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Time Warner (NYSE:TWX)

Q2 2011 Earnings Call

August 03, 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

Anthony Wible - Janney Montgomery Scott LLC

Jessica Cohen - BofA Merrill Lynch

Michael Morris - Davenport & Company, LLC

Spencer Wang - Crédit Suisse AG

Richard Greenfield - BTIG, LLC

Michael Nathanson - Nomura Securities Co. Ltd.

Barton Crockett - Lazard Capital Markets LLC

John Janedis - UBS Investment Bank

Douglas Mitchelson - Deutsche Bank AG

Tuna Amobi - S&P Equity Research

Operator

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

Douglas Shapiro

Well, thanks. This morning, we issued 2 press releases: One, detailing our results for the second quarter, and the other updating our 2011 full year business outlook.

Before we begin, there are 2 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 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 available 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 report 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 to Jeff.

Jeffrey Bewkes

Thanks, Doug, and good morning, everyone. Overall, the second quarter was another pretty successful quarter for us. We posted our highest revenue growth in 4 years, up 10%. We grew adjusted earnings per share by 20%, and we continue to buy back our stock at a faster pace than last year, acquiring another $1 billion worth, for almost 3% of our equity base since we last reported earnings to you. And as you saw in our outlook released this morning, we remain fully on track to meet, if not exceed, our guidance for the full year. More important, this quarter, we had significant progress toward our key strategic objectives. We continue to invest aggressively to make sure that our businesses each remain at the top of their competitive sets. At the same time, we continue to advance to new digital business models that will enable us to thrive as technology and consumption patterns evolve.

Here's my perspective on some of the key highlights from the quarter starting in our Networks. As you know, the upfront marketplace was very strong, particularly for TV. This year, the National Cable Network reportedly pulled in higher dollar commitments than broadcast for the first time ever. Turner performed even better than its peers. Our large-reach entertainment networks, TNT and TBS, both saw in its solid double-digit CPM increases, putting them at the high end of all of TV, broadcast or Cable. It marks the third time in the last 4 years that our CPM increase has outstripped the average of the broadcast networks, providing more evidence that we're narrowing the CPM gap in broadcast.

This strength extends beyond TNT and TBS. Both truTV and Adult Swim saw pricing and volume increases substantially higher than the average for Cable Networks. And our news networks also performed extremely well, with CNN outpacing its cable news competitors for both CPM and volume growth. This performance in the upfront across the entire portfolio is a broad endorsement by advertisers. It underscores the incredible reach of our Networks, the #1 and #2 reach networks on cable, TNT and TBS, the highest reach cable news network, CNN, and the growing reach of Adult Swim and truTV. And that reflects the appeal of our brands and programming and the skill of our sales force in creating compelling marketing partnerships.

Beyond our performance in the upfront, I'll spend a moment updating you on recent ratings trends. TNT had its best quarter ever in primetime, with our sports programming leading the way. We posted fantastic results from our coverage of the NBA playoffs on TNT, clearly the best in cable history and up more than 25% over last year. We also saw strong performances from our originals on TNT, our new share of Falling Skies debuted as the #1 new series launch of the year and, by the way, it's also been posting great numbers on our international networks. Last month, we brought back the Closer and also Rizzoli & Isles, which are delivering the biggest audiences of any dramas on Cable so far this year.

So that's great, but we aren't satisfied with the recent ratings on some of our acquired content on TBS and TNT. That's something we're very focused on and plan to fix. Some of this recent performance is a reflection of the natural life cycle of acquired shows, which tend to decline over time. But we're confident that our plans to add some of the biggest hits on TV will boost viewership, shows like The Big Bang Theory, which is the #1 comedy on TV, and it will debut on TBS at the end of the third quarter; and The Mentalist, the #3 drama on TV, which will start stripping on TNT next year. We also recently struck deals to bring Castle and Hawaii Five-0 to TNT. Keep in mind that even one successful show can have a significant impact for these networks, and we think we have several in the pipeline. As a result, we expect these moves will improve ratings, starting with TBS, in the fourth quarter.

Looking across channels portfolio, we had solid ratings performance from our other networks during the quarter. TruTV posted its best second quarter primetime ratings ever, solidifying its position as a top-tier cable network. Cartoon Network posted double-digit gains in primetime in its key demo, and Adult Swim maintained its dominant position in late-night TV. And notably, CNN was up over 20% in its key demo, again, outperforming its cable news competitors. It's further evidence that when news breaks, more people turn to CNN than anywhere else. We're looking to capitalize on that momentum as we roll out our vast primetime lineup next week.

Let's shift to HBO, where our programming lineup is stronger than ever and getting stronger. Even during the heyday of the Sopranos and Sex and the City, we never had the volume of top quality original programming that we air today on HBO. In June, we concluded the first season of Game of Thrones, which steered viewership steadily over the course of its run to end with over 9 million total viewers per episode. And we debuted the fourth season of True Blood to its highest premiere ratings ever. In fact, 5 of the top 7 most highly watched series in HBO's history are currently on the network: True Blood, Boardwalk Empire, Game of Thrones, Entourage and Hung.

Last month, HBO received the most Emmy nominations of any TV network for the 11th year in a row. Both Boardwalk Empire and Game of Thrones are nominated for outstanding drama series, the first time in decades that 2 freshmen shows from the same network are nominees. And with the richest developing slate in our history, we think the momentum will keep building. Next year, we'll debut Luck, a series from Michael Mann and David Milch, starring Dustin Hoffman, centered around the world of horse racing, and another new series, More As This Story Develops, a new show from Aaron Sorkin. It goes behind his hands at a cable news network. You noticed that some are source materials [ph].

At both Turner and HBO, our TV Everywhere initiatives are gaining momentum. As you know, in May, we launched HBO GO on iOS and Android mobile devices. It's still early, but it's been an even bigger hit than we expected. The mobile application has already been downloaded close to 4 million times. Our research shows that 85% of GO users are watching much more HBO than they did before, and the satisfaction levels of GO users are through the roof.

Over the rest of the year, we'll widen the availability of HBO GO to include connected TVs, game consoles and other connected devices, and we'll keep rolling out internationally. GO is now available throughout Central Europe. We'll launch Brazil and Mexico toward the end of the year, and we'll start to launch in Asia next year. In addition, TV Everywhere versions of Turner Networks are available to about 7 million households in the United States.

Last month, we launched authenticated live streaming of CNN and headline news, online and through iOS apps that have already been downloaded more than 10 million times. We'll be launching apps for other networks in the coming months. And Nielsen is now capturing TV Everywhere usage in its C3 data, making us agnostic to whether viewers watch our shows on TVs, PCs or mobile devices.

Turning to Warner Bros. Our Film results were mixed this quarter, but the team at Warner's have a great track record of making sure the hits outweigh the misses. While the performance of Green Lantern fell short of our expectations, The Hangover Part 2 substantially exceeded them, with global box office over $0.5 billion so far, making it the highest grossing R-rated comedy ever. And of course, after the end of the quarter, we shattered records with the opening of Harry Potter and the Deathly Hallows: Part 2. The records include the highest opening weekend ever, both domestically and internationally. Since its release, the film has already pulled in more than $1 billion globally, putting it on track to be the highest grossing film of the Harry Potter franchise.

Looking out to the remainder of the year, we're very optimistic about 2 fourth quarter releases: Sherlock Holmes: A Game of Shadows, and Happy Feet 2. And we expect to have a strong slate again in 2012. Movies include The Dark Knight Rises and part 1 of The Hobbit, among many others.

Warner Bros. TV production also had a great quarter. At this year's upfront, Warner has placed 27 series on the broadcast schedule, including 16 returning shows and 11 new shows. That places Warner as the #1 producer of TV programming yet again this year. As another measure of our success and growth prospects, consider that our TV backlog costs $5 billion this quarter, to reach its highest level ever.

I'd also like to update you briefly on the progress Warner Bros. is making in accelerating the digital transition in home videos. As we've discussed with you before, we're working hard to make digital ownership of movies more compelling for consumers. As part of that effort, we've been a proponent of the ultraviolet initiative to enable consumers to purchase movies and TV shows and then access them from the cloud on a wide range of devices. Beginning with the releases of Horrible Bosses and Green Lantern in the fourth quarter, the vast majority of our future home video new releases will be UV-enabled.

A key part of our plan to drive usage of ultraviolet, is Flixster, which we purchased in May. Today, Flixster is one of the most popular applications for finding informations about movies. And over the coming months, we'll begin to roll out new upgraded versions of the Flixster service, which will be deeply integrated with ultraviolet. It will enable consumers to establish ultraviolet attempts [ph] to managing more [ph] their digital collection, whether to store it locally or in the cloud, to discover new contact and to share recommendations with friends. We'll start launching the first beta version this week. We believe this could fundamentally change how people manage and watch their movie collections, and it could significantly improve the value proposition of digital ownership.

Moving on to Time Inc. During the quarter, we remained focused on outperforming the industry and maintaining the right cost structure while positioning ourselves to take advantage of new digital opportunities. This quarter, we reached agreement with Apple to enable print subscribers to People, Sports Illustrated, TIME and FORTUNE to access the tablet editions on their iPads at no extra charge. In addition, we've struck agreements to sell single copies, digital subscriptions and bundled print and digital subscriptions of selected titles with every other major tablet manufacturer including Motorola, Samsung, Hewlett-Packard, BlackBerry, Amazon and Barnes & Noble’s NOOK, among others.

As you may have seen, this morning, we announced plans to offer editions of all 21 of our domestic magazine titles on every major tablet platform by the end of this year. Similar to what we're doing in our other businesses, it's another example of the aggressive step we are taking to accelerate the digital transition and help define these new business models.

In sum, we've accomplished a lot this quarter. Heading into the second half of the year, we're right on track to achieve our financial objectives. At the same time, as evidenced by our stock buyback this quarter, we remain committed to providing an attractive return to shareholders. But most important, we continue to make progress on the strategic objectives that we think will position us to prosper long term.

With that, I'll hand it off to John.

John Martin

Thanks, Jeff, and good morning. I'm going to begin by referring to the first slide, which is available on our website.

Before I review our quarterly results, let me remind you first of our financial priorities. We're focused on investing for long-term growth, delivering attractive near-term results and continuing to provide significant direct returns to shareholders. Of course, any given quarter can be affected by the timing of investments, and you see all that at work in the results this quarter.

We had very strong revenue and adjusted EPS growth, while our margins were somewhat impacted by planned investments. We grew revenues 10%, and that's the highest growth rate since the third quarter of 2007, and that was a result of strength across all revenue categories.

Content revenue was particularly robust, increasing 15% in the quarter, while both Subscription and Advertising growth were also strong, so that's good. Adjusted operating income was up 6% year-over-year, and that somewhat trailed the revenue growth, and that's because of strategic investments such as the NCAA basketball tournament and HBO GO, as well as the timing of our film slate. These investments both set us up for accelerated earnings growth in the second half of this year and further strengthen our long-term growth prospects.

Moving down the P&L. Adjusted EPS climbed a very strong 20%, and that was helped by ongoing share repurchase program. So during the first half of the year, we repurchased $2 billion of shares, and that's twice as fast as our pace last year. And this morning, we updated our outlook to at least low-teens growth in adjusted EPS, and that's for this year in 2011. And that reflects our year-to-date performance, plus our confidence in the remainder of the year. So we're very much on track to achieve all financial objectives for the year.

So let me move on now and discuss our segments. And I'll begin with our Networks, where we had another quarter of very strong revenue growth. Advertising revenues were up 11%. Our domestic entertainment networks, which includes kids and young adults, grew Advertising double digits in the quarter. Now that includes ad revenues from the NCAA contract and some small transactions. And if you were to exclude those, growth would have been in the mid-single digits. Domestic news was flat, and that's a result of very typical comparisons. You may recall that domestic news advertising grew double digits in the second quarter last year while every other quarter during the year, it was actually down.

International advertising revenues grew approximately 35% in the quarter, and that was boosted by a couple of transactions and some favorable foreign exchange rates. And if you were to look through those, international advertising revenues were up in the single digits. So you may ask, "Why is that, why isn't it higher?" And it's really 2 stories to tell here. First, we continue to perform very well in our European and Latin American entertainment networks, both of which were up double-digits in the quarter. But due to events in Japan and the Middle East, international news were down in the quarter, so that was a drag on the overall growth rate.

In terms of the third quarter Advertising environment, the scatter market slowed a bit during the upfront but now has largely come back in recent weeks. Domestic scatter pricing is now up in the mid-teens over the upfront. And looking ahead, we expect total ad growth in the third quarter to remain somewhat similar to what it was in the second quarter. And we should begin to benefit from the strong 2011, 2012 upfront in the fourth quarter. That should allow us to maintain very attractive Advertising gross rates even as we lap the acquisition of Chilevisión that occurred late last year.

Moving to Subscription revenues, where we saw another quarter of high single-digit growth. That reflects higher rates domestically and continued international growth. Content revenues were also higher in the quarter, up almost 20%, and that was driven by strong sales with HBO's original programming, including the season 3 home video release of True Blood and the licensing of Game of Thrones outside the U.S.

Adjusted operating income here was up 5% in the quarter, and this was an improvement over the first quarter growth, but clearly below our long-term expectations. And that's largely a result of the investments in the NCAA and HBO GO that I previously mentioned. Together, these investments reduced growth in Time Warner's adjusted operating income this quarter by 400 to 500 basis points.

Turning now to film. Warner Bros. revenues were up a solid 13% in the quarter. On the home entertainment front, we saw significant increases in both video game and home video revenues. Our games business benefited from the releases of Mortal Kombat 9 and LEGO Pirates of the Caribbean: The Video Game. And Harry Potter and the Deathly Hallows: Part 1, which is the #1 selling home video release year-to-date, drove home video revenues up 22% in the quarter.

Despite this higher revenue, adjusted operating income was down modestly in the quarter, and that was because of higher prerelease P&A spending on third quarter releases, much of that tied to the Harry Potter film, as well as higher theatrical film valuation adjustments and increased overhead costs. And the increase in overhead was in part due to recent acquisitions and new business initiatives.

Looking ahead, we continue to expect the second half of the year to be very, very strong. We're off to a great start, with record-breaking performance of Harry Potter and the Deathly Hallows: Part 2, and the third quarter will also benefit from the syndication sale of The Big Bang Theory. And we're looking forward to our fourth quarter releases such as Happy Feet 2 and Sherlock Holmes 2, as Jeff just mentioned, as well as our strong home video and games lineup for the holiday season. So we remain confident, and we've said this before that 2011 will be a record year for Warner Bros.

On the Publishing where all 4 revenue buckets were actually up year-over-year in the quarter. Advertising revenues were up slightly. And if you'll recall, we transferred management of SI.com and Golf.com to Turner last year. So as a result, Time Inc. no longer books the advertising revenue generated by these sites. We all saw that as with certain titles in IPC last year. So if you were to exclude those 2 items for comparability purposes, total Advertising revenues were up 4%, and digital advertising revenues were up in the low teens.

Moving to Subscriptions, which were up for the first time since last year's second quarter. That's Subscription revenues. That was largely a result of an uptick in domestic revenue and favorable foreign exchange rates. And it was partially offset by the sale of titles at IPC. Operating income at Time Inc. was up 10%, with margins up 120 basis points. This is the seventh quarter in a row of year-over-year margin improvement at Time Inc. Total expenses were up modestly, and the biggest driver there was higher paper costs.

Looking to the third quarter, we are seeing some softness in both Advertising and newsstand sales. Adjusted operating income should also be negatively impacted by some continued expense growth, including higher paper prices. So if you were to take all of this into account, adjusted operating income should be down somewhat in the third quarter. However, we expect this segment to return to growth again in the fourth quarter.

Turning to the next slide, which looks at our full year outlook. As I noted a little earlier, we feel even more confident that we'll achieve our financial objectives this year. And this morning is update to our outlook to grow at least low teens in adjusted EPS in 2011. In terms of the quarterly progression, the year is coming in more or less how we planned. The first quarter was our most challenging one from a profit growth perspective due to difficult film comparisons, and the significant investments we made in the NCAA basketball tournament. In the second quarter, we returned to profit growth and adjusted EPS growth.

Now let me quickly highlight some things to be mindful of in each of Q3 and Q4 this year. So beginning in the third quarter, we expect accelerating year-over-year growth for both profit and adjusted EPS. That's largely a result of the strong theatrical and syndication lineup at Warner Bros. In fact, growth would be even higher if not for the timing of programming and marketing spending in the third quarter at the Networks.

We plan to increase programming spending in the mid-teens and to increase marketing spending, which should weigh on the Networks segment profits in Q3. Some of this is related to the airing of additional sports programming. Also, recall that in last year's third quarter, we booked a $58 million reversal of a litigation reserve, which creates another headwind for growth in the quarter. But as we look beyond Q3 and as we look ahead into the fourth quarter, we expect another quarter of very, very strong profit growth.

Warner Bros. should post a big quarter due to the home video and games release slate. And we anticipate strong growth at the Networks, very strong growth, in fact. Again, that's mostly a function of timing. In particular, growth in programming and marketing will be much more modest in Q4 as compared to the third quarter. But we will also benefit from this year's very strong upfront and our expectations for improved programming. So we fully anticipate a very strong second half for this year.

Let me continue on, move to the next slide, which just quickly highlights our free cash flow. Year-to-date, for the second quarter, we generated $555 million of free cash. The big year-over-year decline is mainly due to an increase in working capital. For the first half, that was primarily attributable to increased production spending of both Warner Bros. and HBO.

We said at the beginning of the year that this would be a down year in free cash flow due to the timing of our investment spending in programming and production, as well as higher cash taxes. You saw that decline in the first half, but we expect free cash flow generation to begin to improve starting in the second half now. And we fully expect to see both our free cash flow and our rate of conversion increase in 2012.

Looking at the last slide, which is our net debt position. We ended the quarter with $15 billion in net debt. That's up about $2.1 billion compared to the end of last year. We returned approximately $2.5 billion to shareholders during the first 6 months of the year, and that includes about $2 billion in share repurchases. That's double the pace of our share repurchases that we did last year. Year-to-date, we've also spent a little less than $300 million in M&A activity in the second quarter. The only significant acquisition we made was Flixster. And as Jeff described, we expect Flixster to play an important role in our efforts to accelerate the digital transition for our home video business.

Our debt leverage ratio is now 2.4x, and that's up from around 2x at the end of 2010. That's consistent with our plan to move closer to our target leverage of 2.5x in an effort to better optimize our capital structure. As you know, we manage our capital structure with the goal of finding the right balance between maintaining our strong balance sheet and actively deploying our capital to invest in our businesses, make acquisitions and return capital to shareholders. So with half the year completed, we feel very comfortable with the progress we've made and the path we're on.

So thank you for listening. And now let me turn the call back over to Doug to start the Q&A portion.

Douglas Shapiro

Thanks, Chris. So let's get the Q&A started. [Operator Instructions] Thanks.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Spencer Wang with Credit Suisse.

Spencer Wang - Crédit Suisse AG

A 2-part question for Jeff on digital. Jeff, Warner Bros. has the biggest film and television library, but you guys have been probably a little bit more conservative with respect to licensing some of the content to technology company. So I was wondering, first, if you could just update us on your thoughts with respect to that opportunity. And then secondly, on HBO GO, I know it's really early, but any sense of how HBO GO could impact churn going forward?

Jeffrey Bewkes

We're already selling some product to Netflix, and we have ongoing discussions with all of the digital outlets, Apple, Amazon, Netflix to sell series and movies. Basically, we're fairly vigorous in our approach to it, and I think we've been pretty clear generally that we're eager to maximize the value of all our series and movies. And we want to do it in a way which adds to the value of these over their lifetime, not detract from it. One of the things that -- so we do anything that fits that. We had thought that some of the sales that we saw content owners make to various digital outlets actually undervalued or reduced the lifetime stream of earnings for those products. So we didn't want to do that. And we think there's some good opportunities from all the digital players, including Netflix. On the GO question, things are going very well as we said in the call. The subscriber usage and take up of GO is very enthusiastic. We don't have the numbers on churn yet, but when you have your subscribers using it a lot more then it's obviously going to make the subscription more valuable, whether you're looking at churn, installation or really the value that consumers put on HBO, which will affect over time the support, the retail price and the wholesale price.

Operator

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

Douglas Mitchelson - Deutsche Bank AG

I wanted to follow up on the digital question. Jeff, you just talked about pricing being a holdback related to online video distribution deals. And correct me if I'm wrong, now with Amazon entering the fray, you're at a bit of a position of kingmaker since you haven't done a deal yet. Is the pricing then potentially been solved? Are you at the point where you're in negotiations on deals? And if it's more than just price, what are the other hurdles that are out there?

Jeffrey Bewkes

Yes, I wouldn't emphasize price as a particular problem. We're always interested in having several competitors and healthy ones, digital ones, bidding for the value of our product. And so we can make structures for that, that accommodates the different positions that digital distributors are in as they try to build their businesses. The value of these things is going up, what we've seen basically as you look at particularly subscription VOD, which Amazon is interested in, Netflix is very successful in that area, as is HBO. We think that there is a great place for subscription VOD. HBO already occupied a pretty good place in that area. But take Netflix, it provides another way for us to monetize our content, which is good. And it gives access to deep library of products that consumers couldn't easily get before, particularly the older shows. And so it may be filling a really functional thing for consumers, so that particularly also in the case of serial live shows, which we don't play as well on traditional cable nets or syndication, that can be a good place for subscription VOD services to operate, I mean, obviously, results in more monetization for the content than we were all getting previously. We don't think though that if you're looking at subscription VOD, in most cases, if you think of all the big series or movie products that's out there in the relatively early windows, that's probably not the right outlet for the newer, higher-value content because it has so much money behind it as you take it through the years of its window. So I don't know, does that answer the question?

Douglas Mitchelson - Deutsche Bank AG

Well, let me just take a shot at the timing aspect of it. When it comes to library product that you have at Warner Bros., one option if you think the price is going up in value is just simply cut a short-term deal, 6 months, 1 year, what have you and then get the price increase filing. Should investors anticipate that we're getting reasonably close to a library deal, something that could happen this year or next year?

Jeffrey Bewkes

No, we can't comment on that. Obviously, as you said, we've got the biggest backroom of movies, series. And we deal with all -- we have all kinds of networks coming to license them, now new digital services coming to license them, whether they're using a subscription model or a show-by-show, film-by-film model like Apple. So there are just plenty of places. It's a -- we think it's actually a very promising situation.

Operator

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

Richard Greenfield - BTIG, LLC

I wanted to follow up on that last question because I think the question that is kind of everyone's thinking about is this issue of freshness of content. And you're spending a lot of money for your Cable Networks on acquiring syndicated content, whether it's Hawaii Five-O or The Mentalist, that you talked about at the beginning of the call yet there's a lot of services, and some of them are your own, like an HBO GO, where you can watch content from years ago, whether it's Netflix, where you can watch lots of content and everybody from your peers seems to be feeding into, putting up all this older content. And I think the question broadly is what's the impact on ratings and profitability as consumers have more and more options to watch all of this stuff that isn't recent, that is older? What's the risk to ratings and is there a double-edged sword that -- how do we think about that issue?

Jeffrey Bewkes

All right. That's a good question. In the case of HBO, the ratings are not as important, although as we've seen viewership go up with On Demand, whether it was On Demand on television for HBO, which has had been going on 5, 10 years, or now On Demand on Internet for HBO, which is GO, when you put something On Demand, including this year's Game of Thrones or Sopranos from years ago, a lot more people watch it. So if you then -- that's the premium and pay TV side. HBO has a fairly deep library of all of that, both current and older hit shows. If you go to -- when you ask ratings, I think advertising, when you go to ad-supported networks like TNT, TBS, we have a mix of new originals, acquired series, acquired movies. In the case of all the acquired stuff, they're all hit. In the case of original stuff on TNT, mostly those have been fortunately hits, including some of the new ones that we've put out. If you then go to that and you say, all right, what happens as people have more ability to pick programming On Demand, which has been -- that's given rise to a theory everybody has that then scheduled viewing "collision viewing," which I think is an inaccurate term, will go down as people have more choice. Well, what everyone's forgetting is that when you put the hit programming, including the acquired hits on big cable networks like TNT, USA, TBS, when you put those On Demand, you get the same lift that makes those popular programs more successful. So you have 2 effects going on. One is more choice, so a viewer can move away from a scheduled rerun. The other is more choice, so a viewer can watch the favorite hit show that is available now in rerun. On TV Everywhere, you'll have a habit that develops among all consumers across all Networks that lets you watch a lot of current episodes of your favorite show. And what's developing right behind that is last season, you've got some of that on Hulu Plus where you can see full seasons, last year's season. So what you have is basically newer forms of what everybody used to think of as syndication, that is now being available On Demand. And if you have hit programming, you make it available, you get more viewing.

Richard Greenfield - BTIG, LLC

And just a follow-up. So when you think about who's losing in the process because there's only so many hours in a day to watch video content, do you think there's some things being drawn down by all of this On Demand viewing? Or do you think that the American consumers is just increasing their overall video exposure as you look at it over the next year?

Jeffrey Bewkes

Well, in fact, they're increasing it. But as you move towards more viewing of some show that you prefer, because now you can choose it, it takes away from mediocre programming and kind of mid-link scheduled shows. Hit shows and big brands win. Mediocre stuff loses.

Operator

Our next question comes from the line of Michael Morris with Davenport.

Michael Morris - Davenport & Company, LLC

First, a quick clarification. The outlook for the third quarter, John, you said should be similar to the second quarter in Advertising. Is that the 11% number that you reported, or is this the number kind of x the NCAA?

John Martin

Mike, thanks for the question. I was referring to the reported number. Again, just directionally, just trying to give a sense of how the back part of the year would play out between Q3 and Q4. So we would expect, given all things, there's always lots of variables moving in all directions, but we expect sort of right now similar ad revenue growth.

Michael Morris - Davenport & Company, LLC

Okay. Great. And then on the affiliate fee side, clearly, you've made these content investments, NCAA, front and center there. Can you help us -- the affiliate pacing in the second quarter of 7% of the subscription pacing, I'm assuming Turner domestic was above that. Is it correct that it's more in the 8% to 9% range? And does that level of growth -- I know that you guys don't negotiate publicly and that sort of thing, but does that already reflect the kind of maximum increase you feel that you can get with this NCAA contract or how should we be thinking about that kind of on a multiyear basis given the investments?

John Martin

Thanks, Mike, it's John again. So the answer -- I'll take the latter part of the question first, which is the answer is no. When we announced our commitment to the NCAA, we had said that it would take some time for us to be able to fully monetize and get paid full value, fair value for the value of the content that we'd be airing. And then looking out a little bit more broadly over a multiyear period, I just go back to what we've been saying, which is that we believe for the foreseeable future in any given quarter, by the way, it could be up a little bit or down a little bit. But if you look at it on a sustained period for the foreseeable future, we expect Turner's Subscription revenues to be in the high single-digit growth range annually and HBO to be in the mid-single digit.

Jeffrey Bewkes

I think you already said it, John. But then, that's before you add on top of that some fairly significant increases for sports on the affiliate side.

Operator

Our next question is from the line of Michael Nathanson with Nomura.

Michael Nathanson - Nomura Securities Co. Ltd.

I have one for Jeff and one for John. Jeff, following on the theme of today, how -- you mentioned that there was a fatigue on some of the syndicated programming that's going to be revitalized with some of the new shows we're adding. Can you tell me what sense do you have, what works have you done that says it's fatigue versus just more availability of something like a Family Guy or The Office online? So how do you know it's fatigue versus maybe just over exposure in other places?

Jeffrey Bewkes

Because if you look around at all the networks, not just ours, we don't really see fatigue for acquired shows or series programming that's essentially hit programming that's now going into a brand like TNT or USA or FX, et cetera. And so what I think is that it's important which series you're talking about. I think at Turner, we had some, frankly, bad, as it turned out, programming choices in some of the series we acquired over the last few years. And we talked about, I mean, specifically that when they were hits on network TV and going up in ratings when we made the deal to acquire them and then when they got on our network, they started to deteriorate faster than usual. Some of that maybe that they were available on some of the digital platforms, which if you're asking that, it doesn't help. But that aspect, which I don't think is a major part yet, it could become a larger deterioration effect if you're programming something on a big schedule TV network with a VOD component the way TNT will be. If that thing is available somewhere else all the time, that will obviously erode the viewership over time. So what's happened is our networks, and I think many others, have stopped -- they essentially blocked those rights for VOD, or they blocked them to be somewhere else, so that will help. But that's not the issue here for us we don't think. We think the issue is the shows we picked didn't work as well as the shows some of our basic cable competitors picked. And we've said today and named a few shows we think we'll begin to improve that. But that's basically a traditional programming kind of a problem that you fix by doing better programming.

Michael Nathanson - Nomura Securities Co. Ltd.

Okay. And then for John, just to clarify on the affiliate fee side of the Networks. The change in growth rates, how much of this did you simply do to the inclusion now of your HBO international assets, which were acquired? So is that the main cause of maybe the change in growth rates from 2Q to 1Q?

John Martin

No, it's not. In fact, the HBO international acquisitions that we made, there was only a modest number of them that are in the consolidated revenues because some of them are accounted for on an equity basis. And I think this quarter, we actually lapped HBO Central Europe. So it wasn't -- that wasn't really a driver at all.

Operator

Our next question comes from the line of Jessica Cohen with Bank of America Merrill Lynch.

Jessica Cohen - BofA Merrill Lynch

I have a TV and then a film question. Can you give us any clarity on the $5 billion in backlog for television? What period of time will it come in? Is it all domestic? And how much of it is third party versus Turner?

John Martin

Look, I don't actually have the lot of detail right here. That's a global number, and it's all inclusive and it also includes HBO. And I think Warner Bros. is the lion's share of that. But I don't have the details that go beyond that, and that will be coming in over a number of years as is typical with the backlog figures.

Jessica Cohen - BofA Merrill Lynch

Okay. And on film, given the growth in international markets, I'm just curious how are you thinking about your strategy. Some of the films you mentioned -- I meant, your ownership strategy, some of the films that you mentioned sort of back half that you seem very positive about, like Sherlock Holmes and Happy Feet. I don't think you have rights outside the U.S. or most of the rights outside the U.S. So how are you thinking overall about kind of ownership of film rights?

Jeffrey Bewkes

Well, I'm not -- are you talking about -- I don't think that's right, what you're asking. We have -- we're distributing those worldwide.

Jessica Cohen - BofA Merrill Lynch

Okay. I thought you had a partner. I wasn't told you had a partner then.

John Martin

Yes, we do. We have Village.

Jeffrey Bewkes

That's a finance partner.

John Martin

Yes.

Jeffrey Bewkes

It's not a distribution. So we basically sometimes took partners in the production financing of a film and we then distribute the film. The idea there is to optimize our kind of risk and profitability and stability of profitability, which is we look at the performance of Warner theatrically over any of the last 1, 3, 5 years, it's been very, very steady. I think steadier than any other company. So we basically think we have the optimal risk and profit participation in doing that. And so we think we'll get from our hits and leading tempo slates. We have more tempo in our slates than our competitors do. We think we get most of the returns from that.

Operator

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

Anthony Wible - Janney Montgomery Scott LLC

I was wondering if you can comment on ultraviolet getting ready to launch and whether or not you're going to see any programs with retailers to help spur initial adoption, or maybe even get that historical DVD catalog over to ultraviolet. Will there be any kind of like trade-in programs or anything to that extent?

John Martin

Well, with ultraviolet, what will happen is if you go and buy a physical DVD, you'll have it in the cloud as you walk out of the store. If you buy an electronic copy of a movie from either a cable operator or any electronic retailer, you will also have a copy to pick up in the cloud that you can move from device to device. If you want to take your old DVDs into retailers and have them put it into the cloud and therefore, available for you to move from device to device, you'll be able to do that also.

Anthony Wible - Janney Montgomery Scott LLC

Okay. And when will that officially kick off?

Jeffrey Bewkes

The fall.

John Martin

Yes, you'll be hearing more about our plans in the coming weeks and months. But it's not that far off in the distance. And suffice it to say that we're going to be working closely with all of our retail and distribution partners to try to make this a success. So you'll be hearing a lot more about this.

Operator

Our next question comes from the line of Barton Crockett with Lazard Capital Markets.

Barton Crockett - Lazard Capital Markets LLC

I wanted to ask a question about sports in terms of opportunities and risks. And really, 2 parts, one, could you talk about your interest in potentially acquiring other premium sports packages? There's talks about an NFL package, for instance. Do you think you need to have something more there? And then secondly, just update us in terms of the exposure to the NBA, in terms of how you view the risk to your business from potential of a strike. I know there's a revenue offset and cost offset, but how do you see that at this point?

Jeffrey Bewkes

Well, we don't need -- let's do NFL first. We don't need an NFL package. But we always look at things and try to figure out could they be beneficial to the mix of what we're doing. And sports is a pretty important part of the offering at Turner, but it's focused on having the right sports. And TBS and TNT have modeled its built on a balance of sports, originals and acquired series. We try to optimize that mix for viewers, for distributors, for advertisers. We've been very happy with the performance of NBA, Major League Baseball and NCAA. NCAA, as we said, is really outperforming. But we continue to evaluate potential opportunities as they come up. We look at everything, but we're not going to predict now which things we would think would make sense. You should assume that we'd only do something as big as a major league if we thought we were going to make money out of it. We don't do the as lost [ph] leaders. And on the NBA, we're hoping that the owners and the players can come to an agreement. But it's not a long-term issue for us. And we have protection built into our contract and we'd work with our long-term NBA partners on collaborative solutions if that were to come about. So we think we're in a pretty good position in sports. We've done some smart things, NCAA being the most recent and profitable. But that's the way we think of sports, profitable.

Operator

Our next question comes from the line of Tuna Amobi with Standard & Poor's.

Tuna Amobi - S&P Equity Research

So my question is on Green Lantern. It seems to be our perception, and Jeff, correct me if I'm wrong, that the film did not live up to its expectations. And I'm not sure if you agree with that. And if that's the case, do you still view the film as one of your core franchises, any impact on how that might affect your strategy at DC Comics? And also any comment on how that might play into your strategy to perhaps fill the gap with the end of Harry Potter. That would be helpful.

Jeffrey Bewkes

Sure. Look, as we've said, it did not live up to expectations. So it really fell short of the -- we are always evaluating whether there is a -- and it makes any sense to make a sequel. We're not -- I'm not in a position to tell you the answer to that today. But we will be deciding that in due course. And I'm not concerned about DC strategy. I mean, you make some films work, it's the individuals films not even getting to whether a franchise would work and some don't. And we are now managing DC in a much more holistic way. We think we have already multiple franchises. And we've got new ones we're trying to build. Remember, we have a Batman film for 2012 we talked about, which comes out in DC. And you know how strong the last one was. We've got Zack Snyder on board to direct the next Superman. And we think DC is going to be a major contributor going forward franchises for Warner.

Tuna Amobi - S&P Equity Research

Okay. A question for John. Just trying to understand a little bit more about the potential upside on Big Bang Theory. I know that you've talked about it quite a bit. And as you think about that, if you can help us to understand over the next several years the potential upside. And just as a frame of reference, for example, CBS has talked about billion-dollar franchises. And while that includes NCIS and CSI, they've also mentioned things like The Good Wife and Blue Bloods and shows that you might not ordinarily think about as a potential billion-dollar franchise so to speak. So I understand you don't have a broadcast network, but the domestic and international syndication upside seems to be pretty significant, the fee from the network, et cetera. So if you can provide some color on that, that would be helpful.

John Martin

Thanks, Tuna. I'll provide a little bit of color, but I'm not going to provide a lot of specific so numbers -- look, when Big Bang was sold into Syndication, it went at record levels. And we, as part of our company, are benefiting at Warners because they're producing the show and it's airing on CBS. But then we're benefiting at TBS, and we're really looking forward to it coming on the network. And we think that it's going to be a key ingredient to improving the ratings on TBS, which we said should begin in the fourth quarter. And we think that it's going to monetize its audiences very well, and we have high expectations for the audience levels that it's going to be able to deliver on the network. As it relates from the production side, I think we're extremely pleased with how it's continuing to perform on the broadcast network. And with ratings continuing at very high levels, we think that spells for a great degree of optimism as we look ahead with the potential of multiple, multiple cycles of syndication and international licensing opportunities. And if you look back in history, Warner has had some of the most successful television series in history, and they've been franchises with very, very big numbers in front of them. So we're pleased that we have Big Bang, and we think that there's going to be plenty of monetization ahead.

Operator

Our final question comes from the line of John Janedis with UBS.

John Janedis - UBS Investment Bank

Jeff, this is related to an earlier one, but given the fickle nature of audiences for acquired programming, do you foresee materially more investments in originals for Turner over the next few years? And do you think the market for a syndicated programming has the potential to cool given the increasing number of TV viewing platforms?

Jeffrey Bewkes

I don't know if fickle is the right word to use to acquired programming. Actually, I would go the other way and say that the audience for acquired programming because it's hits, because it's well-established, is actually a very loyal audience. And the question really is how does that loyal audience that comes to an acquired hit series, how does it stick with it over time because, obviously, as you go year after year after year, eventually everything declines at some degree. So I think that's really the question. And there isn't a huge pattern change in the performance of acquired programming. Having said that, we still think that the combination of original series that, frankly, some of the strength of our original series, the ability to launch them is aided by the very strong platform of acquired true-blue hits that are already on our schedule. And it's not the only reason, but it's one reason why we've been so successful in launching new series like The Closer, Rizzoli & Isles, et cetera. We're always evaluating the mix. We are constantly trying to create new long-term original series franchises at Turner, as well as HBO. I should mention not just in the remarks at the beginning, but now that truTV has created a really impressive number of -- and so has Adult Swim, of new series that are quite strong in their target demographics and quite strong with advertisers. So whether you're talking more niche-targeted programming, some acquired, some original or whether you're talking about big reach proven hits like on TBS, TNT, all of it is still strong and performing well. And It really gets down to -- look what John was just answering in the last question. Big Bang Theory is an acquired series. It's going to be a big hit on CBS.

Douglas Shapiro

All right. And with that, thank you very much for listening.

Operator

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

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