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Time Warner (NYSE:TWX)

Q3 2011 Earnings Call

November 02, 2011 10:30 am ET

Executives

Jeffrey L. Bewkes - Chairman and Chief Executive Officer

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

Douglas Shapiro - Head of Investor Relations

Analysts

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

Vasily Karasyov - Susquehanna Financial Group, LLLP, Research Division

Spencer Wang - Crédit Suisse AG, Research Division

John Janedis - UBS Investment Bank, Research Division

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Anthony J. DiClemente - Barclays Capital, Research Division

David W. Miller - Caris & Company, Inc., Research Division

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Time Warner's Third Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Doug Shapiro, Senior Vice President of Investor Relations for Time Warner. Please proceed, sir.

Douglas Shapiro

Thanks. This morning, we issued 2 press releases, one detailing our results for the third quarter, and the other updating 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 available on our site.

And 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.

Thanks, and with that, let me turn it over to Jeff.

Jeffrey L. Bewkes

Thanks, Doug, and thanks for joining us this morning. This was a great quarter for us financially and strategically, led by a fantastic performance from our studio. Revenue was up 11%. That's our fastest growth rate in 4 years. Adjusted operating income climbed 18%, and adjusted EPS was up 27%. Over the last few months, we took advantage of the attractive value of our stock and increased the pace of our repurchases. We bought back $3.7 billion of our stock so far this year, more than double the pace at this time last year.

Following the strong results this quarter, we've raised our expectations for full year adjusted EPS to growth in the high teens. That means we're on track and have doubled our earnings over the past 3 years. It's a testament to the strength of our assets and management depth that we've been able to produce these results during such an uncertain time for the economy and such a period of considerable change for our industry.

Let me put some context around our performance this quarter, and then John will walk you through our results in detail. We believe it's clear that technology and globalization are increasing the demand for high-quality content. As the right business models develop, we believe the value of this content is growing, and we think we're positioned to be one of the chief beneficiaries of these trends.

So to take advantage of this, we've invested and we'll continue to invest aggressively to create and acquire even more great content, and we're pushing hard to develop new business models that enhance the consumer experience in a way that supports our economics.

We made progress toward both these goals this quarter. At Warner Bros. film division, Harry Potter and the Deathly Hallows: Part 2 grossed $1.3 billion at the box office globally, making it the third-highest grossing film ever. The 8 Harry Potter films have now grossed $7.7 billion globally, making it far and away the most successful film series in history. Of course, that's a credit to JK Rowling's brilliant story. But it also underscores Warner Bros. unequaled ability to create and manage film franchises.

While this was the last film in the series, the Harry Potter franchise will endure in a variety of ways for a long time. As just one example, next spring, we'll open the making of Harry Potter attraction at our studio outside London, coinciding with the 2012 London Olympics. We'll give visitors a unique behind-the-scenes look at the productions on the actual sets. Advance tickets just went on sale, and they have blown away our expectations.

Although Harry Potter overshadowed just about everything in the film world this quarter, it wasn't all about Harry at Warner Bros. Contagion and Horrible Bosses were also very strong performers, and we're set up for a strong finish to the year with the sequels to Happy Feet and Sherlock Holmes coming later this quarter.

We're also enjoying fantastic momentum at Warner Bros. Television Production arm. The growth prospects for TV content have never been better, and Warner is in the pole position to benefit. The big story this quarter was the initial syndication of The Big Bang Theory. A hit show like Big Bang can be a tremendous asset to us across the company. For Warner Bros. it generates significant license fees and ongoing barter revenue, and for Turner, it's a critical part of the new lineup at TBS, as I'll discuss in a moment.

Plus looking out over the next few years, our syndication pipeline is building. We've had a great start to the new broadcast network season for both our biggest returning shows like Two and a Half Men, The Big Bang Theory, Mike & Molly and for several of our new shows, especially 2 Broke Girls, Suburgatory and Person of Interest. Reflect on this list for a moment. We've never had so many successful comedies on the air at one time. For all the change in the TV business in the last decade, the holy grail of TV production is still a hit 30-minute comedy. Not only do successful comedies fetch substantial prices in syndication, they can run for multiple cycles and become multibillion dollar annuities. And we've got 4 of the top 7 on all of television.

Over the last few weeks, we've also struck a couple of game-changing deals at The CW with both Netflix and Hulu. Historically, our stake in The CW has been profitable for us because it's a valuable platform for launching new shows. These deals substantially improve the economics of The CW. At the same time, they are great examples of how new distribution outlets can be additive to the traditional TV ecosystem. Many of the shows on The CW target a very specific demographic, and they are serialized, making them tough to syndicate through traditional networks. But they're a perfect fit for SVOD providers like Netflix and Hulu.

In recent months, Warner has also made further progress toward improving the value proposition of owning digital movies. Its home entertainment transitions to digital distribution, we think it's critical to make it more compelling and easier for consumers to buy digital movies and to manage their collections. That's why we've been a big supporter of the UltraViolet initiative, to allow consumers to access their movies from the cloud on a wide variety of devices in and out of the home.

And to help kickstart the process, we bought Flixster, which is the first service to allow consumers to access a UV title. Over time, we expect to see many more UV services launch. In August, we launched the beta of Flixster's collection management service, and we subsequently released the first 2 UltraViolet titles: Horrible Bosses and Green Lantern. We're really happy with the early results, and we expect UltraViolet to gain traction in the coming year as more UV titles are released and many more retail partners rollout their own UV services. In the coming months, we intend to steadily add new features to Flixster. For instance, we'll add a movie starter kit that will give consumers a choice of a complementary digital movie when they create a new UV account. We will open a studio agnostic storefront, and we'll introduce a disk to digital service that will allow consumers to convert their physical DVD collections into digital copies. We'll also keep adding new devices and platforms.

I'll now move over to our Networks business. At Turner this quarter, we again saw strong performance from the original programming at our big entertainment networks. Most notably, Falling Skies on TNT was the #1 new show of the year, while returning shows, Rizzoli & Isles and The Closer, remain the top 2 scripted shows on Cable. We're also confident that the ratings for our acquired programming will improve as we refresh our lineup with new hit shows, the first of which is The Big Bang Theory on TBS.

So after a great start so far, it's only been on the regular schedule for 2 weeks, but it's significantly outperforming the programming that was previously in its time slot, and that's providing a boost to other parts of the TBS schedule, including Conan. Just as important, we think Big Bang will prove to be a great platform for launching original comedies, which you'll see more of in the coming year. So not only should we see a big improvement in TBS ratings in the fourth quarter, we're also excited about the opportunity to drive growth in 2012 and beyond.

CNN had another very strong quarter with ratings up more than 30% in its key demo, dramatically outpacing its cable news competitors again. It's further evidence that more viewers turn to CNN than anywhere else when news breaks. Importantly, we're also seeing the payoff from some of our recent lineup changes with both Anderson Cooper's AC 360 and Piers Morgan Tonight up double digits. With our coverage of the Republican primary debates already breaking audience records on CNN, we think we're really well positioned heading into the 2012 election season.

We also benefited from strong performance at some of our faster growing network, as both truTV and Adult Swim posted their most watched third quarters ever in their key demos. As you all know, Turner's revenue is split between advertising and affiliate fees. So growing ratings is important for our ad sales effort. But to bolster our affiliate fees, it's also important to schedule high-profile programming like sports. That's why we acquired the rights to the NCAA men's basketball tournament. When we announced this NCAA deal, we told you that we expect that it would be significantly profitable for us over the life of the deal. We said that because we expected to negotiate higher affiliate fees for airing March Madness games on TNT, TBS and Turner. We're just starting that process. It should take a couple of years to complete. But recently, we successfully completed our first deals with distributors that include the values that we were seeking for this program. And we've had very constructive conversations with many of our other affiliates too, so I'm even more confident today about the profit potential of the NCAA deal than we were when we signed it.

This quarter, we continue to make progress with our deployment of TV Everywhere at both Turner and HBO. For the past 2 years, we've been primarily focused on getting TV Everywhere up and running technically. Now we're turning to the next phase, increasing awareness and making it easy for consumers to use. Turner now has TV Everywhere versions of its networks available to 70 million U.S. households, and we expect to reach about 80 million by the end of the year.

In addition to authenticated websites for almost all our key U.S. networks, we've now rolled out iOS apps for our CNN, Headline News, HLN, TBS, TNT, tru, Cartoon and Adult Swim. And we'll roll out versions for Android devices and several TV platforms by the end of the year.

At HBO, we're excited by the early success of HBO GO. The mobile app has now been downloaded almost 5 million times. HBO subscribers using GO are watching substantially more HBO than they did before, and the user satisfaction is through the roof. Users are spending the vast majority of their time watching HBO's original program, which continues to set the standard for the television industry. That was evident in September when HBO won more primetime Emmys than any other network for the 10th straight year. We're continuing to launch new platforms and feature enhancements. For instance, HBO GO will be available on Roku this week and is soon to follow on the Xbox.

In this quarter, we launched MAX GO for mobile devices. I'm also happy to report that we've made a lot of progress with the 2 major affiliates who don't yet have authentication agreements. I'm hopeful for their sake, they'll be up and running in the next few months.

Turning to our Publishing business. Like our other divisions, Time Inc. is pushing the digital evolution of its businesses more aggressively than any other magazine publisher. It's the only publisher committed to launching tablet versions of its entire domestic portfolio, and it's the only publisher designing content specifically for each device. We'll be launching tablet versions of at least one magazine every week between now and the end of the year. Early results are very encouraging with hundreds of thousands of print subscribers authenticating across the titles we've launched so far. As I said at the outset, we had another great quarter both financially and strategically.

Across the company, we are focused on increasing our output of high-quality content and leading the evolution of new business models that give consumers what they want in a way that's economically attractive for us. As we aim to do every quarter, we made a lot of progress on both fronts, which makes me very confident about how we're positioned for 2012 and beyond.

I'll now turn it over to John.

John K. Martin

Thanks, Jeff, and good morning. I'm going to begin by referring to the first slide, which is now available on our website. 3/4 of the way through the year, we're really pleased with how we've executed against our goals for investment, growth and returns. Our plan involves some significant investments in the first half of the year, which we told you would result in growth being more back end weighted for 2011, and you could see this with our strong results this third quarter.

Revenue was up double digits, and that's the highest quarterly growth rate since the third quarter of 2007. And adjusted operating income was up 18% year-over-year. Now that translated to a very strong 27% growth in adjusted EPS, and we can't do it every quarter. But these results are consistent with our long-term goal of growing operating income faster than revenue, and growing earnings per share faster than operating income.

During the quarter, we also continued to generate significant free cash flow, increasing our conversion to 60% of adjusted OIBDA. And as Jeff noted, we've increased our direct returns to shareholders. We repurchased about $1.4 billion of our shares since we last reported earnings, and we paid about $250 million in dividends during the quarter. So in light of this strong performance and confidence that it will continue through the fourth quarter, we've raised our 2011 outlook for adjusted EPS to grow in the high teens.

Now let me move to a discussion of our segments. Let me begin with our Networks, where we saw another quarter of really good revenue growth. Advertising revenues were up 9%. Our domestic entertainment networks, including kids and young adults, grew advertising mid-single digits, and domestic news grew high single digits. That reflected strong ratings momentum at CNN and Adult Swim and as expected, softer ratings at TNT and TBS.

International advertising grew over 30% in the quarter, helped by a couple of transactions, as well as favorable foreign exchange rates. If you look through those, international advertising revenues were up in the high single digits, which admittedly was a little lighter than we had expected. Let me provide a little bit more context as to what's happening here.

We're continuing to see very strong performance from our Latin American operations, which have become a key growth driver internationally for us. By way of context, it's a very profitable business for us with margins closer to the levels that we have here in the U.S. And by our estimate, we are now the largest cable programmer in Latin America. We also saw solid growth in our European businesses, but it was a bit lower than we had anticipated going into the quarter. And our results have not been as strong as we'd like in India, where ratings and advertising for our largest entertainment network have been somewhat disappointing.

Looking ahead to the fourth quarter, Turner is seeing similar advertising trends as it did in the third quarter. But the cancellation of NBA games should reduce growth by about 200 to 300 basis points in the quarter. We're also lapping an international acquisition that we made in the fourth quarter of last year. So we expect advertising growth on a reported basis to be in the mid-single digits.

Now for planning purposes, we are assuming here that there will be no NBA games in the fourth quarter, and while that would have the negative impact that I just said on advertising, there will also be an offsetting reduction in programming expenses. So the impact to adjusted operating income from the lost games in the fourth quarter should be relatively immaterial.

In terms of the scatter market, I just know generally that pricing is up high single to low double digits over the recent upfront. Moving over to Subscription revenues now for a moment in the quarter, they're up 6% year-over-year. As is often the case, there were some retroactive adjustments in the third quarter of this year, excuse me, the third quarter of both this year and last year, but together had the impact of reducing growth by about 100 basis points. As we look ahead, we expect subscription growth to be in the mid-single digits in the fourth quarter, and that's due to similar adjustments, as well as some headwinds from a stronger U.S. dollar and recent modest declines in U.S. multi-channel subscribers.

For all of 2011, we continue to expect underlying Subscription revenue growth to be in the high single digits at Turner and in the mid-single digits at HBO. And while the quarters can certainly bounce around from a variety of reasons, those expectations that I just communicated are consistent with what we have coming into the year.

Adjusted operating income was down at the Networks group, 4% in the quarter, and that's largely due to 2 factors, both of which were highlighted on our second quarter earnings call. The first is programming and marketing expenses were up double digits in the quarter, and that was partly due to the timing of our sports programming, including the Major League Baseball playoffs and NASCAR. Second, recall that in last year's third quarter, we booked a $58 million reversal of a litigation reserve. That cost us 500 basis points of growth in this quarter. Please keep in mind for the full year, our programming expenses are trending pretty much exactly as we had expected. And excluding the NCAA Basketball Tournament, as well as the impact of acquisitions, we continue to anticipate programming expenses to be up mid-single digits this year.

As we look to the fourth quarter, some of the timing issues that worked against us this quarter in the third quarter should actually turnaround and work in our favor. So we expect programming expenses to be about flat year-over-year. And again, for planning purposes here, we're assuming that there will be no NBA games played in the quarter. As a result, we expect the fourth quarter to be by far our strongest of the year at the Networks group in terms of growth and adjusted operating income.

Now let me turn to film where Warner Bros. had its best quarter ever. Revenue was up nearly 20%, and profits more than doubled to a record of more than $0.5 billion. These strong results were principally a result of the theatrical release of Harry Potter and the Deathly Hallows: Part 2 and the syndication sale of The Big Bang Theory. The incredible success of these properties underscores our view that the biggest hits are actually increasing in value, and we think the strong theatrical performance of the final Harry Potter movie bodes well for its upcoming home video release in the fourth quarter.

The Big Bang Theory was made available for both broadcast and cable syndications starting in September and was the principal driver of the more than 20% growth in our television revenue at this division in the quarter. And given the continued strong ratings of the show on broadcast, we anticipate that it will be a strong contributor to the profitability of the studio for many years to come.

Our Home Video revenue declined in the quarter, but that was mainly due to a lighter release slate. Our biggest title from a year ago was Clash of the Titans, and we didn't have anything of a similar large release in this year's quarter. It is worth noting, however, that for the industry, we estimate total U.S. home entertainment consumer sales were up almost 4% in the third quarter, which is an encouraging improvement from recent trends.

We anticipate a significant improvement in Home Video revenue for us in the fourth quarter as a result of a strong slate that includes the final Harry Potter film, The Hangover Part II, Green Lantern and Horrible Bosses. The fourth quarter will also benefit from a strong slate of video games headlined by Batman: Arkham City, which has been the best reviewed game of the year and shipped almost 5 million units at launch. And we should also see a nice lift from the SVOD deal that we recently struck and announced with Netflix for CW programming. And we're looking forward to the fourth quarter theatrical releases of Happy Feet 2 and Sherlock Holmes 2: A Game of Shadows. So the fourth quarter should be another very, very strong quarter for us in terms of profits here, and we remain very confident that 2011 will be a record year for Warner Bros.

Moving over to Publishing, where in the third quarter, Advertising revenues declined reflecting lower domestic print advertising. These results were also continuing to be negatively affected by something we've mentioned to you in the past. It's the transfer of the management of SI.com and Golf.com to Turner, as well as the divestiture of titles in IPC. And if you would exclude these items, overall ad revenue was essentially flat in the quarter.

Subscription revenues were also almost flat, and that was a result of continued softness at newsstand, particularly for the celebrity category, and that's offsetting an improvement in domestic subscriptions. Operating income declined in the quarter, and that was a function of both the modest decline in revenue and an increase in expenses resulting partly from higher paper costs.

Looking to the fourth quarter, we do not see a significant change in top line trends. The good news is that print advertising market appears to have stabilized. Much of the softness that occurred in the third quarter happened in July in the run up to the U.S. debt ceiling deadline, and trends actually improved somewhat in August and September. So we don't anticipate seeing a further deterioration relative to the third quarter, which is good.

We do expect Subscription revenue to remain under pressure at the newsstand due to continued softness in the celebrity category, but expenses should also benefit in the fourth quarter from a favorable comparison relative to its restructuring charge last year. So we anticipate a return to growth in adjusted operating income at Publishing in the fourth quarter.

Turning to the next slide, which just highlights our outlook. We're very encouraged by our results for the first 9 months of the year, and our execution gives us confidence to raise our full year outlook as I mentioned earlier. We came into this year thinking that it would be a really good year, and it's been better than we expected. We're on track to grow revenue more than $2 billion this year, and we now expect high teens growth in adjusted EPS. That's particularly notable coming on the heels of about 30% growth in adjusted EPS in both 2009 and 2010.

I think it's also important to point out that we've been able to do this even though, as what usually happens, not everything has worked perfectly this year. For instance, TBS and TNT ratings have been softer than we anticipated. Green Lantern underperformed our expectations. The home video industry has remained soft, and our largest channel entertainment network in India has struggled. And, of course, we've been operating against a relatively difficult backdrop of slowing economic growth and stagnant multichannel household formation.

But we've been able to more than offset all of that due to strong results from CNN, Adult Swim and our sports properties, the outperformance of the rest of our theatrical slate and a great year from our Television Production unit. Broadly speaking, I think our performance is a testament to the strength and the diversity of our revenue streams, and it gives us great confidence in our growth outlook as we look beyond 2011.

Turning to the next slide, which quickly details free cash flow. Year-to-date through the first 3 quarters, we generated $1.7 billion in free cash, with the vast majority of that coming in the third quarter. As we anticipated, conversion remains a little down compared to the year ago, year-to-date first 9 months. And that's largely a result of higher working capital requirements from planned increases in production spending at Warner Bros. and HBO. However, our conversion increased during the quarter, and we fully expect to see our rate of conversion move up next year. We've been talking about that all year.

And the next slide, which is the last slide, provides a net debt reconciliation. We ended the quarter with about $15.3 billion in net debt. That's an increase of about $2.4 billion compared to the end of last year, and that's largely due to the continued direct returns to shareholders that we've been providing. We returned about $1.4 billion to shareholders during the quarter, and that includes over $1.1 billion in share repurchases. We also bought back another $584 million of stock subsequent to the end of the quarter. And as I noted earlier, that's an acceleration in the pace of our returns to shareholders relative to recent quarters. So year-to-date, we have returned more than $4 billion in share repurchases and dividends. And to help fund that activity while maintaining strong liquidity and balance sheet flexibility, we recently issued $1 billion in long-term debt, and we were able to do that at very, very attractive rates.

I'd also note that year-to-date, we've spent about $300 million on M&A activity. We didn't have any significant acquisitions that occurred in the third quarter. Our leverage ratio at the end of the third quarter is about 2.3x. That's down a little bit from the second quarter, but up from around 2x at the end of 2010. Given the pace of our cash generation and share repurchases, we are on track to be closer to our target leverage of 2.5x by year end. And we continue to believe that 2.5x strikes the right balance of maintaining balance sheet strength while allowing us to continue to invest in our businesses, make acquisitions and return capital to shareholders. So with only one quarter left in the year, we are very pleased with our progress to date, and we are confident that we will achieve our capital plan priorities and objectives.

Now let me end there and turn the call back over to Doug who will start the Q&A portion.

Douglas Shapiro

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from the line of Spencer Wang from Credit Suisse.

Spencer Wang - Crédit Suisse AG, Research Division

Just a 2-part question on the studio. First, Jeff or John, given how successful Big Bang Theory was in off network syndication in the third quarter, could you remind us what the pipeline looks like for 2012 specifically? And then the second part is on UltraViolet, maybe for Jeff, how is UltraViolet going to work for Warner, Fox and Universal movies in the HBO window?

Jeffrey L. Bewkes

Let's start with the syndication pipeline. The Big Bang Theory is obviously a big driver this quarter, but we have a very strong pipeline coming up. We've already sold The Mentalist for 2012, happens to go into TNT. We also have Chuck currently available, and we have Fringe available in 2012. We're pretty excited about the possibilities for Mike & Molly for 2 Broke Girls among our other new shows that are currently on the air. So it's really quite good. In the longer term as we said in the kind of prepared remarks, we've got 4 of the 7 comedies on TV, which should be a really strong future in the even longer term. If you go to -- your question of how is UltraViolet working, I think, first of all, we think everyone is -- all the other studios are going to release films in that format. I think your question was about how it interacts with HBO? Would you just focus that?

Spencer Wang - Crédit Suisse AG, Research Division

Sure, Jeff. I guess I was asking my understanding was that HBO has exclusive streaming rights in that window. So would UltraViolet movies from HBO's studio partners work in the HBO window?

Jeffrey L. Bewkes

Yes, they will. HBO has been part of organizing and supporting the UltraViolet group. So yes, they will. And the method by which and the arrangements that are being made by the studios to get those rights, I'm not going to go into in detail, but it's going to work fine. And obviously, we have a big studio. We understand the value of UltraViolet to buying, owning and having owning be a good consumer attraction. But we don't think it's going to be a problem for HBO given some of the tweaks that we'll make to HBO's rights.

Operator

Your next question is coming from the line of Anthony DiClemente from Barclays Capital.

Anthony J. DiClemente - Barclays Capital, Research Division

One for Jeff and one for John. First for Jeff, I just wanted to ask a little bit more about how The CW deal fits with your SVOD strategy? I know that, that content is somewhat unique. It's serialized, for a specific demo, but just want to get a little more of your thinking. Are you you becoming gradually more platform agnostic as it pertains to your studio library and would a slowdown in distribution revenue growth from your traditional affiliates or the slowdown in multi-channel videos subscribers make you more platform agnostic? And then just a quick question for John on the share buyback strategy. We're all trying to figure out how much stock to buyback in our models for 2012. Can you just give us an update on when it might be likely for you guys to consider re-upping of the authorization with the board on the share buyback plan?

Jeffrey L. Bewkes

We've actually always been platform agnostic on the distribution platforms, and what we've been saying all the time, all along, and the deal with Netflix and Hulu illustrate what we've been saying. Is that we always thought there was a role for Netflix and other library SVOD services in the ecosystem. It provides everyone a new way, provides us another way to monetize our concept, which is good. It gives consumers access to content they couldn't easily get before like older and serialized shows. So it can be very good for consumers because they weren't really getting those or would have trouble getting them on a VOD basis. For our studio, what that does is it monetizes some content, particularly the serialized and older series better than it was monetized before. So it adds money to the ecosystem. There's some differences because of the nature of what Netflix is and what Hulu is about how both of those work. But basically each of them is consistent and does not impinge upon the economics and value of the other kind of traditional networks. Not to get too specific, the economics of The CW and Netflix deal, The CW to Netflix deal, is basically good for both of us, just think -- have I answered your question or is there a little more dimension to what you're looking for?

Anthony J. DiClemente - Barclays Capital, Research Division

Yes, it makes sense when you talk about it in terms of catalog content and new opportunity for monetization of catalog. I guess the question is, for more front cycle, first cycle syndication, second cycle syndication, I would assume because of your interest in preserving the ecosystem that at an equivalent price, you prefer the traditional media distributors because you want to avoid fragmentation of the advertising businesses. And so I just wonder would that change, is that changing, am I wrong about that, and so that was the nature of my question. I understand about monetizing longer-tailed catalog content.

Jeffrey L. Bewkes

Well, let's take The CW deal as a template. We'll look at each deal on a case-by-case basis. As a general matter, we would like to maximize the lifetime value of our content. It depends on the nature of the show. So for example, for a show that may have substantial value in the syndication window or even the potential for multiple cycles, think of a big hit comedy, we might not license pre-syndication at all. We might not license to SVOD at all for one of those because it be hard for an SVOD licenser to pay the money that would cover all the later cycles. But for shows that might not be a great fit for traditional buyers of syndicated programming, particularly serialized stuff, and depending on the demographic appeal, it may make sense to license those before even the traditional syndication window because the traditional syndication window for some of those shows, think of The CW shows we licensed to Hulu and to Netflix, actually fit that description. So it really depends on the nature of the programming. But there are certain kind of clearer categories into which a Netflix or a Hulu can provide added value. John?

John K. Martin

Just quickly on your second question, which is thoughts on the buyback. We think we've been very opportunistic this year in accelerating the pace of the buyback in light of the dislocation of the equity markets, coupled with the very, very attractive interest rate environment that the debt markets have been providing. And that's been -- we think it's been smart to sort of use this year to somewhat alter our capital structure, move it more towards optimization. And we've kept in mind the 2.5x leverage target that we've been talking about all year. I'm not going to get into the specifics as to what our plans are going to be beyond this year. I mean, we've got an existing authorization, which we still have ways to go. And then I would say we're going to be looking at the 2.5x leverage ratio and evaluating all of our alternative cost of capital against that backdrop.

Operator

The next question is coming from the line of Doug Mitchelson from Deutsche Bank.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

I guess a question for Jeff and John as well. And sort of a light at your comments around The CW. I do have a question on the Warners library value, and it seems like it's a significant opportunity for 2012. I want to make share we have a handle on the opportunity of the short term relative to your ultimate long-term strategy. And I guess the questions, are you going to take baby steps with SVOD or a giant leap? And what I mean by that is you've got a lot of TV shows that could have outside strategic value to online distributors, sort of obvious to the list, Seinfeld, Friends and so on. And so I guess first, do you actually control the licensing for Seinfeld or is that at Sony? And then second again, as you sort of think, you sort of want to position 2012 for all of us, should we be thinking about the potential for a full library deal or is this something where we should think that you're going to take baby steps? And then for John, I'm just curious if the amortization for television programming is changing now that the online SVOD window's getting locked in. So do you expense less upfront and more later in the show, which could help TV Production profitability in the short term?

Jeffrey L. Bewkes

Well, that's 3. Okay. Seinfeld is controlled by Sony in licensing, but we work well together. On the opportunity, you're quite right about, because Warners is so big, about what we've got for online and a number of distributors: Netflix, Hulu, Amazon and others. Yes, it's a big one. I don't -- we've never taken a baby step with anything. We did not recently take baby steps. We were not reticent or slow to do any of that. It was all the way we were planning to enforce and increase the value of all our programming to all our distributors, including the new SVOD-type distributors. So the recent deals are pretty big. We're happy to do big deals. We just want them to fit into the support of the other gigantic deals that we do every month with traditional networks. So there's plenty of room for us to do more deals out of our giant library of film and TV and not just from Warners, but some of our other programming that we make. If the people that want to buy it can afford it.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Okay. Fair enough, and then, John, on the amortization?

John K. Martin

Yes, Doug. So 2 things. The first is as it relates to the sale or well, rather as it relates to just catalog or proven shows, it's really a nonevent because the amortization on those, in many instances, has already occurred or has largely occurred. I think your question probably is going more towards as we produce new shows and sell those in, and there I think we're going to need to evaluate it as time goes on. It's probably too early to say at this point in time, there would need to be a track record of a demonstrated window where we could basically really count on the fact that it would be there, and then yes, you're right. Over time maybe we have the ability to change somewhat the recognition. But at this point, I think it's too early.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Because you haven't done a big Netflix deal yet, it's not influencing in the accounting, that's basically at this point. So no impact on 3Q. That's helpful.

Jeffrey L. Bewkes

We did a reasonably big Netflix deal.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Yes, from the new Warners.

Operator

Your next question is coming from the line of Vasily Karasyov from Susquehanna Financial.

Vasily Karasyov - Susquehanna Financial Group, LLLP, Research Division

I have one clarification and one question. How do we reconcile your expectation for HBO subscription revenue growth when Time Warner Cable says the premium revenue is down, I think they said 7%. And then, Jeff, looking at your international networks, what do you think is the structural opportunity for the run rate of revenue growth? You clearly are not growing as fast as some of your peers, for example, Discovery that reported earlier. And if you could tell us what you think the drivers of the delta are.

Jeffrey L. Bewkes

Okay. First on HBO. I don't think there's a reconciliation issue. We're generally strong network growth both in programming and revenue. With any one particular distributor that may not be availing itself in that case, you mentioned a specific one, but the real upside in profitability that they should get from a network that's as successful as HBO is with every other distributors. So I think you're talking -- your question is really one for that cable distribution company not for HBO, which is doing quite well with everyone and frankly, I think we're on the -- I think that's kind of a backward-looking statement they made because we are working with them to dramatically improve their performance in premium TV. On international, I don't think I understand your question. Our international networks are growing pretty fast. And as we've said before between HBO and Turner, we think we can double the operating income over the next 3 to 4 years, and they're already making $0.5 billion. They're very different assets from what Discovery does. They're in different markets. And international news, particularly is a different animal, but that doesn't change the fact that international position, share, growth of revenue and earnings is going to be very strong for Time Warner, both at Turner and at HBO. And HBO international is growing quite rapidly.

John K. Martin

And remember the nature of our business, international is beyond just networks. So for example, the third quarter, our international revenues were up 29%. And as a percentage of revenues, we grew to 33% of our total, and we had huge year-over-year gains in Warner Bros., which on an absolute dollar basis, is the biggest business we have outside of the U.S. So we continue to believe that in many parts of the world, international opportunities are faster in growth than U.S. opportunities, and we intend to execute on that over time.

Operator

Your next question is coming from the line of Alexia Quadrani from JPMorgan.

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

Two questions. First just digging in a bit deeper on your ad revenue comments for the fourth quarter. I think you said it looks similar to the third quarter. The upfront obviously starts just at a higher base. Is there some offset? Is scatter not quite as strong as it was in Q3 for you, or was it relative softness in rating? And then just second question. You obviously off to a very good start on TBS and The Big Bang Theory. Are you -- I know it's early, but are you at this point where you hope to be with that show?

Jeffrey L. Bewkes

Yes, on Big Bang, we are. It's up dramatically. It's only 3 weeks in, and we think it's going to continue to build and will help the lead in to Conan. So Big Bang's doing great. On your question on this ad outlook and the scatter outlook, I'm assuming you're asking about the fourth quarter. As we said on the call, the scatter pricing is still up high single to low double digits over the upfront. In terms of volumes, we don't currently have a tremendous amount of excess inventory, which John covered in his remarks. So we're not very active in the scatter market. But still it's an open question on how much of the strength in the upfront was a result of scatter money getting pulled forward into the upfront. So the good news is the cancellations for the first quarter have been very limited. And trends in our international business are good in most territories, but we have seen some pockets of softness out there. And all of that is reflected on our expectation for mid-single digit growth in the fourth quarter.

John K. Martin

And that includes also the expectation of no NBA games.

Operator

Your next question is coming from the line of Michael Nathanson from Nomura.

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

I have one for Jeff, and then I'll have a follow-up for John. Jeff, you talked about the NCAA and your willingness to invest near term for long-term benefit. And I wonder if you talk of the NFL and whether or not they may add some Thursday packages, maybe the Monday package, sorry the Sunday package is available. So can you talk about your interest in NFL programming, and how you would evaluate what the right near-term threshold level would be for losses whether or not you want to do something with the NFL or not.

Jeffrey L. Bewkes

As you know, we've said it a lot. Sports is an important part of the offering at Turner, but we're focused on having the right sports. So TBS and TNT's model is basically built on a balance of sports, original series and acquired series, and we try to optimize, mostly we get it, the mix of those to remain attractive for viewers and advertisers and distributors and a balance of ratings, ad growth and subscriber fees. We're very happy with the performance of NBA, Major League Baseball and NCAA, and of course, you mentioned in NFL, we're going to continue to evaluate potential opportunities in the future. We look at everything, including that. But we can't really comment on exactly what we do in a case like that, other than to say, just as we did say with NCAA, and by the way, we've made tremendous progress in the affiliate deals we've been doing so far, now that NCAA has gone on schedule that we know that that's going to be quite profitable to us as we had expected. We'd only do something the size of the NFL if we were very confident we could monetize it. We would not do it, for example, as a loss leader in our projections. So that's basically how we think of things like that. That would be obviously a giant move if we made such a move.

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

Okay. Maybe I put you on the spot. If you're going to monetize NCAA, do you think you can monetize the NFL?

Jeffrey L. Bewkes

Well, I'll tell you later.

John K. Martin

Do you have a second question, Michael?

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

Yes, and then for John, just going back to, you guys gave us a lot of information about fourth quarter scatter versus upfront, but scatter versus scatter what you're saying it sounds like it's more mid-single scatter versus scatter growth based on just kind of a map of what happened here. Is that right?

John K. Martin

Typically, Michael, we focus as everybody knows on pricing versus the upfront. I know that many analysts for modeling purposes focus on scatter over scatter. Just a quick reminder, last year in the fourth quarter for us, we think scatter was up probably mid-teens to as much as 20%. It was really, really high. And as we said on the call right now for the fourth quarter, scatter pricing for us is up high single to low double. So -- and that's off of the strong upfront that we had, that was up low double digits. So the math suggests, to your point, that scatter on scatter is probably up modestly year-over-year.

Operator

The next question is coming from the line of David Miller from Caris & Company.

David W. Miller - Caris & Company, Inc., Research Division

John, 2 questions for you if I may. It used to be in the syndication business maybe 10 years ago, 15 years ago or so that the golden rule for whether or not a series was syndicated at all at least internationally was 5 years on the air or 100 episodes, whichever came first. Would you say that rule still applies as obviously, the most prolific producer out there of television series or is the industry going to sort of a model similar to kind of the Hawaii Five-0 model where episodes are sold into syndication from essentially the pilot episode right away?

John K. Martin

Yes, the generalization is it's getting sold essentially at the same time now. It's almost day and date. So it's changed a lot. It's been that way actually for a while.

Jeffrey L. Bewkes

Turns out that there are some SVOD players that will buy what is essentially syndicated run on series that don't, that they don't know, and we don't know whether they're going to have 5 years or 100 episodes in the can.

Operator

Your next question is coming from the line of Jessica Reif-Cohen from Merrill Lynch.

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

Can you clarify how big the Netflix and Hulu deals are? And are they -- how spread out will they -- would you recognize it as lumpy or will it be spread out? And I just wanted to follow up on something John said earlier. You mentioned that subscribers are down domestically. I think we've obviously seen that from pay TV, but is that -- how much is it down and is it all just the market maturity or is some of it segmentation?

Jeffrey L. Bewkes

You what to do the Netflix timing to recognish?

John K. Martin

Yes, sure. So without being overly specific, Jessica, obviously, this is a good deal for us, and it's a long-term deal. It's worth hundreds of millions of dollars of revenue to Warner Bros. TV, and it's pretty high margin. In the fourth quarter, we expect to recognize a little more than $100 million in revenue, with operating income of about half of that. And if you're thinking about next year, I would say the recognition is probably similar in terms of order of magnitude, and there's lots of mechanics as to why that's the case, but it's probably the easiest way to give you some guidance.

Jeffrey L. Bewkes

On your subscriber question, Jessica, can you just I'm not sure exactly what you're asking. Would you just say it again?

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

Yes, John had mentioned when you were talking about affiliate fees that subs are down. And I'm just wondering is that because of the market maturity? I mean, the U.S. market maturity or some of the pay TV operators starting to segment with different kind of offers for different consumers or do you think it's that and do you have any sense of where we're going?

Jeffrey L. Bewkes

Okay. Yes, we do. So let's break it down because that's Turner and HBO. For Turner, most of our networks are fully distributed. So any variation in subscriber volume essentially varies with multichannel sub growth. It's not an issue of that kind of less distribution or less universal distribution or any of our networks. And there's no trend problem or issue there. For HBO, basically the sub volumes are also related to multichannel sub growth because HBO is in most, pretty much all of the packages for pay TV other than the ones where our distributor is giving away free subs. So those have been pretty stable on the volume side and the HBO issue on paying subs had to do with the mix between which affiliates were above or below benchmarks. It's a little arcane. The general fact there is the revenues have been very smooth and increasing because the basic paying sub base is strong and stable and growing, and the affiliate rates abilities at both Turner and HBO are steady and strong. And at Turner, they're going to increase. At HBO, they may increase in terms of pricing.

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

Can I just ask one follow-up? Not to this, but just another question for Jeff. There was a great article, a recent article in The New York Times on what you're trying to do with overhead. Can you just give us a sense of how you can save and over what period of time?

Jeffrey L. Bewkes

No, the Times is very exuberant about these kind of things. We think we can save what is in those article. It takes a few years to get to the run rate of those things, I'm trying to remember exactly what they wrote. What we're basically trying to do is whatever waste inefficiency and overlap that we can remove in order to take the money and put it into programming and Internet translations of our services, that's what we're doing. So it's going to take a few years to get to those run rates.

John K. Martin

Yes, I mean, look, if you think back what we've been doing over the last few years and if you think about the actions that we've put in place. When we came in, we cut the corporate overhead a couple of hundred million dollars. We did a soft freeze on pension plan. We standardized all of our health and welfare plans. Those cost saves alone, which are now in our results, are in the hundreds of millions of dollars already. We have been saying and we're executing against this that we've identified several areas of very, very large annual spending in the area of information technology, in the areas of real estate and facilities, and to a lesser extent, in other HR-related, back off management areas, the back office, excuse me. If you look at the aggregate spend in those areas, it's around $2 billion to $2.5 billion, and we're going to work collaboratively and establish shared services models that we think could also bring us savings in the hundreds of millions of dollars. And there was also a reference in the article to a big real estate decision that we're going to be working together as one company to make in the coming years. To put some perspective around that, we spend hundreds of millions of dollars and we occupy 10 buildings in Manhattan, and we're open to any and all options. But we're looking to act in a way where we can bring together and harness the human resources that we have in Manhattan and rationalize our footprint and do it in a very, very cost-efficient way.

Operator

Your next question is coming from the line of John Janedis from UBS.

John Janedis - UBS Investment Bank, Research Division

Can you guys talk a bit more about your programming strategy at Turner going forward? It seems like from a ratings perspective, the shelf life of some of the licensed content is compressing. So are you planning on ramping up the number of original hours in prime time or maybe even shifting some of the budget from syndication into original programming?

Jeffrey L. Bewkes

Yes, possibly. I think -- let me say a few things about that. There's been a lot of speculation about the strength of acquired series on whichever cable networks have them. And basically, I think you lead off with that. If you have acquired series, they do tend to decline in a somewhat predictable way over time. One question asked, are they declining faster? No, if you look across the various networks not just ours. Secondly, what has been happening is a bit of an up-and-down supply of high-quality series, acquired series that are hits on broadcast. That could be ours. There's been a dearth of half, half hours which is about to turn around because the networks have a lot more of them on. So we think that on the acquired series side, there's a fair amount of value, and it may not go down. It may go up. As those series get scheduled with some critical mass on big reach cable networks that offer them on demand. And remember, those kind of series will not be available on demand anywhere else. So that's the kind of good news on the longevity of acquired series. If we're all sitting here saying, hey, the bids are going up and the value is going up on series programming over the lifetime, which we've all seen in these deals, then that means that the value on whichever outlet puts them on is also sustainable not declining. Having said that, we've all seen for years and both Turner and HBO have been leaders in this, that original series can be very important and very significant in terms of CPMs, branding the networks, content sale profits. And you get big hits, we've had them on HBO, we've got them now on TNT. That's very important value to the network and even content earnings for those kind of shows. So the issue gets to be one of mix, we think Time Warner is in a very advantaged place versus our competition because we make more of these hit shows, hours and half hour and sell them to all networks. We're the only series supplier coming out of Warners that has shows on all 4 broadcast networks, and we not only have a show on all of them, we have 3 shows or more on all of them. So that's a fantastic business if you think about it at the Warners side. The fact that we then have 2 big reach networks at TBS and TNT, to pick and support whichever of those become really valuable and to put them on an on-demand offering to support the TNT, TBS brands alongside of high-value sports, alongside of high-value original series, gives us a huge advantage and a tremendous platform and schedule in which to launch original series. So to finish, the obvious thing, you've seen it at HBO, you'll see it increasing at TNT, TBS is to have hit original series on those networks as well. And we'll see about how many -- if you take the balance of what acquired series are there, what originals are there, you'd like to increase the originals, and that'll probably happen unless there's so many valuable hits coming off acquired broadcast that does, it's kind of a balance between those 2 things.

John Janedis - UBS Investment Bank, Research Division

That's helpful, Jeff. And maybe one quickie is I know it's early in the season, but it seems like some of the younger skewing networks like Cartoon are seeing some rating softness. Do you think that's maybe a timing issue related to when the programming hits or maybe the beginning of a new trend where the audience is fragmenting?

Jeffrey L. Bewkes

In Cartoon among the younger audience, it's a long and complicated story between Disney, Nickelodeon and Cartoon, and whichever program we happen to have that are hits. We have a few new promising hits and some others that have been eroding. What I would call your attention to economically because you've mentioned Cartoon, Adult Swim is a hugely successful network with rapidly increasing ratings, CPMs, ad revenues and probably affiliate fees. So don't forget that one. Don't forget truTV.

Douglas Shapiro

I think with that, we'll cut it off, and thank you, everybody, for listening in.

Operator

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

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