Warner Music Group Corp. (WMG) Q4 2014 Earnings Report, Transcript and Summary

Welcome to Warner Music Group's Fourth Quarter and Fiscal Year End 2014 Earnings Call for the period ending September 30, 2014. At the request of Warner Music Group, today's call is being recorded for replay purposes, and if you object, you may disconnect at any time. [Operator Instructions] Now I'd like to turn today's call over to your host, Mr. James Steven, Senior Vice President, Communications and Marketing. You may begin.

Good morning, everyone. Welcome to Warner Music Group's Fourth Quarter and Fiscal Year 2014 Conference Call. Both our earnings press release and the Form 10-K we filed this morning are available on our website. Today, our CEO, Steve Cooper, will update you on our business performance and strategy. Then our EVP Corporate Strategy and Operations, Brian Roberts; and EVP and CFO, Eric Levin, will discuss our financial condition and results. Steve, Brian and Eric will then take your questions. Before Steve'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. 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 that 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 earnings 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. I'll now turn it over to Steve Cooper.

Good morning, everyone. Thanks for joining us today. Our fourth quarter capped a year of strong momentum at Warner Music Group. The industry has undergone 12 months of tremendous change, during which we have continued to make great progress growing both revenue and market share. I'm extremely proud of the many things we accomplished during 2014. First, we delivered numerous successes with our artists and songwriters. From new names like Nico & Vinz, Echosmith and Charli XCX to global superstars like Ed Sheeran, Bruno Mars and Jason Derulo, to longtime legends such as Tom Petty, Neil Young and Led Zeppelin, we are home to the best talent in the business. Second, we completed our integration of Parlophone Label Group both on schedule and on budget. The acquisition has expanded our frontline artist roster, built up our already legendary catalog and grown our presence in classics. It has also bolstered our operations in Europe and deepened our executive bench strength. Third, we moved thoughtfully but aggressively to forge important new digital relationships, including first of their kind partnerships with Shazam, SoundCloud and Tencent. Fourth, we expanded our global footprint in emerging markets. We achieved this through organic growth in countries such as Brazil, additional investment in countries like South Africa, where we established a new wholly owned affiliate and acquisitions in countries such as China with our purchase of the Gold Typhoon roster and catalog. Fifth, we continued to transform our collective skill set and strengthen our leadership team through key hires and promotions. We also moved to a new global headquarters, bringing all of our New York operations, for the first time in our history, under one roof. This has already begun to foster greater collaboration among our labels and business units. Finally, we improved our financial flexibility with the successful refinancing of our debt this past spring. This will yield approximately $30 million in annual interest savings. Now I'd like to turn to our results, which are all given in constant currency unless we note otherwise. Despite industry headwinds, for the fourth quarter, we grew our total revenue by 0.1%, we grew our digital revenue by 10%, we grew adjusted OIBDA by 24% and expanded our adjusted OIBDA margin by 3 percentage points to 16%. The fourth quarter benefited from carryover sales as well as some significant new releases, including albums from Blake Shelton, Robert Plant, Kyary Pamyu Pamyu and Royal Blood. For the full fiscal year, we grew our total revenue by 5%, our digital revenue by 11%, adjusted OIBDA by 12%. We expanded our adjusted OIBDA margin by 1 percentage point to 15.2% and generated cash from operations of $130 million. Before we dive a bit deeper into our Recorded Music and Music Publishing results, I wanted to address some of the recent news about streaming. Our core strategy remains the same. We are determined to protect and promote the value of music. We are focused on unlocking as much revenue as possible from the ever-evolving music ecosystem, and we are committed to ensuring that our artists and songwriters are appropriately compensated as they build long careers. With that in mind, embracing the momentum of streaming models is paramount. As we have said before, streaming and particularly the subscription model, more fully captures the true demand for music. In the streaming universe, consumption drives the economics so that the more people listen to music, the better it is for our artists and our business. Much of the controversy has been around some on-demand digital services described as freemium because they have an ad-supported free to the consumer tier as well as a premium subscription tier. The primary reason we participate in the ad-supported tier is because it provides the means for consumers to discover the advantages of the premium offerings and thus leads them to become paying subscribers. There is also the fact that the ad-supported free to the consumer tier, in conjunction with the attractive price point of paid subscription services, makes streaming a great alternative to piracy. We continue to believe that the long-term sustainability of the freemium model is predicated on high levels of conversion, from ad-supported free to paid subscription. Of course, in order to achieve those levels, the benefits of paid subscriptions must be clearly differentiated from the ad-supported offerings. As we mentioned in our second quarter call, IFPI estimated that worldwide, there were 28 million paying subscribers in 2013. That's up from 20 million in 2012. As IFPI won't issue new global figures until early next year, the U.S. data for the first 6 months of 2014 is probably the best indication that paid streaming services continue to gain real traction. In September, the RIAA announced that the number of paid subscriptions in the U.S. had swelled to 7.8 million, up 43% in the first 6 months of 2014 compared with the prior year period. In a country where the population is almost 320 million, the ongoing potential for growth is obvious. With the industry's U.S. wholesale revenue down 2.5% for the first half of calendar '14, the importance of that growth is also clear. In our view, right now, enabling meaningful global growth in a number of paying subscribers is the best option for artists, for songwriters, for copyright owners and for the services themselves. Subscription streaming is not only a fantastic offering for music fans. It will propel the long-term health of the music industry. We look forward to continuing to work closely with our partners to turbocharge the adoption rate for subscription streaming. We are pleased that 2 of the biggest streaming services in the world have taken meaningful steps to convert segments of their massive customer bases into paying subscribers. Last month, we were the first and to date, the only music major company to sign a partnership with SoundCloud. There are 3 elements of this alliance that excite us: first and foremost, SoundCloud's commitment to launch a subscription tier in the first half of 2015; second, the opportunity for us and our artists to generate revenue from SoundCloud's ad-supported platform while providing a path towards delivering additional revenue from user-generated mixes and mash-ups; and third, SoundCloud's obligation to use their advanced content filters to reduce the illegitimate use of our music. This provides a new foundability for us and our artists to better manage the availability of our content. Also, a few weeks ago, YouTube launched its Music Key subscription service. We are hopeful that this will be a clear step forward in improving the monetization of content on a service where 29 of the top 30 all-time most-watched clips are music videos. We are encouraged by these and other developments in the paid subscription space, especially at a point where our total streaming revenue in the quarter was only $1 million less than our total download revenue. Although this is only one moment in time, it still represents a remarkable shift, considering that in the prior year quarter, streaming revenue was only about half the size of download revenue. Turning now to our specific results, starting with Recorded Music. For the third consecutive year, we grew combined worldwide digital and physical revenue in our Recorded Music business. This fiscal year, the 8% decline in physical revenue was more than offset by our 10% growth in digital revenue. For the fiscal year, our download revenue declined by 14%, but we also saw significantly higher growth, 74% in streaming revenue. That 74% compares to 44% from the prior fiscal year, which gives you some sense of the acceleration in growth we are experiencing in streaming. Recorded Music revenue in the quarter declined 1%, while digital revenue rose 4%, driven by a 51% increase in streaming revenue. I am pleased that we have a wide range of Recorded Music achievements to highlight for the quarter and the year. Our successes span multiple genres, illustrating the breadth and depth of our talented roster. We are especially proud of our ability to help take artists at all stages of their careers to new creative and commercial heights. This focus is reflected in our global best-sellers, which, this year, included sophomore albums from Ed Sheeran and Bruno Mars, Jason Derulo's third album, James Blunt's fourth album and Coldplay's sixth album. In addition, we saw 2 big name artists celebrate their first U.S. #1 albums this quarter. Wiz Khalifa topped the chart with BLACC HOLLYWOOD, his fifth album, which also went to #1 in Canada. We're also proud that Tom Petty & The Heartbreakers hit their first U.S. #1 with their 13th album, Hypnotic Eye, which also landed in the top 10 in the U.K., Canada, Germany and across the Nordics. The quarter also saw many emerging artists enjoy their first global hits. For example, Germany's Robin Schulz went to #1 in the U.K. and across Continental Europe with Prayer in C. The U.K.'s Charli XCX went top 10 all over the world with Boom Clap. Charli is also one of 4 Warner-affiliated artists out of the 8 performers who will be honored at Billboard's 9th Annual Women in Music Awards tomorrow. The other 3 included Aretha Franklin, Idina Menzel, and Paramore's Hayley Williams. In the U.K., our company had a particularly impressive year, having released 3 out of the 4 biggest selling albums in 2014. Ed Sheeran's x is the market's top-selling album this calendar year-to-date, while Spotify named Ed as the world's most streamed artist in 2014. x was also the first album to sell more than 1 million copies in the U.K. in 2014. In addition, Clean Bandit's Rather Be is to date the U.K.'s best-selling single of the year. And to top it off, we recently moved to #2 from #3 in the quarterly album market share rankings for the first time on record. On a global basis, there's a lot to be excited about going into the holiday season. David Guetta, Blake Shelton, Prince, Slipknot, Idina Menzel, Wu-Tang Clan and Bette Midler are among the artists who have released albums since the quarter's close. That said, as usual, we expect our second quarter release schedule to be somewhat lighter in comparison. Now turning to Music Publishing. For the year, Music Publishing revenue rose 2% with 17% growth in digital revenue, compensating for continued softness in mechanical revenue, which is attributable to physical sales. Trends were similar for the fourth quarter. Revenue rose 2% with declines in mechanical revenue, offset by strong 24% growth in digital. As you'll know from previous calls, Warner/Chappell dominated this year's publishing industry awards. It took the highest honor, Publisher of the Year, at 3 of ASCAP's prestigious ceremonies: Pop, Rhythm & Soul and Country. Additionally, last month, Warner/Chappell was named Publisher of the Year at ASCAP's Country Music Awards for the second year running. Warner/Chappell writers Ashley Gorley and Ben Hayslip won Songwriter of the Year and Song of the Year, respectively. These achievements followed Warner/Chappell being named Publisher of the Year at the BMI R&B/Hiphop Awards in August. Our songwriters celebrated 19 most performed Song of the Year awards, 8 of which went to Lil Wayne, who was named Songwriter of the Year. These tremendous accomplishments underscore our ability to attract and retain the world's greatest songwriters and composers. In September, Warner/Chappell announced the signing of Warner Bros. recording artist Echosmith, who are currently having a huge debut single with Cool Kids. In October, we signed Mike Dean, the Grammy-award winning, multi-genre award producer, who has recently been working with Beyoncé, Lorde and Brad Paisley. I'm happy to report that Warner Music Group artists and songwriters were big winners at the recent 15th Annual Latin Grammy Awards. A major highlight was Jorge Drexler, a Warner Music recording artist and Warner/Chappell songwriter, being honored for Record of the Year and Best Singer-Songwriter Album. This success was followed by many of our recording artists and songwriters being recognized by The Recording Academy in the nominations for the 57th Annual Grammy Awards. Our nominations impressively demonstrate the strength and diversity of our artist development activities. Atlantic's Ed Sheeran, who had a breakout year globally, received a highly coveted Album of the Year nomination and joined Nonesuch's The Black Keys and Parlophone's Coldplay with 3 nominations each. In addition, Chris Thile, the acclaimed mandolinist and singer, was nominated 5 times across 2 different Nonesuch projects. Warner/Chappell's songwriters were recognized with nominations in nearly 40 categories, including Julian Raymond for both Best Country Song and Best Song Written for Visual Media. Warner/Chappell's songwriter Beyoncé is now the most Grammy-nominated woman of all time, and she tied for the most nominations this year, including an Album of the Year nod. We wish all of our nominees the best of luck at the awards in February. Before we move on to the financial commentary, I'd like to thank Brian Roberts for his tremendous contributions in leading our finance team over the past 3 years. I'm very glad that he is staying on with us in a newly created role on our senior management team as EVP of Corporate Strategy and Operations. Our new CFO, Eric Levin, is with us on the call today to introduce himself to all of you. Eric, who joined us not long after our fiscal year ended, will bring in valuable experience and expertise as we continue to transform our business. He will take over the financial commentary on our call next quarter. With that, I'd like to turn this over to Eric for a moment.

Thanks, Steve, and good morning, everyone. 2000 (sic) [2014] was clearly an exciting year for Warner Music Group, and our acquisition and integration of PLG was a defining moment in the evolution of the company. At the same time, for the industry at large, the last 12 months were a challenging time. While streaming growth accelerated, download sales began to lose momentum, and physical revenue continued to decline. Against this backdrop of ongoing change, it is encouraging to see that a strong release schedule and excellent execution, assisted by the acquisition of PLG, resulted in overall growth. Since I arrived here just 8 weeks ago, I've been very energized about our plans for the future. I'm looking forward to working with Steve, Brian and the entire management team as we forge new business models, invest in growth areas and manage our costs. I have every confidence in our prospects and look forward to delivering strong results in the year to come. With that, I'll turn the call over to Brian to take us through the details of last year.

Thank you, Eric. Thank you, Steve, and good morning, everyone. I first want to provide an update on the PLG acquisition. As you may recall, the fourth quarter of fiscal 2014 marks the final period we will be discussing earnings including and excluding PLG. I am pleased to state that we have completed the integration process and remain on track to realize synergies of approximately $70 million. To date, we have captured about $45 million of these and expect the balance to come over the next 12 months. Now let me discuss our results in more detail. Fourth quarter revenue was flat, and excluding PLG, our revenue declined 1%. For the fiscal year, revenue grew 5% and declined 4%, excluding PLG. As we discussed before, from an OIBDA perspective, certain adjustments are necessary to make the year-over-year comparisons more meaningful. We have highlighted these in our press release, but let me walk you through them. In the quarter, we had $16 million in PLG-related costs, $8 million in professional fees and other integration costs and $8 million in related restructuring expenses. This compares with a total PLG-related cost of $63 million in the prior quarter. Excluding these items, adjusted OIBDA for the quarter rose 24% to $123 million, and adjusted OIBDA margin rose 3 percentage points to 16%. For the fiscal year, adjusted OIBDA grew 12% to $459 million, and adjusted OIBDA margin expanded 1 percentage point to 15.2%. Adjustments included for the fiscal year are detailed on Page 11 of our press release. Recorded Music fourth quarter revenue was down about 1%. Excluding PLG, it was down 2.5%. Digital revenue grew 4% or 2% excluding PLG. As Steve mentioned, the increase in digital revenue was driven by significant growth in streaming revenue, which, for the quarter, more than compensated for the declines in download revenue. Recorded Music licensing revenue grew by $12 million or 20% in the quarter, primarily related to activity in the Parlophone roster. Artist Services and Expanded Rights revenue rose $2 million in the quarter and represented 14.6% of total Recorded Music revenue as compared to 14.2% in the prior year quarter. As we've indicated on past calls, growth in this segment moves around based on the activities of our European touring operations. For the fiscal year, Recorded Music revenue grew 6% and declined 5% excluding PLG. Recorded Music adjusted OIBDA rose 7% to $80 million in the quarter, and margin rose 80 basis points to 12.4%. The margin increase was driven by a reduction in PLG overhead in 2014 as cost savings and synergies were realized. For the fiscal year, adjusted Recorded Music OIBDA grew 9%, and adjusted OIBDA margin expanded 50 basis points to 14.9%, driven by the timing of our PLG integration. Music Publishing revenue rose 2% in the fourth quarter. Mechanical revenue continued to decline, directly associated with the overall declines in the physical business, but digital revenue was a standout, increasing 24%, driven by growth in streaming. Publishing OIBDA rose 31% for the quarter, and OIBDA margin was up 11 percentage points to 52%, driven in part by a onetime reversal of a previously accrued earnout payment. For the fiscal year, Music Publishing revenue rose 2% and OIBDA grew 11%, with margin expanding 2.5 percentage points to 31% -- to 32.1%. Excluding the onetime earnout reversal mentioned above, margin rose about 1.5 percentage points. You may recall that this past spring, we successfully refinanced our debt. Our total debt went up $163 million and currently sits at about $3 billion. Our blended cost of debt went down to 5.6% at the end of September versus 6.9% a year ago. As such, even with the increase in debt, we will realize annual cash interest savings of approximately $30 million from our latest refinancing. We remain focused on cash management. Operating cash flow was $89 million for the quarter and $130 million for the year. For fiscal 2014, CapEx payment at $76 million. As expected, this represented a meaningful increase versus the prior year end's spend of $34 million, driven by the relocation of our global headquarters to 1633 Broadway, consolidating offices in the U.K. and other PLG-related costs, as well as investments in IT. This fiscal year, we will continue to have CapEx levels at above historic norms of about $35 million, principally due to finalizing our headquarters buildout and further IT investments. Despite the step-up in CapEx investment in 2014, our cash balance was $157 million as of the end of September, with no outstanding revolver draw, as compared to $155 million at the end of fiscal 2013. I want to remind you that the December quarter, the first quarter of our fiscal year, is traditionally a negative working capital quarter due to a normal [ph] operating activity. Beyond that, 2 other factors will impact cash in the December quarter. First, this month, we recently paid cash associated with the final working capital adjustment for the PLG acquisition. Second, cash in the December quarter will be negatively affected by the timing of digital payments received in the September quarter. As I said earlier, we remain keenly focused on cash management and are committed to delivering solid free cash flow for fiscal '15 and beyond. This, coupled with our continued ability to executing on cost management, could drive flexibility to reinvest for sustainable growth. Finally, I wanted to let you know that I've enjoyed all of our interactions over the past few years, and I'm delighted to welcome Eric. I'm excited about -- I'm excited to continue working with Steve and the others in the management team in my new role, and I look forward to the Warner Music Group accomplishing even more in the future. With that, operator, please open the line for questions.

[Operator Instructions] Aaron Watts, Deutsche Bank.

A few questions for me. I guess, there's a lot of detail you just gave us. As we think about kind of the EBITDA growth in the quarter and the pickup in margins, Brian, you talked about some moving pieces, but is there anything kind of materially onetime that bumped up things in the quarter? Because I know the margin pickup was a little better than I thought we would see.

Aaron, the only onetime thing that we had is what I mentioned in the Music Publishing results, which was related to our acquisition of the Southside catalog and a reevaluation of a liability associated with that earnout payment and just a reversal of that. There's no other onetime significant items in the quarter that have driven that growth.

Yes, okay. I wanted to make sure that was the only thing. And I guess, on the -- thinking about the cash that you walked through, obviously, you're going to save some money on your refinancings that you did. You mentioned that your CapEx will be elevated again above the norm. Did you give us a solid number? And I apologize, I haven't had the time to look through the K yet.

No, we didn't give a solid number for fiscal '15, but it's going to run at a level above that historic level, Aaron, of around $35 million. As I said just a couple minutes ago, we have some finalization of the buildout here at 1633, and we're continuing to invest against transforming our IT platform as well. I think there's a possibility to come in a little bit below where we were this year, just given that we had a big payment around 1633 this year, but I don't want to commit to anything for the full year.

Got it, okay. And you updated us on where you're at in terms of achieving the savings you expected for PLG. I think as of last quarter, on the cost side of that equation, you are maybe 2/3 through getting to like an $85 million, $86 million cost for integration. Where are you at today on that? Or how much more cash cost should we expect to be incurred?

So we're still about at the same level that we were last quarter. We have some finalization to go into next year, but -- so it's still about a little more than 2/3 with just about -- just under 1/3 to go.

Okay. And then, I guess, on -- one concern I hear a lot and, clearly, it's something I think about too, is as we transition from digital downloads to streaming, so far, we've seen you guys offset any decline in kind of -- most of the decline in physical and digital downloads, with the uptick in streaming services. Is there anything we should be thinking about or cautious of in terms of the ebbs and flows of your recognition of revenues in a streaming world as we transition to it versus digital downloads, just in the fact that you historically may have collected more money kind of right upfront with the digital download versus the streaming process. Just maybe some more thoughts around that.

There's certainly nothing, Aaron, from a revenue recognition perspective around the differential between digital and streaming. I mean, that transition between the declines now in the download world and the increases in streaming, as in, I think, in Steve's comments, we closed that gap substantially from where it was -- the level of streaming as compared to downloads in total revenue for digital as compared to this year. So while we're seeing that decrease in overall downloads, it's almost at a level where the streaming increase is outstripping that decrease.

Okay. So no kind of step-down function as digital downloads kind of phases out and streaming steps in? It sounds like you believe you can kind of offset one with the other, if not grow.

Yes, that's correct.

Okay. And last question for me, appreciate you taking these. Stephen, I think you touched on this. There's obviously been some friction around the free streaming ad-supported services. Do you -- correct me if I'm wrong, it sounds like you believe that, that is a good conduit to getting people to actually paying for those services. It sounds like some of your contemporaries in the industry might not agree and some artists, but how do you think this plays out? Do you think the industry can fall into line with your view? Or do you think some changes have to happen?

Well, I won't -- I don't think it's appropriate to comment on other people's views. But we believe that streaming is certainly a very meaningful and important part of the future of music. So that's number one. Number two, we believe that, to have a sustainable economic model, we need a vibrant, growing paid subscription service, Aaron, and we are supportive of programs that attract users, allow them to experience the benefits of streaming but which ultimately lead them to paid subscriptions by understanding the benefits and the value of those paid subscriptions versus free. So while I understand that there's some controversy and discussions around that, I think everyone recognizes that there has to be a funnel to attract users and to encourage them to move into paid subscription tiers. The nature and the specifics around those funnels, I think, will continue to be the subject of discussions amongst the content providers and the streaming distributors, Aaron.

Okay. No, that's really helpful. And if I can, just -- Brian, I missed what you said that reversal was in the publishing unit.

It was related, Aaron, to the acquisition of the Southside catalog and just a reevaluation of the liability associated with the earnout in that deal.

And did you quantify it?

Yes. So the differential, I think, for the year was an increase of 2.5%, and without it, it was 1.5% margin increase for publishing.

Our next question comes from David Farber, Crédit Suisse.

I had a couple of questions. Some have been talked about but just wanted to dive a little bit deeper. On the prepared remarks, you guys, obviously, talked about the digital versus the streaming and actually gave out some numbers, I thought. So I wanted to just sort of review what that was in terms of streaming growth versus digital download declines. And then away from that, just wanted to talk a little bit how you guys saw that playing out, maybe over the next 12 or 18 months, just directionally. Just remind us the economics associated with those different mediums. And then just any broad thoughts around how you see that shaping up, and then a couple of follow-ups.

Well, Brian, why don't I take the overview first and you...

Okay, all right.

From an overview, David, I think that, I don't know, almost 10 years ago, a number of industry seers predicted the death of physical. And 10 or 12 years later, while physical continues to decline, it is still a multi-multibillion dollar business around the world that has a long tail. And in fact, as an interesting aside, the sales of vinyl continues to grow every year. So with downloads, we would expect kind of a similar trend, where they continue to decline but where they have a long tail, because there remains around the world a multibillion dollar download business and where any number of music fans prefer to own, even if they also have access alternatives, that being streaming. We have an expectation that streaming will continue to show very strong growth when you look at the FP numbers, whether it be paid subscriptions or a free to the consumer tier that those numbers, relative to the worldwide population or to meaningful markets, the United States, Japan, many of the European countries outside of the Nordics. While the numbers are growing and growing significantly, they still represent a de minimis amount of the population. So we think that because it is such an attractive way to enjoy music that it will, for the foreseeable future, continue to enjoy very robust growth, while the other 2 mediums continue to decline, but with meaningfully long tails. Brian, now it's your turn with David.

All right. So if I recall where you're sort of thinking, just from a trend perspective, right? So as we said in the quarter, we saw streaming revenue really approaching, getting very much closer to total download revenue than we even had in the prior year quarter. So from a Warner perspective, we're seeing that streaming growth is coming to a place where it's just about outstripping the level of overall download declines. And I think we've said, David, in the year, from a recorded music perspective, our download number declined year-over-year on a constant currency basis by about 14%, which is largely where the overall market has been from a decline perspective, and we saw growth in streaming of roughly 74%. Again, slightly in line with the market from a Music Publishing perspective. And I think we've said this before, especially when you think about physical declines in the Recorded Music business and the mechanical declines in the Music Publishing business, there's a bit of a lag between the 2, given the payments to collection societies from record companies that ultimately then get distributed and paid to music publishers, there's a delay there. So Music Publishing, year-over-year, actually saw their download revenue was flat year-over-year. I think you'll start to see, as you move forward, that will -- you'll see the decline in that given the natural lag in the payment process. But streaming revenue went up 45% for the Music Publishing business. So I think the trends are that we're going to continue to see download decline. But as Steve said, when you think about the overall physical business and where everyone thought it might be, if you look back 10 years and where it is today, in 2013, the global Recorded Music business was about a $15 billion business. $8 billion of that is still physical. So it's got a very long tail. I feel the same way about downloads, while they're going to decline, and then the increase in streaming. I think, hopefully, that answers what your question was.

Yes, that's helpful. And then just the economics as you guys think about the transition from what seems like, obviously, a large streaming move higher and the 74% against the digital downloads. Any thoughts around the economics of that? And then I had a balance sheet question.

So the margins around the downloads and streaming in the aggregate are very, very similar for us, right? There's no real difference when you think about the level of compensation from a download to the content owner or a stream to the content owner. So we don't see any real margin degradation around that. We also talked about -- in moving from physical to digital, there was a benefit from a margin increase, and we're going to continue to see that when this digital download to streaming happens. So that -- the margin improvement that we've seen from physical to digital, we're going to continue to see that even from a digital to download to streaming. There's no uptick, but there's no degradation.

Understood. Okay, that's helpful. And then just -- I think covenant leverage was around 5, 5 3 or so at the end of the quarter. So just curious to hear your comfort around that number. And then just somewhat related, you talked a little bit about CapEx into next year, but any thoughts around cash flow and sort of in the next year, uses of that? And also related, any acquisition thoughts or anything into the next year or so? So just broad speaking about the balance sheet and any thoughts around that.

Yes. I mean, from acquisition perspective, just at a high level, of course, we're always in a market looking for the right opportunities for the company to expand its asset base either through organic or acquisition. So that's always on the table for us. And you're right, the leverage is right about there. We're comfortable where we stand right now. Obviously, the objective is, overall, to reduce leverage. And how you're going to do that, you're going to drive revenue growth, drive OIBDA growth and cost management, which is what we've done consistently, and we're going to continue to do that. I talked a little bit about CapEx already. While I think it's going to run at a level above historic norms, it's not something that is going to run beyond where we were for fiscal '14. So we feel comfortable about that as well.

And then is there anything in the -- any of the bank debt around sweeps or anything that you guys will pay attention to for the next year, ECF or otherwise?

No. We just have standard -- there's a standard 1% amortization on the term loan. There's nothing else.

Got it, very good. And then just last question for me, you talked about sort of the cash cycle into the final fourth quarter here -- or I guess, the December quarter, I should say. Just curious if you think you'll need to -- how you think about the cash balance. Will you maybe use the revolver, will you have the cash cycle kind of close in December and then go from there? Or how do you think about needing to use the working capital until the end of the year?

Yes, sure. Thanks, David. So as I said, we got to the end of the year, we had $157 million worth of cash in the balance sheet. It was slightly up from the prior year and no draw on the revolver. We do use the revolver through the quarter. You can see that when you look at the K, and you can see how the draw goes. And we feel very comfortable about our revolver use and what our overall free cash flow generation is, and that hasn't changed for Q1 or, frankly, even going forward. We feel very comfortable with where we are.

Michael McCaffery, Shenkman Capital.

So if I look at fiscal '14 [ph], it was a pretty lumpy year, and you guys did a nice job of telegraphing that upfront, that it was mostly going to be a back-half-weighted year due to the release schedule. Can you provide us any commentary for fiscal '15, how the release schedule will impact quarters or halves of the year, how we should think about comps as we put our models together versus sort of the first half, second half story of fiscal '14?

I can give you an overview, but I won't give you specifics on releases because, as you know, Michael, it's a -- there's volatility typically around that. We -- what we are doing, however, is the following. We are -- and this really addresses the issue of lumpiness and volatility. We are planning our global release schedules on much more of an integrated basis so that our presence in the market is far more constant and far more consistent throughout the year. And we have internally now moved to far more communication, cooperation, collaboration in organizing our roster globally, organizing the productivity of those rosters globally and establishing frameworks around our release schedules to ensure that we are more consistent, more constant, with, however, always a very focused emphasis on the fourth calendar quarter so as to always take advantage of the holiday season. So my expectation is that as our planning and coordination improve, that over time, you will see a steadier, smoother, more consistent flow of music from our artists locally, regionally and globally.

And I guess, just -- is your ability to do that now more enhanced by the integration of having the Parlophone, the deep catalog now that you can take advantage of heading into '15?

Well, I guess, if I was to give you an Arnold Schwarzenegger analogy, that acquisition will allow us to go from Mr. Olympia to Mr. Universe. I think that's the right direction. So it's added a lot of muscle. Obviously, the Warner Music Group was, in large part, an Anglo-driven business. This has given us a much, much, much deeper, stronger, local catalog in both major European markets and in the U.K. As we mentioned before, we are now, organizationally and operationally, fully integrated, so it's given us additional muscle strength and executive bench strength. So the answer is yes to your question broadly.

I show no further questions.

All right. So everybody, listen, from us to you, have a very happy, healthy and wonderful holiday season. And we'll chat with you in 2015. Bye-bye.

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