenue remained constant due to higher sales, which was offset by an unfavorable impact of foreign currency exchange rates of $2 million.

Cost of revenues

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

For the Nine Months Ended

June 30, 2022 vs.

2022 2021 $ Change % Change

Artist and repertoire costs $ 1,427 $ 1,288 $ 139 11 %

Product costs 854 702 152 22 %

Total cost of revenues $ 2,281 $ 1,990 $ 291 15 %

Artist and repertoire costs increased by $139 million, to $1,427 million for the nine months ended June 30, 2022 from $1,288 million for the nine months ended June 30, 2021.

Artist and repertoire costs as a percentage of revenue decreased to 32% for the nine months ended June 30, 2022 from 33% for the nine months ended June 30, 2021, primarily due to revenue mix and timing of artist and repertoire investments.

Product costs increased by $152 million, to $854 million for the nine months ended June 30, 2022 from $702 million for the nine months ended June 30, 2021.

Product costs as a percentage of revenue increased to 19% for the nine months ended June 30, 2022 from 18% for the nine months ended June 30, 2021 due to revenue mix, primarily increases in artist services and expanded rights revenue.

Selling, general and administrative expenses

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

For the Nine Months Ended

June 30, 2022 vs.

2022 2021 $ Change % Change

General and administrative expense (1) $ 696 $ 629 $ 67 11 %

Selling and marketing expense 601 544 57 10 %

Distribution expense 95 83 12 14 %

Total selling, general and administrative expense $ 1,392 $ 1,256 $ 136 11 %

______________________________________

(1) Includes depreciation expense of $59 million and $57 million for the nine months ended June 30, 2022 and June 30, 2021, respectively.

Total selling, general and administrative expense increased by $136 million, or 11%, to $1,392 million for the nine months ended June 30, 2022 from $1,256 million for the nine months ended June 30, 2021.

Expressed as a percentage of revenue, total selling, general and administrative expense decreased to at 31% for the nine months ended June 30, 2022 from 32% for the nine months ended June 30, 2021.

General and administrative expense increased by $67 million to $696 million for the nine months ended June 30, 2022 from $629 million for the nine months ended June 30, 2021.

The increase in general and administrative expense was mainly due to increased employee related costs, including the impact of the additional week, the impact of acquisitions, increased expenses related to transformation initiatives and acquisition transaction costs and unfavorable movements in foreign currency exchange rates of $7 million, partially offset by the impact of the mark-to-market adjustment of an earn-out liability related to an acquisition.

Expressed as a percentage of revenue, general and administrative expense remained constant at 16% for each of the nine months ended June 30, 2022 and June 30, 2021.

Selling and marketing expense increased by $57 million, or 10%, to $601 million for the nine months ended June 30, 2022 from $544 million for the nine months ended June 30, 2021.

Expressed as a percentage of revenue, selling and marketing expense remained constant at 14% for each of the nine months ended June 30, 2022 and June 30, 2021.

Distribution expense was $95 million for the nine months ended June 30, 2022 and $83 million for the nine months ended June 30, 2021.

Expressed as a percentage of revenue, distribution expense remained constant at 2% for each of the nine months ended June 30, 2022 and June 30, 2021.

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 Nine Months Ended

June 30, 2022 vs.

2022 2021 $ Change % Change

Net income attributable to Warner Music Group Corp.

$ 403 $ 276 $ 127 46 %

Income attributable to noncontrolling interest 2 1 1 100 %

Net income 405 277 128 46 %

Income tax expense 148 127 21 17 %

Income before income taxes 553 404 149 37 %

Other income (96) — (96) — %

Interest expense, net 94 93 1 1 %

Loss on extinguishment of debt — 12 (12) -100 %

Operating income 551 509 42 8 %

Amortization expense 198 170 28 16 %

Depreciation expense 59 57 2 4 %

OIBDA $ 808 $ 736 $ 72 10 %

OIBDA increased by $72 million to $808 million for the nine months ended June 30, 2022 as compared to $736 million for the nine months ended June 30, 2021 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 decreased to 18% for the nine months ended June 30, 2022 from 19% for the nine months ended June 30, 2021 due to strong operating performance and the impact of the mark-to-market adjustment of an earn-out liability related to an acquisition, which was offset by growth of lower-margin revenue streams.

Depreciation expense

Our depreciation expense increased by $2 million to $59 million for the nine months ended June 30, 2022 from $57 million for the nine months ended June 30, 2021.

This increase is primarily due to an increase in IT capital spending and assets being placed into service.

Amortization expense

Our amortization expense increased by $28 million, or 16%, to $198 million for the nine months ended June 30, 2022 from $170 million for the nine months ended June 30, 2021.

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

Operating income

Our operating income increased by $42 million to $551 million for the nine months ended June 30, 2022 from $509 million for the nine months ended June 30, 2021.

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.

Loss on extinguishment of debt

There was no loss on extinguishment of debt for the nine months ended June 30, 2022.

We recorded a loss on extinguishment of debt in the amount of $12 million for the nine months ended June 30, 2021 which represents the premium paid on early redemption and unamortized deferred financing costs related to the redemption of the 5.500% Notes.

Interest expense, net

Our interest expense, net, increased to $94 million for the nine months ended June 30, 2022 from $93 million for the nine months ended June 30, 2021 due to a higher principal balance due to the issuance of senior secured notes to partially fund certain music asset acquisitions.

Other income for the nine months ended June 30, 2022 primarily includes foreign currency gains on our Euro-denominated debt of $96 million, currency exchange gains on our intercompany loans of $23 million and unrealized gains on hedging activity of $9 million, partially offset by aggregate realized and unrealized losses of $37 million on the mark-to-market of equity investments.

This compares to unrealized gains of $26 million on the mark-to-market of equity investments, offset by foreign currency losses on our Euro-denominated debt of $20 million and currency exchange losses on our intercompany loans of $7 million for the nine months ended June 30, 2021.

Income tax expense

Our income tax expense increased by $21 million to $148 million for the nine months ended June 30, 2022 from $127 million for the nine months ended June 30, 2021.

The increase of $21 million in income tax expense is primarily due to the impact of higher pre-tax income in the current year, partially offset by the impact of the change in the U.K.

statutory tax rate recognized in the prior year.

Net income increased by $128 million to $405 million for the nine months ended June 30, 2022 from $277 million for the nine months ended June 30, 2021 as a result of the factors described above.

Noncontrolling interest

There was $2 million of income attributable to noncontrolling interest for the nine months ended June 30, 2022 and $1 million of income attributable to noncontrolling interest for the nine months ended June 30, 2021.

Business Segment Results

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

For the Nine Months Ended

June 30, 2022 vs.

2022 2021 $ Change % Change

Recorded Music

Revenues $ 3,722 $ 3,372 $ 350 10 %

Operating income 631 604 27 4 %

OIBDA 804 754 50 7 %

Music Publishing

Revenues 704 556 148 27 %

Operating income 103 61 42 69 %

OIBDA 172 125 47 38 %

Corporate expenses and eliminations

Revenue eliminations (4) (3) (1) 33 %

Operating loss (183) (156) (27) 17 %

OIBDA loss (168) (143) (25) 17 %

Revenues 4,422 3,925 497 13 %

Operating income 551 509 42 8 %

OIBDA 808 736 72 10 %

Recorded Music

Recorded Music revenue increased by $350 million, or 10%, to $3,722 million for the nine months ended June 30, 2022 from $3,372 million for the nine months ended June 30, 2021.

Recorded Music revenues were $1,641 million and $1,454 million, or 44% and 43% of consolidated Recorded Music revenues, for the nine months ended June 30, 2022 and June 30, 2021, respectively.

The overall increase in Recorded Music revenue was driven by increases in digital, artist services and expanded-rights, licensing and physical 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 Nine Months Ended

June 30, 2022 vs.

2022 2021 $ Change % Change

Artist and repertoire costs $ 974 $ 931 $ 43 5 %

Product costs 854 702 152 22 %

Total cost of revenues $ 1,828 $ 1,633 $ 195 12 %

Recorded Music cost of revenues increased by $195 million, or 12%, to $1,828 million for the nine months ended June 30, 2022 from $1,633 million for the nine months ended June 30, 2021.

Expressed as a percentage of Recorded Music revenue, Recorded Music artist and repertoire costs decreased to 26% for the nine months ended June 30, 2022 from 28% for the nine months ended June 30, 2021.

The decrease is primarily attributable to revenue mix.

Expressed as a percentage of Recorded Music revenue, Recorded Music product costs increased to 23% for the nine months ended June 30, 2022 from 21% for the nine months ended June 30, 2021.

The overall increase as a percentage of revenue primarily relates to revenue mix due to an increase in lower-margin 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 Nine Months Ended

June 30, 2022 vs.

2022 2021 $ Change % Change

General and administrative expense (1) $ 446 $ 408 $ 38 9 %

Selling and marketing expense 589 534 55 10 %

Distribution expense 95 83 12 14 %

Total selling, general and administrative expense $ 1,130 $ 1,025 $ 105 10 %

______________________________________

(1) Includes depreciation expense of $40 million for both the nine months ended June 30, 2022 and June 30, 2021.

Recorded Music selling, general and administrative expense increased by $105 million, or 10%, to $1,130 million for the nine months ended June 30, 2022 from $1,025 million for the nine months ended June 30, 2021.

The increase in general and administrative expense was primarily due to increased employee related costs, the unfavorable movements in foreign currency exchange rates of $10 million, restructuring and the impact of acquisitions, including increased expenses related to acquisition transaction costs, partially offset by lower non-cash stock-based compensation and other related expenses of $6 million, as a result of equity awards becoming fully vested, and the impact of the mark-to-market adjustment of an earn-out liability related to an acquisition.

The increase in selling and marketing expense was primarily due to increased variable marketing spend on higher revenues and new releases, increased employee related costs and higher travel expenses as limited travel resumed.

The increase in distribution expense was primarily due to higher artist services and expanded-rights revenue.

Expressed as a percentage of Recorded Music revenue, Recorded Music selling, general and administrative expense remained constant at 30% for each of the nine months ended June 30, 2022 and June 30, 2021.

Operating Income and OIBDA

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

For the Nine Months Ended

June 30, 2022 vs.

2022 2021 $ Change % Change

Operating income $ 631 $ 604 $ 27 4 %

Depreciation and amortization 173 150 23 15 %

OIBDA $ 804 $ 754 $ 50 7 %

Recorded Music OIBDA increased by $50 million, to $804 million for the nine months ended June 30, 2022 from $754 million for the nine months ended June 30, 2021 as a result of higher revenues, partially offset by higher costs of revenue and selling, general and administrative expenses.

Expressed as a percentage of Recorded Music revenue, Recorded Music OIBDA margin remained constant at 22% for each of the nine months ended June 30, 2022 and June 30, 2021 due to strong operating performance and the impact of the mark-to-market adjustment of an earn-out liability related to an acquisition, which was offset by growth of lower-margin revenue streams.

Recorded Music operating income increased by $27 million to $631 million for the nine months ended June 30, 2022 from $604 million for the nine months ended June 30, 2021 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 $148 million, or 27%, to $704 million for the nine months ended June 30, 2022 from $556 million for the nine months ended June 30, 2021.

Music Publishing revenues were $369 million and $277 million, or 52% and 50% of consolidated Music Publishing revenues, for the nine months ended June 30, 2022 and June 30, 2021, respectively.

International Music Publishing revenues were $335 million and $279 million, or 48% and 50% of consolidated Music Publishing revenues, for the nine months ended June 30, 2022 and June 30, 2021, respectively.

The overall increase in Music Publishing revenue was driven by growth across all revenue types, including digital, synchronization, performance and mechanical revenue, as described in the “Total Revenues” and “Revenue by Geographical Location” sections above.

Cost of revenues

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

For the Nine Months Ended

June 30, 2022 vs.

2022 2021 $ Change % Change

Artist and repertoire costs $ 457 $ 360 $ 97 27 %

Total cost of revenues $ 457 $ 360 $ 97 27 %

Music Publishing cost of revenues increased by $97 million, or 27%, to $457 million for the nine months ended June 30, 2022 from $360 million for the nine months ended June 30, 2021.

Expressed as a percentage of Music Publishing revenue, Music Publishing cost of revenues remained constant at 65% for each of the nine months ended June 30, 2022 and June 30, 2021.

Selling, general and administrative expense

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

For the Nine Months Ended

June 30, 2022 vs.

December 31, 2022 vs.

2022 2021 $ Change % Change

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______________________________________

(1) Includes depreciation expense of $4 million for both the nine months ended June 30, 2022 and June 30, 2021.

Music Publishing selling, general and administrative expense increased to $79 million for the nine months ended June 30, 2022 from $75 million for the nine months ended June 30, 2021.

Expressed as a percentage of Music Publishing revenue, Music Publishing selling, general and administrative expense decreased to 11% for the nine months ended June 30, 2022 from 13% for the nine months ended June 30, 2021.

(1) Includes depreciation expense of $1 million and $2 million for the three months ended December 31, 2022 and December 31, 2021, respectively.

Music Publishing selling, general and administrative expense decreased by $1 million, or 4%, to $25 million for the three months ended December 31, 2022 from $26 million for the three months ended December 31, 2021.

Expressed as a percentage of Music Publishing revenue, Music Publishing selling, general and administrative expense decreased to 10% for the three months ended December 31, 2022 from 11% for the three months ended December 31, 2021.

Operating Income and OIBDA

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

For the Nine Months Ended

June 30, 2022 vs.

For the Three Months Ended

December 31, 2022 vs.

2022 2021 $ Change % Change

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OIBDA $ 72 $ 54 $ 18 33 %

Music Publishing OIBDA increased by $47 million, or 38%, to $172 million for the nine months ended June 30, 2022 from $125 million for the nine months ended June 30, 2021.

Expressed as a percentage of Music Publishing revenue, Music Publishing OIBDA margin increased to 24% for the nine months ended June 30, 2022 from 22% for the nine months ended June 30, 2021.

The increase was due to strong operating performance.

Music Publishing operating income increased by $42 million to $103 million for the nine months ended June 30, 2022 from $61 million operating income for the nine months ended June 30, 2021 largely due to the factors that led to the increase in Music Publishing OIBDA noted above, partially offset by an increase in amortizable intangible assets related to the acquisition of music-related assets.

Music Publishing OIBDA increased by $18 million, or 33%, to $72 million for the three months ended December 31, 2022 from $54 million for the three months ended December 31, 2021.

Expressed as a percentage of Music Publishing revenue, Music

Publishing OIBDA margin increased to 29% for the three months ended December 31, 2022 from 24% for the three months ended December 31, 2021, primarily due to strong operating performance and the favorable impact of foreign currency exchange rates.

Music Publishing operating income increased by $17 million to $49 million for the three months ended December 31, 2022 from $32 million for the three months ended December 31, 2021 due to the factors that led to the increase 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 increased by $27 million to $183 million for the nine months ended June 30, 2022 from $156 million for the nine months ended June 30, 2021 which primarily includes expenses related to transformation initiatives, the increase in non-cash stock-based compensation and other related expenses of $8 million from a one-time equity grant and the timing of expense recognition for new annual equity grants, employee related costs, including the impact of the additional week, and professional services.

Our OIBDA loss from corporate expenses and eliminations increased by $25 million to $168 million for the nine months ended June 30, 2022 from $143 million for the nine months ended June 30, 2021 due to the operating loss factors noted above.

Our operating loss from corporate expenses and eliminations decreased by $2 million for the three months ended December 31, 2022 to $67 million from $69 million for the three months ended December 31, 2021, primarily due to lower non-cash stock-based compensation and other related expenses of $5 million from a one-time equity grant in the prior-year quarter and the impact of the additional week in the prior-year quarter, partially offset by an increase in depreciation and expenses related to transformation initiatives.

Our OIBDA loss from corporate expenses and eliminations decreased by $4 million for the three months ended December 31, 2022 to $60 million from $64 million for the three months ended December 31, 2021, primarily due to the operating loss factors noted above.

FINANCIAL CONDITION AND LIQUIDITY

Financial Condition at June 30, 2022

At June 30, 2022, we had $3.785 billion of debt (which is net of $42 million of premiums, discounts and deferred financing costs), $345 million of cash and equivalents (net debt of $3.440 billion, defined as total debt, less cash and equivalents and premiums, discounts and deferred financing costs) and $156 million of Warner Music Group Corp.

Financial Condition at December 31, 2022

At December 31, 2022, we had $3.946 billion of debt (which is net of $44 million of premiums, discounts and deferred financing costs), $720 million of cash and equivalents (net debt of $3.226 billion, defined as total debt, less cash and equivalents and premiums, discounts and deferred financing costs) and $270 million of Warner Music Group Corp.

This compares to $3.732 billion of debt (which is net of $41 million of premiums, discounts and deferred financing costs), $584 million of cash and equivalents (net debt of $3.148 billion) and $152 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 nine months ended June 30, 2022 and June 30, 2021 are unaudited and have been derived from our consolidated interim financial statements included elsewhere herein.

Nine Months Ended

The financial data for the three months ended December 31, 2022 and December 31, 2021 are unaudited and have been derived from our condensed consolidated interim financial statements included elsewhere herein.

Three Months Ended

Cash provided by (used in):

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Operating Activities

Cash provided by operating activities was $336 million for the nine months ended June 30, 2022 as compared with cash provided by operating activities of $410 million for the nine months ended June 30, 2021.

The $74 million decrease in cash provided by operating activities was primarily due to the timing of working capital, driving a use of cash from working capital, partially offset by an increase in OIBDA.

Cash provided by operating activities was $209 million for the three months ended December 31, 2022 as compared with cash provided by operating activities of $129 million for the three months ended December 31, 2021.

The $80 million increase in cash provided by operating activities was primarily due to timing of A&R investments and other movements within working capital.

Investing Activities

Cash used in investing activities was $763 million for the nine months ended June 30, 2022 as compared with cash used in investing activities of $566 million for the nine months ended June 30, 2021.

The $763 million of cash used in investing activities in the nine months ended June 30, 2022 consisted of $499 million relating to investments and acquisitions of businesses, a portion of which was debt-financed, $178 million to acquire music-related assets, a portion of which was debt-financed, and $97 million relating to capital expenditures, partially offset by $11 million of proceeds from the sale of investments.

The $566 million of cash used in investing activities in the nine months ended June 30, 2021 consisted of $49 million relating to investments and acquisitions of businesses, $58 million relating to capital expenditures and $459 million to acquire music-related assets, a portion of which was debt-financed.

Cash used in investing activities was $10 million for the three months ended December 31, 2022 as compared with cash used in investing activities of $624 million for the three months ended December 31, 2021.

The $10 million of cash used in investing activities in the three months ended December 31, 2022 consisted of $8 million relating to investments and acquisitions of businesses, $33 million to acquire music-related assets, and $21 million relating to capital expenditures, partially offset by $42 million of proceeds from divestitures and $10 million of proceeds from the sale of investments.

The $624 million of cash used in investing activities in the three months ended December 31, 2021 consisted of $425 million relating to investments and acquisitions of businesses and $165 million to acquire music-related assets, a portion of which was debt-financed, and $34 million relating to capital expenditures.

Financing Activities

Cash provided by financing activities was $280 million for the nine months ended June 30, 2022 as compared with cash provided by financing activities of $35 million for the nine months ended June 30, 2021.

The $280 million of cash provided by financing activities for the nine months ended June 30, 2022 consisted of proceeds from debt issuance of $535 million, which was used to fund the acquisition of a business and music-related assets, partially offset by dividends paid of $235 million, taxes paid related to net share settlement of restricted stock units of $6 million, deferred financing costs of $5 million, cash paid to settle contingent consideration of $4 million and distributions to noncontrolling interest holders of $5 million.

The $35 million of cash provided by financing activities for the nine months ended June 30, 2021 consisted of proceeds from debt issuance of $244 million which was used to fund the acquisition of music-related assets and proceeds from the increase supplement to the Senior Term Loan Facility of $325 million, partially offset by the redemption of the outstanding aggregate principal amount of $325 million of the 5.500% Senior Notes due 2026, dividends paid of $187 million, call premiums paid on early redemption of the 5.500% Senior Notes due 2026 of $8 million, deferred financing costs of $8 million and distributions to noncontrolling interest holders of $6 million.

Cash used in financing activities was $70 million for the three months ended December 31, 2022 as compared with cash provided by financing activities of $448 million for the three months ended December 31, 2021.

The $70 million of cash used in financing activities for the three months ended December 31, 2022 consisted of cash paid to settle deferred consideration related to a fiscal year 2022 acquisition of music publishing rights of $125 million, dividends paid of $84 million, deferred financing costs of $2 million and distributions to noncontrolling interest holders of $6 million, partially offset by proceeds from the incremental Senior Term Loan Facility of $147 million.

The $448 million of cash provided by financing activities for the three months ended December 31, 2021 consisted of proceeds from debt issuance of $535 million which was used to fund the acquisition of a business and music-related assets, partially offset by dividends paid of $78 million, deferred financing costs of $4 million, cash paid to settle contingent consideration of $4 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.

These sources of liquidity are needed to fund our debt service requirements, working capital requirements, capital expenditure requirements, strategic acquisitions and investments, and

dividends, prepayments of debt, repurchases or retirement of our outstanding debt or notes or repurchases of our outstanding equity securities in open market purchases, privately negotiated purchases or otherwise, we may elect to pay or make in the future.

These sources of liquidity are needed to fund our debt service requirements, working capital requirements, capital expenditure requirements, strategic acquisitions and investments, and dividends, prepayments of debt, repurchases or retirement of our outstanding debt or notes or repurchases of our outstanding equity securities in open market purchases, privately negotiated purchases or otherwise, we may elect to pay or make in the future.

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

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 $185 million, which includes capital expenditures of approximately $80 million.

There has been a slight delay in the timing of the transformation initiative as a result of the ongoing effects of COVID-19.

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

There has been a delay in the timing of the transformation initiative as a result of the disruption from COVID-19.

In addition, the size and scale of this global system implementation requires us to invest more time performing the rigorous system testing and data validation to ensure go-live readiness.

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

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

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For example, our S&P corporate credit rating improved from B in 2017 to BB+ in July 2021 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 3.4% as of June 30, 2022.

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, 2022.

Our nearest-term maturity date is in 2028.

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From time to time, we may incur additional indebtedness for, among other things, working capital, repurchasing, redeeming or tendering for existing indebtedness and acquisitions or other strategic transactions.

3.750% Senior Secured Notes Offering

Senior Term Loan Facility Incremental Commitment Amendment

On November 1, 2022, Acquisition Corp.

issued and sold $540 million of 3.750% Senior Secured Notes due 2029 (the “Notes”).

Interest on the Notes will accrue at the rate of 3.750% per annum and will be payable semi-annually in arrears on June 1 and December 1, commencing on June 1, 2022.

The proceeds of the issuance and sale of the aforementioned Notes were used to fund the acquisition of a business and music-related assets for aggregate cash consideration of $525 million.

Revolving Credit Facility

On January 31, 2018, Acquisition Corp.

entered into the revolving credit agreement (as amended by the amendment dated October 9, 2019 and as further amended, amended and restated or otherwise modified from time to time, the “Revolving Credit Agreement”) for a senior secured 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 Facility”).

On April 3, 2020, Acquisition Corp.

entered into an amendment to the Revolving Credit Agreement (the “Second Amendment”) which, among other things, increased the commitments under the Revolving Credit Facility from an aggregate principal amount of $180 million to an aggregate principal amount of $300 million and 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.

On May 4, 2021, certain covenants set forth in our Revolving Credit Facility were suspended, including the restriction on incurring certain additional indebtedness, based on the determination that the total indebtedness to EBITDA ratio is below the required threshold specified therein.

Acquisition Corp.

is the borrower under the Revolving Credit Agreement which provides for a revolving credit facility in the amount of up to $300 million and includes a $90 million letter of credit sub-facility.

Amounts are available under the Revolving Credit Facility in U.S.

dollars, euros or pounds sterling.

The Revolving Credit Agreement permits loans for general corporate purposes and may also be utilized to issue letters of credit.

Borrowings under the Revolving Credit Agreement bear interest at Acquisition Corp.’s election at a rate equal to (i) the rate for deposits in the borrowing currency in the London interbank market (adjusted for maximum reserves) for the applicable interest period (“Revolving LIBOR”) plus 1.875% per annum, or (ii) the base rate, which is the highest of (x) the corporate base rate established by the administrative agent from time to time, (y) the overnight federal funds rate plus 0.5% and (z) the one-month Revolving LIBOR plus 1.00% per annum, plus, in each case, 0.875% per annum;

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 3.09x at June 30, 2022, 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 June 30, 2022

As of June 30, 2022, our long-term debt, all of which was issued by Acquisition Corp., was as follows (in millions):

entered into a Seventh Incremental Commitment Amendment (the “Seventh Incremental Commitment Amendment”), with Credit Suisse AG, New York Branch, as Tranche H term lender, and Credit Suisse AG, as administrative agent, and acknowledged by the guarantors party thereto and WMG Holdings Corp., to the Senior Term Loan Credit Agreement, pursuant to which Acquisition Corp.

borrowed additional term loans in the amount of $150 million for an aggregate principal amount outstanding under the Senior Term Loan Credit Agreement of $1,295 million.

The Seventh Incremental Commitment Amendment was entered into to fund certain deferred payment obligations owing in respect of certain prior acquisitions, to pay fees and expenses relating thereto and for general corporate purposes.

Existing Debt as of December 31, 2022

As of December 31, 2022, our long-term debt, all of which was issued by Acquisition Corp., was as follows (in millions):

Revolving Credit Facility (a) $ —

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______________________________________

(a) Reflects $300 million of commitments under the Revolving Credit Facility available at June 30, 2022, less letters of credit outstanding of approximately $7 million at June 30, 2022.

There were no loans outstanding under the Revolving Credit Facility at June 30, 2022.

(a) Reflects $300 million of commitments under the Revolving Credit Facility available at December 31, 2022, less letters of credit outstanding of approximately $4 million at December 31, 2022.

There were no loans outstanding under the Revolving Credit Facility at December 31, 2022.

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, 2022.

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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 May 13, 2022, the Company’s board of directors declared a cash dividend of $0.15 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 June 1, 2022.

The Company paid an aggregate of approximately $79 million and $235 million, or $0.15 and $0.45 per share, in cash dividends to stockholders and participating security holders for the three and nine months ended June 30, 2022, respectively.

On November 10, 2022, the Company’s board of directors declared a cash dividend of $0.16 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, 2022.

The Company paid an aggregate of approximately $84 million, or $0.16 per share, in cash dividends to stockholders and participating security holders for the three months ended December 31, 2022.

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 June 30, 2022.

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, 2022.

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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The following is a reconciliation of net income (loss), 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 June 30, 2022, for the twelve months ended June 30, 2021 and for the three months ended June 30, 2022 and June 30, 2021.

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 June 30, 2022.

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, 2022, for the twelve months ended December 31, 2021 and for the three months ended December 31, 2022 and December 31, 2021.

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

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Twelve Months Ended

June 30, Three Months Ended

December 31, Three Months Ended

2022 2021 2022 2021

Net Income (Loss) $ 435 $ 278 $ 125 $ 61

Net Income $ 491 $ 396 $ 124 $ 188

Income tax expense 158 189 48 75

2 unchanged sentences

Loss on extinguishment of debt (a) — 22 — —

Net losses (gains) on divestitures and sale of securities (b) 9 (3) — (2)

Net gains on divestitures and sale of securities (b) (32) (3) (41) —

Restructuring costs (c) 21 30 3 4

10 unchanged sentences

(a) Reflects loss on extinguishment of debt, primarily including tender fees and unamortized deferred financing costs.

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

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

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

(e) Reflects mainly transaction related costs.

(f) Reflects costs associated with our transformation initiatives and IT system updates, which includes costs of $11 million and $41 million related to our finance transformation and other related costs for the three and twelve months ended June 30, 2022, respectively, as well as $9 million and $28 million for the three and twelve months ended June 30, 2021, respectively.

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

(e) Reflects mainly transaction related costs and mark-to-market adjustments of an earn-out liability related to a transaction in 2021.

(f) Reflects costs associated with our transformation initiatives and IT system updates, which includes costs of $10 million and $41 million related to our finance transformation and other related costs for the three and twelve months ended December 31, 2022, respectively, as well as $10 million and $37 million for the three and twelve months ended December 31, 2021, respectively.

(g) Reflects non-cash stock-based compensation expense related to the Omnibus Incentive Plan and the Warner Music Group Corp.

Senior Management Free Cash Flow Plan.

(h) Reflects non-cash activity, including the unrealized losses (gains) on the mark-to-market of equity investments, investment losses (gains), mark-to-market adjustments of an earn-out liability and other non-cash impairments.

(i) Reflects expected savings resulting from transformation initiatives and the pro forma impact of certain specified transactions for the three and twelve months ended June 30, 2022.

(h) Reflects non-cash activity, including the unrealized losses (gains) on the mark-to-market adjustment of equity investments, investment losses (gains), mark-to-market adjustments of an earn-out liability in 2022 and other non-cash impairments.

(i) Reflects expected savings resulting from transformation initiatives and the pro forma impact of certain specified transactions for the three and twelve months ended December 31, 2022.

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 $13 million increase in the twelve months ended June 30, 2022 Adjusted EBITDA.

The pro forma impact of these specified transactions and initiatives resulted in a $9 million decrease in the twelve months ended December 31, 2022 Adjusted EBITDA, primarily driven by the shift in the timing of the financial transformation initiative.

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

of approximately $3.785 billion and the balance of current notes payable of approximately $125 million less cash of $250 million.

of approximately $3.946 billion less cash of $250 million.

(k) 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 June 30, 2022 not exceeding $250 million.

This is calculated net of cash and equivalents of the Company as of December 31, 2022 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.

On May 4, 2021, certain covenants set forth in our Revolving Credit

Facility were suspended, including the restriction on incurring certain additional indebtedness, based on the determination that the total indebtedness to EBITDA ratio is below the required threshold specified therein.

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.

6 unchanged sentences

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