What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2023-02-09 · 498 added, 189 removed, 445 unchanged (61% of the section changed)

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

You should read the following discussion of our results of operations and financial condition with the unaudited interim financial statements included elsewhere in this Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2022 (the “Quarterly Report”).

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

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• the dual class structure of our common stock and Access’s existing ownership of our Class B Common Stock have the effect of concentrating control over our management and affairs and over matters requiring stockholder approval with Access;

• the fact that we maintain certain cash deposits in excess of FDIC insurance limits, which could have an adverse effect on liquidity and financial performance in the event of a bank failure or receivership;

• risks related to other factors discussed under “Risk Factors” of this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

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

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.

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 months ended December 31, 2022 and December 31, 2021.

This section provides an analysis of our results of operations for the three and six months ended March 31, 2023 and March 31, 2022.

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

• Financial condition and liquidity.

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

This section provides an analysis of our cash flows for the six months ended March 31, 2023 and March 31, 2022, as well as a discussion of our financial condition and liquidity as of March 31, 2023.

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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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.

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

This 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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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.

Accordingly, the results of operations for the six months ended March 31, 2022 reflect 27 weeks, or 189 days, compared to 182 days for the six months ended March 31, 2023.

For the six months ended March 31, 2022, the revenue benefit of the additional week was approximately $73 million, primarily reflected in Recorded Music streaming revenue.

Restructuring

In March 2023, the Company announced a restructuring plan (the “Restructuring Plan”) intended to drive the evolution of the Company and position the Company for long-term growth, primarily through headcount reductions.

Under the Restructuring Plan, the Company expects to reduce headcount by approximately 270 people, or approximately 4% of the Company’s overall headcount.

The Company expects to incur total non-recurring restructuring charges of approximately $41 million for severance costs, all of which is expected to be paid in cash.

The Restructuring Plan is expected to be substantially completed by the end of the fiscal quarter ended June 30, 2023, with related cash expenditures expected by the end of fiscal 2024.

The Company expects the headcount reductions to generate pre-tax cost savings of approximately $20 million in fiscal year 2023 and $49 million on an annualized run-rate basis in fiscal year 2024.

The Company anticipates investing a portion of the cost savings from the headcount reductions in an amount to be determined for targeted hires, to add new skill sets and for other initiatives intended to position the Company for long-term growth.

For the three and six months ended March 31, 2023, the Company recognized total restructuring costs of $41 million, consisting of severance costs.

All restructuring costs were recorded in the Recorded Music segment.

During the three and six months ended March 31, 2023, in connection with the Restructuring Plan, the Company recognized $2 million of non-cash stock-based compensation related to the accelerated vesting of certain RSUs.

Executive Transition Costs

During the three and six months ended March 31, 2023, the Company incurred costs associated with the departure of our Chief Executive Officer which occurred in January 2023 and our Chief Financial Officer which is expected to occur by the end of calendar 2023 (the “Executive Transition Costs”).

For the three and six months ended March 31, 2023, the Executive Transition Costs were approximately $3 million which consisted of severance for our previous CEO and our departing CFO.

Such costs are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

The aforementioned departure of our CEO resulted in the recognition of $12 million of non-cash stock-based compensation expense for the three and six months ended March 31, 2023 for RSUs and common stock as there is no remaining service required for vesting.

Such costs are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

Russia-Ukraine Conflict

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While our operations in Russia do not constitute a material portion of our business, a significant escalation or expansion of the conflict's current scope, increased or sustained economic disruption, sanctions or countersanctions, further devaluation of the local currency or increased cyber-related disruptions could make it difficult to deliver our content, broaden inflationary costs, and have an adverse effect on our results of operations.

COVID-19 Pandemic

On March 11, 2020, the COVID-19 outbreak (also referred to as “COVID”) was declared a global pandemic by the World Health Organization.

The global pandemic and governmental responses thereto disrupted physical and manufacturing supply chains and required the closures of physical retailers, resulting in declines in our physical revenue streams at the onset of the pandemic.

Additionally, stay-at-home orders, limited indoor and outdoor gatherings and other restrictions have negatively affected our business in other ways, such as, making it difficult to hold live concert tours, adversely impacting our concert promotion business and the sale of merchandise, delaying the release of new recordings and disrupting the production and release of motion pictures and television programs, which negatively affected licensing revenue in our Recorded Music business and synchronization revenue in our Music Publishing business.

However, the disruption from the COVID-19 pandemic, including the disruption caused by the Omicron variant, accelerated growth of other revenue streams such as fitness and interactive gaming (including augmented reality and virtual reality), which may continue to grow.

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

Three Months Ended March 31, 2023 Compared with Three Months Ended March 31, 2022

Consolidated Results

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For the Three Months Ended

December 31, 2022 vs.

March 31, 2023 vs.

2023 2022 $ Change % Change

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Total Revenues

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.

Total revenues increased by $23 million, or 2%, to $1,399 million for the three months ended March 31, 2023 from $1,376 million for the three months ended March 31, 2022.

The increase includes $38 million of unfavorable currency exchange fluctuations.

Prior to intersegment eliminations, Recorded Music and Music Publishing revenues represented 82% and 18% of total revenue for the three months ended March 31, 2023, respectively, and 83% and 17% of total revenue for the three months ended March 31, 2022, respectively.

Prior to intersegment eliminations, 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 December 31, 2021 were composed of U.S.

and international revenues represented 47% and 53% of total revenues for the three months ended March 31, 2023 and 46% and 54% of total revenues for the three months ended March 31, 2022.

Total digital revenues after intersegment eliminations increased by $11 million, or 1%, to $942 million for the three months ended March 31, 2023 from $931 million for the three months ended March 31, 2022.

Total streaming revenue increased 2% with growth in Music Publishing of 16%, partially offset by a decrease in Recorded Music streaming revenue of $3 million, which includes $20 million of unfavorable currency exchange fluctuations.

Prior to intersegment eliminations, total digital revenues for the three months ended March 31, 2023 were composed of U.S.

revenues of $473 million and international revenues of $469 million, or 50% of total digital revenues for each of U.S.

and international revenues.

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

revenues of $457 million and international revenues of $474 million, or 49% and 51% of total digital revenues, respectively.

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.

Recorded Music revenues decreased by $4 million to $1,143 million for the three months ended March 31, 2023 from $1,147 million for the three months ended March 31, 2022.

The decrease includes $32 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 $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.

Recorded Music revenues were $522 million and $518 million, or 46% and 45% of consolidated Recorded Music revenues for the three months ended March 31, 2023 and March 31, 2022, respectively.

International Recorded Music revenues were $621 million and $629 million, or 54% and 55% of consolidated Recorded Music revenues for the three months ended March 31, 2023 and March 31, 2022, respectively.

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

Artist services and expanded-rights revenue decreased by $10 million due to an unfavorable impact of foreign currency exchange rates of $4 million and lower merchandising and advertising revenue, partially offset by higher concert promotion revenue.

Digital revenue decreased by $8 million, which includes an unfavorable impact of foreign currency exchange rates of $20 million.

Revenue from streaming services decreased by $3 million to $773 million for the three months ended March 31, 2023 from $776 million for the three months ended March 31, 2022 and was impacted by unfavorable foreign currency exchange rates of $20 million, or 3%.

Streaming revenue reflects a lighter release schedule, as well as a market-related slowdown in ad-supported revenue.

The quarter included success from Michael Bublé, Ed Sheeran, Zach Bryan and Dua Lipa.

Download and other digital revenues decreased by $5 million, or 18%, to $23 million for the three months ended March 31, 2023 from $28 million for the three months ended March 31, 2022 due to the continued shift to streaming services.

Physical revenue decreased by $4 million, driven by an unfavorable impact of foreign currency exchange rates of $5 million, which offset strong physical performance in the United States.

Licensing revenue increased by $18 million, which includes growth in brand income and a licensing settlement, partially offset by an unfavorable impact of foreign currency exchange rates of $3 million.

Music Publishing revenues increased by $27 million, or 12%, to $257 million for the three months ended March 31, 2023 from $230 million for the three months ended March 31, 2022.

Music Publishing revenues were $135 million and $117 million, or 53% and 51% of consolidated Music Publishing revenues, for the three months ended March 31, 2023 and March 31, 2022, respectively.

International Music Publishing revenues were $122 million and $113 million, or 47% and 49% of consolidated Music Publishing revenues, for the three months ended March 31, 2023 and March 31, 2022, respectively.

The overall increase in Music Publishing revenue was mainly driven by increases in digital revenue of $19 million, or 15%, performance revenue of $9 million and mechanical revenue of $3 million, partially offset by a decrease in synchronization revenue of $4 million.

The increase in digital revenue is primarily due to increases in streaming revenue driven by the continued growth in streaming services and the impact of digital deal renewals, partially offset by an unfavorable impact of foreign currency exchange rates of $3 million.

Revenue from streaming services grew by $20 million, or 16%, to $142 million for the three months ended March 31, 2023 from $122 million for the three months ended March 31, 2022.

Performance revenue increased due to the timing of payments from collection societies and continued recovery from COVID disruption, partially offset by an unfavorable impact of foreign currency exchange rates of $1 million.

Mechanical revenue increased from strong share of physical sales.

The decrease in synchronization revenue is attributable to lower commercial licensing activity in the United States and an unfavorable impact of foreign currency exchange rates of $2 million, partially offset by copyright infringement settlements.

Revenue by Geographical Location

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.

revenue increased by $22 million, or 3%, to $657 million for the three months ended March 31, 2023 from $635 million for the three months ended March 31, 2022.

Recorded Music revenue increased by $4 million, or 1%.

The primary driver was the increase of U.S.

Recorded Music licensing revenue of $12 million, which includes a licensing settlement.

Increases are also attributable to higher U.S.

Recorded Music physical revenue of $3 million due to the success of strong U.S.

physical releases.

Digital revenue was flat with streaming revenue increase of $1 million, which was impacted by a lighter release schedule, as well as a market-related slowdown in ad-supported revenue, offset by download and other digital decrease of $1 million.

Recorded Music artist services and expanded-rights revenue decreased by $11 million primarily driven by lower advertising and merchandising revenue.

Music Publishing revenue increased by $18 million, or 15%, to $135 million for the three months ended March 31, 2023 from $117 million for the three months ended March 31, 2022.

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

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

Music Publishing of $16 million in digital revenue due to the continued growth in streaming services and the impact of digital deal renewals.

Music Publishing streaming revenue increased by $14 million, or 20%.

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 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.

Performance revenue increased by $4 million driven by the timing of payments from collection societies.

Mechanical revenue increased by $1 million.

The decrease in synchronization revenue of $3 million is due to lower commercial licensing activity, partially offset by copyright infringement settlements.

International revenue increased by $1 million to $743 million for the three months ended March 31, 2023 from $742 million for the three months ended March 31, 2022.

Excluding the unfavorable impact of foreign currency exchange rates of $38 million, International revenue increased by $39 million, or 6%.

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 revenue decreased by $8 million primarily due to decreases in digital revenue of $8 million and physical revenue of $7 million, partially offset by an increase in licensing revenue of $6 million and artist services and expanded-rights revenue of $1 million.

International Recorded Music digital revenue decreased due to a $4 million, or 1%, decrease in streaming revenue which was primarily driven by an unfavorable impact of foreign currency exchange rates of $20 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.

International Recorded Music physical revenue decreased by $7 million, primarily driven by an unfavorable impact of foreign currency exchange rates and a lighter release schedule.

International Recorded Music licensing revenue increased by $6 million, which includes growth in brand income, partially offset by an unfavorable impact of foreign currency exchange rates.

International Recorded Music artist services and expanded-rights revenue increased by $1 million due to higher concert promotion revenue, partially offset by lower direct-to-consumer merchandising revenue at EMP and the unfavorable impact of foreign currency exchange rates of $4 million.

International Music Publishing revenue increased from the prior-year quarter by $9 million, or 8%, to $122 million for the three months ended March 31, 2023 from $113 million for the three months ended March 31, 2022.

This was driven by the increase in performance revenue of $5 million, digital revenue of $3 million and mechanical revenue of $2 million, partially offset by a decrease in synchronization revenue of $1 million.

Performance revenue increase was driven by continued recovery from COVID disruption.

International Music Publishing streaming revenue increased by $6 million, or 11%, while download and other digital decreased by $3 million.

Mechanical revenue increased from strong share of physical sales.

Lower synchronization revenue is primarily due to the unfavorable impact of foreign currency exchange rates, which offset increased television licensing activity.

Cost of revenues

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For the Three Months Ended

December 31, 2022 vs.

March 31, 2023 vs.

2023 2022 $ Change % Change

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Total cost of revenues $ 721 $ 697 $ 24 3 %

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.

Artist and repertoire costs increased by $14 million, to $462 million for the three months ended March 31, 2023 from $448 million for the three months ended March 31, 2022.

Artist and repertoire costs as a percentage of revenue remained constant at 33% for each of the three months ended March 31, 2023 and March 31, 2022.

Product costs increased by $10 million, to $259 million for the three months ended March 31, 2023 from $249 million for the three months ended March 31, 2022.

Product costs as a percentage of revenue increased to 19% for the three months ended March 31, 2023 from 18% for the three months ended March 31, 2022.

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 expenses

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For the Three Months Ended

December 31, 2022 vs.

March 31, 2023 vs.

2023 2022 $ Change % Change

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______________________________________

(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.

(1) Includes depreciation expense of $22 million and $20 million for the three months ended March 31, 2023 and March 31, 2022, respectively.

Total selling, general and administrative expense increased by $8 million, or 2%, to $452 million for the three months ended March 31, 2023 from $444 million for the three months ended March 31, 2022.

Expressed as a percentage of revenue, total selling, general and administrative expense remained constant at 32% for each of the three months ended March 31, 2023 and March 31, 2022.

General and administrative expense increased by $24 million to $253 million for the three months ended March 31, 2023 from $229 million for the three months ended March 31, 2022.

The increase in general and administrative expense was mainly due to higher non-cash stock-based compensation and other related expenses of $14 million, primarily related to the separation agreement with our previous Chief Executive Officer, and the Executive Transition Costs of $3 million.

Expressed as a percentage of revenue, general and administrative expense increased to 18% for the three months ended March 31, 2023 from 17% for the three months ended March 31, 2022 due to the factors described above.

Selling and marketing expense decreased by $17 million, or 9%, to $172 million for the three months ended March 31, 2023 from $189 million for the three months ended March 31, 2022 due to lower variable marketing spend.

Expressed as a percentage of revenue, selling and marketing expense decreased to 12% for the three months ended March 31, 2023 from 14% for the three months ended March 31, 2022.

Distribution expense was $27 million for the three months ended March 31, 2023 and $26 million for the three months ended March 31, 2022.

Expressed as a percentage of revenue, distribution expense remained constant at 2% for each of the three months ended March 31, 2023 and March 31, 2022.

Restructuring

For the three months ended March 31, 2023, total restructuring costs were $41 million consisting of severance costs for the Restructuring Plan.

Reconciliation of Net Income Attributable to Warner Music Group Corp.

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December 31, 2022 vs.

March 31, 2023 vs.

2023 2022 $ Change % Change

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Income before income taxes 58 126 (68) -54 %

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

Other expense 31 8 23 — %

Interest expense, net 35 32 3 9 %

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OIBDA $ 207 $ 255 $ (48) -19 %

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.

OIBDA decreased by $48 million to $207 million for the three months ended March 31, 2023 as compared to $255 million for the three months ended March 31, 2022 as a result of higher revenues offset by higher cost of revenues and selling, general and administrative expenses, as well as the Restructuring Plan costs of $41 million.

Expressed as a percentage of total revenue, OIBDA margin decreased to 15% for the three months ended March 31, 2023 from 19% for the three months ended March 31, 2022 primarily due to the Restructuring Plan costs of $41 million, the increase in non-cash stock-based compensation and other related expenses of $14 million and the Executive Transition Costs of $3 million.

Depreciation expense

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

Our depreciation expense increased by $2 million to $22 million for the three months ended March 31, 2023 from $20 million for the three months ended March 31, 2022 primarily due to an increase in IT capital spend and assets being placed into service.

Amortization expense

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.

Our amortization expense decreased by $8 million, or 12%, to $61 million for the three months ended March 31, 2023 from $69 million for the three months ended March 31, 2022.

The decrease is primarily due to certain intangible assets becoming fully amortized.

Operating income

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.

Our operating income decreased by $42 million to $124 million for the three months ended March 31, 2023 from $166 million for the three months ended March 31, 2022.

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

Interest expense, net

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.

Our interest expense, net, increased to $35 million for the three months ended March 31, 2023 from $32 million for the three months ended March 31, 2022 due to a higher principal balance from the issuance of the incremental Senior Term Loan Facility in January 2023 and higher interest rates on variable rate debt, partially offset by interest income.

Other expense

Other expense for the three months ended March 31, 2023 primarily includes foreign currency losses on our Euro-denominated debt of $20 million and currency exchange losses on our intercompany loans of $13 million.

This compares to aggregate realized and unrealized losses of $39 million on the mark-to-market of equity investments, partially offset by foreign currency gains on our Euro-denominated debt of $19 million and currency exchange gains on our intercompany loans of $11 million for the three months ended March 31, 2022.

Income tax expense

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.

Our income tax expense decreased by $13 million to $21 million for the three months ended March 31, 2023 from $34 million for the three months ended March 31, 2022.

The decrease of $13 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.

Net income decreased by $55 million to $37 million for the three months ended March 31, 2023 from $92 million for the three months ended March 31, 2022 as a result of the factors described above.

Noncontrolling interest

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.

There was $3 million of income attributable to noncontrolling interest for the three months ended March 31, 2023 and no income attributable to noncontrolling interest for the three months ended March 31, 2022.

Business Segment Results

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Recorded Music

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.

Recorded Music revenue decreased by $4 million to $1,143 million for the three months ended March 31, 2023 from $1,147 million for the three months ended March 31, 2022.

Recorded Music revenues were $522 million and $518 million, or 46% and 45% of consolidated Recorded Music revenues, for the three months ended March 31, 2023 and March 31, 2022, respectively.

International Recorded Music revenues were $621 million and $629 million, or 54% and 55% of consolidated Recorded Music revenues, for the three months ended March 31, 2023 and March 31, 2022, respectively.

The overall decrease in Recorded Music revenue was driven by decreases in artist services and expanded-rights, digital and physical 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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Total cost of revenues $ 568 $ 554 $ 14 3 %

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.

Recorded Music cost of revenues increased by $14 million, or 3%, to $568 million for the three months ended March 31, 2023 from $554 million for the three months ended March 31, 2022.

Expressed as a percentage of Recorded Music revenue, Recorded Music artist and repertoire costs remained constant at 27% for each of the three months ended March 31, 2023 and March 31, 2022.

Expressed as a percentage of Recorded Music revenue, Recorded Music product costs increased to 23% for the three months ended March 31, 2023 from 22% for the three months ended March 31, 2022.

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

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______________________________________

(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.

(1) Includes depreciation expense of $13 million and $14 million for the three months ended March 31, 2023 and March 31, 2022, respectively.

Recorded Music selling, general and administrative expense decreased by $13 million, or 4%, to $344 million for the three months ended March 31, 2023 from $357 million for the three months ended March 31, 2022.

The increase in general and administrative expense includes higher non-cash stock-based compensation and other related expenses of $2 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.

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

Expressed as a percentage of Recorded Music revenue, Recorded Music selling, general and administrative expense decreased to 30% for the three months ended March 31, 2023 from 31% for the three months ended March 31, 2022.

Restructuring

For the three months ended March 31, 2023, total restructuring costs were $41 million consisting of severance costs for the Restructuring Plan.

Operating Income and OIBDA

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OIBDA $ 203 $ 250 $ (47) -19 %

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.

Recorded Music OIBDA decreased by $47 million to $203 million for the three months ended March 31, 2023 from $250 million for the three months ended March 31, 2022 as a result of lower revenues, higher cost of revenue and the Restructuring Plan costs of $41 million, partially offset by lower selling, general and administrative expenses.

Expressed as a percentage of Recorded Music revenue, Recorded Music OIBDA margin decreased to 18% for the three months ended March 31, 2023 from 22% for the three months ended March 31, 2022 primarily due to the Restructuring Plan costs of $41 million and revenue mix resulting from higher third-party distributed label revenue, partially offset by lower variable marketing spend.

Recorded Music operating income decreased by $38 million to $151 million for the three months ended March 31, 2023 from $189 million for the three months ended March 31, 2022 due to the factors that led to the decrease in Recorded Music OIBDA noted above, partially offset by a decrease in amortizable intangible assets.

Music Publishing

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.

Music Publishing revenues increased by $27 million, or 12%, to $257 million for the three months ended March 31, 2023 from $230 million for the three months ended March 31, 2022.

Music Publishing revenues were $135 million and $117 million, or 53% and 51% of consolidated Music Publishing revenues, for the three months ended March 31, 2023 and March 31, 2022, respectively.

The overall increase in Music Publishing revenue was driven by growth in digital, performance and mechanical 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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1 unchanged sentence

Total cost of revenues $ 155 $ 144 $ 11 8 %

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.

Music Publishing cost of revenues increased by $11 million, or 8%, to $155 million for the three months ended March 31, 2023 from $144 million for the three months ended March 31, 2022.

Expressed as a percentage of Music Publishing revenue, Music Publishing cost of revenues decreased to 60% for the three months ended March 31, 2023 from 63% for the three months ended March 31, 2022, primarily attributable to revenue mix and the favorable impact of foreign currency exchange rates.

Selling, general and administrative expense

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______________________________________

(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.

(1) Includes depreciation expense of $1 million for each of the three months ended March 31, 2023 and March 31, 2022.

Music Publishing selling, general and administrative expense increased by $2 million, or 8%, to $28 million for the three months ended March 31, 2023 from $26 million for the three months ended March 31, 2022.

Expressed as a percentage of Music Publishing revenue, Music Publishing selling, general and administrative expense remained constant at 11% for each of the three months ended March 31, 2023 and March 31, 2022.

Operating Income and OIBDA

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OIBDA $ 75 $ 61 $ 14 23 %

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.

Music Publishing OIBDA increased by $14 million, or 23%, to $75 million for the three months ended March 31, 2023 from $61 million for the three months ended March 31, 2022.

Expressed as a percentage of Music Publishing revenue, Music Publishing OIBDA margin increased to 29% for the three months ended March 31, 2023 from 27% for the three months ended March 31, 2022, primarily due to strong operating performance.

Music Publishing operating income increased by $14 million to $52 million for the three months ended March 31, 2023 from $38 million for the three months ended March 31, 2022 due to the factors that led to the increase in Music Publishing OIBDA noted above.

Corporate Expenses and Eliminations

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.

Our operating loss from corporate expenses and eliminations increased by $18 million for the three months ended March 31, 2023 to $79 million from $61 million for the three months ended March 31, 2022, due to higher employee related costs including non-cash stock-based compensation and other related expenses of $11 million, primarily related to the separation agreement with our previous Chief Executive Officer, and the Executive Transition Costs of $3 million, an increase in depreciation and expenses related to transformation initiatives, partially offset by lower professional services.

Our OIBDA loss from corporate expenses and eliminations increased by $15 million for the three months ended March 31, 2023 to $71 million from $56 million for the three months ended March 31, 2022, primarily due to the operating loss factors noted above.

RESULTS OF OPERATIONS

Six Months Ended March 31, 2023 Compared with Six Months Ended March 31, 2022

Consolidated Results

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

For the Six Months Ended

March 31, 2023 vs.

2023 2022 $ Change % Change

Revenue by Type

Digital $ 1,599 $ 1,674 $ (75) -4 %

Physical 251 317 (66) -21 %

Total Digital and Physical 1,850 1,991 (141) -7 %

Artist services and expanded-rights 337 373 (36) -10 %

Licensing 195 169 26 15 %

Total Recorded Music 2,382 2,533 (151) -6 %

Performance 90 74 16 22 %

Digital 295 260 35 13 %

Mechanical 30 27 3 11 %

Synchronization 85 92 (7) -8 %

Other 7 6 1 17 %

Total Music Publishing 507 459 48 10 %

Intersegment eliminations (2) (2) — — %

Total Revenues $ 2,887 $ 2,990 $ (103) -3 %

Revenue by Geographical Location

Recorded Music $ 1,061 $ 1,126 $ (65) -6 %

Music Publishing 268 232 36 16 %

1,329 1,358 (29) -2 %

International Recorded Music 1,321 1,407 (86) -6 %

International Music Publishing 239 227 12 5 %

Total International 1,560 1,634 (74) -5 %

Intersegment eliminations (2) (2) — — %

Total Revenues $ 2,887 $ 2,990 $ (103) -3 %

Total Revenues

Total revenues decreased by $103 million, or 3%, to $2,887 million for the six months ended March 31, 2023 from $2,990 million for the six months ended March 31, 2022.

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

The decrease includes $122 million of unfavorable currency exchange fluctuations.

Prior to intersegment eliminations, Recorded Music and Music Publishing revenues represented 82% and 18% of total revenues for the six months ended March 31, 2023, respectively, and 85% and 15% of total revenues for the six months ended March 31, 2022, respectively.

Prior to intersegment eliminations, U.S.

and international revenues represented 46% and 54% for the six months ended March 31, 2023, respectively, and 45% and 55% for the six months ended March 31, 2022, respectively.

Total digital revenues after intersegment eliminations decreased by $39 million, or 2%, to $1,894 million for the six months ended March 31, 2023 from $1,933 million for the six months ended March 31, 2022.

Total streaming revenue decreased 1% with growth in Music Publishing of 15%, offset by a decline in Recorded Music streaming revenue of 4% which includes $55 million of unfavorable currency exchange fluctuations.

Prior to intersegment eliminations, total digital revenues for the six months ended March 31, 2023 were composed of U.S.

revenues of $957 million and international revenues of $937 million, or 51% and 49% of total digital revenues, respectively.

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

revenues of $971 million and international revenues of $963 million, or 50% of total digital revenues for each of U.S.

and international revenues.

Recorded Music revenues decreased by $151 million, or 6%, to $2,382 million for the six months ended March 31, 2023 from $2,533 million for the six months ended March 31, 2022.

The decrease includes $106 million of unfavorable currency exchange fluctuations.

Recorded Music revenues were $1,061 million and $1,126 million, or 45% and 44% of consolidated Recorded Music revenues, for the six months ended March 31, 2023 and March 31, 2022, respectively.

International Recorded Music revenues were $1,321 million and $1,407 million, or 55% and 56% of consolidated Recorded Music revenues, for the six months ended March 31, 2023 and March 31, 2022, respectively.

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 $75 million, which includes an unfavorable impact of foreign currency exchange rates of $57 million.

Revenue from streaming services decreased by $59 million, or 4%, to $1,553 million for the six months ended March 31, 2023 from $1,612 million for the six months ended March 31, 2022 and was impacted by unfavorable foreign currency exchange rates of $55 million, or 3%.

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

The current year included carryover success from Ed Sheeran, Dua Lipa, Zach Bryan and Michael Bublé.

Download and other digital revenues decreased by $16 million, or 26%, to $46 million for the six months ended March 31, 2023 from $62 million for the six months ended March 31, 2022 due to the continued shift to streaming services.

Physical revenue decreased by $66 million, or 21%, driven by an unfavorable impact of foreign currency exchange rates of $19 million and a lighter release schedule.

Artist services and expanded-rights revenue decreased by $36 million due to an unfavorable impact of foreign currency exchange rates of $21 million, lower direct-to-consumer merchandising revenue at EMP and lower advertising revenue, partially offset by higher concert promotion revenue.

Licensing revenue increased by $26 million, which includes a licensing settlement and growth in brand income and broadcast fees revenue, partially offset by an unfavorable impact of foreign currency exchange rates of $9 million.

Music Publishing revenues increased by $48 million, or 10%, to $507 million for the six months ended March 31, 2023 from $459 million for the six months ended March 31, 2022.

Music Publishing revenues were $268 million and $232 million, or 53% and 51% of consolidated Music Publishing revenues, for the six months ended March 31, 2023 and March 31, 2022, respectively.

International Music Publishing revenues were $239 million and $227 million, or 47% and 49% of Music Publishing revenues, for the six months ended March 31, 2023 and March 31, 2022, respectively.

The overall increase in Music Publishing revenue was mainly driven by increases in digital revenue of $35 million, or 13%, performance revenue of $16 million and mechanical revenue of $3 million, partially offset by a decrease in synchronization revenue of $7 million.

Revenue from streaming services grew by $37 million, or 15%, to $288 million for the six months ended March 31, 2023 from $251 million for the six months ended March 31, 2022.

Mechanical revenue increased from strong share of physical sales, partially offset by an unfavorable impact of foreign currency exchange rates of $2 million.

The decrease in synchronization revenue is attributable to lower commercial licensing activity in the United States and an unfavorable impact of foreign currency exchange rates of $3 million.

Revenue by Geographical Location

revenue decreased by $29 million, or 2%, to $1,329 million for the six months ended March 31, 2023 from $1,358 million for the six months ended March 31, 2022.

Recorded Music revenue decreased by $65 million, or 6%.

The primary driver was the decrease of U.S.

Recorded Music digital revenue of $47 million.

Recorded Music streaming revenue decreased by $41 million, or 5%, as a result of a lighter release schedule and the impact of the additional week in the prior year, as well as a market-related slowdown in ad-supported revenue.

Download and other digital revenues decreased by $6 million.

Decreases are also attributable to lower U.S.

Recorded Music physical revenue of $17 million due to a lighter release schedule.

Recorded Music artist services and expanded-rights revenue decreased by $16 million primarily driven by lower advertising revenues.

The increase in licensing revenue of $15 million includes a licensing settlement.

Music Publishing revenue increased by $36 million, or 16%, to $268 million for the six months ended March 31, 2023 from $232 million for the six months ended March 31, 2022.

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 and the impact of digital deal renewals.

Music Publishing streaming revenue increased by $32 million, or 23%.

Performance revenue increased by $9 million driven by the timing of payments from collection societies and continued recovery from COVID disruption.

Mechanical revenue increased by $1 million.

The decrease in synchronization revenue of $7 million is due to lower commercial licensing activity.

International revenue decreased by $74 million, or 5%, to $1,560 million for the six months ended March 31, 2023 from $1,634 million for the six months ended March 31, 2022.

Excluding the unfavorable impact of foreign currency exchange rates, International revenue increased by $48 million, or 3%.

International Recorded Music revenue decreased by $86 million due to decreases in physical revenue of $49 million, digital revenue of $28 million and artist services and expanded-rights revenue of $20

million, partially offset by an increase in licensing revenue of $11 million.

International Recorded Music physical revenue decreased by $49 million, primarily driven by an unfavorable impact of foreign currency exchange rates and a lighter release schedule.

International Recorded Music digital revenue decreased due to a $18 million, or 2%, decrease in streaming revenue which was primarily driven by an unfavorable impact of foreign currency exchange rates of $55 million.

Download and other digital revenues decreased by $10 million.

International Recorded Music artist services and expanded-rights revenue decreased by $20 million due to the unfavorable impact of foreign currency exchange rates of $21 million and lower direct-to-consumer merchandising revenue at EMP, partially offset by higher concert promotion revenue.

International Recorded Music licensing revenue increased by $11 million, including growth in brand income and broadcast fees revenue, partially offset by the unfavorable impact of foreign currency exchange rates.

International Music Publishing revenue increased by $12 million, or 5%, to $239 million for the six months ended March 31, 2023 from $227 million for the six months ended March 31, 2022.

This was primarily driven by the increase in performance revenue of $7 million, mechanical revenue of $2 million and digital revenue of $2 million.

Performance revenue increased driven by continued recovery from COVID disruption.

Higher mechanical revenue is primarily driven by strong share of physical sales.

International Music Publishing streaming revenue increased by $5 million, or 5%, which includes unfavorable impact of foreign currency exchange rates of $6 million.

Download and other digital revenue decreased by $3 million.

Synchronization revenue remained constant primarily due to an unfavorable impact of foreign currency exchange rates, which offset higher commercial and television licensing activity.

Cost of revenues

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

For the Six Months Ended

March 31, 2023 vs.

2023 2022 $ Change % Change

Artist and repertoire costs $ 926 $ 941 $ (15) -2 %

Product costs 556 574 (18) -3 %

Total cost of revenues $ 1,482 $ 1,515 $ (33) -2 %

Artist and repertoire costs decreased by $15 million, to $926 million for the six months ended March 31, 2023 from $941 million for the six months ended March 31, 2022.

Artist and repertoire costs as a percentage of revenue increased to 32% for the six months ended March 31, 2023 from 31% for the six months ended March 31, 2022, primarily due to timing of artist and repertoire investments.

Product costs decreased by $18 million, to $556 million for the six months ended March 31, 2023 from $574 million for the six months ended March 31, 2022.

Product costs as a percentage of revenue remained constant at 19% for each of the six months ended March 31, 2023 and March 31, 2022.

Selling, general and administrative expenses

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

For the Six Months Ended

March 31, 2023 vs.

2023 2022 $ Change % Change

General and administrative expense (1) $ 474 $ 471 $ 3 1 %

Selling and marketing expense 360 403 (43) -11 %

Distribution expense 58 67 (9) -13 %

Total selling, general and administrative expense $ 892 $ 941 $ (49) -5 %

______________________________________

(1) Includes depreciation expense of $43 million and $41 million for the six months ended March 31, 2023 and March 31, 2022, respectively.

Total selling, general and administrative expense decreased by $49 million, or 5%, to $892 million for the six months ended March 31, 2023 from $941 million for the six months ended March 31, 2022.

Expressed as a percentage of revenue, total selling, general and administrative expense remained constant at 31% for each of the six months ended March 31, 2023 and March 31, 2022.

General and administrative expense increased by $3 million to $474 million for the six months ended March 31, 2023 from $471 million for the six months ended March 31, 2022.

The increase in general and administrative expense was mainly due to higher employee related costs including non-cash stock-based compensation and other related expenses of $5 million and the Executive Transition Costs of $3 million and expenses related to transformation initiatives, partially offset by higher acquisition transaction costs

and the impact of the additional week in the prior year and favorable movements in foreign currency exchange rates of $11 million.

Expressed as a percentage of revenue, general and administrative expense remained constant at 16% for each of the six months ended March 31, 2023 and March 31, 2022.

Selling and marketing expense decreased by $43 million, or 11%, to $360 million for the six months ended March 31, 2023 from $403 million for the six months ended March 31, 2022.

Expressed as a percentage of revenue, selling and marketing expense decreased to 12% for the six months ended March 31, 2023 from 13% for the six months ended March 31, 2022 due to lower variable marketing spend.

Distribution expense was $58 million for the six months ended March 31, 2023 and $67 million for the six months ended March 31, 2022.

Expressed as a percentage of revenue, distribution expense remained constant at 2% for each of the six months ended March 31, 2023 and March 31, 2022.

Restructuring

For the six months ended March 31, 2023, total restructuring costs were $41 million consisting of severance costs for the Restructuring Plan.

Net gain on divestiture

During the six months ended March 31, 2023, 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.

and Operating Income to Consolidated OIBDA

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

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

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

For the Six Months Ended

March 31, 2023 vs.

2023 2022 $ Change % Change

Net income attributable to Warner Music Group Corp.

$ 156 $ 279 $ (123) -44 %

Income attributable to noncontrolling interest 5 1 4 — %

Net income 161 280 (119) -43 %

Income tax expense 69 109 (40) -37 %

Income before income taxes 230 389 (159) -41 %

Other expense (income) 92 (46) 138 — %

Interest expense, net 67 62 5 8 %

Operating income 389 405 (16) -4 %

Amortization expense 124 129 (5) -4 %

Depreciation expense 43 41 2 5 %

OIBDA $ 556 $ 575 $ (19) -3 %

OIBDA decreased by $19 million to $556 million for the six months ended March 31, 2023 as compared to $575 million for the six months ended March 31, 2022 as a result of lower revenues and the Restructuring Plan costs of $41 million, partially 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 remained constant at 19% for each of the six months ended March 31, 2023 and March 31, 2022 with the Restructuring Plan costs offset by the net gain on sale of the Company's interest in certain sound recording rights.

Depreciation expense

Our depreciation expense increased by $2 million to $43 million for the six months ended March 31, 2023 from $41 million for the six months ended March 31, 2022.

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

Amortization expense

Our amortization expense decreased by $5 million, or 4%, to $124 million for the six months ended March 31, 2023 from $129 million for the six months ended March 31, 2022.

The decrease is primarily due to certain intangible assets becoming fully amortized.

Operating income

Our operating income decreased by $16 million to $389 million for the six months ended March 31, 2023 from $405 million for the six months ended March 31, 2022.

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

Interest expense, net

Our interest expense, net, increased to $67 million for the six months ended March 31, 2023 from $62 million for the six months ended March 31, 2022 due to a higher principal balance due to the issuance of the incremental Senior Term Loan Facility in January 2023 and higher interest rates, partially offset by interest income.

Other expense (income)

Other expense for the six months ended March 31, 2023 primarily includes foreign currency losses on our Euro-denominated debt of $88 million.

This compares to foreign currency gains on our Euro-denominated debt of $50 million, currency exchange gains on our intercompany loans of $17 million and unrealized gains on hedging activity of $5 million, partially offset by aggregate realized and unrealized losses of $31 million on the mark-to-market of equity investments for the six months ended March 31, 2022.

Income tax expense

Our income tax expense decreased by $40 million to $69 million for the six months ended March 31, 2023 from $109 million for the six months ended March 31, 2022.

The decrease of $40 million in income tax expense is primarily due to the impact of lower pre-tax income in the current year.

Net income decreased by $119 million to $161 million for the six months ended March 31, 2023 from $280 million for the six months ended March 31, 2022 as a result of the factors described above.

Noncontrolling interest

There was $5 million of income attributable to noncontrolling interest for the six months ended March 31, 2023 and $1 million of income attributable to noncontrolling interest for the six months ended March 31, 2022.

Business Segment Results

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

For the Six Months Ended

March 31, 2023 vs.

2023 2022 $ Change % Change

Recorded Music

Revenues $ 2,382 $ 2,533 $ (151) -6 %

Operating income 434 465 (31) -7 %

OIBDA 540 580 (40) -7 %

Music Publishing

Revenues 507 459 48 10 %

Operating income 101 70 31 44 %

OIBDA 147 115 32 28 %

Corporate expenses and eliminations

Revenue eliminations (2) (2) — — %

Operating loss (146) (130) (16) 12 %

OIBDA loss (131) (120) (11) 9 %

Revenues 2,887 2,990 (103) -3 %

Operating income 389 405 (16) -4 %

OIBDA 556 575 (19) -3 %

Recorded Music

Recorded Music revenue decreased by $151 million, or 6%, to $2,382 million for the six months ended March 31, 2023 from $2,533 million for the six months ended March 31, 2022.

Recorded Music revenues were $1,061 million and $1,126 million, or 45% and 44% of consolidated Recorded Music revenues, for the six months ended March 31, 2023 and March 31, 2022, 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

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

For the Six Months Ended

March 31, 2023 vs.

2023 2022 $ Change % Change

Artist and repertoire costs $ 620 $ 648 $ (28) -4 %

Product costs 556 574 (18) -3 %

Total cost of revenues $ 1,176 $ 1,222 $ (46) -4 %

Recorded Music cost of revenues decreased by $46 million, or 4%, to $1,176 million for the six months ended March 31, 2023 from $1,222 million for the six months ended March 31, 2022.

Expressed as a percentage of Recorded Music revenue, Recorded Music artist and repertoire costs remained constant at 26% for each of the six months ended March 31, 2023 and March 31, 2022.

Expressed as a percentage of Recorded Music revenue, Recorded Music product costs remained constant at 23% for each of the six months ended March 31, 2023 and March 31, 2022.

Selling, general and administrative expense

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

For the Six Months Ended

March 31, 2023 vs.

2023 2022 $ Change % Change

General and administrative expense (1) $ 282 $ 297 $ (15) -5 %

Selling and marketing expense 352 395 (43) -11 %

Distribution expense 58 67 (9) -13 %

Total selling, general and administrative expense $ 692 $ 759 $ (67) -9 %

______________________________________

(1) Includes depreciation expense of $26 million and $28 million for the six months ended March 31, 2023 and March 31, 2022, respectively.

Recorded Music selling, general and administrative expense decreased by $67 million, or 9%, to $692 million for the six months ended March 31, 2023 from $759 million for the six months ended March 31, 2022.

The decrease in general and administrative expense was primarily due to the favorable movements in foreign currency exchange rates of $11 million and lower expenses related to acquisition transaction costs and employee related costs.

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, partially offset by rising costs.

Expressed as a percentage of Recorded Music revenue, Recorded Music selling, general and administrative expense decreased to 29% for the six months ended March 31, 2023 from 30% for the six months ended March 31, 2022.

Restructuring

For the six months ended March 31, 2023, total restructuring costs were $41 million consisting of severance costs for the Restructuring Plan.

Net gain on divestiture

Operating Income and OIBDA

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

For the Six Months Ended

March 31, 2023 vs.

2023 2022 $ Change % Change

Operating income $ 434 $ 465 $ (31) -7 %

Depreciation and amortization 106 115 (9) -8 %

OIBDA $ 540 $ 580 $ (40) -7 %

Recorded Music OIBDA decreased by $40 million, to $540 million for the six months ended March 31, 2023 from $580 million for the six months ended March 31, 2022 as a result of lower revenues and the Restructuring Plan costs of $41 million, partially offset by lower costs 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 remained constant at 23% for each of the six months ended March 31, 2023 and March 31, 2022 with the Restructuring Plan costs offset by the net gain on sale of the Company’s interest in certain sound recording rights.

Recorded Music operating income decreased by $31 million to $434 million for the six months ended March 31, 2023 from $465 million for the six months ended March 31, 2022 due to the factors that led to the decrease in Recorded Music OIBDA noted above, partially offset by a decrease in amortization due to certain intangible assets becoming fully amortized.

Music Publishing

Music Publishing revenues increased by $48 million, or 10%, to $507 million for the six months ended March 31, 2023 from $459 million for the six months ended March 31, 2022.

Music Publishing revenues were $268 million and $232 million, or 53% and 51% of consolidated Music Publishing revenues, for the six months ended March 31, 2023 and March 31, 2022, respectively.

International Music Publishing revenues were $239 million and $227 million, or 47% and 49% of consolidated Music Publishing revenues, for the six months ended March 31, 2023 and March 31, 2022, respectively.

The overall increase in Music Publishing revenue was driven by growth in digital, performance and mechanical revenue, partially offset by lower synchronization 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 Six Months Ended

March 31, 2023 vs.

2023 2022 $ Change % Change

Artist and repertoire costs $ 309 $ 295 $ 14 5 %

Total cost of revenues $ 309 $ 295 $ 14 5 %

Music Publishing cost of revenues increased by $14 million, or 5%, to $309 million for the six months ended March 31, 2023 from $295 million for the six months ended March 31, 2022.

Expressed as a percentage of Music Publishing revenue, Music Publishing cost of revenues decreased to 61% for the six months ended March 31, 2023 from 64% for the six months ended March 31, 2022, primarily attributable to revenue mix and the favorable impact of foreign currency exchange rates.

Selling, general and administrative expense

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

For the Six Months Ended

March 31, 2023 vs.

2023 2022 $ Change % Change

General and administrative expense (1) $ 52 $ 51 $ 1 2 %

Selling and marketing expense 1 1 — — %

Total selling, general and administrative expense $ 53 $ 52 $ 1 2 %

______________________________________

(1) Includes depreciation expense of $2 million and $3 million for the six months ended March 31, 2023 and March 31, 2022, respectively.

Music Publishing selling, general and administrative expense increased to $53 million for the six months ended March 31, 2023 from $52 million for the six months ended March 31, 2022.

Expressed as a percentage of Music Publishing revenue, Music Publishing selling, general and administrative expense decreased to 10% for the six months ended March 31, 2023 from 11% for the six months ended March 31, 2022.

Operating Income and OIBDA

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

For the Six Months Ended

March 31, 2023 vs.

2023 2022 $ Change % Change

Operating income $ 101 $ 70 $ 31 44 %

Depreciation and amortization 46 45 1 2 %

OIBDA $ 147 $ 115 $ 32 28 %

Music Publishing OIBDA increased by $32 million, or 28%, to $147 million for the six months ended March 31, 2023 from $115 million for the six months ended March 31, 2022.

Expressed as a percentage of Music Publishing revenue, Music Publishing

OIBDA margin increased to 29% for the six months ended March 31, 2023 from 25% for the six months ended March 31, 2022.

The increase was due to strong operating performance and the favorable impact of foreign currency exchange rates.

Music Publishing operating income increased by $31 million to $101 million for the six months ended March 31, 2023 from $70 million operating income for the six months ended March 31, 2022 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.

Corporate Expenses and Eliminations

Our operating loss from corporate expenses and eliminations increased by $16 million to $146 million for the six months ended March 31, 2023 from $130 million for the six months ended March 31, 2022, primarily due to higher employee related costs including non-cash stock-based compensation and other related expenses of $6 million and the Executive Transition Costs of $3 million, higher depreciation and expenses related to transformation initiatives, partially offset by the impact of the additional week in the prior year and a decrease in professional services.

Our OIBDA loss from corporate expenses and eliminations increased by $11 million to $131 million for the six months ended March 31, 2023 from $120 million for the six months ended March 31, 2022 due to the operating loss factors noted above.

FINANCIAL CONDITION AND LIQUIDITY

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.

Financial Condition at March 31, 2023

At March 31, 2023, we had $3.986 billion of debt (which is net of $43 million of premiums, discounts and deferred financing costs), $601 million of cash and equivalents (net debt of $3.385 billion, defined as total debt, less cash and equivalents and premiums, discounts and deferred financing costs) and $252 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 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

The financial data for the six months ended March 31, 2023 and March 31, 2022 are unaudited and have been derived from our condensed consolidated interim financial statements included elsewhere herein.

Six Months Ended

Cash provided by (used in):

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Operating Activities

Cash provided by operating activities was $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.

Cash provided by operating activities was $203 million for the six months ended March 31, 2023 as compared with cash provided by operating activities of $173 million for the six months ended March 31, 2022.

The $30 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 $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.

Cash used in investing activities was $51 million for the six months ended March 31, 2023 as compared with cash used in investing activities of $649 million for the six months ended March 31, 2022.

The $51 million of cash used in investing activities in the six months ended March 31, 2023 consisted of $17 million relating to investments and acquisitions of businesses, $42 million to acquire music-related assets, and $56 million relating to capital expenditures, partially offset by $42 million of proceeds from divestitures and $22 million of proceeds from the sale of investments.

The $649 million of cash used in investing activities in the six months ended March 31, 2022 consisted of $429 million relating to investments and acquisitions of businesses, a portion of which was debt-financed, $169 million to acquire music-related assets, a portion of which was debt-financed, and $62 million relating to capital expenditures, partially offset by $11 million of proceeds from the sale of investments.

Financing Activities

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.

Cash used in financing activities was $143 million for the six months ended March 31, 2023 as compared with cash provided by financing activities of $363 million for the six months ended March 31, 2022.

The $143 million of cash used in financing activities for the six months ended March 31, 2023 consisted of cash paid to settle deferred consideration related to prior year acquisitions of music publishing rights and music catalogs of $133 million, dividends paid of $167 million, deferred financing costs of $2 million and distributions to noncontrolling interest holders of $7 million, partially offset by proceeds from the incremental Senior Term Loan Facility of $147 million and proceeds from the Term Loan Mortgage of $19 million.

The $363 million of cash provided by financing activities for the six months ended March 31, 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 $156 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 $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.

maintain our cash in various banks and other financial institutions around the world, and in some cases those cash deposits are in excess of FDIC or other deposit insurance.

In the event of a bank failure or receivership, we may not have access to those cash deposits in excess of the relevant deposit insurance, which could have an adverse effect on our liquidity and financial performance.

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 $235 million, which includes capital expenditures of approximately $100 million.

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.

The timing of global deployment has been delayed as the size and scale of this global system implementation requires rigorous system testing and data validation to ensure go-live readiness.

In April 2023, we successfully launched certain components of our new technology platform in select territories.

The Company will continue to deploy our new technology platform to remaining territories in a wave-based approach with additional territories expected to implement during fiscal year 2023 and fiscal year 2024.

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

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

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

For example, our S&P corporate credit rating 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 3.7% as of December 31, 2022.

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 Ba2 in April 2023.

In addition, our weighted-average interest rate on our outstanding indebtedness has decreased from 10.5% in 2011 to 4.0% as of March 31, 2023.

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.

Senior Term Loan Facility Incremental Commitment Amendment

Senior Term Loan Facility Amendment

On November 1, 2022, Acquisition Corp.

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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):

Term Loan Mortgage Agreement

On January 27, 2023, Acquisition Corp., along with Warner Records Inc.

and Warner Music Inc., entered into an agreement with Truist Bank, which provides for a term loan of $19 million (“Term Loan Mortgage”) secured by the Company’s real estate properties in Nashville, Tennessee.

Interest on the Term Loan Mortgage will accrue at a rate of 30-day SOFR plus the applicable margin of 1.40% subject to a zero floor.

Equal principal installments and interest are due monthly.

Revolving Credit Agreement Amendment

On March 23, 2023, Acquisition Corp.

entered into an amendment (the “Fourth 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 Fourth Revolving Credit Agreement Amendment provides for the replacement of LIBOR-based rates with a SOFR-based rate and other rates for alternate currencies, such as EURIBOR and SONIA.

We utilized the expedients set forth in ASC Topic 848, including those relating to derivative instruments used in hedging relationships.

This transition does not result in a financial impact to our consolidated financial statements.

Existing Debt as of March 31, 2023

As of March 31, 2023, 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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3.000% Senior Secured Notes due 2031 800

Term Loan Mortgage 19

Total long-term debt, including the current portion $ 4,029

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______________________________________

(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.

(a) Reflects $300 million of commitments under the Revolving Credit Facility available at March 31, 2023, less letters of credit outstanding of approximately $4 million at March 31, 2023.

There were no loans outstanding under the Revolving Credit Facility at March 31, 2023.

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 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.

On February 10, 2023, 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 March 1, 2023.

The Company paid an aggregate of approximately $83 million and $167 million, or $0.16 and $0.32 per share, in cash dividends to stockholders and participating security holders for the three and six months ended March 31, 2023, respectively.

Covenant Compliance

The Company was in compliance with its covenants under its outstanding notes, the Revolving Credit Facility and the Senior Term Loan Facility as of December 31, 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 March 31, 2023.

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 December 31, 2022, for the twelve months ended December 31, 2021 and for the three months ended December 31, 2022 and December 31, 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 December 31, 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 March 31, 2023, for the twelve months ended March 31, 2022 and for the three months ended March 31, 2023 and March 31, 2022.

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

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Twelve Months Ended

December 31, Three Months Ended

March 31, Three Months Ended

2023 2022 2023 2022

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

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

Net (gains) losses on divestitures and sale of securities (b) (42) 7 (1) 9

Restructuring costs (c) 65 28 45 1

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

(c) Reflects severance costs and other restructuring related expenses, including those related to the Restructuring Plan as well as the Executive Transition Costs in the current quarter.

(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.

(f) Reflects costs associated with our transformation initiatives and IT system updates, which includes costs of $12 million and $42 million related to our finance transformation and other related costs for the three and twelve months ended March 31, 2023, respectively, as well as $10 million and $39 million for the three and twelve months ended March 31, 2022, respectively.

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

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(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.

(i) Reflects expected savings resulting from transformation initiatives, including the Restructuring Plan, and the pro forma impact of certain specified transactions for the three and twelve months ended March 31, 2023.

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 $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.

The pro forma impact of these specified transactions and initiatives resulted in a $38 million increase in the twelve months ended March 31, 2023 Adjusted EBITDA.

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

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(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 December 31, 2022 not exceeding $250 million.

This is calculated net of cash and equivalents of the Company as of March 31, 2023 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.

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.

7 unchanged sentences

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What changed 10-Q

Item 2. Management’s Discussion and Analysis