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Time Warner Inc. (TWX)

Q1 2009 Earnings Call

April 29, 2009 10:300 AM ET

Executives

Doug Shapiro - Vice President, Investor Relations

Jeffrey L. Bewkes - Chairman and Chief Executive Officer

John K. Martin - Executive Vice President and Chief Financial Officer

Analysts

Spencer Wang - Credit Suisse

Jason Bazinet - Citigroup

Anthony Diclemente - Barclays Capital

Tuna Amobi - Standard & Poor's

Michael Morris - UBS

Douglas Mitchelson - Deutsche Bank Securities

Richard Greenfield - Pali Research

Jessica Reif-Cohen - BAS-ML

Operator

Good morning and thank you all for holding. Hello and welcome to the Time Warner First Quarter 2009 Earnings Call. At this time all participants are in a listen-only mode. (Operator Instructions). Today's conference is being recorded. If you have any objections you may disconnect at this time.

And now I will turn the call over to Doug Shapiro, Vice President of Investor Relations. Sir, you may begin.

Doug Shapiro

Thanks and sorry again for the delays.

This morning, we issued two press releases, one detailing our results for the first quarter and the other reaffirming our 2009 business outlook. Before we begin, there are a few items I need to cover.

First, we refer to certain non-GAAP financial measures. Schedules setting out reconciliations of these historical non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release, our trending 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 statements 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 Form 10-K and Form 10-Q. Time Warner is under no obligation, and in fact, expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

Finally, I'd like to point out the updated trending schedules that were posted on our website this morning include a recap financial information for 2007 and 2008.

Thanks and let me now turn the call over to Jeff.

Jeffrey L. Bewkes

Thanks, Doug. Good morning everyone. I hope you can hear us. I'll just jump right in. This quarter we completed the Cable spin, a big step forward in reshaping Time Warner

So, today we're a much more content focused company. And with the advantages of our brands and our scale, I think we're formally on track to achieve our key goals: to make Time Warner the leading content company in the world and to improve our stockholders' returns. We performed to that in line this quarter with what we anticipated, despite the obviously challenging economic environment.

Advertising at AOL and Time Inc. especially is proving even tougher than we expected, when we last talked a few months ago.

Home video has improved somewhat since the fourth quarter but remains challenged. Nevertheless, we posted relatively solid growth from our content businesses in the quarter with Content Group's adjusted OIBDA up 3%. And this morning as you saw we reaffirmed our outlook for the year.

Looking ahead to longer term, we need to do four things to drive the company forward. First, leverage our brands and our operating scale to make the best content. As consumer entertainment choices increase, we're seeing hits growing in their value. And of course nobody can make only hits, but the scale of our operations helps us to achieve better economics from the content we make. And those superior economics coupled with our strong brands, helps us to attract the best project and the best talent.

Second, we need to operate our businesses as efficiently as possible. Last year we took major cost savings steps at New Line Time Inc. incorporate. This year we're taking further measures at AOL and Warner Bros. And these are well under. This isn't just a matter of one-time reductions, we will remain as you have seen us do over the last 18 months, focused on improving our efficiency and our productivity across the entire company.

Third, we need to expand our presence internationally, with a particular focus on certain key regions. Last month, for example, we announced an investment and a channel partnership with CME, one of the premier media companies in Central and Eastern Europe.

This deal was a natural extension of our efforts to expand our networks globally because CME is ideally positioned to benefit as the economy there re-bounced and as the TV business in those countries continues to develop towards multi-channel.

And then fourth, we need to develop new business models that exploit changes in consumer usage and in technology. We get a lot of questions about how the economics of our content businesses will evolve. We've always used our leadership position to advance models that improve our economics and we will continue to do that.

I would like to give you just a few examples. Turner was one of the first able programmers to foresee the conversions of offline and online inventory and so Turner pioneered the idea of multi-platform bar. According to Nielsen, CNN is by far the most integrated brand on TV. That's the largest audience of combined television and online users of any network whether it's a broadcast or a cable network. And this broad reach enable CNN to attract more advertisers across more category in any of its competitors and to sell more multi-platform ads than anybody or consider HBO which has been consistently innovating since its launch in 1972. It was the first cable network to broadcast on a satellite, the first to offer multiplex channels, the first to offer (inaudible).

A few weeks going in that chain of development HBO on behalf of something called HBO Go which is an online extension of the HBO service for HBO subscribers. It will use a quick and easy authentication process and offer over 650 hours of programming that's about 3 times as much content that is available through HBO on demand.

HBO Go, is an example of an important initiative that we call TV Everywhere. The idea is simple; if you subscribe to a TV channel at home you can watch it for free on broadband from any provider wherever and whenever you want on demand.

With over 90% of U.S. households already paying for televisions, programmers will be able to give consumers even more for their money. There is a tremendous level of interest in TV Everywhere across the industry, and we're working with several distributors on a trial slated for the second half of this year.

Warner Bros. is also continuing to lead the industry in developing new businesses. When Warners pioneered the idea of DVD sell though, other studios bought. It became the largest source of profits in the film business. The other studios also bought when we championed VOD day-and-date, as the way to offset the maturation of standard DVD. Now, it's one of the fastest growing and most profitable segments of home entertainment. And the other studios are starting to follow Warner's league.

Over to Time Inc., we are certainly feeling the effects of a difficult magazine advertising environment, but we are assuming that this is all cyclical and will automatically come back when the economy turns. We've been aggressively moving to right size of our cost structure and focus our resources. At the same time, Time Inc. has been the most aggressive publisher in moving its content to the web.

Today it gets 15% of its domestic ad revenue online. That's more than any of its peers by pretty significant margin.

Shifting away now from our content businesses, AOL faces different challenges and opportunities. This quarter we hired Tim Armstrong as AOL's Chairman and CEO. Tim is one of the most highly regarded executives in the Internet sector and he is ideally suited to lead AOL. He started just three weeks ago and we will have a lot more to say in coming weeks and months about his plans.

But it's fair to say that Tim wouldn't have to come AOL if he didn't a lot of upside in the value of AOL's brands and its products and in its inventory. Among Tim's priority is getting AOL back to industry level growth rates, is to substantially improved the yield management and make AOL once again a must product for premium advertisers.

He is already moving quickly to refine the company's strategy, its areas of focus and its organization. Tim will also play a key role working with us, to determine the best structure for AOL. We intend to announce our plans about that very soon.

Before wrapping up, I'd like to finish some touch on the balance sheet. Our separation of Cable not only increased our strategic and operational focus, it also significantly enhanced our balance sheet in terms of both the strength of the balance sheet and our flexibility.

We know how important capital allocation is to the value of our stock. And we take that very seriously in this year that we are all in. To remind you of our priorities, we start with reinvesting in our businesses which usually provide us the highest return opportunities. We also look to return value directly to our shareholders.

As you know, we've decided to maintain our dividend after the Cable separation but it now represents a significantly higher payout ratio. We aim to grow the dividend over time as free cash flow grows. We have $2.2 billion remaining our stock repurchase authorization. We intend to restart our buyback as soon as we can, if conditions are warranting after we announce our plans for AOL.

As an ongoing discipline we will also of course look at potential acquisitions that could improve our businesses' competitive positions. But we know that most M&A in the media sector has not created value, so any deal we do, will have to be compelling strategically and will have to clear our financial return hurdles.

It's tough out there, in the economy, no question but I feel very good about how we're positioned. We have powerful, enduring brands, industry leading scale and a strong management with a long record of innovation. We've increased our focus on efficiency and our balance sheet is extremely strong. We're just as eager as you are to improve our stockholder returns. And I am confident that we're on track to do just that.

Again thanks for joining us today and I'll now hand off the call to John.

John K. Martin

Thanks Jeff and good morning everyone. They are slides that are now available on our website to help you follow along with my remarks.

And let me begin by mentioning two basis of presentation points, because the separation of Time Warner Cable was completed in March, Time Warner Cable's financials are presented today as discontinued operations for the current and prior year quarters. In addition on March 27th we completed a one for three reverse stock split which is reflected in our per share results and our business outlook. So turning now to the first slide which presents our consolidated financial highlights for the quarter.

As we expected, the operating environment was difficult. In addition to the tough ad conditions, we faced significant headwinds from the continued decline of AOL's

access business, the stronger U.S. dollar and higher pension expense. In fact, while revenues decreased about $500 million in the quarter, roughly three quarters of this was due to just two factors: the decline in FX and AOL's access revenues.

Looking at a OIBDA in the first quarter, FX was about a $70 million drag, and pension expense was up $30 million year-over-year, so the two together reduced OIBDA growth by approximately 600 basis points. Notwithstanding these headwinds we were able to maintain flat margins relative to last year through careful cost management across all of our divisions.

On an aggregate basis, we reduced operating expenses by 7% in the quarter or about $400 million. Costs were lower at all of our divisions other than Networks and at Networks they were up only low single digits, and as Jeff said we remain very, very focused on cost control. And we plan to continue to drive efficiency gains.

And if you in the quarter look at just the Content Group as Jeff said, so we're not including AOL and the numbers here, are adjusted OIBDA grew nearly 3% with both Film and Networks up double-digits, we consider that to be pretty encouraging in light of the current environment. We had another strong quarter of free cash flow converting 83% of adjusted OIBDA.

Now please turn for the next slide for our EPS results. In the first quarter 2009 diluted EPS was $0.46 and that was flat for last year. Adjusted EPS, which excludes certain items that affect comparability, was $0.45 and that was down 3 pennies from the same period a year ago.

Turning to free cash flow on the next slide, it was about $1.3 billion in the quarter and as I mentioned that was a very high 83% conversion ratio. This ratio does tend to be higher in the first quarter and that's due to positive swings in working capital primarily at our Film division, as well as timing of interest and tax payments. Nevertheless it's a really terrific start to the year and that highlights the relatively low capital intensity of our content businesses, CapEx for example was less than 2% of total revenue in the quarter.

Moving onto the next slide, we ended first quarter with $10.4 billion in consolidated net debt; that's half the level we ended with at the end of last year. And this reflects the $9.25 billion special dividend that we will see from Time Warner Cable, as well as more than $1 billion in free cash flow generation. With this separation of Time Warner Cable now complete our leverage ratio is about 1.6 times and that's based on the last 12 months adjusted OIBDA. That's also exactly where we expected it to be.

In March, we used the proceeds from the special dividend to repay our $2 billion term loan facility. And we paid down the $2.5 billion outstanding on our bank credit facilities so we ended the quarter with a little more than $7 billion of cash on hand and nearly $7 billion available on our revolver. Obviously that's very significant balance sheet capacity more than we intend to operate the company with on a longer term basis.

In the near-term, one thing to remember is that the degree of excess capacity will depend in part as to what our decision is with respect to AOL structure among other things. And I'd also want to point out that with Time Warner Cable being able to raise debt in the current quarter repays its bridge loan, we are no longer providing them with a supplemental loan facility, so that's a good news.

Looking now at our divisional results, moving forward in the presentation beginning at our Networks. We had solid revenue and double-digit of EBITDA growth in the quarter. Subscription revenues were up 9% and that's due to higher affiliate revenues at both Turner and HBO, as well as the impact of consolidating HBO Latin America.

Advertising revenues declined 2% over the prior year and that was primarily due to softness in our International Networks at Turner which were down mid-teens, and about half of that was due to unfavorable foreign currency.

Our Domestic Networks were about flat in the quarter reflecting a slight decline in entertainment and a small increase at news. Margins expanded nearly 200 basis points year-over-year as a result of a very small cost increase. And this drove OIBDA up 11% well ahead of revenue growth.

Key cost drivers here was modest growth in programming expenses and lower news gathering costs. The consolidation of HBO Latin America also contributed the growth in the quarter on the OIBDA line.

Looking ahead into the second quarter, scatter market pricing is about flat to upfront levels. However, business is getting booked very close to air date which somewhat reduces our visibility and second quarter cancellation levels are up over last year.

International Advertising at Turner is also tracking the decline in the second quarter and when you add these two together we're currently expecting advertising revenue to be down somewhere mid single digits in Q2. And just a reminder last year's second quarter we had very, very strong ad growth, so in comparison year-over-year.

Of new launch, turning to our Film division, Warner Bros. also posted solid OIBDA growth in the quarter. Revenues declined 7% due mostly to tough comps in both home video and theatrical as well as unfavorable foreign currency. This was partially offset by higher TV licensing revenue as compared to the WGA strike last year.

In the first quarter of last year, we had 13, excuse me key home video releases led by I am Legend compared to only five this year which included Body of Lies and Nights in Rodanthe.

First quarter theatrical releases this year included Watchmen, and the carryover from Gran Torino and Benjamin Button and this compared to 10,000 BC and Fool's Gold and carryover from I am Legend and The Bucket List last year.

OIBIT in the quarter was up 10% that's despite the decline in revenues. And that was driven by lower P&A due to the fewer releases, lower restructuring charges and lower overhead following the reorganization of New Line. This was offset by higher TV production expenses again as compared to the strike affected quarter last year.

Looking into the second quarter, we have very high hopes for two theatrical releases Terminator Salvation and The Hangover. However, please keep in mind that we once again will have difficult home video comparisons as we anticipate five key releases compared to 10 last year.

We will also incur additional restructuring costs and those would be related to the previously disclosed initiatives. And that compares to essentially none in the second quarter of last year.

Moving onto Publishing, where both first quarter revenues and OIBDA were down pretty substantially year-over-year, total advertising revenues declined 30%, reflecting a lower print advertising unfavorable FX at IPC and a decline in online advertising. Eight of Time Inc.'s top 10 advertiser categories experienced year-over-year declines in particular food, pharma and auto. And I'd point out that the decline in print was almost entirely driven by volume, which we think will help revenue rebound once demand comes back into the market. And in addition, I've mentioned that based on PI data, Time Inc.'s domestic advertising share actually grew modestly in the quarter.

Subscription revenues were down 16%, about half of that was due to unfavorable FX and it was also affected by disputes we had with two of our wholesalers during the quarter which did disrupt the supply chain. We also did start to see some softness in subscription renewals due to the economy but this only had a very small effect in the quarter.

The OIBDA decline was due to a number of things, the decline in revenue, offset by reductions in the cost base, following all the restructuring efforts that were previously put into effect. And Time Inc. also incurred an $18 million increase in bad debt reserves related to a newsstand wholesaler. It's worth noting that costs for Time Inc. are incurred relatively evenly throughout the year, but that advertising is very seasonal, with the first quarter traditionally being our smallest quarter of the year.

I mention this because it makes the first quarter our lowest margin and highest operating leverage quarter, and we would not expect a similar level of either OIBDA margin or year-over-year OIBDA percentage declines for the remainder of the year, even if the ad market did not improve from Q1 levels.

Looking ahead, second quarter print advertising remains challenged and is pacing similar to Q1. And again as a reminder, visibility here remains limited but with easier comparisons in the second half of the year, we clearly hope trends begin to improve.

Turning to AOL where the first quarter results were also affected by the continued downturn in advertising. Total ad revenues were down 20% to $443 million and I'm going to briefly walk through the three components here.

Display on the AOL Network was down 17% to $158 million. As has been the case in recent quarters, deal declined as more inventories was monetized through lower price sales channels which carry lower CPMs.

Unlike in recent quarters, however, we also started to see some pricing pressure on our reserved inventory and key categories remain challenged such as finance, consumer products, autos and telecom.

Page search revenues declined 12% to $152 million and that was due primarily to lower query volume and a lesser extent lower revenue per search query on certain AOL properties as well as lower click through rates offset increases in cost per click.

And as we began to discuss with you last quarter, we do expect search revenues to remain pressured this year due to the continued migration of domestic users to AOL.com and away from the client as well as algorithmic changes put into place by Google that reduced our effective cost per click.

Looking at the last component of advertising, third party revenues declined 29% to $133 million in the first quarter, the absence of one large customer Apollo and this is probably going to be the last quarter we refer to this. But the absence of Apollo contributed about $16 million to the year-over-year decline that's about one third. And since the agreement was terminated in the first quarter of last year, this should be the last quarter of any meaningful comparison for Apollo.

Excluding Apollo, third party network revenue was still down 23%. This reflected lower demand for both performance and branded advertising on the network and retail and autos were particularly soft.

Moving over to the other side of the business, AOL's access business lost 570,000 subscribers in the quarter and that's actually down a little bit sequentially from losses we experienced in the fourth quarter of last year.

OIBDA was about $255 million in the quarter. That's down 37% as the decline in revenues more than offset lower tax and G&A costs. And as I mentioned last quarter, we expect that AOL will incur up to about $150 million of restructuring charges this year and in the first quarter we incurred about $58 million.

So looking ahead our advertising revenues thus far in the second quarter are tracking down about the same level we saw in Q1 in percentage terms. And before I move on beyond AOL, I do want to make two more quick points. First, we recently received and successfully completed a consent from the holders of about $12 billion of our debt. And that provides us with much more flexibility with regards to AOL structure going forward, so we have viewed as good news.

And second, I point out as we highlighted in our 10-Q filling today, we have notified Google of our intent to acquire their 5% stake in AOL. So while we remain open to the other potential solutions working it thorough with them, the next step in the process is an independent valuation of AOL and the process will likely take a few months.

The next slide briefly touches on our corporate expenses, and they were down 22% year-over-year. Last year we lowered corporate costs by about $80 million on a run rate basis and the steps that we took a year ago are still benefiting us in the first quarter. And obviously we're continuing to look hard at our costs everywhere but here at corporate as well.

Moving on to our business outlook, last quarter we said that we expected our 2009 adjusted EPS to be about flat with $0.66 in 2008, which I went on further to define as a few pennies about 5% up or down. I am taking into account the one-for-three reverse stock split our 2008 base has now been adjusted to $1.98, we still expect adjusted EPS this year to be around flat compared to last year. And I think it's fair to say that a likely range of outcome is still plus or minus 5%.

Regarding our quarterly results, I'd remind that our comparisons are meaningfully more difficult than the first half to three quarters of this year. So our assumption of around flat adjusted EPS reflects expected declines in the first three quarters which would then be offset growth in the fourth quarter.

In terms of the progression throughout the year, we expect that the second quarter will be our most challenging from the growth perspective. The outlook for ad growth is relatively similar to Q1, and our home video comparisons at Warner Bros. are expected to remain challenging.

The second quarter is also our most difficult comparison period in terms of restructuring expenses, and we should also expect higher programming costs at our Networks division based on amortization.

So, that really covers the review of first quarter and obviously we're trying to provide you some context on what we see for the second quarter and full year. We appreciate your listening in and your interest in Time Warner.

And with that, let me turn the call over to Doug, so, we can start the Q&A session.

Doug Shapiro

Hi, thanks. Could we get the Q&A started?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Spencer Wang.

Spencer Wang - Credit Suisse

Thanks, good morning. Two questions, I guess the first is for Jeff. Jeff, you alluded to the maturation of the DVD business. Yet digital has been a little bit slow to develop to. I was wondering if you could just talk a little bit of how you can or plan on accelerating the transition to digital over next call it, one to two years to smooth out the transition from DVD? Then John you mentioned cost savings a lot and the focus on cost, can you just talk a little bit about where you see incremental opportunities to take out costs both at the corporate level and maybe divisionally? Thank you.

Jeffrey Bewkes

Thanks Spencer. Let me start with DVD. Strategy first on a couple of points on what's happening. We're number one in the fastest growing parts of the business, which are Blu-ray and VOD and electronic sell-through. We happen -- I think that we're usually at the top on the old standard DVDs too. But in those new areas, having pretty big slate and the scale of distribution that we have globally not just in the U.S. really helps us to get our product featured and get very good terms for it.

We're pretty strong in catalogue because of the size of library and then adding the product not just from Warner but some TV product from HBO and Turner and Warner TV slate which is large in addition to its film slate. It's essentially the starting building block for how we're doing this. And as I mentioned in my prepared remarks, we always try to be at the forefront to your question of leading the new model.

So if you look at moving into Blu-ray or iTunes the margin improvement there is 70% up in margins on electronic rental as we move to day-and-date and VOD it's 40% or so in moving to iTunes or electronic sell-through. So that's really why we're going first on all of these transitions. And its -- and the results that we are getting, we think are going to bring the rest of the industry with us as they have in the past. So that's basically how we're approaching at to speed it up, well I'll leave it for follow up -- there's more to that question. And John, do you have the other question?

John Martin

Yeah. So, as it relates to costs and I guess the way that we like to think about it's not just cost cutting it's trying to wherever we can identify areas to improve the efficiency of our operations and redeploying the capital to more productive uses. So, just quickly looking across the company I mean if you look at what the studious are doing out of Warners they're in the midst of implementing and executing on a very material shared services project that will affect any number of functions. It's resulting in a material and meaningful reduction in workforce, and it will take some time to complete the implementation but we believe one it's completed the payback will be within 24 months of post completion. So a very, very high ROI.

If you look at our Publishing business, we're going to benefit this year from the material restructuring that was put into place last year that essentially reorganized the company from top to bottom in terms of being much more clustered around magazines that make sense. And we said that we expected the benefits this year to be $175 million. I suspect that we will probably even do better than that and more obviously continuing to look at where we can save money given the challenging environment that our Publishing business is operating in.

At AOL we're focused on continuing to rationalize the cost base against the revenue opportunity on the web business. I know what Tim is really focused on and where we need to make the right investments to drive product development and make sure we're making the most with our investments there. And we're looking at focusing and rationalizing our facilities across the industry. Even our Networks business which we don't talk a lot about, Phil Kent and the team there as well as Bill Nelson and the team at HBO have done really good job of holding down costs and redeploying it to more productive areas like programming. And so that's one of the reasons why we expect we are going to see nice margins expansion there in that line of business.

As far as corporate goes, we've really significantly reduced corporate already. And I think the function that corporate is going to play going forward is trying to work collaboratively with our divisions to look at ways that we can across the company save additional monies by leveraging our scale in any number of areas. And you will be hearing about that in the coming months. So I think there are opportunities across the entire company. I think we've done a good job. It's one of the reasons why our results are, we believe are relatively resilient versus the rest of the industry. But obviously we're going to continue to work hard at it.

Doug Shapiro

Next question and I meant to say, please try to call us up to one question, so we can accommodate as many people as possible. Thanks.

Operator

Thank you. Our next question is come from Michael Nathan.

Unidentified Analyst

Thanks. I've one for Jeff and then just a quick for John, Doug I'm sorry. On Cable Network side I wondered what percentage of revenues are now from international markets and what's the strategy to increase scale in those markets, from a HBO perspective and Turner perspective? And John if you spun AOL would your target leverage ratios change in terms of where you want to be, so that's two questions?.

John Martin

Yeah, just in terms of percentage revenues from international just rough justice is around -- being around 10%.

Unidentified Analyst

Okay.

Jeffrey Bewkes

How we got -- what's view of HBO and Turner, on HBO, we have been buying in partner shares in South America and HBO Asia and HBO South Asia. And that's essentially not only improving or increasing our financial exposure, it's also increasing our ability to direct what happens with HBO in those regions. And it is making possible future coordination between HBO network activities and some of our other networks at Warner Turner and even local ones like Clacksons (ph) or CME that we are becoming partners with. So that's one general direction in the case of HBO.

It's worth noting wherever HBO is operating overseas it's number one in its market usually but maybe only one exception to that. At Turner I mentioned CME but, there is very strong position for CNN in the international English language news, business both on TV and online. There are some countries, in which we've in a local language. The real speed grower internet network overseas is Cartoon Network, which in certain key markets like India and Brazil that we've identified as important. It's the leading market in those populations, another huge future kids populations.

So, we continue to both extend the programming strength on those networks CNN and Cartoon Network and then due to the things that you saw us talking about today, whether it's taking up partnerships with strong networks like CME whether it's buying Clacksons group of thematic networks In south America, and then operating them in a suite of channels, where you have not just the Turner Networks that you know in the States, but some of the ones that are specifically focused overseas. Another one comes to mind, RealNetworks in India which Turner and Warner really work on together, and we've just launched the general entertainment network in India. That's -- you'll see us doing more of that if we find good opportunities to do it.

Unidentified Analyst

Okay. Thanks.

John Martin

And Michael, on your leverage question, just as a quick reminder our stated target leverage is about 2.5 times notwithstanding the fact that we're currently operating in around 1.6 times. I wouldn't suspect if the decision is made to separate out AOL I wouldn't anticipate that it's going to result in any material change in our view as to this stated target leverage. But obviously, if AOL is on its own footing the remaining Time Warner would no longer benefit from the earnings in free cash flow generation from AOL. So depending on how AOL would be capitalized which obviously no decisions have been made there either. And you could see leverage go up to TWX somewhat, and I would sort of end by saying that and we all recognize that we enjoy very significant meaningful capacity. And it's one of the reasons why I wanted to mention it in my remarks which is that, we have more capacity right now than we intend to operate the company with on a go forward basis longer-term. But if we were to separate out AOL we would anticipate and expect that Time Warner would still have a very adequate and attractive financial flexibility and capacity going forward.

Doug Shapiro

May we have the next question please?

Operator

Our next question is from Jason Bazinet.

Jason Bazinet - Citigroup

Just have a quick question regarding the disclosure in the Q about potentially buying the AOL stake from Google. Does that reflect your interest in the asset or is that just to give your company more flexibility regarding timing given the provisions the Google has?

John Martin

Well, I mean as you know there is a process that Google started off and it could result in registering a stake of us buying it back. And our interest in the property would obviously depend on valuation and we're going to start to move down that path. It's not a material amount of money one way or the other, I don't think it's not a huge material event for Time Warner in total. And as I said in my remarks, there is still some conversations we'll have with Google and we're open to other suggestions. But at this point in the disclosure in the Q just wanted to make sure that we said that we're moving down the path that could result in us acquiring back the stake.

Jason Bazinet - Citigroup

Okay. And then I can I have just one follow up housekeeping question, I guess in the trending schedule you used to give the international ad numbers at AOL. Can you give those?

John Martin

Yeah. Jason we can talk about that offline. I mean basically it's usually about one- third, two-third international, domestic.

Jason Bazinet - Citigroup

Okay. Thank you.

Doug Shapiro

Next question please.

Operator

Our next question is from Anthony Diclemente.

Anthony Diclemente - Barclays Capital

Hi, thanks just one question for Jeff, I was hoping you could just continue to elaborate more on TV Everywhere the authentication concept. And just thinking about this potential solution, how feasible is it that you can get the distributors and the programmers together on this both in terms of the technical aspect and then actual incentive for a cable programmer be it a small one or larger conglomerate what is -- what would the incentive be for them to become a part of TV Everywhere or not to? Thanks for your comments.

John Martin

Okay, thanks. I think the whole thing is very simple. You've already got a billing system running efficiently through the current providers of video which would be cable MSOs, it's a couple of satellite companies and cell phone companies. They are currently providing multi-channel TV networks to over 90% of American households.

So all the billing and all of the authentication is done already, they've all got it, it's pretty simple. Given that we're all talking about letting viewers 90 plus percent of Americans watch program when they've already paid for, having a check-in software that simply asks given consumer pay for this by pinging the cable operator satellite operators and phone operators is a very simple instantaneous thing. It's much more simple for example than an iTunes billing activation for buying something online or for Google search algorithm. And incentive for all of the distributors to join and help us this to occur is that it supports all of their video revenue.

And so it seems pretty simple from the networks point of view, it's also pretty clear, any multi-channel network that's got to a dual revenue streams has clearly got a benefit in making that channel and brand royalty move across any platform or devices. Because, if I just speak for our company, it's good for TNT or HBO, that if you got it in your home, you can watch it out of your home and on VOD. And that we can then maintain the subscription payment you're already making and the ad sales across platform ability, that deciding in media. So, the system is simple, it's not hard. It doesn't put any blocks for consumers and it's clearly in the interest of all cable multi-channel networks, and all video providers.

So it's really absolutely -- there's nobody that it isn't in the interest of really, and the outline at this point seem to be broadcast networks, which are in a clearly different position and have different paths.

Doug Shapiro

Could you take the next question please?

Operator

Our next question is from Tuna Amobi.

Tuna Amobi - Standard & Poor's

Great, so I wanted to ask about any update you have Jeff on the Bebo re-launch and when you think that the user metrics overall at AOL will begin to converge with the monetization initiatives there. What you expect Tim Armstrong to be focused on in the next year or so? And if I can -- have a step-up question quickly for John, do you foresee an instance with for example your so called content orientated adjusted EBITDA could decline this year and still hit your EPS targets?

Jeffrey Bewkes

John -- on Bebo first, since the Bebo acquisition we keep re-launching key parts of Bebo. The social inbox was launched in early December and it includes integrated e-mail, aggregated social feeds. In February we launched a new home page, which had profile on it, and had your time line experience and it had our aggregated feeds platform, which is called Live Stream. Over the next couple of months, Phase II of the Bebo roll up will happen, with an introduction of products in the United States including a new desktop client.

On usage of Bebo overall comps score uniques are up 5% year-to-year, in the first quarter, to about 24.5 million, that's driven primarily by the United States activity. But we've also seen growth in Australia, New Zealand and Ireland. The uniques at Bebo did decline 15% in the UK due to Facebook competition, and page viewers have been down across the board. So, that's on Bebo, and we're quickly transitioning to your AOL question. What will Tim do, it's little early after a couple of weeks.

But basically as I said in the remarks he's working hard as his team at AOL to better capitalize on our existing products and content. And to build into a few of the wide space areas that we see emerging that fits AOL's core strength, some of which will keep to ourselves until we occupy them. It's a little early to talk about targets but we feel strongly and Tim does too that AOL has to hold itself being a leader in the growing space of its competitors competition with the other big companies. And we have to have metrics that reflect that growth. We have put up as you saw us announce some room in an envelope for additional restructuring. And we are moving pretty quickly as we also said to refine the organization and the emphasis in our operating resources commitment to those areas that are growing and pulling them away from those that are not growing. We do think we've got the building blocks, so for us to turn around at AOL which we see underway in both usage and monetization.

Tuna Amobi - Standard & Poor's

All right thanks John.

John Martin

I'll be quick and unfortunately I am going to refrain from giving any specific of OIBDA guidance. It's one of the things we decided to do coming into the year with the difficult operating environment. We thought we had an enough leverage to manage and be able to deliver about flat adjusted EPS and as a result of that I just don't want to get into more specifics on OIBDA.

Doug Shapiro

Okay, next question please.

Operator

And our next question is from Michael Morris.

Michael Morris - UBS

Hi thanks. Can you expand a bit on the trends that you're seeing in network advertising especially as we head into the upfront? In particular it seems that demand is clearly a bit softer, the pricing has remained flat. So, just couple of things that I would like to figure out is, one, as you compete with the Broadcast Networks where your CPMs and some of your key programs you are offering there and what's your value proposition heading in this year? And then number two, how do you view the risk of maybe some of aggressive price competition given that it appears that demand is a bit softer heading into the second quarter? Thanks.

Jeffrey Bewkes

Okay, on the second one we are probably not --- John has been -- gives tactical responsive, now we're going to handle price competition. But just in general, we're in a very good position on television advertising competition at Turner, because we have the scale, rich ratings and quality programming environment, that the advertisers want on TV. And then we have the final weapon which is very attractive pricing in relation to Broadcast.

So, the CPM gap is again starting to close. If you have TBS and TNT in the top three, you got the Gulfstream number one which in the adults 18 to 34 group, CNN total day ratings continuing to grow. And with the CPMs at about two thirds of Broadcast, that's a very good environment for us. And if you just look at what's been happening recently in last year's upfront, our price increases were the highest across any network group in television whether it was Broadcast or Cable.

And so in general to your question, Cable is taking viewer shift at an accelerating pace. If you look at just the first quarter '08 or '09 versus '08 last year Cable is up over 2 million total viewers this year versus last. In this year season to-date Cable is up 3% Broadcast is down 5% in primetime.

The primetime share of Cable is 60% versus Broadcast at 40 and yet the ad dollars are 30% for Cable and 70% for Broadcast. So that's a huge hunting reservation to go out off to and you have got Broadcast off to the worst start that's have in a decade. It's down nearly 2 million adults 18 to 49 and it's season starts are off 7%. More than three quarters of the shows returning to Broadcast are down this year in ratings.

So if you look now at the upfront which is starting to come into play it's hard to predict with a lot of certainty but we are very well positioned given what we just said about the rich and quality and ratings of our networks. And with Broadcast getting into those kind of problems and having that much exposure on its pricing we think that our advertisers are going to be considered continuing to look at TV as the total picture and making economic decisions about where they can get banks for the buck in a good environment in terms of programming environment

So, that's how it looks to us. We really can't go into our tactics of how we are going to use those advantages.

Michael Morris - UBS

Great. Thank you.

Doug Shapiro

Next question please.

Operator

Our next question is from Doug Mitchelson.

Douglas Mitchelson - Deutsche Bank Securities

Hi. Thanks, good morning. So, Jeff as you consider your options at AOL, I am wondering if you have any concerns regarding your loss of synergies between your Content Group and AOL. And I guess I was not surprised but still amazing that you noted in schedule six where you breakout AOL and Content and then eliminations between the two. There is only $8 million of eliminations for revenue and none it all for EBIT. So, that implies there's essentially no synergies between AOL and Content. So, is that right? And that the second part of the question is just the 10-Q said management is committed to spin off all or part of AOL. What are the factors that are going to drive your decision on AOL since you don't have Board approval yet? Thanks.

Jeffrey Bewkes

On the first, in terms of synergies you can't just look at synergies from financial eliminations on. They tend to rise when you are selling things through different parts of your company in a supplier-customer relationship. And that's not the only way that you can get an advantage as a branded media company with TV networks, magazine title and so forth, putting them online and having the giant audience of something like AOL and potentially ad sales coordination.

So I would say having said those things, we have joint ventures like TMC, and a number of showcases and traffic movements that occur, between our Publishing company, our Networks and our studio back and forth with AOL, which is a huge repository of uniques and page views. Having said that, that doesn't necessarily turn into commercial and accounting hosting, because those are promotional in some cases or audience building an image building, they're not sales. And that really speaks to what portals and online services like Yahoo! and AOL are, they're not lease holders, they don't buy and exhibit rights by and large.

So from the point of view still on synergy, of what you use can branded media products like Harry Potter, HBO, TNT make of the AOL and Yahoos and MSNs of the world, they can do that by essentially getting all of their audiences exposure to those branded products on all platforms, which would include not just AOL but the others. And that I think gives you a clear idea of where AOL will compete because it will compete on that basis with Yahoos and MSNs and all of them will be useful traffic and new form of media augmenters for things like network TV and branded franchises like Harry Potter.

When you go to the -- you asked I think about the process and what factors we've put in to making our decisions on spin or not, basically if you ask the question what are the arguments or reasons why theoretically you would separate a company like Time Warner Cable which we just did or in this case AOL. The obvious goal is to whether you can improve the value of all stock, the entity that goes out if it goes out. And Time Warner which would be answered by -- if that doesn't answer the question. Do you improve the strategic focus and the strategic options of both AOL and Time Warner if they were separate? And do you moving more specifically to AOL improve its ability to attract and retain talents and would that AOL business as it goes forward be better capitalized and more appealing to a specific shareholder base that might be different than the one that is investing in the Time Warner Media Company. When we answer those questions to the point that we can explain them to all of you then you would -- we'll then take action and we anticipate that, that will not be too long from now.

Douglas Mitchelson - Deutsche Bank Securities

Thanks much.

Doug Shapiro

Great. Next question please.

Operator

Our next question is from Richard Greenfield.

Richard Greenfield - Pali Research

Hi. Question, when you look at your Film business, there is a comment in the 10-Q that you could back ownership of four films at least temporarily and maybe more films later this year. I wanted to know what films were those, are there no longer being co-financed? And given the fact they wont be co-financed were these profitable films and therefore will you book more revenue and profit because of this or less? How does that just play out?

And then just a follow-up for Jeff about the whole TV Everywhere thing, CNN is not just about videos, could you envision charging ISPs for access two sites such as CNN or TMZ, such as ESPN 360 does, especially as broadband outputs appear to be on the rise with higher speed broadband rolling out. Thanks.

Jeffrey Bewkes

Oh, thanks. On the four films John will answer it because -- and I will come back to that.

John Martin

There was another question before the TBF --

Richard Greenfield - Pali Research

I do not know what the -- who the co-financing partners --

John Martin

You want to start -

Jeffrey Bewkes

Okay. I will do TV -- first of all Rich, I think you've been writing some great stuff on the other company. So is that -- I don't think that and if you take this specific case of CNN, while I am not right now going to give an absolutely firm answer that we wouldn't have some layer of surface of CNN that you might not have reason to charge for. So having said that in general we think that when our viewers, our network watchers have paid for a network like CNN, TNT, HBO that programming ought to be available on all platforms on demand.

And we have basically if you look at our record on this, done precisely that with HBO when we put it on VOD. We've moved it to kind of uniform availability, some of our distributors haven't but that's what we've basically done. And so we don't really envision having broadband be a charging mechanism, it's not really the way broadband currently works. It's not likely to be if you move in that direction an advantageous trades to move charging over broadband versus what's currently existing, and that's particularly consumer friendly to do it that way.

The way we are talking about is making it free, making it easy for people to use so that, they don't have to worry about whether they are walking in their house or looking at their TV on the wall, and then they walk out the door with their laptop or their handheld. They ought to be able to use their network, TNT, CNN, HBO. The same way on all those environments and on all those devices and the simplest way to do that is just to rely on what's already built, which is they have already paid for and it's already been collected and the mechanism is simple and reliable to do that. So that's why we believe this is a simple way to evolve the industry very quickly because speed is important to get this out in consumers' hands as quickly as possible and not have them to worry about whether they're getting this over TV steaming versus internet, broadband delivery. John is going to answer the --

John Martin

Yeah I'll take the other question. Look just by way of quick context, Warner's for a long time has been entering into co-financing relationships with partners. They have a diverse portfolio of wholly-owned films, JV films, acquired films and distribution VOs and those are specifically designed to minimize financial risks of maintaining upside. And our existing financing agreements typically cover multiple films that are produced over a multiyear timeframe. It is true as we disclosed in the Q that one of our largest co-financing partners has not been able to up until now fund its share of the production costs on certain films and as you mentioned it's four films.

They are still in the process of trying to obtain their financing, if they do, great. We've had a longstanding relationship with them. I would prefer not to mention who it is specifically because I am not sure they would appreciate that. And I prefer as accordingly not to mention the specific films but as you said in the Q it's four films.

It will not have a meaningful impact to our P&L one way or the other. It would in the near term have more of an impact on cash because we would recoup some of the cash that we've been funding. But if for whatever reason they can't obtain financing, we're also not that concerned about our ability to finance films going forward given the flexibility and given our position in the industry. So, hope that's enough on that.

Doug Shapiro

Let's take the last question please.

Operator

Our next question is from Jessica Reif-Cohen.

Jessica Reif-Cohen - BAS-ML

Hi, thank you. I am wondering if you could comment, probably for Jeff, how you see your asset mix changing momentum, which clearly you're on a path of -- or AOL in the path of being separated. Is Publishing a critical asset for a content company? And despite your comments on M&A, historically, you are a different management team now than before, when you bought AOL. So I guess, the way, like I said, you're the only company in terms of the cash position, is that not a competitive advantage?

Jeffrey Bewkes

Yes, it is a competitive advantage, but only if you have to use it well. In terms of the complexion or proposition of Time Warner and to your specific question, is publishing a core business, there are lot things that are attractive about publishing, even if its experiencing a tough ad market right now. And for one thing like our other Time Warner businesses it is branded content business and it can go across multiple platforms like our Networks.

Time Inc. Publishing has huge scale in its business domestically, and in the places where top rating overseas, it has a very cash flow generation. We think it can grow and leadership is up in a number overall -- in a number of the brands more than others.

Having said that, there are obviously some questions which are -- is the situation in publishing, magazine publishing specifically cyclical or secular? And how does it compare to what's happened in the present business of the newspapers? We think that's a very different business than newspapers and if you take some of the key differences magazine leadership is growing whereas newspapers were declining.

And the percentage of Americans that read magazines is twice the number percentage -- 85% versus 48% reading newspaper. And then a very critical set of difference is, magazines are national, not local and they are not relying on classified ads. So that's... those are some of the positive points on print and magazines. Some of the questions of course remain -- it's been a fairly long pressure on the add market. There are pressures on key advertising sectors that have traditionally supported things like the news magazines business. There are clearly differences between magazines that are frequency week, weeklies and biweeklies much healthier than monthlies. Style, fashion and magazine that appeal to women have been much stronger and more prompt to growth and to cross platform success than others.

So, definitely lot of questions about, how that specific business works overall. But I mean we'll probably be a further shakeout in that industry. And there is lot of things to address and I am not going to go off solely on magazines. But we're very focused with the magazine management on those questions and how to make our Publishing company the most successful amongst its competitive set. And then as assuming that we continue to do that, we then have to determine what is the best financial structure for that business in long run? Back to the rest of Time Warner, which may well include Publishing, but we're not making a religious statement about it either way at this point.

Clearly, the lead that we have in worldwide film and television production and distribution, and television branded networks, not just on TV, but online it is a significant business opportunity. It's growing around the world, it's growing due to digital. We have advantage position, and it's something we know how to do. So those will be the guiding focus points of Time Warner going forward.

Doug Shapiro

With that I think we're few minutes past the hour. I apologize again for the technical delay at the beginning and thanks a lot for listening in.

Operator

Thank you. And this does conclude today's conference. You may disconnect at this time.

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Source: Time Warner Q1 2009 Earnings Call Transcript
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