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Time Warner (NYSE:TWX)

Q1 2011 Earnings Call

May 04, 2011 10:30 am ET

Executives

John Martin - Chierf Administrative Officer, Chief Financial Officer and Executive Vice President

Jeffrey Bewkes - Chairman and Chief Executive Officer

Douglas Shapiro - Head of Investor Relations

Analysts

Jessica Cohen - BofA Merrill Lynch

Anthony Wible - Janney Montgomery Scott LLC

Spencer Wang - Crédit Suisse AG

Benjamin Swinburne - Morgan Stanley

Richard Greenfield - BTIG, LLC

Michael Nathanson - Nomura Securities Co. Ltd.

David Miller - Caris & Company

Douglas Mitchelson - Deutsche Bank AG

John Janedis - UBS Investment Bank

Operator

Good day, ladies and gentlemen, and welcome to the Time Warner First Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Doug Shapiro, SVP Investor Relations. Please proceed.

Douglas Shapiro

Well, thanks a lot, and good morning, everyone. This morning, we issued 2 press releases: One, detailing our results for the first quarter, and the other reaffirming our 2011 full year business outlook.

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 measures to the most directly comparable GAAP measures are included in our earnings release and trending schedules. These reconciliations are available on our website at timewarner.com/investors. Reconciliations of our expected future financial performance are also included in the business outlook release that's on our site.

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, and with that, I'll turn the call over the Jeff.

Jeffrey Bewkes

Thanks, Doug, and thanks for listening in this morning. I'm very pleased with how we started off the year. We posted strong metrics this quarter including almost 20% revenue growth at our Networks segment. And while we knew coming in that we faced tough profit comparisons this quarter, our results came in right where we expected, putting us firmly on track to achieve our outlook for the full year.

We're also making a lot of progress toward our longer-term strategic objectives. In particular, our efforts to allow consumers to buy our content once and then access it on whatever device they want, wherever and whenever they want, a set of initiatives that we call Content Everywhere, continue to gather momentum.

John will talk about our financial results in detail in a few minutes. But first, I'd like to highlight some of the key operational and strategic milestones that we have achieved over the past few months. And I'll start with Turner, where our investment in must-see sports is really paying off.

Of course, the big story this quarter was our NCAA coverage. It was a huge success commercially and creatively and a big boost for the TBS, TNT and truTV brands. Our collaboration with CBS worked even better than we'd anticipated in every way: ratings, financial performance, quality of the coverage and integration of our sales efforts. It was the most watched tournament since 2005, and traffic for March Madness On Demand was up over 60%. We also surpassed our expectations for ad sales, which powered Turner to over 30% ad revenue growth in the quarter.

Our investment in sports is also paying off with the NBA. The 2010-2011 regular season was the most watched in Turner's 27 years of airing the NBA, and it was up more than 40% over last year. That momentum has continued into the playoffs, making TNT the #1 network on basic cable in April and, on some nights, making TNT the #1 network on all of television.

CNN's performance this quarter was a testament to the critical role it plays in America and throughout the world. In the midst of the catastrophe in Japan and unrest in the Middle East, CNN’s prime time ratings were up more than 30% during the quarter while both of its cable news competitors saw declines. This shows that when news breaks, viewers seek out the breadth of coverage, the exceptional journalism and the trusted brand that only CNN offers. It also shows why CNN is always indispensable to its affiliates even if ratings sometimes fluctuate quarter-to-quarter.

You're probably curious to get our view on the upcoming upfront. I won't be too specific. But with the current premiums in the scatter market, very low levels of cancellations and supply constraints at most of the broadcast networks, all the indicators are very positive. The combination of our strong brands, high-quality programming and talented sales force makes us confident that our pricing will again be near the top end of the industry range across broadcast and Cable. At HBO, our investments in high-quality content are also paying off. Last month, we debuted Game of Thrones to tremendous critical acclaim, and the premier has already attracted 8 million viewers. When added to our roster of other tent-pole shows like True Blood and Boardwalk Empire, HBO now has the strongest slate of programming in its history. Just as this week, we also launched HBO GO on mobile devices including the iPad, iPhone and Android smartphones. Our iPad app is getting rave reviews from the consumers who are using it, and it was the most downloaded free iPad app in iTunes this weekend.

HBO GO is the first fully realized example of what TV Everywhere can be. And to those of you who've seen it, you know that it represents a quantum leap in the consumer value of subscribing to HBO. Besides all the benefits it provides to HBO and to HBO subscribers, we think it could also substantially increase consumer awareness of the TV Everywhere concept and accelerate momentum for the initiative across the industry.

Over the course of the year, we intend to steadily introduce new features including some that HBO can uniquely provide and expand availability to additional tablets and connected devices. HBO GO is now available through almost all of our major distributors, reaching about 80% of our subscriber base.

Time Warner Cable and Cablevision are the main exceptions. We're optimistic that these distributors will also realize the benefits of providing their highest revenue subscribers all this additional value at no extra cost.

Turning to our film and TV production businesses. Warner Bros. had a relatively light release late this quarter, but we're optimistic about the schedule for the rest of the year, which includes The Hangover Part I, Green Lantern, the eagerly anticipated finale of the Harry Potter franchise, Happy Feet 2 and Sherlock Holmes 2.

We're also extremely well positioned at Warner Bros TV. As you know, we have a great syndication pipeline this year, most notably headlined by The Big Bang Theory. And although it's often overlooked, keep in mind that the strong advertising environment benefits Warner Bros. too. For many of our first on-and-off net syndicated shows, Warner makes up a big portion of our revenue. So while it's too early to talk about our pickups this year, we're feeling optimistic as we head into the broadcast upfronts in the next couple of weeks, both in terms of our powerful lineup of returning shows and in terms of new pilots.

With our strong film slate, the momentum in our TV business and several promising games, we continue to expect Warner will post record profits this year.

I also want to talk for a moment about the important progress we've made toward our key home video digital initiatives over the last few months. As home video transactions continue to transition to digital, we have 2 main goals. First, we want to advantage our most profitable distribution channels; and second, we're working hard to make digital ownership more compelling for consumers. Toward these ends, we became the first studio to make it possible to rent movies through Facebook. And last week, we launched our test of premium VOD called Home Premier by offering the movie, Hall Pass through DirecTV.

Similar to what we've done with other new windows, over the next few months, we'll expand the test to other titles and other distributors and then evaluate the impact.

This week, we also agreed to acquire Flixster, a social network for movie fans. We'll use the Flixster brand and platform to launch several initiatives that aim to dramatically improve the consumer proposition of owning digital movies, and we'll do that in a studio-agnostic way that should benefit the whole industry. We will share more details in time. But in short order, we plan to expand the functionality of Flixster to allow consumers to organize and access their digital movie collections on whatever device they like as well as buy and rent movies.

Finally at Time Inc. During the quarter, we remain focused on outperforming the industry and maintaining the right cost structure. Like our other businesses, we also focused on giving consumers access to our content on more devices. We launched SI All Access, which enables Sports Illustrated readers to pay one price to get the print edition, as well as a digital edition and to have it accessible online or on Android tablets and smartphones. And we just reached agreement with Apple to enable our print subscribers to access the iPad versions of Time, Sports Illustrated and FORTUNE at no extra cost.

Before I hand it off to John, one final note. As you probably noticed, this quarter, we bought back about $1 billion of our stock. That's double the quarterly pace of last year, and it represents about 2.5% of our equity base in just one quarter. This step reflects our commitment to continue to enhance stockholder returns and our confidence in the value of our stock, our competitive position and our growth prospects.

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

John Martin

Thanks, Jeff, and good morning. During my remarks I'll be referring to a presentation that is now available on our website.

So let me begin with the first slide, which shows the highlights for the quarter. Last quarter, I talked about our plans to be even more aggressive this year, pursuing our goals of investment, growth and returns, and I think we're off to a great start this year.

Heading into the year, we knew as Jeff said, that the first quarter would be our most challenged from a profit growth perspective. This was due to the timing of programming investments, particularly in the NCAA Tournament and the timing of our film slate, which is heavily weighted towards the second half of the year. Nevertheless, we are very pleased with our strong revenue growth in the quarter, and that was helped by the great performance of the NCAA, which surpassed our expectations and was a major driver of advertising growth.

And while adjusted operating income was down year-over-year, it came in pretty much as we expected, and we firmly remain on track to meet our financial objectives for the year. And this morning, we reaffirmed our outlook for low-teens growth in adjusted EPS in 2011. We aim to do that while investing even more in our businesses and returning even more capital to our shareholders.

During the quarter, as Jeff said, we repurchased about $1 billion of our shares, and we paid $260 million in dividends. That marks a significant acceleration from our previous pace of direct returns and underscores our confidence in the fundamentals of our businesses and their cash generation capabilities.

Moving over to the next slide, which shows consolidated first quarter financial highlights. Revenues were up 6% or more than $350 million year-over-year, and that was led by robust growth in both Subscription and Advertising revenues. Content revenues were down year-over-year, and that was due primarily to the tough comps at the studio.

Overall operating expenses grew over 10%, causing adjusted operating income to decline by 10% year-over-year. This quarter, the programming production and marketing expenses were up a lot, and much of that was due to the costs of the NCAA Tournament. Over the remainder of the year, we expect that these expenses should grow in the mid-single digits. So margin trends should improve as the year progresses.

In general, we're continuing our efforts to fund investment in high-quality content and other revenue-generating areas by reallocating capital away from overhead. That was evident again this quarter. Beyond programming production and marketing as well as acquisitions, our expenses grew only in the low-single digits year-over-year.

Continuing to move down the P&L. Adjusted EPS declined 5% in the quarter. That was a smaller decline as compared to adjusted operating income, and that's because of our ongoing share repurchase program.

Turning now to our segment highlights, and let's begin at the Networks division, where we had very strong revenue growth at both Turner and HBO. Advertising revenues were up 31%. This was driven largely by both the NCAA coverage on our networks and the generally strong domestic pricing environment. Our domestic entertainment networks, which includes kids and young adults, grew advertising over 30% in the quarter. Domestic news was up in the high single digits, and that was helped by the improved audience delivery at CNN.

International Advertising revenue grew over 50% in the quarter, and growth here was helped by some transactions we've done in the past year. And if you look through those, Advertising revenues were up single digits.

Growth was much stronger than that in our European and Latin American entertainment businesses, which were both up strong double digits on an organic basis. But Asia and International News were negatively impacted by the events in the Middle East and Japan. And as a result of that, they were both down in the quarter.

So far in the second quarter, domestic scatter pricing remains robust, up 20% to 30% over the upfront, and cancellations remain low. We obviously won't get the same magnitude of lift in the second quarter from the NCAA Tournament. But we still expect very, very healthy year-over-year growth. And as Jeff mentioned, we feel extremely well positioned heading into the upfront.

Subscription revenue growth remained really terrific in the first quarter, up 9%. That reflects consistent strong growth trends domestically as well as continued expansion in growth internationally. Moving on, content revenues were up almost 50%, and that was led by the strong demand for HBO's original programming, including The Pacific, Sex and the City and Boardwalk Empire.

Adjusted operating income was up 2% in the quarter as the Networks grew. There were 2 reasons why year-over-year growth was so modest during the quarter. The first obviously is the NCAA Tournament, where we recognized the significant majority of the costs for the year during the first quarter when the tournament was aired. Most of the remaining costs will be recognized in the second quarter, and beyond that, non-NCAA-related programming expenses also grew at a higher rate in the first quarter as compared to what we expect for the full year, but that was really due just to timing.

So before I move on here, let me just quickly pause and give you an update on HBO subscriber counts. We said coming into the year that we expected the U.S. subscriber count to stabilize this year, and I'm happy to report that that's exactly what we've seen so far this year. So we feel pretty good about that.

Let me turn now to film on the next slide. And as Jeff said this is a very light quarter for us. And again, we knew coming into the quarter that both revenue and adjusted operating income would be down significantly year-over-year. This was due to the tough comparisons in both theatrical and home video and a 2011 release slate that is more weighted towards later quarters.

Last year's first quarter, for example, benefited from the strong theatrical performances of Sherlock Holmes and The Blind Side, and we just didn't have any comparable titles this year. The Blind Side was also particularly strong on home video for us. That comparison, along with significantly fewer releases was the largest factor in the 21% decline in home video revenue in the quarter.

On a more positive note, the performance of our television product was very strong in the quarter, and we have really been pleased with the initial home video release sales of Harry Potter and the Deathly Hallows: Part 1, which was released last month. This underscores the continued strong demand in home entertainment for our event films.

Looking ahead, we continue to anticipate record film profits in 2011. Our release slate starts to pick up at the second quarter with the theatrical releases of The Hangover II and the Green Lantern. In addition to the Harry Potter home video release, we have a great games lineup with Mortal Kombat 9 and LEGO Pirates of the Caribbean. That momentum should continue as the year progresses with the actual releases like the final Harry Potter and Happy Feet 2 as well as the syndication sale of Big Bang Theory. So we feel very good about the year here.

Moving over to Publishing. Advertising revenues were essentially flat in the quarter, but the reported growth rate here was affected by the transfer of management of SI.com and Golf.com to Turner and the divestiture of certain titles at IPC. Excluding these 2 items, overall Advertising revenues were up 4% in the quarter, and digital Advertising revenues were up double digits. Looking ahead to Q2, we anticipate underlying domestic advertising trends to remain positive.

Turning over to subscription revenues for a moment, the majority of the decline in the first quarter was in our International business, which was impacted by the divestitures at IPC that I just mentioned.

Domestic subscription revenue was also somewhat lower, however, due partly to continued pressure at newsstands. But we are seeing subscription fundamentals begin to stabilize. And as the year progresses, we expect to see an improvement in year-over-year revenue trends, particularly in the second half of the year. That reflects both favorable trends in renewals as well as the ramp up of new retail partnerships.

Operating income at Time Inc. was up 26%, with margins up 160 basis points. This is the sixth consecutive quarter of year-over-year margin improvement at Time Inc.

Total expenses here were down nearly $15 million over last year as we continue to remain focused on cost management. For the year, we continue to expect overall expenses at Publishing to be relatively flat as compared to 2010.

Moving to the next slide, which contains our 2011 outlook. Let me just pause for a second and talk about our expectations for the second quarter. As I mentioned before, coming into the year, we anticipated that the first quarter would be our most challenged from a profit growth rate perspective, and we absolutely expect profits to grow in the second quarter year-over-year. But keep in mind that we still expect to incur modest losses on the NCAA contract. And at our Film division, we expect P&A spending to be higher than the prior year, and we also expect to incur restructuring costs in the neighborhood of $25 million to $30 million.

So for Q2, we expect that year-over-year growth in adjusted operating income will clearly be considerably better than the first quarter but will lag what we will see in each of the third and fourth quarters of this year. Growth should accelerate significantly in the second half as we benefit from an improving film slate, a strong syndication lineup and lower programming expense growth at the networks.

Turning to the next slide, which looks at our free cash flow. We generated approximately $700 million of free cash in the quarter. That's a good start for the year but somewhat below the year ago levels. And the decline year-over-year was due mainly to the significant increase in working capital, and that was primarily attributable to the timing of TV-syndication receipts and lower home video sales during the 2010 holiday season. Interest payments, cash taxes and CapEx were also somewhat higher.

Looking at the final slide, which takes a look at our net debt. We ended the quarter with $13.5 billion in net debt, that's up about $650 million compared to the end of last year, and that's due to the increased pace of direct returns to shareholders. We returned, as I mentioned, over $1.2 billion during the quarter including $1 billion in share repurchases. So our total direct returns were up 60% over the first quarter a year ago.

During the quarter, we also spent about $160 million on M&A activity, and that related primarily to our acquisition of additional interest in HBO's operations in Latin America as well as increased ownership interest in CME. We saw this as a nice opportunity to further increase our exposure to businesses and regions where we see significant growth opportunities in the coming years. These acquisitions are consistent with our focus on international networks, which we expect to be one of the biggest growth drivers for the company over the next several years.

As a result of these actions, our leverage ratio is now almost 2.2x. That's up from around 2x at year end. That's consistent with our plans to move closer to our target leverage of about 2.5x by the year end this year in an effort to better optimize our capital structure.

One last thing to note. Last month, we issued about $2 billion of public debt. We were able to access the markets at very attractive rates while further extending the average length of our debt maturities. As you know, we manage our capital structure with a goal of striking the right balance between maintaining a strong liquid balance sheet with solid credit ratings and actively deploying our capital to invest in our businesses, make acquisitions and to return capital to our shareholders. So we're quite pleased with our progress that we made on our capital plan so far this year. And so with that being concluded, let me now turn the call back over to Doug to start the Q&A part of this session.

Douglas Shapiro

Okay, thanks. Let's get the Q&A started.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Michael Nathanson with Nomura.

Michael Nathanson - Nomura Securities Co. Ltd.

I have one for Jeff and one for John. Jeff, you mentioned how pleased you were about the NCAA and how well it performed. I just want to say like there's a general feeling in the market that CBS made a good deal by getting rid of losses they were going to have and moving those losses to Turner. So if you could talk a bit about how big losses were this year for you and how do you see the trend over time for the NCAA deal helping Turner.

Jeffrey Bewkes

Yes, we think that this is going to be a very profitable deal over time, and it's actually performing in revenue terms, ratings terms as well, better than we expected. But because of the structure of the deal over the 14 years, where a lot of the advantage comes to us because we have 3 networks in the deal and because we have some affiliate fee upside that we think is very large, we don't have as much versus CBS in the first year. And I think John, who explained it pretty well in his descriptive remark, should flesh it out. So I'll just give it to you.

John Martin

Sure. Let me attempt to clarify because the nature of the agreement is in some respects, pretty simple. But then there's a loss cap calculation that's a little complicated. Let me begin by saying economically, we share revenues and costs equally with CBS, subject to the loss caps, and I'm going to come back to that in a minute. But as Jeff said, that means that we're going to share programming rights fees up to nearly $11 billion over the 14-year term, and that includes fees as well as production costs and ad revenues to be shared equally by Turner and CBS. CBS losses however, are limited to certain pre-specified annual amounts and I think we've included those in our public filings. In the first quarter, we did trigger the loss cap, but the amount incurred under that cap was not significant at all. We think it's important to note that the loss cap is based on a cash cost, not a book cost. That's very important to understand, and the calculation is the same for us as it is for CBS. The cash cost increases very, very slowly over the 14-year life of the agreement. And going into the agreement, we fully expected that we were going to be losing money on a cash basis in the early years in the contract. But just to reiterate what Jeff said, we fully expect to make that up as we move into the agreement and we're highly confident only supported even more by the performance from this Tournament, that this is going to be incredibly accretive on an NPV basis in the fullness of time. And then the question is, “Why did we agree to cap CBS losses?” Well put simply, we just feel like this is a terrific deal for us and capping CBS' losses made sense to us because we believe frankly we have more upside than them. We get more of the risk, and we'll get more of the reward as the nature of our relationship changes considerably over the life of the agreement. As Jeff said, it's going to be a significant factor in our future affiliate fee agreements, and even the number of games moves over time and we'll have 2/3 of the games by the end of the contract. So we're very, very confident in our ability to monetize it, and we feel really good on all fronts.

Douglas Shapiro

Mike, did you have another question?

Michael Nathanson - Nomura Securities Co. Ltd.

Yes, the other question would be I know this is another hard question to answer, which is if you back out the NCAA advertising growth this quarter from your domestic ad growth, what would approximate your domestic ad growth close to apples-to-apples as you can get?

John Martin

Let me try to help a little bit there and please just know that this requires some forecasting and estimating. So look, I think I said in my proactive remarks, the trends in the first quarter remain very, very strong on an organic basis, and you know that we had strong organic trends in Q4. Much of that continued into Q1. And please appreciate that it really isn't possible to be exactly precise because the NCAA Tournament took up a lot of our prime time in the quarter. And so it displaced the considerable amount of inventory that was programmed differently last year. And as a result of the NCAA, we programmed our networks very differently when you had was type of big, high-profile sporting event. For example, we had significantly fewer originals in the first quarter this year than we did a year ago. On TNT, for example, we had half the number of originals. Last year, we had about 25. This year, we only had about 13. So it's not as simple as just pulling out the NCAA revenue. You have to make a number of estimates. But to just try to be transparent, we're estimating total revenue growth domestically and internationally if you normalize for the NCAA, would be in the high single digits in the quarter.

Operator

Your next question comes from the line of Spencer Wang with Crédit Suisse.

Spencer Wang - Crédit Suisse AG

Just 2 quick questions. Jeff, last week in an interview, you talked about how you expect Time Warner to exceed everybody's expectations. So I was wondering if you could maybe clarify what you meant by that. And then secondly, given that it seems like you're pretty pleased about the performance of NCAA, was wondering if you could just share with us your thoughts on investing more in sports in the future.

Jeffrey Bewkes

Spencer, I appreciate the question. I think that the comments were taken a little bit out of context, and what the context was, was Charlie Rose and I talking in the Tribeca Film Festival was a question about, "How do we think about M&A over time versus buybacks?" And basically, what we were discussing was the fact that there seemed to be pretty widespread concerns about the sustainability of really all the media businesses, including the Time Warner ones and of growth over the long run. So what I was saying was sharing my confidence that given the industries that we operate in and the position we have, the strength of our assets, essentially the very stable and superior performance of all of our businesses in terms of earnings and revenues, did I think that we will continue to grow fairly steadily over the long run. And what I was saying was, if we're right over time and we have been so far, then we will outperform what seemed to be the consensus expectations of not only our company, but most of the media companies over the long run, and that's why we're buying back our stock. I certainly wasn't referring or focusing and certainly, Charlie wasn't asking about this quarter. He's not a financial analyst. In terms of the sports-rights competition, it's a pretty important part of the offering at Turner. But we're focused on having the right sport, and I think John was just explaining the power of NCAA. But let's remember and add to that, that we're very happy with the performance of the NBA, National Basketball, Major League Baseball as well as NCAA. And so we will continue to evaluate potential opportunities in the future. But the way we look at it, the TBS and TNT models are built on a pretty unique and fairly powerful balance of sports, original series and acquired series and some very powerful movies, and we think that's optimized mix to remain pretty attractive not just for viewers and advertisers but for distributors as well.

Operator

Your next question comes from the line of John Janedis with UBS.

John Janedis - UBS Investment Bank

Jeff, can you talk a bit more broadly about your views on syndicated programming and programming costs throughout the exports. Meaning as you acquire more expensive product, is the return on that investment expected to decline? And to what extent do you need to boost in affiliate fees to make the math work?

Jeffrey Bewkes

Syndicated products, series products is getting more and more valuable because there are more buyers. And like for us, we're actually in an ever stronger position, giving the pipeline that we provide to the big 4 American broadcast networks and increasingly all the cable networks. So there's a lot going on there with some of the reality shows going on, broadcast network TV. It makes scripted shows, I think, more valuable. With the retrans support coming to broadcast networks, it makes them a little healthier and able to sustain economics. That's very helpful for not only Warner's, which is the lead supplier for this globally and in the United States. But it also helps our Cable Networks because given our unique position of reach with TBS and TNT, we're one of the biggest buyers and users of hit-series programming. And so for us, the fact that the kind of economic support for making big series and making it available for syndication and then having the 2 of the leading broad-reach networks to program in syndication is a fairly virtuous circle for us. And the international demand, which is increasing for the same product, simply helps us. So overall, it's a fairly strong situation. And I think that everybody ought to rethink, on the positive side, the strength and value of acquired series on syndicated networks.

John Martin

The only thing I would add just as a broad generality in terms of returns, I mean our Cable Networks are already our highest return on capital business. And if you look at over the last 3, 4, 5 years fairly consistently, we've been able to grow margins. I mean this year, we've been explicit in saying that we've had a little bit of margin pressure because of the first year of the NCAA contract. But with a 14-year deal, it's going to be a significant source of growth over time and margin enhancement. And I would suspect over the next 2, 3, 4, 5 years again, we're going to do to see margin expansion of our Cable Networks, and that's how we're going to approach running.

Jeffrey Bewkes

You had a follow-up?

John Janedis - UBS Investment Bank

Yes, one quick follow-up. Right at the end of last year, there was a lot talk about some lower-end Cable TV packages, talk about the end of those. Anecdotally, has there been any traction there or not really?

John Martin

Well, probably a better question for them than us, but our understanding is no.

Operator

Your next question comes from the line of Tony Wible with Janney.

Anthony Wible - Janney Montgomery Scott LLC

I had a question about HBO. I mean it seems like it's doing well. It's selling content, developing new shows. But one of the common criticisms I hear is that HBO will ultimately be undermined by Netflix. That being said, can you expand on your comments to recent film festival welcoming Netflix into the business? It would seem to imply that I guess you see them as maybe more of a complement than a direct threat.

Jeffrey Bewkes

As you all know, I want to talk about Netflix and I love to talk about HBO. So this is my favorite subject. Let me just clarify our view of subscription VOD and Netflix. Let's start by saying that HBO is a subscription VOD service. So is Netflix, and our view of Netflix has been very consistent. I've tried at times to be humorous about it, sometimes to make a point. So let me try to be clear. We think there's definitely a role for subscription VOD services, library services and Netflix in the ecosystem. And what is the role? Well, clearly, it's a way to give consumers access to a deep library of content that they couldn't easily get before, particularly older shows, although they're probably going to be able to get them more easily in other places now as time goes on. But it's been a useful thing to have subscription services for product that you couldn't get before. It's particularly also had -- I think there's been some utility for viewers in being able to get serialized shows that don't play as well on traditional cable networks or in syndication. So from that point of view, it can be good for consumers. And because SVOD monetizes some content that couldn't be monetized before and it monetizes some content better than it was monetized before, particularly the older library stuff. Then in that sense, you can add money to the ecosystem, and that's good for everybody and performs a useful function. But what we've always said is that as you think of those positives, you need to make sure that SVOD doesn't devalue the content and disrupt the ecosystem. So basically, our view has been that it is not usually the right outlet for the newer higher value content that is functioning much more powerfully for viewers on other kinds of networks in other windows. We have said because of all that, we do not think that it would be a suitable substitute for multichannel TV for most consumers. And therefore, we don't think it'll upend the multichannel TV business. We've been basically trying to emphasize that point, and so there's been I think a little understandable but somewhat overblown concern about cord cutting. But I'll leave that to further questions.

Anthony Wible - Janney Montgomery Scott LLC

And if I could follow up, I mean, what gives you confidence I guess about Netflix not displacing the time that consumers have for entertainment? Or any kind of cord shaving or cord cutting?

Jeffrey Bewkes

Yes, okay. Well, thank you for asking. We watch it closely. I'm sure all of you do, but we haven't seen it yet. Let's look at SVOD generally and start with Netflix, which is certainly the leading entity there. I think Netflix has something around 23 million subs in the U.S. We believe there's only about 4 million households that have broadband and no multichannel TV, and that number is almost unchanged over the year since Netflix started its streaming or watch-instantly service. So even though people seem to like the Netflix service, evidenced by the number of subs, it hasn't led to very many Netflix subs cutting the cord. And looking forward, it's hard to see how subscription VOD becomes a replacement for multichannel TV because as far as we can see, it probably won't economically be able to offer a lot of the current shows, sports, live events, first on of things of all kinds that are available on all of the high-value networks. And we don't think there's very many subscribers that are going to be willing to give those things up. And in general, we don't think U.S. consumers want less choice. The record of the last 30, 40 years has been they want more choice. And just to really acid test that, there are already a number of stripped-down TV packages that are available and very few consumers take them. Just take DISH Network has a focus on value. It's lowest priced packaged is $24.99. Most people don't take that, which is why the average revenue at DISH is closer to $70. And then add the last part of the puzzle, which is -- and you can see it this week with HBO GO, TV Everywhere versions, VOD availability for all the networks everybody loves is going to make the current network subscriptions, foremost among them HBO, even more powerful and it fits right into the desire that as SVOD services have shown is a pretty strong desire among consumers. So all this really suggests that things like Netflix are welcome additions to the infrastructure. They can monetize value for companies like Warner that maybe there wasn't in terms of efficiency for all their product, wasn't as available as before. And they're likely to remain complementary to the strong multichannel brands that are getting stronger all the time and that are about to be more available on VOD.

Anthony Wible - Janney Montgomery Scott LLC

Great, and all those are very great points. I appreciate the feedback.

Operator

Your next question comes from the line of Jessica Reif-Collins (sic) [Jessica Reif-Cohen] with BAML [Bank of America Merrill Lynch].

Jessica Cohen - BofA Merrill Lynch

Jeff, I was just wondering if we could go back to your Charlie Rose conversation and talk a little bit about your strategic positioning over the next couple of years. I mean do you feel a need to change your asset mix in any way, whether through acquisition or disposal? I mean do you need more scale internationally or domestically? Do you want complementary assets? Do you really need to own Publishing?

Jeffrey Bewkes

We don't feel the need, absolutely not the need to change any of the asset mixes. We feel that Publishing is a very strong performer, relative to its competitive set and it's undergoing a pretty interesting upside with the tablets coming along. And so whether it's in Publishing, whether it's Networks, whether it's Film production or TV series production, we're already operating at basically the lead share against all our competition. I'll be then saying, "Well, what about internet?" So we don't need to do anything in that area, and we've been opportunistic. We are able to do whatever we would desire to do if it came down to an acquisition, and we don't need to do those if anything comes up in the competitive set. We can afford to pass it, let it go to a competitor and not weaken our competitive position. On the other hand, we, if we acquire something, it probably has more leverage to make it more synergistically a value creation than other buyers. So that's how we look at it. We haven't seen anything that has motivated us lately in those areas. If you go overseas, we have done some acquisitions, and we've done it for a scale to advantage both our strong position with global networks like HBO, which is #1 in every market it operates in; CNN and Cartoon channel (sic) [Cartoon Network], which are usually at the top of the global pack in whatever genre they're serving. And so where we've been mostly had some reasonably significant acquisitions in South America, which has led us to be the #1 network group in South America across all of Latin and Central America. We've done a significant thing in Eastern Europe with CME. We've made some moves in India, which haven't so far performed as well as we'd like. And that's basically what we've done so far.

Operator

Your next question comes from the line of David Miller with Caris & Company.

David Miller - Caris & Company

So Jeff, just trying to figure out just given this environment, which on a national basis from an advertising perspective, there's obviously just hugely robust and it's clearly a sellers' market going into the upfront on both broadcast and Cable. I know you can't really prognosticate on what you're going to do in terms of holding back inventory. But in the past, with the environment like this one, a sellers' market where in general, consensus expectations are that you guys are probably going to bag low double-digit CPM growth. What's that threshold that you're comfortable with in terms of holding back inventory if you don't get what you want? Is it 68%, 70%, 75%? Again, I'm not asking you to prognosticate on what you're going to do. I'm just asking on what you've done in the past.

Jeffrey Bewkes

I'd love to tell you, but I'm not going to tell because we obviously manage that in a fluid market and the Turner asset, I think that's mostly what you're referring to. They are quite good at making that trade-off, and so what I could say generally is that the second quarter ad outlook per [indiscernible] is very healthy. We're seeing 20% to 30% increases over the upfront. Sports has been particularly strong. Some of that comes from the NBA strength that John was mentioning. And remember we displaced those programming a little bit to do that. So that's a bit of a mix issue. As we know, the cancellations have been minimal, and we're going to continue to benefit from the strong upfront pricing that we have. So the pricing should be pretty strong. But as you asked, there's a lot of things to balance in terms of when do you move the price and when do you hold back, and it's really too early to say. I think we'll be at the top of the competitive set in terms of our ad sales performance and our pricing position.

Operator

Your next question comes from the line of Doug Mitchelson with Deutsche Bank.

Douglas Mitchelson - Deutsche Bank AG

A question for Jeff and John. Jeff, how does 2Q shake out for a number of original episodes on Turner versus last year, given a lot of series were pushed out of 1Q due to the NCAA?

Jeffrey Bewkes

Wait, what are you asking?

Douglas Mitchelson - Deutsche Bank AG

I'm just asking how many original TV episodes will be on Turner sort of year-over-year because it drives sensitivity on ad revenue, right? I think in first quarter, you've had a lot fewer original TV episodes on Turner because series were pushed out due to the NCAAs, right?

John Martin

So are you asking sequentially or year-over-year?

Douglas Mitchelson - Deutsche Bank AG

Year-over-year.

John Martin

No, in the second quarter?

Jeffrey Bewkes

Second quarter?

John Martin

I don't even know right off the top head. I mean my gut reaction would be it'd be roughly comparable. But I just don't know.

Douglas Shapiro

Doug, I can probably get to back to you offline. But I don't think we have that.

John Martin

Obviously, the first quarter was notable because of the NCAA, which was new. But second quarter, we'll have to get back to you with the details.

Douglas Mitchelson - Deutsche Bank AG

All right. Let me change just my question for Jeff then. Given the comment on SVOD services, library services providing value to consumers, how much upside then is left at Warner Bros. selling library content to Netflix? And I think you've been more conservative than some peers on that.

Jeffrey Bewkes

Well, not really. We already licensed some content to Netflix from Warner's. And we are, and have been, open to the idea of licensing more to whether it's Netflix or other SVOD services, and there are a few rustling around in the forest of things. So we've just been waiting for the right deal. But what we have said is that when we license our content to SVOD services that our priorities are really 2 things. One is maximizing the value of the content. And we think for certain content, SVOD services like Netflix can do that. And also secondly, to make sure we don't damage the ecosystem or devalue our products in the process, we'd like it to be incremental really for any given deal and we'd like it to be incremental in the sense that it establishes a healthy bidding situation for the future.

Douglas Mitchelson - Deutsche Bank AG

Okay, and then the question for John. You've mentioned confidence in cash generation capabilities. I think you've ranged between 40% and 50% of EBITDA in the past generated as free cash flow. Is there a percentage that you would suggest investors should think about for 2011 or beyond?

John Martin

Well, I think for 2011 specifically, we haven't given direct guidance. We did say that conversion would be down somewhat as compared to last year. There's a number of reasons why. I think cash tax is being up is one big reason why. The second big reason, if you look at -- and we've said that we expect a record operating profit performance at Warner Bros. this year. So clearly, a portion of that growth is coming from syndication revenues and profits being recognized where we'll receive cash over time over the life of the agreement, whereas the accounting rules require that you recognize the revenue upon availability, which would be this year. So I think it's better to talk about the longer term, which is next 2, 3, 4, 5 years. We have said that conversion should go up again beginning next year. And I think if you look at just the free cash flow generation capability of our businesses, we don't see any difference looking back as to looking forward. In other words, we don't anticipate that the capital intensity is going to change very much. We don't anticipate that our conversions will be the depressed on any long-term sustainable basis. So we continue to believe that we're going to continue to generate free cash flow at very, very healthy percentages.

Jeffrey Bewkes

I just want to add one thing. Maybe it's what you're asking. If you were trying to -- remember that the original series on Turner will pick up in the summer. They will. So that is true that in this summer season, we have a lot of our originals coming back, and the Turner Network has a big success running with not only Closer but Rizzoli & Isles and several new shows that they launched.

Operator

Your next question comes from the line of Richard Greenfield with BTIG.

Richard Greenfield - BTIG, LLC

Two questions. One, you said last week that movies do most of their business in the first few weeks after their release, then they're out of the theaters generally. Wondering why then the premium VOD window you're putting at 8 weeks versus at 4, which will probably get a lot more traction from a consumer standpoint. Two, do you see any benefits to splitting off HBO? It seems to be an asset that's pretty undervalued within Time Warner, and was curious how you think about pursuing that type of a strategy especially if parts of HBO might not always align with other initiatives at Time Warner's other businesses.

Jeffrey Bewkes

I'll come back to HBO. But actually, they do align with the other businesses. But let's start with the first one. If your question was, "If it's good to release films earlier by, whenever, 8 or some weeks out, why not release them earlier still?" It's not clear yet if the trade-offs for both viewers, people that buy tickets and go to movies, and the whole infrastructure of exhibition that needs to support that, really is a valid one even at 8 weeks out. So we're going to have to see. We're doing a test to see what demand does it fulfill, to what extent does it under mark ticket sales, which we don't intend. But it does that. If it does that, it'll be something that we all have to rethink. As you move it closer, which I believe was your question, you simply exacerbate that, and it doesn't really seem at this point to be necessary. So it may not be necessary even to the extent that the test is pegged at 8 weeks out. So we'll see. It's a little early to say. What nobody wants to do is really cannibalize the theatrical window. That's a legitimate concerns the exhibitors have, and it's a concern that we share with them. So that's so far the answer to that. On the HBO one, thanks Rich. I've enjoyed and admired a lot of the stuff that you've been writing about. I mean I think everybody enjoys reading these thoughts because a lot of them are very forward thinking. I'd have to say in this case, it doesn't make any sense to us to consider spinning off HBO. I think you're right that if HBO is valued or thought to have the challenges that some have asked, they're not getting it as they saw in droves over the many years I've been associated with HBO. HBO's in a really strong position. You should watch what happens with GO this week and begin to appreciate that. And so if you say, "Well, why should we have it?" Well, we love having HBO. It's a strong performer. It aligns really well with the scale of our other networks. I don't suppose it's really appreciated out there, the extent to which we do benefit from the leverage of having the Turner Networks and HBO both here and overseas. So that's one thing. We like the business in itself. That's the second thing. We don't think it's going to be viewed more valuably separate than part of us. That'd be the third thing. We do have a very strong relationship with Warner as we have always had. It wouldn't be any better or worse if it were a separate company than it is together. In fact, we think there've been a lot of advantages running both ways at Warner and at HBO from being able to look at the world together because what happens in pay TV is that we look out about 10 years, and we always have the evidence of our VOD position, and the invention of VOD inside Time Warner proves that. It wouldn't have any effect on bidding for movies. And finally, it's not HBO's intent. It never has been to prevent consumers from accessing their legitimately purchased content. It's pretty clear that Warner's has been one of the leaders of making digital purchase more valuable and efficient for consumers. HBO has been a part of that and knows about it.

Richard Greenfield - BTIG, LLC

Do you see any way that HBO could go direct to the consumer then without having to go through a multichannel operator?

Jeffrey Bewkes

Well, as we have said, HBO does have the ability to do that, and the reason that we have not done it has to with the interests as HBO assesses, nothing to do with any conflict with any other part of Time Warner. If it is worthwhile and thought by both HBO and us here at Time Warner to be a wise thing to do, we'd do it. And it doesn't really conflict with any other part of our company.

Operator

The last question comes from the line of Ben Swinburne with Morgan Stanley.

Benjamin Swinburne - Morgan Stanley

Jeff and John, can you talk a little bit about Turner, the programming investment strategy and the programming investment growth through the year, excluding the Tournament, just sort of on a normalized basis. And I'm asking in the context of the ratings at TNT and TBS, and I'd love to hear you talk about where the weakness is coming from, if it's original, is there syndicated content; and if that changes, how you think about the mix going into future seasons. And if you're thinking at all about what might happen if there's no NBA season next year -- I think the bargaining agreement expires in July 1, I think, and certainly there could be a lost season or at least a delay. How does that impact things?

Jeffrey Bewkes

And I think I'll start. John'll see most of it. I think the ratings were a mixed bag. So we need to be careful focusing too much on the ratings, and I think maybe your question understood that because the ratings are an important indicator. But they're not the only indicator. And we always talk about programming for profits, which means we prioritize getting the right mix of programming as you asked and the one that's valued by consumers and advertisers and distribution partners, all mixing the right balance of revenues and costs. So the way to basically look at that it's not all ratings points are created equal. If you dissect the ratings, I'd say the trends this quarter are consistent with what we've seen for a while. I'll just start, and then John'll pick up with the facts. In sports, as you know, we had very strong sports programming. NCAA viewership was up 7% over last year, and it was the highest-rated Tournament since '05. The NBA's been very strong. That's in sports. In originals, they did well in the quarter. But given that we had more mix devoted, of air time to sports as you and someone else have asked, we have fewer originals in the quarter, and we'll have more of them in the next quarter. For acquired series, we have seen some weakness in some of our acquired series. It's been going on for a while. Some of that is because we've had a couple of aging acquired series that aren't performing as well as we expected like Bones. And some of it is because some of the shows we've had have been showing up on other services like SVOD, which we think has hurt them. And we think that what we've got to elevate the performance of acquired series is we've got Big Bang Theory coming to TBS, and we have The Mentalist coming to TNT. And we think that should add a significant impact, and we have some sports playoffs coming this spring and originals this summer, which in the short run should lift the ratings. But John, you have. . .

John Martin

Just I think -- this'll actually be quick. But I mean clearly, our programming expense growth in the first quarter is going to be highest year-over-year growth percentage of the year. And I think we've been pretty clear as to why that was, and that was all planned for. Coming into this year, what we said was if you set aside for a moment NCAA Tournament, all of the rest of our programming would be up in the high single digits, and we continue to believe -- I mean that is what's is going to happen. Remember, all of these costs are under our control and largely planned for well in advance. And so in the first quarter, we have the NCAA, which was a considerable percentage of the overall growth. In addition, we had some incremental investment in the higher profile programming that wasn't there a year ago including Conan. We did on the Cartoon Network the Hall of Game. We had some incremental investments in series like Southland. But if you look at all other programming costs growth beyond that, it was up in the mid-single digits. So I feel really good about our ability to control the cost growth and plan for it and do it with within the architecture of how to grow earnings over time, where we know where what subscription revenue growth is going to be, and we've got a pretty good guess as to what ad revenue is going to be. So hopefully, that's helpful.

Benjamin Swinburne - Morgan Stanley

Yes, any contingency plans on the NBA if that doesn't happen from a programming perspective?

John Martin

Not that we'd be willing to share on the call.

Benjamin Swinburne - Morgan Stanley

Okay.

John Martin

Right, but we have.

Douglas Shapiro

All right. I think that's it for us, but thank you very much for dialing in.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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