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Time Warner, Inc. (NYSE:TWX)

Q3 2008 Earnings Call

November 5, 2008 10:30 am ET

Executives

Doug Shapiro - Vice President, Investor Relations

Jeffrey L. Bewkes - President, Chief Executive Officer, Director

John K. Martin, Jr. - Chief Financial Officer, Executive Vice President

Analysts

Michael Nathanson – Sanford C Bernstein & Company, Inc.

Jessica Reif Cohan - Merrill Lynch

Doug Mitchelson – Deutsche Bank

Benjamin Swinburne - Morgan Stanley

Tuna Amobi - Standard & Poors Equity Group

Michael Morris - UBS

Anthony DiClemente - Barclays Capital

Imran Khan - JP Morgan

Operator

Hello and welcome to Time Warner third quarter 2008 earnings conference call. (Operator Instructions) Now I will turn the call over to Mr. Doug Shapiro, Vice President of Investor Relations. Sir, you may begin.

Doug Shapiro

Thank you, Shirley. Good morning everyone. Welcome to Warner’s 2008 third quarter earnings conference call. This morning we issued two press releases, one detailing our results for the third quarter and the other updating our 2008 business outlook.

Before we begin there are two things I need to cover. First we refer to certain non-GAAP financial measures. Schedules setting our reconciliations of these historical non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release or trading schedules.

These reconciliations are available on our website at timewarner.com/investors. A reconciliation of our expected future financial performance is also included in the business outlook release that’s available on our website.

Second, today’s announcement includes certain forward looking statement which are based on management’s current expectations. Actual results may vary materially from those expressed or implied by these statements due to various factors; these factors are discussed in detail in Time Warner’s SEC filings including its most recent annual report on Form 10K and quarterly reports on Form 10Q.

Time Warner is under no obligation and in fact expressly disclaims any obligation to update or alter its forward looking statement whether as a result of new information, future events or otherwise.

I’d also like point out that the fall issue of In Focus our new investor newsletter is also now available on our website. And with that covered, let me turn it over to Jeff.

Jeffrey L. Bewkes

Thanks, Doug. Good morning everybody. I know there’s some other news out this morning you may have learned something about it on CNN, so thanks for ripping yourselves away from your sets and joining us today. I’ll give my view on our progress and then turn it over to John to talk about our financial results and after that we’ll take your questions.

There are basically three headlines this quarter. First, our businesses have proved to be resilient in a very challenging environment that’s due to our business mix and to our brands and scale which enable us to make compelling contact on a consistent basis.

Second, our balance sheet is very strong. It’s a real advantage at times like these. And third, we continue to make strides toward the structural objective we outlined for you last February moving us closer to our goal of being the global leader in creating and distributing branded content. I like to go through these in reverse order, first two are pretty quick.

As you know, the most significant of our structural initiatives is separating out the cable business and that will make us an even more content focused company. We continue to make progress on that transaction and we remain confident that it will be consummated.

Understandably we’ve gotten questions lately about Time Warner’s Cable’s ability to finance the dividend but as Time Warner Cable outlined in its call this morning, it has more then sufficient committed capital, committed financing in place. So from a timing perspective the gating factor continues to be the regulatory process but we still think we’re pace to close by early next year.

The second headline is the strength of our balance sheet due in large part to the capital strategy that we’ve executed over the last few years our balance sheet is very strong in terms of liquidity and capacity. John will walk you through the details but the bottom line is that we’re very pleased about where we stand today.

And this strength give us both the ability to weather difficult economic conditions and it gives us the flexibility to continue to invest in the long-term competitive position of our businesses in a period when others may have to retrench.

So now I’d like to spend the rest of the time this morning discussing the first headline which is the resilience of our businesses. We’ve been as surprised as anybody else by the speed and the magnitude of the financial crisis and it’s hard to predict the ultimate impact on the economy.

But our results in the quarter and our outlook for the year show that overall our businesses are well positioned. As you saw in the earnings release this morning our third quarter was the strongest of the year, we had an adjusted EBITDA up 9% and adjusted EPS rising almost 30%.

We’ve also updated our full year outlook for adjusted EBITDA growth this morning to around 5% reflecting in part a restructuring charge that we expect to take at Time, Inc. in the fourth quarter. Excluding the rough $300 million of restructuring charges that we’re taking this year at New Line, Corporate and now at Time, Inc., we expect our adjusted EBITDA to grow near the low end of the 7 to 9% range that we first gave back in February. We’re very pleased to be able to say that in the middle of this economic climate and it’s clearly a tougher climate then what we anticipated when we started out the year.

This resilient operating performance stems from two things. First, there’s our asset mix which give us diverse revenue streams. Most of our revenue comes from our content and subscription businesses which have historically been largely insulted from macro economic swings.

Less then 22% of revenue comes from advertising today and even if you were to exclude Time Warner Cable our advertising piece is really about a quarter of our revenue. But let’s go in to the ad position or the ad revenue, even where we have ad exposure we’re relatively well positioned. More then a third of our advertising comes from our cable networks business.

While Turner would not be immune to a prolonged ad down-turn, it is advantageously situated within both the television business and in relation to most other ad based businesses as is shown by its recent outstanding results. And we have almost no local advertising the local cable ads in the cable company. So that’s the first part of the resilience.

The second part of our resilience reflects our ability to make compelling content on a consistent basis. You know, companies claim that and reach for it and always been the core of Time Warner but its more important today then ever because as media consumption shifts, hits are growing in value.

Consumers have more choice in how, when and where they use media and they’re using that choice to gravitate both to the niche content and to the biggest hits. We’re seeing evidence of this shift toward to hits on traditional platforms and on new digital platforms and we’re seeing it in the United States and overseas.

We fundamentally believe that we can position our company structurally to make better more popular content on a more consistent basis. And the reason is that our brands and our scale enable us to invest more in development and innovation which provides better economics, which in turn attracts talent, that increases the quality and success rates of what we do, that builds brand equity and drives audiences which fuels further investment attracts further talents essential a virtuous circle.

A few example of that starting with our networks, we had another great quarter obviously in our networks business including 9% ad growth we had another quarter of double digit affiliate revenue growth and as you know, record adjusted EBITDA earnings growth.

But let's focus on a few key brands to see the grand scale dynamic working. At CNN which I think is the right one to start with on a day like this we’ve invested to build the largest news gathering infrastructure of any network, broadcast or cable in the news business and that effort has clearly paid off.

This quarter CNN reach in its key demographic was 20% better then its nearest competitor. CNN.com was the leading news source on the web as ranked by Unique Visitors and CNN Keynote coverage of the Democratic Convention was the number one across all of television. That’s the first time in history that a cable network has done that.

Moving over to the entertainment networks, TNT and TBS, the scale of those networks has also allowed us to invest in the highest quality original and syndicated acquired content. For example, Raising the Bar, a new original on TNT, set a record this quarter as ad supported cable’s top new series launch ever and The Closer, another original drama on TNT is the number one ad supported cable series ever.

And TBS now claims four of the five sitcoms on cable, including the number original comedy on cable, Tyler Perry's House of Pain. HBO is another great example of our strategy. It pioneered the idea of reinvesting part of its big base of affiliate fees into original programming.

Since then, the HBO brand has become synonymous with the highest quality television and not coincidentally, it is grown to be one of the most profitable networks in the world and is three times larger then its next largest competitor in paid TV.

It’s no accident HBO took home a quarter of all Emmy Awards this year, just one network. And as we speak today, HBO is building on this lead, it has more pilots in development now then at any time in its history and several of HBO’s new shows are building strong momentum. True Blood which launched in September is on track and currently is the third most popular series that HBO has ever had right behind the Sopranos and Sex in the City.

Turning to our film business, it posted another strong quarter growing adjusted EBITDA on top of strong earnings from last year. Warner Brothers ability to operate at industry leading scale of production and industry leading scale in marketing and distribution improves our economics and those of our participants and that enables us to attract the talent that makes the best films and the best television series.

Last quarter I mentioned that our studios have produced eight of the top 15 highest grossing films of all time. No other studio has produced more then two. This year we have the number one share at the box office, the number one share in standard DVD sell through, the number one share in Blue Ray sell through and the number one share in VOD. And keep in mind that the Dark Knight is only included in those box office numbers not in the others because it hasn’t yet been distributed into the other windows yet.

These advantages that was film are also evident in our TV series production business. Warner Brothers TV is the largest independent supplier of scripted show to the major broadcast networks. And similar to the film studio that scale and development in production and distribution enables us to offer our participants the best economics, yielding exclusive development deals with such A list writer-directors as Jerry Bruckheimer, J.J. Abrams and Josh Swartz to name a few, there are many more.

As a result Warners has the best track record in TV production. Our success rate converting pilots into series is by far the best in the industry and just to point to a recent success, two Warner Brothers shows, The Mentalist and Fringe are the highest rated debuts so far this year in its broadcast season.

Rounding out our content businesses, let’s talk about publishing. Time Inc. is clearly feeling the effects of the advertising market, with ad revenue down 8% this quarter. Nevertheless, it also illustrates the importance of having brands at scale.

People magazine is the best example. It’s by far the biggest magazine in the celebrity category, and it’s the most profitable title at Time Inc. More people read People each week than watch the season finale of American Idol, and its competition has expanded in the celeb category. People has only increased its share.

In the first half of this year, it increased circulation at a higher rate then any other celebrity-oriented magazine, and despite its size in a difficult third quarter, People’s combined print and online advertising was modestly up.

This again shows that as media consumption fragments, both consumers and advertisers turn to the highest quality brands. With this strategic comparative in mind, we took a hard look at Time’s organizational structure as we had done a few quarters ago in our film group.

In general, we work continuously to reorganize the structure of our businesses to improve their efficiency and their competitive position, it will be, and it has been an on-going way of doing business for us.

And so last week, we announced the most comprehensive overall in Time Inc.’s history. We are organizing our US Magazines and our companion websites into three business units that have like readership and like advertisers.

This will enable similar titles for the first time to share some editorial and sales infrastructure. It will also streamline management substantially, and speed up our decision- making, integrating as well, digital with traditional print operations.

And consistent with our over-arching strategy, it will enable us to ensure that we’re concentrating our resources on developing the biggest and most promising brands. Through these steps, we expect to reduce Time Inc’s workforce by about 6%, and to generate at least $150 million in annual run-rate savings, which will be realizing starting next year.

Shifting then from content to AOL. The economy has also had an impact on AOL’s advertising business. In particular, we’ve seen increasing weakness from certain advertising categories, specifically in mortgage finance, and domestic autos. But there were bright spots.

Our usage continues to grow rapidly, which is an important indicator of the underlying health of the business. Page views were up 14% in the quarter, fueled by more than 100% growth at our content channels, providing more evidence that our redesigns of the last two years, and the new niche sites AOL has launched are succeeding.

AOL has also re-launched AOL.com during the quarter, featuring access to outside email services and social networks. It’s already having an impact. In September, AOL.com traffic, according to comScore, was up more than 30%, and uniques were up 11%.

To sum up, while this is a period of considerable uncertainty, we believe our business will remain resilient, thanks both to our diversified revenue streams, and to our proven ability to make compelling content consistently in good times or bad.

We’re reassured by the strength of our balance sheet, which is obviously crucial in the current environment, and we continue to make progress towards the structural objectives that will move us to our goal of making Time Warner the leading pure content company in the years to come. Thanks for listening, and now I’ll turn the call over to John.

John K. Martin, Jr.

Thanks Jeff, and good morning. Let me just mention that there are slides that are available on our website, which we hope will help you follow along with my remarks.

Getting right into it, the first slide highlights our consolidated, third quarter results. We posted strong adjusted OIBDA growth of 9%, despite flat revenue. Our revenues this quarter reflect 5% growth in subscriptions and a small decline in advertising and the subscription revenues were impacted by a decline in AOL’s access business, and if you look through that, subscription revenues were actually up 9%.

Networks, AOL and film all posted significant margin expansion, and in fact, on a consolidated basis, we posted our highest margin since the year 2001. Adjusted OIBDA growth in our content businesses, which we’re defining as Time Warner’s results without AOL and cable, was even faster, up 14% in the third quarter. Our adjusted earnings per diluted share jumped 29% compared to the year ago quarter.

And lastly, on this slide, I highlight that we have generated, through September, 5 billion of free cash flow. This exceeds our most recent four-year guidance, and it represents a very high, adjusted OIBDA conversion rate of 51%.

The next slide provides a little bit more detail on our EPFS figures. Diluted EPS was $0.30, which compares to $0.24 in the third quarter of last year. There were some items this quarter that affected comparability, they’re highlighted here and in even greater detail in our earnings release. Adjusting for these, the quarters EPS was $.031, up 29%, that’s due to the growth in adjusted OIBDA, lower interest expense, and a smaller, outstanding share count due to our buy-back program.

Turning to free cash flow, with the details highlighted on the next slide, in the quarter, Time Warner delivered over $2 billion in free cash. It was our best quarter ever, and it represented a very high, 59% conversion rate.

We’ve now generated, at or above $1 billion in free cash flow in each of the past 10 of 11 quarters; so very predictable and very high levels. And year-to-date, free cash of nearly $5 billion is $1 billion higher versus the first nine-months of last year.

So to put some context around this, it took us 12 months, not 9, to generate $5 billion last year, so we’re on track again, to have a record year at the company. You may recall that our outlook at the beginning of this year was that we expected to generate free cash flow of only $3.6 billion.

A couple of things have contributed to the high than expected levels. First, we’ve had lower cash taxes then we expected, due to the Economic Stimulus Act, as well as some rigorous proactive tax planning. Second, our interest expense was less due to lower rates, and again, careful management of the balance sheet, and third, we’ve had favorable working capital movements due to capital management of the balance sheet, and partially tied to lower production costs due to the writers strike.

I’ll point out that year-to-date, 82% of Time Warner’s capital spending was at the cable segment, so if you look at capital outside of the cable segment, CAPEX represents only about 2% to 3% of revenues, which is an extremely low figure.

Turning to the next slide, we are updating our four-year business outlook, and as outlined in our release this morning, our outlook now takes into account the roughly $100 to $125-million of restructuring charges that we expect to take in the fourth quarter, primarily in our publishing segment, as well as the possible risk of additional pressure on our advertising businesses, particularly at AOL and publishing, and it also includes the revised outlook at Time Warner Cable.

We focus on three measures in the outlook release; adjusted OIBDA growth is now expected to be around 5% as Jeff said, and that’s off a base of $12.9 billion, and excluding the roughly $300 million in aggregate restructuring charges that we now expect to incur this year, we would have been at the low end of the original 7% to 9% range that we provided in February of this year, and with the caveat that our visibility is somewhat limited by the economy, I’ll also point out that our outlook implies that excluding restructuring charges, the fourth quarter should be another strong quarter of growth.

We’ve also increased our free cash flow guidance for the second time this year to around $5.5 billion, and I’ll add that this outlook is net of an expected $700 million in pension contributions this year, and that includes roughly $400 to $500 million that we anticipate that we’re going to make in the fourth quarter.

Diluted EPS now is expected to be in the range of $1.04 to $1.07. That compares to our prior outlook of $1.07 to $1.11. In addition to the restructuring charges, other items are impacting comparability such as gains and losses on asset sales, asset impairments and costs incurred in conjunction with the Time Warner Cable separation, and that had the impact of reducing our EPS outlook by $0.04.

Let me move on and cover the key highlights of the divisions, and let me start with the networks division where we clearly had a very terrific third quarter. Adjusted OIBDA rose 21% to a little more then a billion dollars. It was a record quarter, and it was boosted by strong advertising and subscription revenue growth, as well as lower programming costs.

Essentially, every dollar of revenue growth fell to the adjusted OIBDA line in the quarter. Turner’s ad revenues climbed 9%, and that was driven by growth in both news and entertainment, and that was mainly due to higher CPM’s and audience growth domestically, as well as an increase in the number of units sold internationally.

Looking to the fourth quarter, we remain cautiously optimistic that Turner will once again continue to post solid advertising growth. We can’t yet fully gauge the impact of recent events in the financial markets on the broader economy, and Turner would not likely be immune to any widespread protracted ads slowed down, and in addition, we expect that certain advertiser categories, such as automotive and financial services will be challenged.

But having said all of that, the benefits of this years strong up-front, are kicking in this quarter, cancellation rates are running at normal levels, and while the current scatter market is moving cautiously, it still is running modestly ahead of up-front pricing.

Moving over to subscription revenues, they were up 10% in the quarter, and that reflected solid growth in affiliate fees at both Turner and HBO, as well as subscriber growth at Turner and international expansion. This was Turner’s sixth consecutive quarter of double-digit subscription revenue growth.

Turning to film, Warner Brothers posted another strong quarter, OIBDA was up 6% as the phenomenal performance of the Dark Knight, as well as lower film write-offs, offset very tough comparisons in the theatrical, home video, and off networks indication.

Please recall that last years third quarter included the theatrical release of the fifth Harry Potter movie, and the video release of 300. Those were both very successful. It also included the initial availabilities of 2 1/2 men, Cold Case, and the George Lopez Show, and we really had nothing comparable this year.

In addition, despite $17 million of restructuring charges associated with Newline incurred in the quarter, margins climbed about 200 basis points over last year, to their highest level in 10 quarters, and Warner Brothers Margins were higher even than the entire film line indicates.

As you may know, we’ve made the decision to move Harry Potter and the Half-Blood Prince from the fourth quarter of this year to the summer of 2009, to take advantage of the lite release schedule created by the writers strike.

And that decision will move revenue and earnings out of the fourth quarter, because Harry Potter has traditionally actually been profitable for us in the initial theatrical window. Nevertheless, we still expect strong results in the fourth quarter from the film division, as the home video releases of The Dark Knight, and Get Smart accompanied with lower P&A expense, should off set some tough home video comparisons.

And just as a reminder, last year in the fourth quarter, we had the home video releases of Harry Potter and the Order of the Phoenix, Rush Hour 3, and Hairspray. And as we focus on this year, we have some pretty big and promising theatrical releases coming up in the fourth quarter, such as Yes Man, staring Jim Carey; Four Christmas’s, staring Vince Vaughn and Reese Witherspoon; and the international distribution of The Curious Case of Benjamin Button, which is starring Brad Pitt.

Turning next to cable, as you know, Time Warner Cable held a call earlier this morning to discuss its third quarter results. OIBDA in the cable division was up 9%, and that was despite softness in its high-margin advertising business.

The company also continues to generate very strong free cash flow levels, they’re up 64% year-to-date, and as we outlined on the next slide, subscriber metrics were also solid across the board. Time Warner Cable added 522,000 RGU’s, which was essentially flat with the number that it added a year ago, and it did mark the 14th consecutive quarter of RGU growth, exceeding 500,000.

High-speed data net additions remain strong, providing further evidence that Time Warner Cable is taking broadband’s share from its telco competitors. And as Time Warner Cable’s management outlined this morning, the company has modestly reduced its outlook estimates for revenue and adjusted OIBDA growth, and it reaffirmed its outlook for free cash flow and EPS growth, and just to be clear, that revision is fully factored into Time Warner’s updated outlook release that we published this morning.

So let me move on to AOL. AOL’s results for the quarter were mixed. Starting with the audience business, as Jeff mentioned, we saw once again, very strong usage growth at AOL, particularly in our content verticals.

Total advertising revenues were down however, 6% to a little more than $500 million. Advertising, just as a reminder, consists of display, paid search, and third-party network revenues, each of which accounts for about a third of the total.

So just to briefly walk through the components, display advertising, on the AOL network declined, down 15% to $181 million. Both page views and network impressions were up. They were up substantially, and pricing for guaranteed inventory was somewhat higher.

However, on an overall basis, and this is similar to what we’ve seen in the past quarters, the revenue decline reflected a mixed shift from higher priced guaranteed inventory, to lower-priced non-guaranteed network inventory. Advertiser demand in several categories was particularly soft, including personal finance and autos.

Moving over to paid search, revenue growth there was 12%, and the number was about $182 million, and the growth was due largely to increases in revenue per search quarry.

And in our third-party network business, revenues declined 12% versus the year ago quarter, to $144 million. Please keep in mind that the decline related to a large customer that we had last year, Apollo, was substantially larger than the contribution from any acquisitions that we made during the quarter, so that’s a drag on the results.

The acquisitions contribute $29 million to the year-over-year growth, and Apollo was down $55 million. So if you look through that, third party network advertising revenues were actually up 7%. Now the 7% growth is lower than what we’ve seen in recent quarters, and that’s due to both the decline in branded advertising as well as lower consumer response to our performance advertising.

Just mentioning for a moment the Access business, AOL subscribers declined by 634,000, and AOL ended the quarter with about 7.5 million domestic subscribers.

Looking at profits for a moment, AOL’s adjusted OIBDA in the quarter was almost $400 million. That’s down 7% year-over-year, and that was weighed down by lower revenue, principally in the Access business, as well as higher traffic acquisition costs or TAC, and that was partly offset by lower personnel and overhead costs. Total expenses at AOL were actually down 23% year-over-year, and that means that margins of 39% were actually the highest levels that they’ve seen in years.

Looking at the fourth quarter, we expect that both display and third party network advertising is probably going to remain soft, and keep in mind, similar to the third quarter, the impact of lower revenues form Apollo should remain a drag.

Nevertheless, we expect adjusted OIBDA to be higher here, year-over-year in the fourth quarter, and that’s due to continued tight cost control and management, as well as just a reminder there were some material restructuring charges in last years fourth quarter at AOL.

Turning to publishing, revenues declined 7% in the quarter due to an 8% decline in advertising revenues and relatively flat subscription revenue. We continue to see softness in print advertising demand, with nine of our top 10 categories down year-over-year in the third quarter, most notably, media and movies, food, retail and toiletries and cosmetics. Readership remains strong however, and Time Inc. continues to outpace the industry, according to the most recent MRI data.

Adjusted OIBDA declined 19% in the quarter, and that was due primarily to the decline of the high margin advertising revenue, and that was partly offset by lower expenses. And as Jeff mentioned, Time Inc. announced a comprehensive reorganization plan, and we expect that that should attribute at least $150 lift to profit, beginning next year, once it’s complete.

Looking forward right now in the fourth quarter, Print advertising is actually pacing below where we saw the third quarter end up, and in addition, I’ve mentioned the fourth quarter, you should expect that we’re going to take a restructuring charge at this segment.

Let me just touch on corporate spending for a second, that’s highlighted on the next slide. As you know, we have been committed to reducing our corporate costs, and during the third quarter, corporate expenses declined 22% year-over-year, and that marks the lowest expense quarter since the year 2001 at this company. We continue to track nicely ahead of our target of reducing annual corporate expenses by $50 million this year, and even beyond this goal, we expect to keep a very tight reign on corporate costs.

Now let me move on and just provide a little bit of more perspective on the health of our balance sheet. The bottom line is that in large part due to the capital strategy that the company has employed now for some time, we have ample liquidity, and we have substantial financial flexibility, and this part was the slide that highlights our net debt.

As you can see, we ended the quarter with just over $33.5 billion in net debt; that’s down about $2 billion year-to-date, as free cash flow has been partially off set by investments, acquisitions and dividends. I’d also point out that the net debt figure is higher by the $820 million that we held and invested in the reserve primary fund at September 30th, which many of you probably know is the fund that broke the buck, and our monies there consisted of about $300 million of Time Warner, and about $500 million of Time Warner Cable.

Roughly, half of these amounts have since been recovered; we received them last week, and we believe and fully expect the remaining funds to be fully recovered within the next 12 months. So we as a company, we have significant liquidity, that’s on the next slide.

At September 30, on a consolidated basis, we had $18 billion of cash and availability, with over $5 billion at Time Warner if you exclude Time Warner Cable, and almost $13 billion of Time Warner Cable. And please note, that this also doesn’t include the cash held at the reserve fund that I just mentioned.

Understandably, lately we’ve been asked whether Time Warner Cable has the ability to continue to pay it’s nearly $11 billion-dollar dividend, as Jeff said, the answer is yes and that was covered on their call as well.

It’s essentially fully financed today, they’ve got nearly $13 billion in cash and committed capacity, and that is including its revolver and bridge facility. Like all our facilities, that commitment is spread across a diverse array of banks globally, all of which are very important to the economies of their primary countries of operation.

As Jeff mentioned, the separation is on track to close early next year. I just wanted to add to that, that we do intend to seek shareholder approval for a reverse stock-split, which we’re conducting in connection with this transaction, and as you know, if we choose a full or a partial spinoff at the distribution, that should reduce the absolute dollar of our stock price upon completion of the transaction, and so we think a reverse stock-split would be prudent, and it would improve the liquidity and attractiveness of the Time Warner Stock.

Wrapping up with this last slide, we also have substantial financial flexibility. As shown here, and I think we’ve shown this slide in the past, on a consolidated basis, at the end of the quarter, Time Warner had debt leverage of around 2.6:1, pro forma for the cable separation. We estimate that Time Warner would have leverage of about 1.6:1, and you can see here Time Warner Cable proform on September 30, would have leverage of about 3.9:1.

In addition, other then just some very small capital leases, our only scheduled debt maturity over the next two years is $2 billion of floating rate notes that are due in November of next year, and there is no debt maturities in 2010. The average maturity of our debt is nearly 11 years. So with ample liquidity, substantial flexibility, we think that we’re in an attractive position in this current environment. And with that, let me turn the call back over to Doug, and we’d be happy to start the Q & A portion of the call.

Doug Shapiro

Thank you, Shirley can you please start the Q & A, and please try to limit yourself to one question, so we can accommodate as many people as possible, thanks.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Spencer Wang, you may ask your question, and please state your company name.

Spencer Wang – Credit Suisse Banc

Credit Suisse Bancs, good morning. I guess my one question is for both Jeff and John. You’ve generated significant free cash flow, the balance sheet’s in good shape. You’ll be receiving a one-time dividend in early 2009. Can you just talk a little bit about how you’ll be deploying your excess financial capacity? Could you just speak to how everything came about reinvesting in the core businesses versus buy-back, versus acquisitions, versus perhaps raising the dividend, thank you.

John K. Martin, Jr.

Thanks Spencer, it’s John. I’ll take it. I mean the approach that we’re setting out is really -- it’s similar to what we’ve said before. First we’ve got to focus on actually achieving the separation and getting that done, and then once we get the cash, we take very seriously how we deploy that capital to make sure that we are earning attractive returns.

I guess I would first say that we’re closely monitoring the financial crisis impact on both access to, as well as the cost of capital. And over time, our leverage decision is going to be influenced by both of these factors, and frankly, as we sit here today, we feel extremely fortunate that we have such a strong balance sheet, and we have such flexibility at this point. We do view that as being a real strategic asset in this environment.

Beyond what I just said, I think it’s sticking to the priorities that we’ve laid out before, which is that we’re going to look to fully invest in our businesses. We’ve been doing that, so I don’t anticipate that that’s going to take up any of our additional capacity, but beyond that, we’d be looking to do a few things; one, potentially doing acquisitions that we believe would add and create value once they’re put through a disciplined filter or process to make sure that they actually are additive. There’s nothing that we see is a must-have, and we don’t see any strategic holes in our portfolio right now.

Having said that, then beyond that, we’d be looking at returning capital in the form of dividends and share buy-backs, and over time, that will probably be a balance of all of the above.

Doug Shapiro

Go to the next question please Shirley.

Operator

Thank you, and this question comes from Michael Nathanson, you may ask your question, please state your company name.

Michael Nathanson – Sanford C Bernstein & Company, Inc.

Thanks, Sanford Bernstein. I have a question about AOL cost growth in this quarter. This quarter is was actually a soft drop in the run rate of costs in AOL without a big restructuring charge; can you tell me what happened in the quarter? And is this current cost base a good run rate going forward at AOL?

Doug Shapiro

Some of the cost reduction AOL tracks access as it declines, and AOL has been continuously putting through not restructuring in the formal accounting sense, but reorganizing and reducing costs. I think that because of the mix of those two businesses, the cost levels of AOL can continue in some key areas to decline, but John, if you have any particular --

John K. Martin, Jr.

It’s not any one thing Michael, it’s any number of things, and it’s the variable cost continuing to decline in the Access business Jeff mentioned, but there’s clearly the benefits due to active management. We saw a pretty meaningful decline in costs of service which is lower personnel related and overhead costs.

There were lower costs in the member services group, there were lower costs in product development, there was some benefits found year-over-year from prior year decisions to close some call centers, and there was also lower marketing and just general G&A and personnel costs, and it was all of the above.

And it’s been anticipated, which is one of the reasons why we expected the year-over-year OIBDA comparisons to improve in the back half of this year at AOL as we continue to try to actively manage to make sure that the costs are measuring up appropriately against the revenue opportunities.

Michael Nathanson – Sanford C Bernstein & Company, Inc.

And John, just on a counting basis, are these actions tied to that charge in the fourth quarter? So you guys--?

John K. Martin, Jr.

No.

Michael Nathanson – Sanford C Bernstein & Company, Inc.

So it’s separate? Okay.

John K. Martin, Jr.

Go to the next question please Shirley.

Operator

Thanks, our next question comes from Jessica Reif Cohan; you may ask your question, please state your company name.

Jessica Reif Cohan - Merrill Lynch

Merrill Lynch, thank you. The question is for Jeff. I was just wondering if you could talk about your vision for the next three years, what asset mix will look like. Of course, there’s been lots of speculation on AOL, but if you make acquisitions, then John said there’d be a balance, is your desire for cable network specifically? Do you think you’ll add to content? Can you talk about international?

Jeffrey L. Bewkes

Yes, thanks Jessica. We can’t predict or speculate on what exactly would happen in acquisitions, and as John said, and we’ve been saying it consistently, in the media business, there’s been a lot of value destroyed through poor acquisitions and poor capital allocation, so any acquisition we do, has to meet some pretty stringent return requirements.

Having said that, in theory and in practice, we’ll look at anything that would improve our operating position and scale. In the content business as we’ve described today, if you tick them off, basically it would be cable networks, perhaps Feldman TV production, particularly international for anything we can get to good scale on, because secular growth there is good.

Small games publishers, some of which we’ve been doing. So it’s in those areas, and provided things improve our position and returns, we’ll consider them and we have, as we’ve said today, the resources which some others don’t to pursue whatever opportunities come up.

Doug Shapiro

All right, thank you and go on to the next question please.

Operator

Thank you, our next question comes from Doug Mitchelson; you may ask your question and please say your company name.

Doug Mitchelson – Deutsche Bank

I think I’m going to follow up on Jessica’s question; there’s been a lot of speculation on strategic action with AOL, perhaps something along the lines of a merger into a major competitor. Is there as of today, any specific quality interest from peers in merging with AOL? And if that interest exists, what are the hurdles right now, from your perspective, to entering into a transaction?

John K. Martin, Jr.

Well, as we’ve talked about before with regard to any division, but AOL as well, we can’t really, and don’t speculate on any potential deal. As we’ve said when this question has come up about AOL, we are believers in the value of scale at the operating level for all of our businesses, that’s what we’ve talked about today.

The same is true with AOL. We do think that we have adequate scale domestically in AOL, but we have said that if there was a strategic opportunity to put AOL in a stronger position, we would look at it closely.

You know all of the usual suspects and things that go on including even some breaking news today in some of our competitors so the opportunities or possibilities remain open for this whole business to restructure itself and to build adequate scale to compete with whoever is in the lead position.

And I think we’ve all seen the interest at bulk just to mention a few companies, Microsoft, Yahoo and even Google to bulk up and increase scale and we’re no different in that regard so beyond that we can’t really say what is possible or what is underway.

Doug Shapiro

Shirley, the next question.

Operator

Thank you and this question from Ben Swinburne. You may ask your question, please state your company name.

Benjamin Swinburne - Morgan Stanley

Morgan Stanley. Good morning. Jeff, could you talk about the film segment looking out from here a couple of points sort of your financial relationships and your JV partners now that the credit markets have changed a lot and now that you’ve got the New Line Warner Brothers (inaudible) consolidation behind you for a bit time.

Any change in your view of potential cost savings or is there more to take out from here, the right slate size and maybe a little more specificity on how maybe to fine tuning the slate size and reduce the number of films and drive profitability from here other then just making better movies. Thanks.

Doug Shapiro

That’s one question for the record.

Jeffrey L. Bewkes

That is one question and the answer is we’re only going to make the hit movies for now on. So, you really have two questions, one is financing the other is kind of the optimal slate focus size both in film and TV. We’ve already said on that second one that we have moved Warners on its own and then New Line in the restructuring.

If you take our film slate and focus it and we’ve moved from what was combines in the 40 to 50 film release number between New Line and Warner before if you include Picturehouse and WIP, all those have been consolidated and we’re now more in the 25 film slate release category.

So with film slates being more focused and with solid access to capital which I’ll talk about now, we’re not at all concerned about our ability to finance films going forward. Essentially, Warners has done a great job in the lining up and producing results for finance partners.

We always retain world wide distribution rights but our existing finance arrangements cover multiple films to be produced over a multi-year time frame even now and given Warners’ advantage position in film and TV but in film is what we do external financing on, and the mix that we have between wholly owned films, joint ventures and distribution deals, we don’t see any issue or change in how we finance films. So it’s a fairly advantaged position that we’re in on the film finance side.

Doug Shapiro

We’ll go to the next question please.

Operator

Thank you and this question comes from Tuna Amobi. You may ask your question and please state your company name.

Tuna Amobi - Standard & Poors Equity Group

Standard & Poors Equity Group, thank you very much. So, on Platform A, I’m just trying to understand better to trends there, I know that John talked about Apollo so the first question on that would be when do you expect that comparison to lap and you can get back to normalized growth level there?

Also on that Platform, can you talk about beat place just kind of put that in context is this some grand vision of how you see advertised interests, advertised moving online and what kind of target advertisers and the kind of interest that you are generating from that initiative and also you talk about a launch of that, is it going to be global launch or just the U.S. and then roll out internationally? Thank you.

John K. Martin, Jr.

Tuna, the second part of your question, I’m not sure we heard you, is that bebo? What did you say?

Tuna Amobi - Standard & Poors Equity Group

Beat place, beat place, the exchange platform, a platform.

John K. Martin, Jr.

Oh, okay.

Tuna Amobi - Standard & Poors Equity Group

Which is launching the first of next year is my understanding.

John K. Martin, Jr.

Right, right. Well, let me start and I’ll just and Jeff obviously it's your prerogative you can jump in whenever you want, but on the mechanics of Apollo, the most significant year-over-year drag that it's going to have in the growth rates is really going to be in the fourth quarter.

We really did have some Apollo money in the first quarter of this year but the numbers trail off pretty materially. You know, going ahead of that we fully expect over time and obviously the economy provides a little bit of a haze in terms of predicting exactly when, but over time we’re going to be able to grow this business in a very attractive way.

Given secular usage trends, we’re very optimistic about the prospects of both online and mobile display advertising and in fact over time, we expect that branded advertising dollars currently spent on other mediums are actually going in part shift over into online and to display.

And at AOL on the O&O side, we’ve experienced strong demand for our branded vertical channels but softness in more currently bulk types of inventory such as email. Given the economic environment this trend could persist for awhile despite the fact that we’re seeing some improving sales execution at Platform A.

We’ve got more focus vertical sales and better inventory management but over time our confidence is really underscored by the fact that Platform A is providing improved targeting that’s going to increase the value of all types of display inventory, improve reporting and analytical capabilities which we think can provide our publishing and advertising partners with greater insight into how Platform A can deliver the marginal yield.

And lastly, Platform A does have a unique ability to tap into multiple pockets of advertiser demand by having the one and only today truly integrated end-to-end advertising platform.

Jeffrey L. Bewkes

So, Tuna, it sounds like you’re asking about bid place which is launching early next year and the goal of that is to open up the display business that we have to long-tailed advertisers which, is what Google has basically done in search.

I think for the same reason that John just mentioned on having an integrated platform end-to-end that that will augment our capabilities and take advantage of Platform A’s lead 90% reach in search. I would just point out kind of even putting that into a bigger point, that really in terms of our display position, usage keeps going up so inventory keeps going up and it’s these abilities to monetize improve that is going to bring long-term growth starting, you know, now in how to use ad modernization practices perform.

Tuna Amobi - Standard & Poors Equity Group

Alright, thank you.

Doug Shapiro

(Inaudible) for the next question.

Operator

Thank you and the next question comes from Michael Morris. You may ask your question and please state your company name.

Michael Morris - UBS

Thank you, I’m with UBS. On the networks advertising in particular which was strong again this quarter, can you talk to us a little bit about some I guess unique items that could cause difficult comps. One, benefit from the writer’s strike that you may have seen in the fourth quarter of last year and first quarter this year and secondly, any ratings strength at CNN during the election, how do you look at those going forward in terms of year-over-year comparisons. And then also can you share with us how much of your inventory material was sold in the upfront this year? Thanks.

Jeffrey L. Bewkes

Yes, I’ll start with that. I ‘m not worried about any comps from now out. And I think I understood your question to be are we so well in either the third quarter now or the fourth quarter of this year that we’re going to have high comps to deal with next year, which if that’s the question, it's a good problem to have, I’m not really worried it at this point.

It is true that CNN is having extraordinary performance with fairly significant increase within ad sales in this last third and fourth quarter around the election. We don’t necessarily say that that can’t continue given the vibrancy of stories that are out in world, a new administration that’s going to be quite a interesting and different in terms of the change, the world financial situation, the international, including the two wars that are going to have to be managed going forward.

So we would not say, if the premise of the question is that there would be such high comps from this year that it necessarily cause difficulty in continuing to grow it next year.

In the bigger picture of Turner ads, and I said it mostly in the remarks, if you really boil it down, what you have go to the entertainment networks, TBS, TNT, big reach, the only company with two big broad reach cable networks (inaudible) audiences come off networks, big broadcast networks they come over to Turner, very strong demos and particularly good youth to trending demos at TBS, TNT increasingly unique high quality programming, not just the proven hit series we get from network television but also the originals and the sports packages that Turner had.

If you put all those advantages together and you look then at the relatively inexpensive pricing that TBS, TNT offer against the networks, we think we’ve got buoyancy built in that outweighs any kind of quarter-to-quarter issues that you have in your question.

And in terms of the political advertising at CNN, election spending was definitely up but we don’t generate, you’ve got to keep this in mind, that much extra profit from high ad growth at CNN in news in kind of an election period because the news gathering costs are up.

So I don’t see it as something that would cause essentially a high hurdle to have to be exceeded next year. I think that we’re very optimistic about being able to continue this progress on the network ad side.

Doug Shapiro

Let’s go to next the question oh, John?

John K. Martin, Jr.

It's just the only thing, more from the accounting perspective, I do at least want mention that people shouldn’t expect the programming costs are consistently be down year-over-year with what we saw in the third quarter.

There is a seasonality with respect particularly to sports programming and some of you may remember last quarter actually are programming costs were up because we had higher then normal amortization of the NBA costs to coincide with the play-offs. So sports costs in Q3 were down considerably sequentially and we also had lower original costs in the third quarter and that’s just more timing then anything else.

So fourth quarter, you should see cost growth go back to something that is more normalized but again, I would just remind you as you look at sort of in the longer term in the way that the networks are being managed we fully expect that there is going to be upward bias in margins in our networks as we continue to manage the investment against the revenue opportunity.

Doug Shapiro

Okay, can we go to another question please, Shirley.

Operator

Yes, and this question comes from Anthony DiClemente.

Anthony DiClemente - Barclays Capital

Thanks for taking my question from Barclays Capital. A question for John, what were the number of world wide DVD units sold in the quarter, I wonder if you have that and also if you also have the world wide DVD sales in the quarter.

The reason for the question is of course it’s really difficult for us to analyze whether the recession itself is impacting home video in cyclical manner because you have lumpiness given the timing of releases, sometimes you have hits, sometimes you don’t. I was wondering if given you scale in the business, as you mentioned, could you try to comment.

And this if for John and Jeff, please if you could try to comment on how the recession effects home video whether it be pricing or volume a shift to rental behavior perhaps, a higher take-up on day-in-day or VOD in general or any other trends you might be seeing. Thanks a lot for taking the question.

Jeffrey L. Bewkes

Yes thank you and let me start and then John has a point or two, it’s more then a point or two. We’ve seen reduced foot traffic at retail where DVDs are. We’re watching closely to see whether there’s for what kind of impact that may have on home video sales. So, I can give you, or John will give you a couple of numbers on it.

Essentially the industry is down a little bit but we’re up so, so far so good. We’ve been out, well, I guess I jumped into it, we’ve been outperforming the industry lately. The U.S. consumer spending on home video as 13 and a half billion it was down about 2.5% year to date versus the prior year and consumer spending at Warner Home Video Software was $2.7 billion an increased 7% so as I mentioned in the opening remarks, Warner was number one year to date with a 20.5 share of DVD sale in the U.S, up from last year.

Generally, and this goes beyond DVD sales to movie tickets, those kinds of home entertainment options, movie tickets particularly, seems to be fairly resistant to economic downturns. Doesn’t necessarily mean there totally resistant but relatively so and so that would be the general view. Do you want to add anything to that?

John K. Martin, Jr.

No, I think you hit the biggest numbers. I mean, what we don’t know in the fourth quarter yet is exactly what if any impact there maybe just on DVD catalog in particular because we do believe that A titles are going to still sell very, very well and we fully anticipate that we’re going to shift a lot of units of titles such as the Dark Knight.

The only other thing that sort of going out that is going to impact next year too, is you’re beginning to see a real ramp in electronic sale through revenues. Where, you know, this year, year to date it approaching almost $300 million and more then doubling year-over-year so that’s helping to buoy any potential down-draft in DVD. So, you know, I think as Jeff said, we’ve got a real leadership position here and we’re cautiously optimistic about the economy but we’re very confident in our competitor position.

Jeffrey L. Bewkes

Yes, we should add, because I don’t want us to be too positive about it. The real question I think you’re asking is will there be a significant, let’s not go all the way to severe, effect of this economic situation on say DVDs and nobody really knows that yet and Christmas is going to be very important to the extent people buy fewer players and that they don’t buy quite as many catalog titles as John just said at Christmas.

That could cause some reduction, there is one offsetting kind of general point which is that it maybe that the players are coming out under $20 which could hold up the sales a little bit. So I think that both things are going on. All of us, and your question says it, are looking for what kind of negative impact will there be. We think there will be some, we’re not sure how much and we think we’ll do better then others whatever it is.

Doug Shapiro

It looks like we ran over by a minute of so but can we just take the last question please?

Operator

Thank you and this question comes from Imran Khan. You may ask your question, please state your company name.

Imran Khan - JP Morgan

Yes, hi, thank you for taking my question, Imran Khan from JP Morgan. A quick question on the AOL front, you know you clearly improved the margin significantly by effectively managing cost of that business and as you look at the business, what other areas of cost saving you see from the business if the advertising market remains soft? Thank you.

Jeffrey L. Bewkes

Well, I can start. I mean, look, you know at this point, we’re going to continue and the management team there has been and is going to continue to manage the cost base as I said against the revenue opportunity.

If you look at the access business where the rate of the client and revenues is actually moderating, access already has very high margins and is a variable cost component, so the variable costs will come down, marketing will continue to down but the rate of changing cost there is probably going to become less significant.

And on the audience side of the business, it’s going to be based on active management decisions nothing that I’m prepared to go into a lot of detail here and as we think we about how to decide the business and grow the business accordingly.

John K. Martin, Jr.

We do think that there are some areas where we can continue to cut costs and improve margins in AOL going forward and so you will be seeing that over time.

Doug Shapiro

Thanks everyone for calling in and we’re also available here if you have further questions, thanks a lot.

Operator

Thank you and this does conclude today’s conference. We thank you for your participation at this time you may disconnect you line.

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