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Time Warner Inc. (NYSE:TWX)

Q1 2014 Earnings Conference Call

April 30, 2014, 10:30 AM ET

Executives

Michael Kopelman - Senior Vice President, Investor Relations

Jeffery Bewkes - Chairman and Chief Executive Officer

Howard Averill - Executive Vice President and Chief Financial Officer

Analysts

Meghan Durkin - Deutsche Bank

Ben Swinburne - Morgan Stanley

Michael Nathanson - MoffettNathanson

David Bank - RBC Capital Markets

Anthony DiClemente - Nomura Securities

Vasily Karasyov - Sterne, Agee

Michael Morris - Guggenheim

Operator

Hello, and welcome to the Time Warner Inc. first quarter 2014 earnings call. My name is Joe, and I will be your operator for today's call. (Operator Instructions) I will now turn the call over to Mr. Michael Kopelman, Senior Vice President of Investor Relations. Mr. Kopelman, you may begin.

Michael Kopelman

Thanks. Good morning, everyone. Welcome to Time Warner's first quarter earnings conference call. This morning we issued two press releases, one detailing our results for the first quarter and the other updating our 2014 full year business outlook, which as a reminder excludes Time Inc.

Before we begin, there are two items I need to cover. First, we refer to certain non-GAAP financial measures. Schedules setting out reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release and trending schedules. These reconciliations are available on our website at www.timewarner.com/investors. Reconciliations of our expected future financial performance are also included in the business outlook release that is 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 Annual Report on Form 10-K and subsequent quarterly reports on 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. Thank you.

Now, I'll turn the call over to Jeff. Jeff?

Jeffery Bewkes

Thanks, Mike, and thanks for listening in this morning. We had an excellent first quarter. Excluding Time Inc., revenues grew 10%, adjusted operating income increased 12% and adjusted earnings per share was up 26%. We also generated over $1.7 billion in free cash flow.

For just one quarter into the year, that provides a pretty good indication of the return we can achieve on our investments in programming and of the growth potential of our businesses. And as a result of our strong start to the year, this morning we raised our outlook for 2014 adjusted EPS to grow in the low-teens. That's not an unusual level of growth for us.

Over the past five years, we have grown adjusted EPS at least in the low-teens every year. Our growth in any given year maybe higher or lower, depending on factors like the timing of new affiliate agreements or investments in program, but on average, we think we can continue to grow adjusted EPS in the low to mid-teens, if not better, over at least the next three to four years.

We have an established track record of turning solid operating growth into even more attractive returns for our shareholders, and we're extremely confident, we can continue to do so for the foreseeable future.

Our confidence is underpinned by the strength of our brands, by industry-leading scale across our businesses and by the increasing value of our engaging and globally relevant content. All of those factors have been evident in our negotiations during Turner's current domestic affiliate renewal cycle.

In fact, based on the deals we've already completed, we anticipate double-digit growth in domestic subscription revenue at Turner will extend another two years beyond the 2013 through 2016 period that we previously discussed with you. That's double-digit growth on average over five years and it provides a lot of visibility into our earnings power over that time period.

Given our confidence in our growth prospects and strong cash generation year-to-date, we have decided to accelerate our share repurchases starting this quarter, and we now expect to reach our target net leverage of 2.75x by the end of this year.

Now, I'd like to spend a few minutes walking through some recent operational highlights. Nowhere was the growing popularity and improving economics of our content more evident this quarter than at Warner Bros.

In the first quarter of 2014, Warner has picked up right where it left off last year, finishing number one at the domestic box office, and collecting more Academy Awards than all the other major studios combined, led by seven for Gravity, including Best Director for Alfonso Cuarón. Not bad for a movie that also finished with over $700 million at the global box office.

Warner's performance at the box office in the first quarter was a result of its continued development of franchise films with global appeal, including The LEGO Movie, which was the quarter's number one release at the domestic box office, and 300: Rise of an Empire.

Warner is already working on another LEGO Movie for release in 2017. We think that LEGO has the ability to be an evergreen franchise that along with DC Comics and with J.K. Rowling's new series of films, will underpin the economics of our film business for many, many years.

As you may know, our relationship with LEGO also includes important video game and television properties, underscoring our ability to monetize high-quality intellectual property across the company.

So with a strong start to the year, our promising slate of movies for this summer and a great line up of television shows to be announced at the upfront in a couple of weeks, Warner is in position to have another great year in 2014.

HBO also got off to a red-hot start this year with True Detective garnering the largest ever viewership for a freshman series on the HBO network. The success of True Detective means that HBO's current line up includes four of its top five highest rated shows ever. Of course that includes Game of Thrones, which has become a global phenomenon.

Season 4 premiered to HBO's largest audiences since the Sopranos Finale, and Season 3's home video release had the highest first month sales of any HBO show ever in HBO's history. And if anything, Game of Thrones has taught us a vital lesson, decline any wedding invitation in Westeros.

The success of HBO's groundbreaking original storytelling has always been a testament to visionary creators such as the Game of Thrones' team David Benioff and D.B. Weiss, True Detective's Nick Pizzolatto and Silicon Valley's Mike Judge, and the fantastic actors that they attract as well as the strength of HBO's brand and best-in-class marketing.

But I think HBO's record audiences are also a result of its leadership in making its content available on-demand and across all major platforms. We firmly believe that if you have great content, giving consumers control over where, when and on what platform they watch it, will drive increased consumption and value. That's the promise of TV Everywhere, and there is no better example of that than HBO's success with HBO on-demand and HBO GO.

In keeping with the spirit of taking advantage of new platforms to connect with consumers and improve monetization, HBO announced last week that it would be making a selection of its catalog programming available to Amazon Prime Instant Video.

We are hopeful that availability on Prime Instant Video will introduce additional consumers to the great content that HBO produces and will potentially drive sub-additions over time to the HBO network service. And we plan to use additional revenue from the deal to invest even more in HBO's groundbreaking original programming and to further accelerate the development of next generation of HBO GO.

It's that combination of unrivaled content, including the strongest slate of Hollywood movie hits and the use of the latest technology that has helped HBO to become the world's leading premium TV and subscription video-on-demand service. Given the positive subscriber trends, we've seen both in recent years and so far in 2014, we feel great about HBO's ability to drive continued growth for many years to come.

Turner also had a landmark start to the year, bringing the Elite Eight and the Final Four to cable for the first time ever. The NCAA Tournament continues to be a runaway success and its strong linear TV performance was accentuated by more than 40% growth in digital video streams for March Madness Live.

Like HBO GO, March Madness Live is a great example of how TV Everywhere can enhance the consumer experience and the value of our networks through distributors. And the success of the NCAA Tournament helped TBS maintain its number one position in ad supported cable among adults 18 to 49.

Similarly, Adult Swim continues to lead the industry of attracting younger viewers. Once again finishing the first quarter as the number one ad supported cable network in total day for adults 18 to 34. To better take advantage of the growing demand for its distinctive content, we recently expanded Adult Swim to the 8.00 PM hour.

We also have momentum at CNN, which grew delivery in its key demo over 50% in March, again demonstrating that it's the authoritative voice, viewers turn to when news breaks. Just as important, CNN generated nearly 4 billion page views and 275 million video starts in March. That's its biggest month ever for both metrics.

In a world where consumers increasingly look to digital products for their news, CNN has a substantial lead on its cable news peers in cross platform unique users, and actually has the largest number of monthly unique mobile users of any news service domestically, and we're just getting started.

At its upfront, earlier this month, CNN introduced CNNx, which represents a leap forward in interactive merits, and it's a product that CNN is unique positioned to provide. It's available today on your tablet and you'll start seeing it on set top boxes later this year. We think it will be another real point of differentiation for CNN.

Despite these successes and having three of the top 10 cable networks in adults 18 to 49 in the first quarter, we are not satisfied with the recent ratings and advertising performance at some of the Turner network. At truTV for example, we followed a couple of strong years with a significant drop off in performance.

But we have new leadership in place, who just announced the slate of innovative unscripted programs that will start in May with The Carbonaro Effect, and continue through this fall with shows like MOTOR CITY MASTERS, Way Out West and Hair Jacked. We think it's some of the best and most creative programming the network has ever done, and that give us great confidence in truTV and in our ability to materially improve its monetization over time.

We've also had some challenges at TNT. It was the top five cable network in prime time last year and it had some of the most popular originals on basic cable, but it can and will do better. Over the past few years, we didn't take enough creative risk with its programming, and as a result, TNT has lost ground with younger viewers.

We've already started to address that with the new programming that you'll see this summer, including The Last Ship, Murder in the First and Legends. These shows should also help TNT expand its audience with key male demos.

To be clear, these types of changes take time and we won't get to where we want to be in the quarter or two. But we've all seen that network performance tends to move in cycles. And by virtue of its scale and our position as the world's leading producer of high quality television product, TNT has accessed all the resources it needs.

We're confident and we're determined that we will see improvement as the year progresses and that we can drive growth in its audience and its economics over time. At Time Inc., the new management team has made great progress in preparing for success as an independent public company. We are on track to complete the spin in the next month or so, and you'll hear more about their plans as that date approaches.

So in closing, I am really pleased with how we've started 2014. We're making progress on our strategic initiatives across the company. And at the same time, our investments in great storytelling and journalism are paying off, allowing us to produce very attractive financial results. And with the global growth in demand for our content continuing unabated, we think we're in a great position to grow at these kinds of attractive levels for a very long time.

And with that, I'll turn it over to Howard.

Howard Averill

Thanks, Jeff, and good morning. I'll begin by referring to the first slide of our presentation, which is now available on our website. Given that we expect to complete the spin-off of Time Inc. this quarter and our full year outlook excludes Time Inc., I will focus my remarks on our company results prepared on the same basis.

Excluding Time Inc., revenues were up 10% and we had leverage all the way down the income statement with adjusted operating income increasing 12% and adjusted EPS growing 26%. Turner, HBO and Warner Bros. all posted record first quarter adjusted operating income.

So to reiterate, what Jeff said, we're off to a great start in 2014. Adjusted operating income margins expanded 60 basis points, despite a 9% increase in expenses and net expense growth was largely related to content investments at Warner Bros. and Turner, and the consolidation of HBO Asia and HBO Nordic.

SG&A was flat in the quarter and it would have been down, excluding the consolidations, as we continue to focus on funding aggressive investments in programming by limiting growth in other expenses.

We were able to grow adjusted EPS even faster than adjusted operating income, due mostly to our ongoing share repurchase program and improved results at our equity investments, including HBO Latin America. We also had a benefit of almost $40 million from recognition of interest income on a long-standing note receivable that was collected.

During the quarter, we repurchased close to $1 billion in shares, and combined with our dividend we've returned almost $1.6 billion to shareholders year-to-date. We also had a very strong quarter for free cash flow, generating $1.7 billion, nearly 80% increase from last year's first quarter.

And as Jeff mentioned, in light of our strong first quarter and our confidence in the remainder of the year, we've raised our 2014 outlook for adjusted EPS excluding Time Inc. We now expect growth to be in the low-teens. I'll tough more on the details of our outlook throughout the presentation.

Now, turning to the segment highlights. I'll begin at Turner. The revenues and adjusted operating income continued to grow despite rating and FX headwinds.

Subscription revenues grew 7% in the quarter, which included more than 100 basis point drag from FX. Domestic subscription revenue growth was solidly in the high single-digits, a significant acceleration relative to the past couple of years. And that acceleration was the result of rate increases related to Turner's domestic affiliate renewals.

Excluding the impact of FX, international subscription revenue was also up in the high single-digits with largest gains coming from Latin America, which remains our strongest region and where we continue to see healthy subscriber trends. Looking forward, we'll continue to benefits from Turner's domestic affiliate renewals for the remainder of the year.

And as Jeff noted, we anticipate this will be a sustained lift in our subscription revenue growth rate. Based on deals we already have in place, we expect to grow our domestic subscription revenue at low double-digit rate on average through 2018.

Turning to advertising. Revenues increased 5% in the quarter, which was at the lower end of the range we originally expected, and that included the impact of both soft ratings and moderate demand in the scatter market. Of that growth, about 300 basis points was due to the NCAA Tournament, including the benefit from airing two NCAA Elite Eight games.

Domestic advertising increased similarly to the overall result, and that included mid single-digit increase at domestic entertainment, including kids and young adults and a low single-digit growth at our news networks.

Excluding a drag of approximately 400 basis points from FX, international advertising would have been up high single-digits. That reflected solid underlying growth in Latin America and international news.

Looking ahead to the second quarter, scatter pricing is up high single to low double-digits over the upfront, with volume still relatively modest and we expect ratings to remain a drag on our performance.

Also keep in mind that as a result of airing two Final Four games, the NCAA should provide around a 300 basis point benefit in the quarter. Taking all of that into account, we anticipate total advertising to grow in the low single-digits in the second quarter.

Moving on, adjusted operating income grew 3% in the quarter and that included a 9% increase in programming cost, primarily due to the NCAA Tournament and continued investments in original programming across our networks. Consistent with our focus on costs discipline, we limited non-programming expense growth to just 2% in the quarter.

As we look to the remainder of 2014, we anticipate Turner's adjusted operating income growth to accelerate, starting in the second quarter. And despite ongoing investments in sports and original programming, we expect solid margin expansion for the year. So Turner is on pace for another good year in 2014.

Moving onto HBO, where we saw strong growth in both revenues and adjusted operating income. Subscription revenues were up 8% in the quarter with consolidation of HBO Asia and HBO Nordic, contributing around 400 basis points to that growth.

Building on a strong 2013, our domestic subscriber trends remain positive, and similar to the past few quarters, the majority of recent subscriber additions have been non-revenue generating. So while that's a good barometer of consumer demand for HBO, subscriber growth did not have a material impact on our revenue.

Turning to content revenues, which were up 13% in the quarter, and that was primarily due to very strong home video sales of Season 3 of Game of Thrones, which more than offset softness in library product. Looking ahead, we anticipate a significant bump in content revenues in the second quarter due to the Amazon deal announced last week.

As Jeffery noted, HBO intends to invest the majority of proceeds from the transaction back into programming, marketing and technology. So we don't expect to commensurate increase in profits this year.

Adjusted operating income was up 11% in the quarter and margins expanded almost 100 basis points, and that was despite the drag on margins from the international consolidations. Programming expenses increased 8% with 600 basis points of that growth due to the consolidations.

Underneath that, acquired theatrical expenses increased, while programming write-offs decreased. Absent to programming write-offs, original programming expenses would have increased in the mid single-digits.

Across HBO's international properties, first quarter results were equally impressive. Total international revenue, including unconsolidated JVs, was up double-digits and subscriber trends remain strong, especially in Latin America.

Like the rest of the company, HBO remains focused on containing overheads in order to help fund investments in programming and technology. And adjusting for the international consolidations, SG&A was down in the quarter and total non-programming expenses were up just 2%. So HBO started the year with a lot of momentum from both an operating and a financial perspective and it's on track for another year of solid growth.

Turning now to Warner's, which had a record first quarter, growing revenue by 14% and adjusted operating income by more than 40%. Strong theatrical performance was the biggest driver of growth in the quarter led by the box office success of The LEGO Movie and 300: Rise of an Empire, as well as carryover revenue from the latest Hobbit installment and Gravity.

On the TV side, revenue and associated profits grew due to higher initial telecast revenue related to increased production as well as continued growth from international syndication. We also benefited from double-digit gains and SVOD revenue, mainly due to international growth. We continue to see healthy demand for our product from SVOD services and expect contributions from the SVOD distribution channel to increase this year.

Across theatrical and TV, home entertainment revenue was down in the quarter, largely due to the timing of the release of the latest Hobbit installment on home video, which is in the second quarter this year versus the first quarter of last year. Despite that, digital trends remain positive with Warner electronic sell-through up over 20% in the first quarter.

Consumer spending across the broader home video market was also down in the first quarter due to a softer theatrical slate and the timing of Easter. But digital growth was even stronger for the industry with electronic sell-through up 45%.

So on the whole, we remain very encouraged by the ongoing transition to digital. To help drive that transition, Warner continues to champion industry-wide digital ownership initiative like UltraViolet, which now has over 17 million accounts.

Looking ahead, Warner has very difficult theatrical comparison for the rest of the year. Even so, given a strong start theatrically and positive trends in the TV business, Warner is on pace for another record year in 2014.

Now, onto Time Inc. With the new management team is driving significant changes critical to its success, as an independent public company. Revenues increased 1% in the quarter and benefited from the acquisition of American Express Publishing Corporation.

Excluding this, revenues would have decreased 5% with advertising down 7% and subscription flat. Revenues also benefited from one additional issue each of people and time compared to last year. Adjusted operating loss was $94 million and that was primarily a result of $115 million in restructuring charges in the quarter.

To offset challenging revenue trends, the management team has been extremely focused on cost discipline and changing the way Time Inc. operates, with a goal of stabilizing the business and freeing up resources to invest in growth initiatives. And excluding the acquisition and restructuring charges, expenses fell 3% in the quarter.

Looking forward, Time Inc. remains on track with the outlook we provided in February. Excluding restructuring and severance charges, we expect modest declines in full year adjusted operating income in 2014. And that's largely a function of continuing revenue pressure and incremental public company and stock compensation expenses that Time Inc. will incur this year.

As Jeff noted, we remain on track to complete the spin-off of Time Inc. this quarter. And as part of that process, Time Inc. recently issued senior notes and senior commitments for $1.4 billion in debt and a $500 million revolver. That's consistent with our plan for an initial capital structure that includes approximately $1.3 billion in net debt.

We think this will allow sufficient flexibility to both invest in the business and provide direct returns to shareholders, while also optimizing its cost of capital and delivering attractive levered equity returns to investors. So, Time Inc. has made a lot of progress and is well on its way to executing against its goals for the year and successfully making the transition to a standalone public company.

Moving to free cash flow and including Time Inc., which was very strong in the quarter, the big year-over-year improvement is primarily due to the strong growth in adjusted operating income and a favorable swing in working capital.

The improvement in working capital reflects lower participations and production spend due to title mix at Warner Bros. and the timing of sports programming payments at Turner. Cash interest improved due to the receipt of interest income I noted earlier, but given the additional debt we took on late last year, we expect cash interest to increase for the remainder of the year.

The decline in cash taxes was primarily the result of the timing of audit settlements. As with interest expense, our cash taxes are likely to be higher for the full year due to the expiration of certain favorable tax legislation.

Putting that all together, we do not expect free cash flow to grow at this level for the year. Nonetheless, we're off to a great start from a cash perspective and we fully expect to deliver another year of strong free cash flow in 2014.

Now, onto net debt. We ended the first quarter with $16.7 billion of net debt, down versus the end of 2013 due to the very strong free cash flow generation I just noted, and $1.3 billion in proceeds from the sale of our office space in Time Warner Center. Out net leverage ratio was 2.2x as of March 31.

We returned about $1.3 billion to shareholders in the form of dividends and share repurchases during the quarter, and that's consistent with our continued commitment to provide direct returns to shareholders.

As Jeff mentioned, we intend to move to a target net leverage ratio of 2.75x by the end of 2014, which is faster than our initial plan. Our decision to move more quickly to our target leverage is a reflection of both our confidence in the company's outlook and our view that our stock is very attractive at current level.

In light of that, we'll be accelerating our share repurchase program in the coming quarters. By moving more quickly to our target leverage, we will also move back toward a more efficient cash position following significant inflows from the sale of our office space and the Time Inc. spent.

At the same time, we continue to invest aggressively in our businesses. We've already discussed the investments we are making in great contents across our divisions. We're also investing in strategic M&A to improve our competitive position, add new capabilities and accelerate growth, especially outside the U.S.

While we don't need to do M&A, we're always open to opportunities that complement our existing assets and provide risk-adjusted returns that are more attractive than our alternative uses of capital. And already this year we've committed over $700 million to acquire Eyeworks' international television production operations and to fund an additional round of investment in CME.

This combination of investing in our businesses, opportunistic M&A and significant direct return to shareholders is the same balanced approach to capital allocation we've been employing for a number of years now, and we still believe it's the right approach today.

Now, onto the final slide, which shows our outlook for 2014. We had a great first quarter and feel really good about how we are positioned for the rest of this year. That's given us the confidence to raise our full year 2014 outlook to low-teens adjusted EPS growth.

And keep in mind, that despite our expectation of a negative swing in inter-company eliminations and a higher effective tax rate, between the two, we still anticipate a negative year-over-year impact of approximately $0.15 to $0.20 to adjusted EPS for the year.

Looking more closely at the second quarter, we have somewhat more challenging comparison against what was a very strong quarter a year ago. Even so we anticipate solid growth in both adjusted operating income and adjusted EPS. We're doing all this while investing aggressively for future growth. And as Jeff mentioned, we think we can continue to grow adjusted EPS at attractive levels for the foreseeable future.

With that, I'll turn it back to Mike to start the Q&A.

Michael Kopelman

Thanks, Howard. Joe, can you please open up the lines for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) And it looks like our first question here comes from Mr. Doug Mitchelson from Deutsche Bank.

Meghan Durkin - Deutsche Bank

This is actually Meghan Durkin standing in for Doug. So you talked for a couple of times about the softness in the scatter market. I am curious to hear how the tone is in the sports advertising market and how that compares to the entertainment ad market? And then I have a follow-up.

Jeffery Bewkes

Well, scatter has been relatively steady, but within the sports side it tends to be a little bit softer, we have seen that. And I think what's happened is we are seeing some pull from World Cup coming out of the marketplace just like we saw in the first quarter with the Olympics. So it's a little bit softer than we had anticipated.

Meghan Durkin - Deutsche Bank

The entertainment is just going along similar to how it's been, kind of a little soft?

Jeffery Bewkes

Well, I would say that, if I just stated generally speaking that, we're not seeing quite as much volume. On the entertainment side, we're seeing more of a drag from the ratings side, more so than just the volumes, it's more on -- there's a drag from the ratings.

Meghan Durkin - Deutsche Bank

And then on a completely different topic. I was interested to hear how Jeff would respond to Jeff Katzenberg's recent comments when he was quoted, as saying that movies are not a growth business, but television is.

Jeffery Bewkes

Well, maybe it's for him. He doesn't make very many movies. We've been doing fine in movies. And let's just put some context on. So 2013 for Warner Bros was a record year domestically. We had a very strong slate. We were number one in the box office. I think 2014 was off to a strong start, it's up about 7% in the first quarter.

And we also see continued growth overseas, which has become a bigger driver of our business. International demand on theatrical side is particularly strong for the kinds of the best films that we produce. And we already talked in our -- what we've said already about the films that we had including LEGO and 300 this first quarter, but if you go to the rest of the year, we do have some tough comparisons given how strong we were last year.

But we had a great year last year. For the rest of '14 the slate looks good. We have Godzilla coming, Edge of Tomorrow and the final installment of The Hobbit. So we think we're going to have a record year in 2014. We do think we can grow the business over time and we've been doing it. So we don't agree with that view. And I think it maybe -- the business at their end is quite different.

Operator

Our next question will come from Mr. Ben Swinburne from Morgan Stanley.

Ben Swinburne - Morgan Stanley

Jeff, the extension of your affiliate revenue growth trajectory, the double-digit CAGR into 2018. Trying to get a sense for sort of how much is fully baked already? You have talked about the CAGR through '16, and you had seven of the top 10 deals done. Can you give us some context on the '18 outlook, why did you decide to reveal that to us today and sort of what's the new distribution landscape look like in your decision to go there?

And obviously that lifts the growth of the company and the earnings power of the company over multiple years. Just want to get a little more color on that. And on HBO, the subscriber trends are great. What has to happen to translate the subscriber growth to better revenue growth in the U.S.?

Jeffery Bewkes

Let's do the Turner first. The reason we just wanted to go farther out, we've had the deals that we've been mentioning in place for a while. We had given guidance out three years, we thought that was enough in terms of how our affiliate sales were going. We kept getting questions about our growth after '16, since we have pretty good visibility in it, we thought, we ought to say, since we have deals that go beyond '16, we should provide a little more clarity.

The rate increases we have, we're seeing not just through '16, but also through '18, because the outlook for the three years through '16 hasn't changed. It's still the attractive ramp that we told you about before, but it just continues for a couple of more years. We thought we ought to say that. So that's the Turner stock.

In terms of HBO, there's really strong programming or strong critics and ratings performance, there is strong take-up of GO, there is strong take up of international subscriber growth and there is a pretty robust steady trend in domestic, which I think is where your question is focused. Basically, there is two ways to improve the mix in terms of how we view the deals to provide incentives for affiliate performance.

First, we can focus more resources working with our underperforming affiliates. And that's a combination of incentives and other actions to get out of those markets, the natural HBO subscriber penetration that HBO really earns in terms of its program. And if we're not going to get it through the affiliates that are underperforming, we are going to find ways to make that happen.

Second, we look to sharing the upside of our best performing affiliate and those are the ones who have been really setting a clear benchmark for where HBO can go. And so when we take those deal structures and fit into the more HBO participation in the upside that takes a little bit of time as the renewals come in.

And then finally, if you add on top of that some of the innovations, that certain affiliates have come up with, which are lower-priced packages that you can put HBO in, some broadband-only efforts by facility-based distributors. These are all pretty promising. And I'm not going to give more specifics, but what we have, which is the fundamental underlying good fact is that the viewer's love the HBO program.

The rights and ability of HBO GO to provide it in a very great exciting way is increasing, and the upside that we get from --so that's producing an ability on our part to invest a lot more in programming. We're going to use most of the proceeds from the Amazon transaction to increase our programming going forward. So it's adding up to a very nice platform for future growth, for acceleration of HBO, revenue and earnings growth.

Operator

Our next question comes from Mr. Michael Nathanson from MoffettNathanson.

Michael Nathanson - MoffettNathanson

I have two, one is for Howard, and one is for Jeff. Howard, first on SVOD. You guys have been pretty transparent about SVOD revenues over the past couple of years. I know you won't call it Amazon particularly, but can you give us a sense in '14, how big will SVOD get for the company when you're looking at the entire landscape of SVOD deals? Would you be getting over $500 million or so for '14?

And then for Jeff, I wondered what the move to Amazon represents in terms of what you see for HBO GO in terms of usage trends? Are you seeing pretty much the usage trend is focused on newer product, and therefore the catalog has been pretty much tapped out for HBO GO? And you think there's a chance that, find people who have never seen it before? So what do you have the research on usage by catalog versus new?

Howard Averill

Michael, first on SVOD. So the starting point, we generated about $375 million last year and that was up slightly from 2012 and we think that's near the top of our competitive set. By the way, it doesn't include the revenue that The CW network directly receives from SVOD, which is pretty significant. So we're going to be able to grow that again in 2014. And in terms of where the growth is coming from, a lot of that is coming from international territories

But again, to keep the overall in the perspective, it is a small portion of our overall revenue. It's about 10% of our TV licensing revenue last year and it's only about 3% of film and TV revenue. More importantly, it's probably the fact that it's clear that there is consumer demand for this content in an on-demand environment and that's particularly true for past seasons of serialized shows. So I'm pretty confident that we're going to be able to continue to monetize that content moving forward.

Jeffery Bewkes

So you were asking about basically the usage in on-demand of HBO viewers between different categories of programming; older, newer and movie series et cetera? Is that what you asked?

Michael Nathanson - MoffettNathanson

Right.

Jeffery Bewkes

Well, so let me try to give me that. That gives me a lot of good news, and which good news outweighs this other good news, so you have all read in the press that the fairly impressive numbers for HBO VOD usage on current episodes of Game of Thrones or True Detective and so on. I mean there's a tremendous usage going on of all current and new series.

There is also, which has not gotten enough attention, a fairly strong usage both in linear programming and in some on-demand usage of the movie slate, let's not forget the movie slate at HBO, it's got by far the strongest line-up of current movie releases. What we're seeing though, when you go and you look at the interest, that viewers have all around the world, included in your question, a lot of people didn't see some of the classic hits at HBO.

And so when you make them available, whether it's the Amazon Prime deal where you can see tremendous shows like Sopranos, but most Amazon Prime subs don't have HBO, so it's a great opportunity to familiarize them with HBO programming, get them interested as prospects for our HBO sub, the affiliates that sell HBO.

So it's a tremendous marketing thing for HBO subscribers over time, in addition to being a very fertile place for people to buy HBO programming, so most of this you do relativity, most of that huge viewing goes to current series. But I think we're going to see some fairly strong viewing and sampling of the HBO classics and the library shows that are coming on Amazon.

Howard Averill

Michael, just to follow-up on the financials of the Amazon deal. We're not going to disclose the specifics, but it is a multi-year deal and we're going to be recognizing revenue reasonably evenly over all years of the contract. So in 2014, we're going to see a pretty -- we're going to recognize pretty much all the revenue related to the transaction in the second quarter.

So when you see a pretty sizeable bump, there's going to be a benefit to HBO season in the second quarter and you're going to see similar lumpy recognition in future years. But in terms of the overall profits, we intend to invest most of those proceeds back into the business including spending on additional programming, marketing and technology spend. So the impact on 2014 is not significant.

Jeffery Bewkes

So the move up, which we're telling you about, the strong year we are having in '14 and the increase in guidance is mostly core trends at Time Warner. It's not in the large part coming out of the Amazon, that's a little part of it, but we're going to invest most of that part.

Operator

Our next question comes from Mr. David Bank from RBC Capital Markets.

David Bank - RBC Capital Markets

Kind of a follow-up on something. I think given your commentary around ratings, it definitely sounds like the softness, x the NCAAs over the past couple of quarters have clearly been driven by content cyclicality as opposed to secular issues. But I wanted to try and drill down a little further, because I think this has been something of a hot topic recently for investors, especially around the upfront.

So I was wondering if you take those sort of core low single-digit growth numbers x the impact of the NCAAs shifting, I mean you have a really enormous portfolio and there are different dayparts, different demo targets, really hard I think for us to track ratings on the outside in a specific way.

Can you give us kind of an aggregate revenue weighted basis GRP decline, so that we could -- how much of this is about pricing versus by impressions, right? I don't mean like scatter pricing over the upfront, but actual kind of blended pricing increases. And then I guess the second part of that is, Jeff, specifically, could you kind of comment on your thoughts right now about the secular strength of national cable advertising dollars versus some of the digital guys fighting for wallet share.

Jeffery Bewkes

I sympathize with that question. You're trying to pull a pattern out.

David Bank - RBC Capital Markets

Thank you for your sympathy.

Jeffery Bewkes

Yes, sometimes when we're talking amongst ourselves, we say, well, let me try to collect your thoughts sort of or my thoughts. So I would simplify, so basically it's about rate, which Howard try to get at and we have stronger and weaker ratings performance. We think that if you really get into under the performance that we're seeing, which we think, it's essentially ratings, a little bit of market, but it's mostly ratings.

And on that issue and it's like anything, follow the money, the big money is TBS, TNT. TNT has been softer than it should have been as we've talked about. Let's get into that from an investment point of view. The way we look at it, we've got the two strongest big reach networks in cable, TBS, TNT and a lot of other networks that are very strong. None of them are flank or weak networks and we need to refresh the original programming and we've got a budget that we talked to you about, that's on our trend line that gives us plenty of money to move towards younger-skewing programming, edgier programming that will fit both brands.

And to the question of how should we view the likelihood of our succeeding, let's remind ourselves that Warner Bros. is Hollywood's leading TV studio; HBO's been more successful with its original program than any other network; Turners had some great success in broad reach, somewhat to old-skewing originals, which we're now going to focus very intently on doing younger ones. There's nothing else to say about Time Warner across those divisions. We know how to create successful TV series. And since Turner has had its share of hits, we're now moving the target towards younger male and female-skewing stuff.

And we have new management that's going to actively pursue this, we think that we'll be able to do this and come up with something -- look, we got to do it and not be complacent, which I'm not saying I tend to be complacent about it, but we're very excited about it and we think that we have all the pieces to have very strong programming strength there over time.

It's going to take a little while, but let's keep a couple of rating things in perspective, and not over focused on current softness at Turner, which is that the Turner domestic advertising is less than 15% of total company revenue. Now, as it turns around that will be a nice lift for us. But just keep that in mind. TBS is still number one in 18 to 49 and 18 to 34 in primetime in the first quarter. Adult Swim remains number one in 18 to 34 and 18 to 49 in total there.

Now, TNT which had the softest was the top five network in '13 and now it's slipped off a little. And CNN is showing great momentum right now. But if you go back to basically TBS and TNT, the answer to your question is the ratings are softer than they are going to be and unless we just can't figure out how to do it, which would be I guess the only downside, this is all going to get a lot better and turn into a fairly strong mid-term and out earnings story at Turner.

Howard Averill

So David, let me just give you a little bit more context about the current trends and it is a combination of factors, so looking at the second quarter for example, scatter pricing for Entertainment Networks is up, it's still up high-single to low double-digits over the upfront. But again, as I mentioned, we're just not seeing much volume overall.

And also just generally speaking to it, but also more for sports, so as I mentioned we saw demand siphoned off in the first quarter and in the second quarter we are seeing it with World Cup, and again, the ratings tend to be a little bit of a drag. Further than that, on the international side, we're also seeing a slight drag from FX and the World Cup.

But going in the other direction we do expect about 300 basis points benefit from NCAA in the second quarter. So as I said in my prepared remarks, that all translates into low single-digit growth in advertising. But from where we sit today that would probably be even on the lower-end of low single-digits. So that gives you a little more color.

Jeffery Bewkes

For that quarter.

Howard Averill

For the quarter, right.

Jeffery Bewkes

Yeah.

Operator

Our next question here comes from Mr. Anthony DiClemente from Nomura.

Anthony DiClemente - Nomura Securities

I have two questions for either Howard or Jeff. You guys mentioned that the Amazon revenue would be recognized evenly over the horizon of the contract. You also said most of this year's revenue will be reinvested in programming and other expenses. So my question is should we think about this year as a one-time step-up in investment in HBO or do you think that the incremental margin on that kind of evenly paced Amazon revenue will expand in 2015?

And then my second question would be in terms of the new guidance or the extension of the double-digit domestic affiliate fee growth, how should we think about how international plays into it over the course of time over that extended five-year period of time? Do you think that international cable will be accretive to that growth rate on the domestic side or not?

Jeffery Bewkes

Let me do the first one and then may ask you about the second. On the HBO, Amazon, what percent of the revenue lift do we decide to take into earnings in a given year? So we said we're going to invest most of it in programming and technical capacity for GO that's because it's expanding so well.

Probably our margin on it would go up over the next few years, but we may decide to invest it as we go in more programming that we find pretty attractive, and that programming, not just supporting the service, subscriber revenue and profit domestically and overseas, those things when we have them and we like them, like with the Game of Thrones, we haven't even sold it yet.

They turn into tremendous sources of content revenue and profit with very large contribution, once you get past hit status, so depending on what we've got, we'll decide later whether we take more of it into earnings or whether we just use it to expand the future earnings basically.

Howard Averill

What was the other question? Can you repeat your second?

Jeffery Bewkes

Could you do it again? We didn't understand.

Anthony DiClemente - Nomura Securities

The other question is as we model Turner going forward, you've got domestic and international, and you guys are providing guidance on the domestic side, and we're just trying to figure out what that equates to on a global basis. So over the next five years, do you expect the international piece to be accretive or dilutive to your double-digit affiliate fee guidance on the domestic side? Is that clear?

Jeffery Bewkes

You are trying to find out if the international is double-digit on its own base, is that what you're saying?

Anthony DiClemente - Nomura Securities

Yes, that'd be great to know.

Jeffery Bewkes

We're trying to figure out if we have thought of it that way. The international trends are really strong. Does anybody have the exact percentage growth of international?

Howard Averill

Ends up high single-digits in the first quarter.

Jeffery Bewkes

It's probably better.

Howard Averill

Well, we think it's going to be that, I mean, there has been a drag on FX particularly this year, but it is growing from an organic standpoint.

Anthony DiClemente - Nomura Securities

Maybe another way to ask the question would be you have these deals in place on the domestic side that are long-term and multi-year. Do you have that kind of visibility internationally that would give you the conviction to put forth kind of a similar type of affiliate guidance for international or not?

Jeffery Bewkes

International's is not one country, it's many. So there's no simple answer, because each territory is different. The sub-growth is different. In Latin America, which is our biggest region, the biggest driver is not the price increase in the affiliates deal, many of which we have going on and there is some decent price increases, most of it is volume increases that are pretty significant. And you can just look at the numbers we have been posting and see extremely strong, secular sub-growth all across Latin America, our biggest region.

You then go into our other regions, Eastern Europe, the Rim of Asia, we're launching new networks, such as HBO in the Netherlands and the Nordic regions and India. CNN in Indonesia, truTV in Brazil, TNT in Chile and some of the other expansion of our South America sourced channels.

So generally we don't see that much of -- more of the increase overseas is in sub-growth than in pricing, because it is similar to the stage of development that the international markets are in. What's good about that is that the international trends are set. And if you don't have FX going against you, you would probably be in a pretty steady double-digit neighborhood. And it's hard to say what the FX trends are going to be.

Operator

Our next question here comes from Vasily Karasyov from Sterne, Agee.

Vasily Karasyov - Sterne, Agee

Jeff, I wanted to follow-up on your comments on the Turner and upcoming turnaround hopefully in ratings and programming. You said that some of the originals ended up skewing-older than -- was that by design or did it just end up doing that? And I wonder if you could tell us, where you think -- I am sure you have very sophisticated research, where the viewers' went and where, assuming the cable total viewership is stable, whom should you take share from with the new programming at Turner?

Jeffery Bewkes

Yes. So I think the first part of your question is the reason, some of our Turner original, particularly on TNT skewed older, is it because we aimed for that and hit the target. And the answer is yes. So that actually gives us a fair amount of confidence that when we move the sighting of what we're aiming at, we'll hit that target too.

The reason we were doing the former aim at big general entertainment audiences is that is come-off the very successful Turner strategy of being the network -- the broadcast network replacement. That was working great for the advertisers and audiences. There were shows like The Closer, Rizzoli & Isles, which have the biggest audiences in cable right next to a broadcast series

But what's happened I think as we all know is that the younger viewership has become more important and the advertisement interest in more younger skewing, a little edgier programming than what they wanted to buy a couple of years ago has become pretty pronounced.

Some of that is probably because there have been some very good series that showed up on some basic networks that were like that, Breaking Bad is a good example. And some of it is because everyone has got a little change in their view advertising included, the viewers too, that came out of subscription via these shows that are serialized and edgier. And so basically the interest of the audience and the growth of the younger audience has meant back the better target and that's where we'll be.

Vasily Karasyov - Sterne, Agee

And would that also translate into higher CPM hopefully?

Jeffery Bewkes

Yes. More ratings, higher CPMs, more money.

Operator

Our last question here will come from Mr. Michael Morris from Guggenheim.

Michael Morris - Guggenheim

Two questions, one, for Jeff. Disney and DISH recently reached a deal that allows them to provide a personal subscription service via broadband, and it requires more participation. So my question is, have you considered that? Are you discussing the topic with DISH and what would it take for you to get involved or participate in a service like that?

And then Howard, just on return of capital, clearly great cash flow and return of capital is primarily focused on the share repurchases. Can you talk a little bit about the thought process of continuing with repurchases versus dividends, just given how strong and stable and growing your affiliate streams are, could support higher dividend growth story?

Jeffery Bewkes

Let me start on the DISH question. So DISH, Sony, Verizon are all expressing interest in virtual MVPDs. There is a lot of discussion about this. Of course, we're talking with all of them as we have been, and are certainly open to opportunities to grow our business. We're not philosophically opposed to that kind of structure, but we have to believe it will be additive and sustainable. And so there are a fair number of questions in terms of the ad model, the quality of service over whichever broadband method they are thinking about and how this would impact investment in the plan that we all need to develop high quality TV.

What you asked about I think specifically, which is the DISH-Disney arrangement could be interesting for us. And it's not so different than the Comcast innovation, selling HBO on a light weight TV package. So, yes, we're talking to DISH about whether there is some applicability of that for us.

It could allow them and other distributors to target a group of consumers, but otherwise might not subscribe to multichannel TV. And to the extent that that is a good entree into the ecosystem for younger consumers, but then either because it serves them well and does not cannibalize what they would otherwise do as a video subscriber or leaves them to become bigger package video subscribers, that's good for everybody. So we are exploring that.

Howard Averill

Michael, on dividend versus buyback, obviously, we think both should play a role in our effort to try to get returns. But it's important to note that we have the highest payout and the highest dividend yield of our peer group. We announced the 10% increase in our dividend back in February, at the same time as we mentioned early, we think the stock is attractive, so we also find repurchasing shares to be a good vehicle for additional returns to shareholders. And this is all really consistent with what we've done in the past few years. And the clock is really not changing. So there is no reason to expect that we're going to deviate from that formula.

Michael Kopelman

Thanks everybody for joining us today. As always we're here for any additional questions. Have a great day.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.

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