Welcome to Warner Music Group's fiscal fourth quarter and full year earnings Conference Call for the period ended September 30, 2006. (Operator Instructions). Now I would like to turn the call over to today to your host, Ms. Jill Krutick, Senior Vice President of Investor Relations and Corporate Development.

Thank you very much. Good morning, everyone. Welcome to Warner Music Group's fiscal fourth quarter and fiscal year conference call. Hopefully you've seen the press release we issued this morning with our results. We also filed our Form 10-K today which you can find on our website at wmg.com. Today, our Chairman and CEO, Edgar Bronfman Jr. will share with you our strategic update; and our EVP and CFO, Michael Fleisher, will discuss fiscal fourth quarter and fiscal year results. Finally Edgar will wrap up before we take your questions. Before Edgar's comments, let me remind you that this communication includes forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance. Words such as estimates, expects, plans, intends, believes, should, and will and variations of such words or similar expressions that predict or indicate future events or trends or do not relate to historical matters identify forward-looking statements. Such statements include, but are not limited to, estimates of our future performance such as the success of future album sales, projected digital sales, increases and gains in physical sales, expected expansion of the online marketplace and market share gains. All forward-looking statements are made as of today and we disclaim any duty to update such statements. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them; however, there can be no assurance that management's expectations, beliefs and projections will result or be achieved. Investors should not rely on forward-looking statements because they are subject to a variety of risks, uncertainties and other factors that can cause actual results to differ materially from our expectations. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our press release and Form 10-K and other SEC filings. We plan to present certain non-GAAP results during this conference call. We have provided schedules reconciling these results to our GAAP results in our earnings press release posted on our website at wmg.com. With that, let me turn it over to Edgar. Thank you.

Thanks, Jill and welcome everyone. Thanks for joining us. I think this is a good opportunity to step back for a moment and look at what's happened to our business over the course of the fiscal year. I'm pleased with what we've accomplished and delivered. Comparing our fiscal ’06 to ‘05, digital revenues up 126% to $355 million; total constant currency revenue was up 2%; adjusted OIBDA is up 8%; adjusted operating income is up 18%; and we had an ending cash and short-term investments balance of $385 million. I think you'll also see that we've had several major achievements this quarter as well. First, in the quarter, and calendar year-to-date we continue to outperform the market by gaining margin and market share, despite a difficult industry environment and a modest fourth quarter release schedule, resulting in tough period-to-period comparisons. According to SoundScan, which is based on calendar year results, we were the only major recorded music company to increase our total U.S. album share year over year for the first nine months of 2006, and among the music majors, we experienced the greatest rise in U.S. current album and digital album shares for that same nine-month period. Second, we achieved a new Warner Music Group digital milestone, exceeding the $100 million threshold in quarterly digital revenue. On a percentage of revenue basis, we continue to be the leader in digital, growing our quarterly digital revenue both sequentially and year over year to $104 million or 12.2% of total revenue. While the quarter was soft for us in terms of physical sales, on a worldwide basis for the year, gains in digital recorded music revenue more than offset declines in physical recorded music revenue. Furthermore, for the fiscal year, domestic recorded music digital revenue rose to 16% of total domestic recorded music revenue. Third, despite a light quarterly release schedule, we had some notable A&R achievements including continued gains in U.S. share and strong local repertoire in certain key international markets. This is a result of our A&R strategy of focusing on innovative efforts with established artists and initiatives developed new artists, gaining share in the fastest-growing genres and developing local repertoire in the largest international markets. Fourth, we continue to reap the benefits from our focus on profitable growth, excluding non-recurring items which Michael will discuss in more detail, our quarterly OIBDA was essentially flat and our OIBDA margin expanded 0.8 percentage points year over year to 13.2%, as we continue to manage the business efficiently. You will also see on our press release some of the challenges we highlighted on our last call, specifically our notably tough comparison with last year's quarter. As expected, our fourth quarter revenue was 7% lower year over year on a constant currency basis, given significant carryover sales and an unusually large Atlantic release schedule in the fourth quarter of 2005. In fact, Atlantic had nearly as many releases in the fourth quarter of 2005 as it did for the entire fiscal year 2006; an example of why we continue to focus on our fiscal year results and not on specific quarterly comparisons. Now I'd like to give you some further color on two of our greatest strengths: our digital business and our A&R strategy. We are sustaining our leadership in the music industry's digital revolution. Warner Music Group remains the only major music company that reported digital album share in the U.S. above its physical album share for the September quarter and calendar year-to-date. Our primary U.S. sales and distribution company, WIA Corp., had the highest year-over-year increase in digital track share for the first nine months of 2006 of any major U.S. music distributor. According to SoundScan, WIA’s digital track share increased by 17% to a 20.4 share when comparing the same nine month period in ‘05 and ‘06. Furthermore, WIA was recently named large distributor of the year by the National Association of Recording Merchandisers, or NARM, an achievement of which we are very proud. WMG has five of the top-selling digital tracks in the U.S. for the first nine months of 2006 including: We continue to be on the leading edge of digital innovation. For example, this quarter we reached a series of agreements to support our pioneering video strategy, the three main components of which are: Let me give you a few examples of how we're executing on our video strategy. First, the deal we reached with YouTube is emblematic of what we are trying to achievement. In a first-of-its-kind deal for any media content company, we established a strategic relationship with the category leader in video, built upon an ad-sponsored business model. Through YouTube, we can monetize our library of music videos from WMG's world renowned roster of artists, as well as other unique video assets such as behind the scenes footage, artist interviews, original programming and similar special content. Furthermore, we became the first global media company to broadly embrace the power and creativity of user-generated content. Second, WMG announced a strategic business relationship with Google that gives users the ability to stream, on demand, WMG 's extensive music video collection through an ad-supported revenue sharing agreement, or to purchase videos online for download. Third, in an effort to broaden the reach of our diverse collection of video assets through multiple digital platforms, we unveiled a new video initiative with Brightcove, an internet TV pioneer. Through Brightcove, we are making our video catalog available in the digital space, but in this instance, directly to consumers. The Brightcove Internet TV service allows us to commercially distribute our video content on an ad-supported basis. Finally, we were the first major music company to reach a deal with Movie, the leader in instant personal video. This ad-supported business arrangement gives users a quick, easy and legitimate way of weaving their personal video clips and photos into original artists music videos, tour footage and behind the scenes concert reels. By creating original music video remixes, lending their own content with our content, fans can engage and interact with their favorite artist in a completely new way that will transform consumers’ experience of creating user-generated videos. As a result of our video strategy, our huge repository of video content is being transformed from a secondary marketing expense to a primary profit center. I'm pleased with the progress of this initiative which should generate measurable revenue by the end of our fiscal year. Moving to our global releases and A&R initiatives, Warner Music again distinguished itself on a variety of fronts. Let's note the total industry-wide album units sold in the U.S., Both digital and physical, fell by 7% this quarter as compared to the same period last year, according to SoundScan. However, despite few major releases for us in our fourth quarter, we still outpaced our major competitors, holding within 2% of the unit figures for the prior year quarter. In fact, comparing our fourth quarters in ‘06 and ‘05, our U.S. album share increased about one point to 19%. If one factors in all the ways music is consumed today, including online and mobile, the industry is likely up slightly in the U.S, contrary to what some market watchers may believe. After all, if we add digital track sales to the album totals based on the RIAA standard ten tracks per album equivalent, the U.S. music industry is down 3% year over year for the quarter, or up just 1% for the first nine months year over year; and that's before we add any contribution from mobile or online subscription services. Converting our digital tracks into album sales, we still outpaced our competition as we would then be up 2% for the quarter, year over year, in U.S. album unit sales and an impressive 11% year over year comparing the first nine months of calendar ‘05 and ‘06. For the ‘06 fiscal year we gained album share in the U.S. year over year in four out of the top five musical genres based on releases from artists such as Madonna, James Blunt, Red Hot Chili Peppers, Enya and Green Day. We've been working to build and carefully manage a premiere roster of both developing and established artists. Established and new artists contributed to solid carryover sales in the quarter, including Warner Brother's Muse and Red Hot Chili Peppers and Atlantic’s Gnarls Barkley and Panic! At the Disco. Despite the small number of releases in this quarter compared to the massive output in the prior year quarter, our Atlantic label maintained its momentum in breaking new artists, most notably at Bad Boy Records. Bad Boy’s Yung Joc, Danity Kane and Cassie were all high performing newcomers in the quarter with each approaching platinum or gold status. In addition, Diddy's own new album Press Play debuted at number one on the Billboard 200 adding even more heat to reemergence of his Bad Boy label. The digital appeal of urban music resonates as Yung Joc single Hits Going Down sold nearly 4.5 million ringtones in the U.S., a Warner Music Group record. At the MTV Music Video Awards, Atlantic had more nominations and wins than any other label, grabbing seven including Video of the Year for break out success story, Panic! At the Disco. For the recent MTV Europe Awards, Warner Music Group had the most wins among the music majors including Red Hot Chili Peppers for best album, Stadium Arcadium and Gnarls Barkley for the best song, Crazy. Also notable was TI's results at the first ever BET Hip Hop Awards held on November 11, where TI was up for eight awards, and won Best Hip Hop Video, Best CD, and MVP of the year. Highlighting our successful A&R efforts designed to enhance our local repertoire in key international markets is our recent success in Japan. Warner Music has traditionally played a limited role in the second-largest recorded music market in the world, Japan, with a share that approximated just 5% in 2005. However, our management team has revamped the organization by bringing a fresh approach to A&R, modernizing the marketing and the changing media landscape, right-sizing the organization and reorganizing our digital operations by integrating them into the fabric of the business. These efforts have paid off by enhancing our local repertoire and increasing the penetration of western repertoire in Japan. For example, Warner Music Japan has had the best-selling international artist album, Daniel Powter, and the best-selling international compilation album, Beautiful Songs, year-to-date. On the local Japanese repertoire front, multi-platinum seller Kobukuro, an adult contemporary male duo act, released a greatest hits album which was Number one in Japan for four weeks running and has already sold 2 million albums. Ayaka is a 17-year-old pop artist with great prospects whose debut album, First Message, topped the Japanese chart and sold almost 1 million units in less than one week. Ayaka has already sold over 3.3 million master tones, underscoring the digital appeal of artists in this region. Taken together, these efforts resulted in Warner Music Japan nearly doubling it's historical SoundScan share levels to 8% year-to-date through October and becoming the number one music company among the majors for the month of October with a 17% total share. A local repertoire story in Latin America that is achieving international success is Mana, the kings of Latino Rock. Multi-platinum, multi-Grammy Award winner, Mana has a great following in both the U.S. and a broad. Mana's new album, AMAR ES COMBATIR, is off to an amazing start in Latin America, Spain and the U.S. having sold more than 1 million albums in the first two months of release. The Spanish language album debuted at number one across Latin America and Spain and debuted in the top five in the U.S. on the Billboard top 200 chart, a level that only one other Latin artist has ever achieved. Having recently extended and expanded our publishing deal with Mana, we benefit from a dual recorded music and music publishing revenue stream. Turning to music publishing, our management team continues to take steps to reinvigorate that business. A few recent industry awards highlight Warner Chappell's potential. Warner Chappell was named publisher of the year at BMI's sixth annual Urban Music Awards. In addition, Warner Chappell writer John Rich from Big & Rich won ASCAP’s country songwriter Artist of the Year Award for the second consecutive year for songs that included Mississippi Girl, which he wrote and was performed by Warner Brothers artist Faith Hill. In an effort to make strategic efforts to drive long-term growth, Warner Chappell signed several important deals during the quarter including the extension of our sub publishing agreement with Disney Music Publishing under which Warner Chappell administers the rights to more than 10,000 titles in the legendary Disney music catalog as well as the company’s future film and television releases across most major markets in Europe and South America. Additionally, Warner Chappell recently formed a new publishing venture with singer/songwriter/producer Keith Seigel and music executive Alan Caite and entered into a co-publishing arrangement with David Vincent Williams, the winner of the 2002 Country Music Awards Song of the Year for I'm Moving On, a hit single for Rascal Flats. As you can see, we managed the business to generate sustained value. We remain, as ever, focused on executing our strategy and building shareholder value every day. As we continue to remind the market, we manage our business for the fiscal year, not for any particular quarter. While the release schedule limited results for the fourth quarter of fiscal ‘06, the fact is we will be facing an even tougher comparison in our first quarter of fiscal '07 on both a revenue and OIBDA basis which Michael will help to put in better perspective for you in a moment. However, regardless of any particular quarter’s comparison, we enter 2007 with a renewed energy for our ability to continue to generate value, continue to accelerate the digital transformation and continue to innovate and attract creative executives, artists and songwriters. Now, I'd like to turn the call over to Michael for a run through of our financials. Michael D. Fleisher: Thank you, Edgar and good morning, everyone. Let me start by saying that through the tremendous efforts of our finance team and many others throughout the company, we are fully compliant with section 404 of the Sarbanes-Oxley Act as of our September 30 2006 deadline. As a result of our companywide section 404 initiative, we have also remediated and eliminated our only remaining material weakness related to our U.S. royalty controls. I'm extremely pleased with both of these accomplishments. Complying with section 404 and clearing a material weakness are high hurdles which could not have been traversed without the time and dedication of so many of our employees. Now I'd like to cover some of our key financial highlights for the quarter. We generated quarterly net income of $12 million or $0.08 per diluted share. Looking at the income statement for the three months ended September 30, we reported revenue of $854 million, which declined 6% from the same period in 2005, or 7% on a constant currency basis. As expected, the timing of releases, a challenging industry environment and a tough comparable prior year period set the tone for this quarter. We manage our business on a fiscal year basis, not a quarterly basis. For our fiscal year 2006, despite a still difficult music business, our revenue is up 2% on a constant currency basis to $3.5 billion. Domestic revenue increased 2%, while international revenue also rose 2% on a constant currency basis. Top sellers for the year were Madonna, James Blunt, Red Hot Chili Peppers, Enya and Green Day. Worldwide, we had 18 releases that sold more than 1 million units this fiscal year versus 17 in the prior year; and 37 releases that sold between 500,000 and 1 million units this year, seven more than last year. Quarterly revenue declines in the U.S. and Europe were partially offset by gains in the Asia Pacific region, particularly Japan. Recorded music and music publishing both contributed to the quarterly revenue declines though our digital recorded music business increased significantly. Strong territories for our recorded music business included Spain, Latin America, Japan, and other Asia Pacific countries, all with double-digit revenue growth as compared to the prior year quarter. In Japan, revenue grew 50% from the prior year quarter on a constant currency basis, with local repertoire from Ayaka and Kobukuro contributing to the strong results. Our quarterly digital revenue nearly doubled to $104 million or 12% of total revenue and was up 13% sequentially. For the full fiscal year, our digital revenue grew more than 125% to $355 million from $157 million last year. Similar to recent quarters, approximately 71% of our digital revenue was generated in the U.S. and 29% in the rest of the world. Our worldwide digital revenue continues to be split about 50/50 between online and mobile. While today, online is still larger than mobile in the U.S. and the reverse is true internationally, we see this distinction blurring as the mobile contribution becomes more prominent in the U.S. We continue to believe that we are in the very early stages of digital music that should flourish as 3G penetration rises, product innovation flows and broadband expands globally. Total operating income before depreciation and amortization, or OIBDA, excluding non-recurring items remains steady at $113 million compared to $112 million in the prior year quarter. This essentially flat adjusted OIBDA performance also included two one-time events that cancel each other out. We had modest deal-related expenses of about $5 million for pursuing BMG Music Publishing and EMI, offset by a $5 million royalty benefit in music publishing which I'll describe in more detail momentarily. Despite these deal-related expenses, excluding non-recurring items, we experienced a 0.8 percentage point year-over-year improvement in OIBDA margin for the quarter to 13.2%. Non-recurring items in this quarter consisted of $13 million in recorded music OIBDA from the Kazaa settlement. For the full fiscal year, our margin expansion was even more pronounced. On an 8% gain in adjusted OIBDA to $505 million, we reported a 1.1 percentage point improvement in our OIBDA margin to 14.4%. Let's now look at our different business segments. The quarterly worldwide revenue of our recorded music business fell 7% to $731 million on a constant currency basis. Contributing to this decline was a tough comp am for Atlantic, given its strong release schedule in last year's quarter which included James Blunt and Sean Paul and for Warner Brothers, which last year saw strong carryover from Green Day as well as new releases from Faith Hill and Eric Clapton. Domestic recorded music revenue fell 10% in the quarter while international recorded music revenue was essentially flat from the prior year quarter, helped by strength in local repertoire. Recorded music digital revenue grew 106% from the prior year quarter to $97 million or 13% of total recorded music revenue. Domestic recorded music digital revenue amounted to $68 million or 19% of total domestic recorded music revenue for the quarter. Major sellers in the quarter included Mana, Kobukuro, Danity Kane and Muse. Excluding non-recurring items, quarterly recorded music OIBDA was $88 million, a 10% decline year-over-year which reflected lower revenue and an unfavorable sales mix as we saw an increase in our third-party distribution business, which has lower margin sales than sales of our wholly-owned product. Excluding non-recurring items, our 12% recorded music OIBDA margin represents a 0.6 percentage point decrease over the prior year quarter, as a result of applying a similar fixed cost base to a lower revenue base. Full fiscal year Recorded Music OIBDA margins adjusted for non-recurring items expanded 0.8 percentage points to 15.5%, highlighting digital gains and cost management efforts. Let's move on to our music publishing business. In comparison to the same quarterly period in 2005, music publishing revenue fell 9% to $128 million on a constant currency basis. Year-over-year declines in mechanical revenue were partially offset by gains in synchronization and performance revenue for the quarter. Mechanical revenue declines reflect continuing declines in physical sales. Contributing to gains in synchronization revenue are our recent turnaround efforts. Music publishing OIBDA increased 26% over the prior year quarter to $53 million as a result of sales mix helped by growth in performance, synchronization and digital revenue sources and effective cost containment. Furthermore, as a byproduct of our SOX compliance work, we have reconciled our royalty payable balances. These efforts resulted in a $5 million, one-time profit benefit in music publishing. Looking at our cash management and our balance sheet, we ended the quarter with a cash and short-term investments balance of $385 million which consisted of $367 million in cash and $18 million in short-term investments. Total net debt amounted to approximately $1.9 billion, which reflects total debt less cash and short-term investments. As previously disclosed, we declared our fifth quarterly dividend of $0.13 per share on September 20, giving us a yield of 2% based on yesterday's close. The dividend was paid on October 20. We maintain our intention to pay up to an $80 million annual dividend to shareholders on a quarterly basis. For the quarter, we generated free cash flow of $62 million. Our free cash flow is calculated by taking cash from operations of $84 million, less capital expenditures of $12 million, and net cash paid for investments of $10 million. Our unlevered after-tax cash flow, we believe, provides the most accurate reflection of the ongoing cash generation capability of our business. Unlevered after-tax cash flow was $85 million in the quarter. Unlevered after-tax flow is calculated by adding back $23 million in cash interest to free cash flow. For the quarter our cash conversion, calculated by taking unlevered after-tax cash flow and dividing by adjusted OIBDA of $113 million was 75%. For the fiscal year, our cash conversion to adjusted OIBDA of $505 million was 62%. We continue to see the benefits of good long-term tax planning. We provided income tax expense of $47 million for the 12 months ended September 30, 2006 compared to $55 million for the prior year. Our income tax expense was reduced in 2006 primarily because a higher percentage of shared service operating expenses, which support both domestic and international operations, were allocated to foreign income and reduced foreign income taxes. For the three months ended September 30, 2006 we had a tax provision of $9 million on pretax earnings of $21 million, giving us an effective tax rate of 42.9% for the quarter. For the fiscal year, we paid cash income taxes of $66 million and received income tax refunds of $11 million. Substantially all of our income taxes are being paid outside the U.S. because our U.S. taxable income is being offset by our interest expense deduction and the annual recurring non-cash deduction related to the amortization of the purchase price paid to Time-Warner for Warner Music Group. At September 30, 2006 we have a U.S. tax loss carryover of $126 million and foreign tax credit carryovers of $46 million. These carryovers will be available to reduce our U.S. income taxes in future years. Echoing Edgar's earlier remarks, we will face even tougher comparison in the first quarter of fiscal 2007 than in the fourth fiscal quarter of 2006 on both the revenue and OIBDA lines. In fact, we expect fiscal 2007 to be more second half weighted based on the timing of our releases. More specifically, in last year's December quarter, we benefited from an extraordinarily strong release schedule which included albums from Madonna and Enya and strong carryover sales from James Blunt and Green Day. In fact, our top five sellers in the first quarter of last year accounted for 15.6 million units worldwide, a sales magnitude we haven't seen in that quarter for five years. A more challenging global music industry back drop will also be a factor in our first quarter. On the OIBDA line, last year's first quarter releases outperformed our expectations. These releases generated substantially higher than expected sales volumes in the quarter with unusually attractive profit characteristics. As a result, unlike this quarter's flat OIBDA, we also expect to see substantial pressure on our OIBDA line in the first fiscal quarter of 2007. As you are well aware, even given these expected comparisons, we do not manage our business for any single quarter. We strive to release the right content at the right time in an effort to maximize fiscal year profit potential and artist career development. As a matter of policy, we do not provide financial guidance to the investment community given the quarterly variations and the timing of our music release schedule and associated marketing and promotion expenses are normal. However we are delighted with our financial strength, digital leadership and cost management efforts and remain energized about our ability to capitalize on opportunities in the transforming music industry in the coming fiscal year. Now I would like to turn the call back to Edgar for closing remarks.

Thanks, Michael. Over the course of this past year, I am really pleased with the milestones we have achieved. Sustaining our digital leadership position and enabling and promoting new business models, increasing our margin and market share, breaking many important new artists while bringing established artists to new career milestones, and continuing to drive shareholder value. It reinforces our conviction that we are on the right path of transforming Warner Music Group into the premier music-based content company. We have a board, a shareholder base, and a management team who are all focused on creating value year-in and year-out, and we look forward to continuing that progress. Thank you all, and Operator, if you would, we would like to open it up now for Q&A.

(Operator Instructions) Our first question is coming from William Drewry from Credit Suisse, and your line is open.

Thanks very much. I have two questions, if I could. One, the first one was, Edgar, I was just wondering, as you see the shift to mobile from digital that Michael alluded to, I was just wondering if you could talk about what implications that might have on the price model. I think that you in the past have expressed, I don’t know if frustration is the right word, but maybe discontent on the rigidity of digital pricing. I was just wondering what opportunities mobile might open up for you as that platform develops. Then, a second one is, I think I sort of know the answer to this, but just wondering if you could talk about consolidation opportunities in the space right now, what maybe your M&A goals are for the company as you go into 2007, and anything that might be on the market, as there continues to be consolidation that might fit well with Warner Music. Thanks.

Let me answer the second question first. As you probably expect, we do not really talk much about M&A, though I suspect there are a number of non-Warner Music affiliated private equity partners on the call this morning, and we welcome them to the Warner Music call as well. What I would say, which I have said before, not in any specific context, we are believers in the digital transformation of the media business. We are buyers of content and we are excited about our ability to take that content and expand its opportunity on the digital platform. So as opportunities become available, we will be interested and active potential purchasers. With regard to mobile, we I think have always been very focused on the mobile opportunity. We have by far and away the largest mobile distribution footprint of any media company in the world, not just any music company. Our footprint reaches over 1.4 billion mobile subscribers, and because of the size and breadth of that footprint, we see different pricing models across different content in all kinds of markets. So there are full-track downloads, there are master tones, there are SMS tones, there are screensavers -- there is all kinds of content. I think we will see a fair amount of different pricing from carriers in different markets over time. I do think that we will see, as a result of so many more carriers, handset manufacturers, content companies and markets, more variability in the pricing than we see in the U.S. online market today, but I do not want to predict where those pricing models go on any specific basis.

Thank you. Our next question comes from Doug Mitchelson from Deutsche Bank. Your line is open.

Thank you. This is actually Garrett stepping in for Doug Mitchelson. Just a couple of questions. Concerning margin expansion, obviously as you mentioned before, fiscal first quarter ’07 is going to be very difficult but can we see margin expansion carrying forward at the kind of level we saw in fiscal ’06? Just curious on how much is wireless contributing to results right now and expectations for domestic wireless growth in ’07? Thank you.

I think what we have said on the margin expansion question is really that we are targeting ourselves mid-teens margins, OIBDA margins. We are real happy with the fiscal ’06 performance. Needless to say, we target ourselves to do better than that in ’07. I think it is largely going to be dependent on the success of the digital music marketplace, where we can generate increased margins, and at the same time, how quickly the physical marketplace is impacted. Remind me of the second question?

Sure, just about wireless growth in terms of how much is it contributing so far and expectations for domestic wireless growth in fiscal ’07.

Mobile is just about half of our digital revenue today. We expect that pace to probably continue into 2007, though I think we will see good growth for Warner Music in U.S. mobile wireless in 2007. I must say, I am very encouraged by our own initiative and very encouraged by what I have seen that will be coming from handset manufacturers being introduced into the market throughout calendar year ’07.

Thank you. Our next question does come from Eric Handler from Lehman Brothers. Your line is open.

Thanks, good morning. Could you just dig a little deeper on the disparity in the growth rates between physical and digital? Was there anything that really occurred in the quarter, be it new video revenue, expansion of master ringtones, anything along those lines that you just seem to be up from quite a bit, relative to the industry, on both sides. I’m just curious on that. Secondly, you are now a little bit over a year into your Bad Boy relationship, and you had a really good quarter there. Is this a business that is now profitable? Could you give a little bit more light on that?

Let me answer the second question first. Bad Boy is a profitable venture. Remember that not only does Warner Music share in the profits of Bad Boy as a joint venture, but we have a distribution fee which we collect on all the releases from Bad Boy, so the total Warner Music Group profit from Bad Boy is significantly greater than our percentage of profits at Bad Boy itself, but Bad Boy itself is a profitable venture. Michael D. Fleisher: On your digital question versus the physical business, I think part of our out-performance on the digital side continues to be our laser focus on that business and that being an integrated part of everything we do. In particular, things that we have talked about in the past, like digital album bundles, continue to be a place where we dramatically outperform our competition, and in fact our market share there is even greater than our larger digital market share. I think we continue to see just great strength across the entire digital product line. In making the comparison between the digital and the physical, I think it is also important to understand on the physical side that there is some timing. Our revenues are calculated when we ship physical product and we calculate revenues on the digital products when we sell it, and when it is sold through to consumers because there is no inventory. Last year’s physical quarter had large shipments that went out at the end of September for early October, the big Q1 releases.

Thank you. Our next question comes from Anthony Noto from Goldman Sachs. Your line is open.

Thank you very much. Edgar, first question, physical appears to be down about 12% year over year. If that is not right, just correct me, but I was just wondering, could you separate out the drivers of that decline, separate from the tough comps, i.e. from an industry perspective, are you seeing changes in piracy and/or demand? If you could comment on that. Separately, the publishing margins were up quite significantly, as you mentioned, Michael, to 41.4% from 31.4%, and you mentioned that was due to mix, cost-cutting and then a one-time benefit. Excluding the one-time benefit, can mix and the cuts that you made on the cost side allow the margin to stay at the 41%-plus range as you try to reinvigorate growth over the next 12 to 24 months there? Then, if you have any comments about the satellite radio negotiations. Thanks.

I think we may reverse this. I am going to ask Michael to answer the question about the physical decline. Maybe I can just make a comment about publishing margins. I just want to be clear. I think the 41.4% publishing margin is an extraordinarily high margin which we called out based on largely this result of fixing the royalty balances. I do not know of any publishing business at the moment that sustains at 41.4% margin, and ours is not going to do that. I do think that as a result of our turnaround efforts, we are still maintaining strong music publishing margins and we expect to continue to do that, but not at that level. I think those are unrealistic levels, and as I said, I do not believe any major music publisher, or even minor music publisher, is managing its business at those margins. Michael D. Fleisher: Anthony, on the physical question, I think yes, if you look at physical worldwide revenues, they were down 12%. If I just use Soundscan information, just because I think it is the most easiest, accessible figures, for the quarter, our physical albums were down 7%. If you look at our total albums, including digital albums and total end-track equivalents, we were actually up 2% for the quarter. The reason you are seeing a distinction between the revenue picture and the Soundscan numbers is what I was saying earlier, which is Soundscan is based on sell-through to customers. The revenue figures are based on shipments. Last year, because we had such a big Q1 and big Q1 releases, some of those shipments went out at the very tail-end of Q4 and were captured in the Q4 revenue but did not sell through to Soundscan until the next quarter. That is why you are seeing a distinction between the revenue picture Q-over-Q and the Soundscan picture Q-over-Q.

Great. Any comment on satellite radio?

Thanks for reminding me. Sorry we dropped that, Anthony. No, I do not think there is any comment. I think that it will be -- we have filed our arguments, the satellite radio industry has filed their arguments. I have every expectation at this stage, at least, that it will go through all of the processes contemplated in the original contract, meaning it will go through an arbitration proceeding. When that proceeding is finalized, any increase in the rates will be retroactive to the beginning of the contract or to January 1, 2007.

Thank you. Our next question comes from Michael Savner from Banc of America, and your line is open.

Good morning, thanks very much. Just a follow-up again on the physical questions. Is there anymore leverage in that model? I know you run it pretty lean right now, but as you see the physical numbers really not showing much signs of stabilization, do you have the opportunity as you are allocating more resources to digital to pull more resources away physical, and shore up that business ever farther? Secondly, I know this is a question we like to ask every couple of quarters or so, just your thoughts on the status of tiered pricing, if that is something that you would like to see happen, and if you are moving any closer to doing that, and whether Microsoft’s entry with the Zune gives you any leverage to do that. A comment on both of those would be fantastic. Thanks.

On the physical side, let me make a couple of comments. One is we have been successful so far in focusing resources on growth and being very, very sober about how many resources we want to apply to declining businesses. In the middle of an industry transformation, the history is the incumbents often look forward to turnarounds and maintain resources against traditional business models while failing to put too much cost against that and then insufficient resources up against opportunities. I think we have been pretty good so far at balancing and we are going to continue to balance by making sure we have plenty of resources to grow the businesses that are growing and we do not over-provide for businesses which are not growing. That is a process which will continue. So to answer your question, there will be additional leverage, there must be additional leverage as one revenue stream declines and other revenue streams [pick up]. Having said that, I also want to say that we feel it is important that we innovate, that we bring our level of innovation on the digital side to the physical side. In the first quarter of calendar ’07, so in other words, our fiscal second quarter, we are going to begin releasing quite a number of titles not only on CDs but on DVDs, and ultimately even on other platforms that are not in that quarter. DVD albums will be towards people who buy a physical platform and put it into their computer. We are going to give them a much richer experience. We are going to give them video, we are going to give them links, we are going to give them all kinds of things that are not available on a physical CD, so that we begin to innovate in the physical space. Quite honestly, we are selling the same physical platform that the industry has been selling for 25 years. If the television industry were doing that, it would be down too. We have to innovate in the physical space and we are going to innovate in the physical space. But having said that, we are also going to be very focused on how much resources we devote to it. With regard to tiered pricing, I think what I would say is we were very grateful for Universal’s leadership in regard to its Microsoft negotiations. I think it shows the power of content and the importance of content, but it also took the industry leader to take a strong stand. I believe and hope that as the industry becomes more focused on creating value that there will be opportunities for more variable models for consumers across various different platforms. I think I should not predict because I do not know the outcome.

Fair enough. Thank you.

Thank you. Our next question does come from Bishop Cheen from Wachovia. Your line is open.

Thank you for taking the question. Edgar, could you talk a little bit about gift cards and what you see in the sales? It seems that downloading music devices, the sales have been very brisk based on Black Friday. Gift cards would naturally follow. That would bode very well for you in your fiscal Q2. Any feeling for what is going on there?

I think as we have said previously, we do see sort of a developing pattern of seasonality around digital sales, which is of course growth in the March quarter and in the June quarter, based on the sales in the December quarter of music devices and gift cards and other things that are associated with that, and people taking up those gift cards, et cetera, through the first six months of the year, and then somewhat of a flattening in the second six months of the year. I would also note that as digital becomes a larger and larger percentage of our business, and I think Michael mentioned our percentage in this past quarter of U.S. reported music, that the relationship will have something to do with our release schedule as well. So as it becomes a larger percentage, where we have a strong release schedule, we are going to do well in physical and on digital. Where we have a weaker release schedule, there will be those issues as well. We do expect the seasonality that we have witnessed in ’04 and ’05 and ’06 to continue into ’07, with accelerated growth in digital revenues in what would be our Q2 and Q3, and a more collaborative kind of pattern in what would be our Q4 and Q1.

Thank you. Edgar, one follow-up, on developing video as a viable, profitable business, any feeling for when you might see the acceleration, the slope of that development? Is that the back-half ’07, or more an ’08 kind of --

I think when we purchased Warner Music, I think the phrase that I used around digital revenue was that we would see measurable revenue in ’05 and material revenue in ’06. I think I would do the same thing around video, which is to say I think we will probably see measurable revenue in ’07 and more material levels in ’08.

Thank you. Our next question comes from Rich Greenfield from Pali Research. Your line is open.

Just a big picture question for Edgar. When you look at the comments you made about the industry being up marginally when you include mobile and online or digital downloads, if you look at that type of expectation as you move into 2007, your revenues in 2006, you were up -- if you take out the sheet music issue, you were up about 3% versus an industry that let’s just say is up about 1%, and your EBITDA was up a little less than 8%. Do you think you can keep grabbing as much market share as you gained in 2006 to get to those type of levels? Or given the volatility of market share, is it likely that you will revert more back to a more stable market share over the next couple of years and therefore will track the industry closer than you tracked versus the out-performance you had in 2006? Then just a follow-up for Michael. Digital revenues, I believe you said in the past that you generally book it on a cash basis. I was just wondering, kind of a follow-up to the earlier question, was there anything new that kind of kicked in in terms of deals or anything that was new in the quarter that was not there the last year that you picked up because of the cash basis of recognition? Thanks. Michael D. Fleisher: Let me answer your second question first. Nothing unusual in the quarter. No one-time events, no unusual advances to revenue or anything like that. It was just straightforward revenue from the digital service providers around the globe.

But any new service providers that were not in the year-ago quarter, major ones? Michael D. Fleisher: Yes, there continued to be -- they come on stream throughout the year, but they all start very small and grow gradually, so it is not like there was -- I could not point to any one that said wow, this one really sort of moved the needle in a particular quarter.

On our ability to continue to outperform the market, obviously we believe we can do that. I was going to say, and maybe it is facetious, but frankly I think our board pays me too much money to do otherwise, and that is what management has to do and I think we have demonstrated our ability to do that and I think we have laid the groundwork for us to continue to do that, because as the digital revenues continue to grow and become a more important piece of the business, our position in that market frankly is stronger than our competitors, and our relationships with mobile carriers, with video producers, with online distributors, et cetera. I think we are closer to them. We manage our accounts with them better. We have the ability to execute against them better. We are more focused from a sales and content development standpoint than our competitors and I think we can continue that momentum. In addition, as I said, we intend to innovate on the physical platform. We are going to deliver products to consumers that are much more physically appealing, much richer in content, much broader and more malleable. We are going to give consumers more and more content that consumers can use in ways that consumers wish to use them, and we are going to monetize those efforts rather than try to limit those efforts.

When you look at the industry being up 1% in 2006, roughly, do you think the industry can do a lot better than that in 2007?

Well, look, I do think that as digital revenue becomes a larger percentage of industry revenue, that that growth rate can accelerate. I am a little hesitant to say what it will precisely be in 2007 because digital remains a smaller percentage than I would like it to be, so in other words, even with its great growth, it is going to move the needle less than it would if it were 30% or 40% of industry revenue rather than sort of the 10%-ish that it is of general industry revenue. Also, from our own standpoint, as I have said, though we, as Michael and I have indicated, are perfectly comfortable with our prospects for 2007, they are going to be more back-half weighted than front-half weighted. If you look at our first quarter last year and our best-selling albums, four of our five best-selling albums of the entire year had their sales peaks in our first quarter. That pattern is going to be different in ’07 than ’06, but as we have said from the very start, that is why we do not really focus a lot on quarterly comparisons because our release schedules are going to be so variable. As a result of those release schedules being variable, so will our mechanical revenue be more variable in our music publishing business.

Thank you. Our next question comes from Jason Bazinet from Citigroup. Your line is open.

Just had one longer term question. Given the secular shift towards digital and the comments you made regarding innovating on the physical side, if you look out a number of years, if you had your druthers, what do you think the appropriate level of mix is on the recorded side between digital and physical? Said another way, when do you think that the digital growth will begin to slow, or at least as a percentage will begin to stabilize? Is it 40%? Is it 60%? Is it 80%? Thanks so much.

The truthful answer is I do not know. I can tell you, and I think I have mentioned this before, that about 18 months ago or so I think it was now, Bill Gates predicted that within 10 years, so let’s say now about 8.5 years, more than 80% of all music revenues would derived digitally. He is clearly a smarter guy than I am, and that is as good a benchmark as any out there, but I certainly think that more than half of music revenues will be digital in a relatively short period of time. I do not know whether that is three years or five years, but it is coming and it is coming rapidly. Those revenues will come from sources that are much broader than our past revenue base. In other words, our past revenue base was audio only and albums principally. We are now going to be and are creating a mix of content that is both tone-based, so SMS tones of three or four seconds, to video-based and everything in between. So our content offerings will be much broader and obviously our distribution platforms will be much more varied and much broader than they have been in the past.

Our next question comes from Steve Lidberg from Pacific Crest. Your line is open.

Good morning. Two questions. First of all, on the margin, looking at the margin of digital. Could you provide an update relative to the delta that you are seeing on the digital margin versus physical, or maybe the company overall? Second question, as you look at the publishing business and the reporting discrepancy on the digital side, are we getting to the point that we should see an acceleration of digital revenue on publishing, given the growth that we have seen on the recorded music side? Thanks.

On the publishing side, I think the answer is yes. Everybody is working on it. Everybody is focused on it. It is still a very thorny issue with way too many parties involved and way too much complexity of systems that were really built for physical business and not built to be reporting the digital business, and separating those two out, but I would say that at least in our shop, we feel real good about our opportunity over the course of ’07 to start to collect more fully on the digital music publishing revenues. On the question of digital margin, we are where we have been all along. We think that when you make a direct comparison, there is an extra sort of 10 margin points at the gross margin line between digital products and physical products, and we expect as digital becomes a more and more prominent piece of our total revenue stream, to see that margin and see it flow through. Obviously margin in any particular quarter will be affected not only from that but also the mix of sales and the release schedule.

Any commentary with regard to where that stands from an operating margin perspective, or an OIBDA margin?

We have not talked about it pushing it down further.

Thank you. Our next question comes from Tuna Amobi from Standard and Poor’s. Your line is open.

Thank you very much. I have two broader picture questions as well. First of all, I would like some comment, perhaps from Edgar, on why you took a pass on the BMG music publishing acquisition. Any comment on whether the decision was financial or strategic? Because clearly, I think there is an argument that that deal could potentially help to contain the volatility of the three major revenue streams in the music publishing. We do not see any regulatory issues that you would have encountered. Arguably, the deal could also have helped to accelerate the scaling of the digital music publishing revenues, so I would like some comment on why you took a pass on that deal. Separately, I would like some sense on what your monetization strategy for user-generated content is. It seems to us that you have been the most aggressive among your peers to embrace this category, whether it’s your deal with Google Video or YouTube or movie, so I would just like to get a sense of how you see this user category developing. Do you have any issues with piracy? Along those lines, does your deal, do any of these deals preclude you doing any deal with Spiral Frog or some of these other online sites? Thank you very much.

Sure. Let me try and answer both questions. With regard to BMG music publishing, I am sorry you feel we took a pass. We do not think we took a pass. We thought we bid very aggressively. We worked very hard on that acquisition and we made what we thought was a very, very aggressive bid for the business. As it turned out, Universal made an even more aggressive bid than we did, both in terms of the amount of money it was prepared to pay, which was a multiple of EBITDA which was slightly higher than the multiple of EBITDA that we offered. Universal was also willing to take on more regulatory risk in a way than I think we were prepared to do, as we made our offer to Bertelsmann, and third, as you read, Universal made as part of its agreement with Bertelsmann the settlement of certain litigations that it had. But we were very aggressive, we felt, in that acquisition attempt. As I mentioned in a reply to an earlier question, we are buyers of content. We are optimistic about our ability to grow these businesses year-in and year-out, and we will continue to be aggressive, as good content opportunities become available in the marketplace. With regard to user-generated content, we identified this area well more than a year ago as being an area of enormous opportunity. We believe that one of the great things about the Internet is that it unleashes the power and creativity not of thousands of people but of tens or even hundreds of millions of people eventually around the world. Our deals with YouTube, with Google, with BrightCo, with Movie, with others, will all ultimately I think have elements and all other carriers of mobile content online, et cetera, we hope will eventually all have user-generated components to those deals, so that consumers can take our content and interact with it in their own unique and creative ways, and we can share in the benefits of that creativity.

Any comments on piracy concerns and any exclusivity that prevents, for example, you guys talking to Spiral Frog?

First of all, there are no exclusivity -- we do not sign exclusive contracts for our content, generally. If we do, it is just a sort of specific promotional opportunity around a specific artist or some such thing, so no, there are no exclusivity issues that would prevent us from dealing with Spiral Frog or anybody else, though I would say I think Spiral Frog is not yet a factor in the market, so the deals that we have done, we have tried to be forward thinking with companies that are already major factors in the market. With regard to piracy, it is an ongoing issue. The industry has been I think increasingly effective at trying to contain it. I do not think any of else feel that it can be eliminated, but we continue to contain it through legal and educational means, and combat it with increasing availability of content so that consumers can choose a more convenient and hopefully more satisfying, legitimate way of accessing all of our content. That has been our strategy and that continues to be our strategy. Operator, I think that is it for the call. We have hit our deadline. I would like to thank everybody on the call for listening and for participating, and we look forward to talking to you again in February. Thanks very much. Bye-bye.

Thank you. That does end today’s conference. You may disconnect at this time.