Time Warner (TWX) Jeffrey L. Bewkes on Q2 2016 Results - Earnings Call Transcript

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Time Warner, Inc. (NYSE:TWX)

Q2 2016 Earnings Call

August 03, 2016 8:30 am ET

Executives

Jessica L. Holscott - Senior Vice President, Investor Relations, Time Warner, Inc.

Jeffrey L. Bewkes - Chairman & Chief Executive Officer

Howard M. Averill - Chief Financial Officer & Executive Vice President

Kevin Tsujihara - Chairman & Chief Executive Officer, Warner Bros. Entertainment, Inc.

John K. Martin - Chairman & Chief Executive Officer, Turner Broadcasting System, Inc.

Richard L. Plepler - Chairman & Chief Executive Officer, Home Box Office, Inc.

Analysts

Michael B. Nathanson - MoffettNathanson LLC

Michael Morris - Guggenheim Securities LLC

Doug Mitchelson - UBS Securities LLC

John Janedis - Jefferies LLC

Richard Greenfield - BTIG LLC

Omar Sheikh - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Jessica Jean Reif Cohen - Bank of America Merrill Lynch

Doug Creutz - Cowen & Co. LLC

Operator

Welcome to the Time Warner, Inc. Second Quarter 2016 Earnings Call. My name is Rob, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Jessica Holscott, Senior Vice President of Investor Relations. Mrs. Holscott, you may now begin.

Jessica L. Holscott - Senior Vice President, Investor Relations, Time Warner, Inc.

Thanks, Rob, and good morning everyone. Welcome to Time Warner's second quarter earnings conference call. This morning we issued three press releases; one detailing our results for the second quarter, one updating our 2016 full year business outlook, and the third announcing Time Warner's agreements with Hulu, including making an equity investment.

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

Second, today's announcement includes certain forward-looking statements which are based on management's current expectations. Actual results may vary materially from those expressed or implied by these statements due to various factors. These factors are discussed in detail in Time Warner's SEC filings including its most recent Annual Report on Form 10-K and subsequent quarterly reports on the 10-Q.

Time Warner is under no obligation and is 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.

I'll now turn the call over to Jeff Bewkes, Time Warner's Chairman and CEO, who will be followed by Howard Averill, Time Warner's CFO. After the prepared remarks, our divisional CEOs, John Martin, Richard Plepler and Kevin Tsujihara will join us for our Q&A session.

With that, I'd like to turn it over to Jeff.

Jeffrey L. Bewkes - Chairman & Chief Executive Officer

Thanks, Jessica. Thanks everybody for listing in this morning. We're about halfway through the year and we're well on our way to exceeding our original 2016 goals. At the same time, we've been making the necessary investments in the very best video content and the development of new and exciting distribution opportunities in order to continue driving industry-leading growth over the long term. In the quarter, we generated revenues of $7 billion and adjusted operating income of $1.8 billion. And adjusted earnings per share grew to $1.29 per share. We also returned over $1 billion to shareholders in share repurchases and dividends. Our financial results continue to be fueled by creative excellence across our divisions.

Since we last spoke with you, we received 148 Primetime Emmy nominations, that's more than any other company, with HBO's 94 again setting the pace for the industry. TNT and TBS finished the second quarter as the two highest graded cable networks in primetime. With TNT airing cables most viewed NBA telecast of all time and Warners once again came out of the upfront as the leading supplier to the broadcast network. We expect that momentum to continue this weekend with the opening of Suicide Squad, one of the summer's most anticipated movies.

Our results also reflect the consistent execution of a strategy that we've been discussing with you for years. A core part of that strategy is to ensure that our networks, our shows and our brands are available to consumers on a wide range of platforms and devices and in all-important bundles, both within the traditional ecosystem and outside of it. With state-of-the-art user interfaces and more and more on-demand functionality. Now in many cases, we'll simply extend our traditional wholesale model of licensing our content and networks to third parties, but we are also investing in new services, both wholly-owned and with partners that have a more direct relationship with consumers. In doing that, we're positioning ourselves to develop new revenue streams for our industry-leading brands.

Among our initiatives is to-date, HBO NOW is the most significant and the second quarter was its strongest yet. But even HBO NOW is just one of many investments and initiatives in this area. HBO has launched similar services in the Nordic region and in parts of Latin America with additional launches scheduled for later this year. At Turner, we're in the process of launching an arthouse film SVOD service called FilmStruck which follows the recent launches of SVOD services by Adult Swim in Canada and Esporte Interativo in Brazil. And those join short form digital content initiatives like Great Big Story and Super Deluxe. And over at Warner's, the SVOD service we partnered on in China with Tencent video VIP recently passed 10 million subscribers. We've also enhanced our broadband distribution capabilities with acquisitions like iStreamPlanet and DramaFever.

This morning, we announced another exciting next step in that strategy, and that's our investment in Hulu. This investment fits our strategy like a glove. It will increase our company's exposure to the secular growth in over-the-top services, and it will give Hulu more resources to offer consumers more shows and more choices, fostering competition and innovation amongst both SVOD services and among MVPD services. We also announced that the virtual MVPD service Hulu expects to launch early next year will include live and on-demand access to the full suite of Turner networks. Consumers clearly want innovative interfaces. They want more robust on-demand capabilities, and they expect a greater variety of content packages. And we want to support services that do just that.

So consistent with our strategy, our investment in Hulu leaves us free to continue to support fully, as we always have, other traditional and broadband delivered distribution platforms. We look forward to working closely with our existing MVPD partners and with existing and new over-the-top partners in bringing consumers more choice in how to access our best-in-class shows and networks. We expect there will be a number of additional virtual MVPDs that launch over the coming year, and we think that the increase in choices available as a result of these new services will be great both for consumers and for our industry-leading brands.

Speaking of brands, let me share a few more highlights from the past quarter that show how our investments in Turner's core brands are helping transform its business by driving increased engagement with audiences across both traditional and new platforms. Here in the US, Turner had three of the top five ad-supported cable networks in prime time among adults 18 to 49. That's TNT, TBS, and Adult Swim. And Adult Swim, which continues to be far and away the most watched by millennials. It attracts 60% more 18- to 34-year-olds than its nearest competitor, 60% more.

Now we've talked before about the bold programming refresh underway at both TBS and TNT, and we couldn't be happier with the initial results. We've launched five marquee originals across TBS and TNT in this year, and we've already renewed all of them. Together, Wrecked, Angie Tribeca, The Detour, Full Frontal with Samantha Bee, and Animal Kingdom are great examples of where we're taking the TBS and TNT brands, and they've all surpassed our expectations for our initial slate of new shows.

We're particularly pleased with the audience growth we've seen from Samantha Bee and Animal Kingdom since their launches, and we're also gratified by the strong positive response that we've had from the gaming community to the launch of ELEAGUE. That's our eSports initiative.

The strong demand we saw in the upfront clearly demonstrated the belief advertisers have in the direction we're moving in and in the value of our brands, and that translated into double-digit CPM increases for Turner's entertainment networks. We also benefited from Turner's continued innovation in advertising products, with our targeting analytics capability setting the pace for the industry.

Demand in the upfront was particularly strong for CNN, which has undergone nothing short of a renaissance over the past few years. To date, 2016 is the most-watched year in CNN's history and as the US presidential election draws closer, CNN continues to gain momentum and take share from its peers. CNN was the number one news – let me say this very clearly, CNN was the number one news network among adults 18 to 49 in prime time for the third consecutive quarter, and CNN Digital becomes the number one news service in multi-platform and mobile uniques.

During the conventions of the past two weeks, both conventions, CNN led all networks, broadcast and cable alike, in viewership. And while CNN's in-depth news coverage continues to lead the industry, it's also building its next generation of viewers with a strong lineup of originals and leading digital products.

We're just excited about the momentum at HBO, which once again proved it's without peer when it comes to premium content. It's 94 Emmy nominations led the industry for the 16th straight year and included nominations for Game of Thrones for outstanding drama and both Veep and Silicon Valley for outstanding comedy, as well as John Oliver and Bill Maher for outstanding variety talk show.

HBO's status as the gold standard for premium content was also reinforced by the response to the most recent season of Game of Thrones, which averaged over 25 million viewers per episode. That's more than 25% higher than last year's record, and it's nothing less than astounding if you consider HBO's sub base. Much of that growth was driven by its digital platforms, where viewership nearly doubled from a year ago. Our digital platforms also contributed to double-digit growth for Veep and Silicon Valley, both of which reached series highs.

We've been thrilled with the overwhelming critical and consumer response to the limited crime series The Knight Of, which will be followed up this fall by the much-anticipated sci-fi series, Westworld, from Warner Bros. and the return of Sarah Jessica Parker to HBO in Divorce.

So we couldn't feel better about HBO's content lineup. The strength of the HBO content and brand have been evident in the growth of HBO NOW, and we're looking to super serve that audience by introducing new content geared for our digital and on-demand platforms. That started with the debut of Bill Simmons' Any Given Wednesday that happened in June, and we're going to follow that with the VICE News Tonight and John Stewart's highly original and much-anticipated new project later this year.

Now let me turn to Warner Bros., which remains on track for another record year as it continues to take advantage of its iconic IP with a franchise-driven strategy that spans television, film, and games. The strength of our great IP at Warners was evident this quarter in the performance of Warners television, which is once again leading the industry.

For the 2016 to 2017 season, Warner TV is set to be the number one producer of broadcast shows for the thirteenth time in the last 14 seasons. With 31 series, 22 of which are returning. That's the highest returning series number in the company's history.

Across all networks and services, Warner Bros. will produce 65 series for the upcoming year. That includes 10 shows originating in the DC Comics universe, underscoring the importance of the DC franchise to our television business, but DC is also critical component for video games business, which coming off a record performance last year just had its being biggest LEGO launch ever.

We're going to follow that up next month with Batman: The Telltale Series from our publisher at Telltale Games. Batman is also the star of Batman Arkham VR. That's our first virtual reality game. Arkham VR will be one of the launch titles for PlayStation VR, and it's Batman like you have never seen him before because you basically are him. It's a great example of how great IP translates across many different platforms and experiences, and it underscores the strength of our competitive position as new platforms continue to emerge.

On the Theatrical side, we are starting to build some real momentum with the recent string of highly profitable performers in Me Before You, Central Intelligence and Conjuring 2. Conjuring 2 has already past $300 million at the global box office, and it's become one of the most successful horror franchises in history. And we're thrilled with the recent opening of Lights Out. That's another micro-budget horror hit from New Line. Looking forward, Suicide Squad is tracking to be the biggest opening ever for an August release.

So we're already well on our way to what we think will be a blockbuster second half performance for our theatrical business. We follow Suicide Squad with War Dogs, a raucous comedy from Todd Phillips starring Jonah Hill and Bradley Cooper that will debut later this month. And next month, we'll have the inspiring story of Sully from Clint Eastwood starring Tom Hanks and Storks, a charming movie from Warner Animation.

Later this year, we will all have a chance to return to the Wizarding World created by J.K. Rowling when Fantastic Beasts and Where to Find Them hits theaters. Months ahead of its release, excitement about the franchise is already building. Harry Potter and the Cursed Child, which is J.K. Rowling's first stage production, recently opened, and it's already sold out through next May. The book version of the play script was released last week, and it had the most preorders of any title at Barnes & Noble since the last Harry Potter book was released in 2007. And the opening of the Harry Potter – Hogsmeade attraction at Universal Hollywood has been really well received, driving significant increases in audience.

That all sets the stage for the November release of Fantastic Beasts, a stunning new chapter in J.K.'s continuing saga. We couldn't be more excited, and as Warner announced earlier today, the second installment of the series is already set for release in November 16, 2018.

So we're in the midst of a very vibrant content cycle here across our businesses, and that puts us in a great position to benefit as global demand for the best video content continues to rise. We're making a lot of progress, both in strengthening our position within the traditional ecosystem and building new revenue streams and capabilities outside. And our investment in and Turner's agreement with Hulu is just another example of how we're taking advantage of new platforms to serve consumers, increase competition and further grow our business.

We're seeing increased value accrue to the very strongest brands and to the very best video content, and along with that come new opportunities that arise from digital distribution all around the world. And that's why we're very confident about the rest of 2016 and well beyond. Thanks for listening. Let me turn it over to Howard who has the fantastic financial details to give you.

Howard M. Averill - Chief Financial Officer & Executive Vice President

Thanks, Jeff, and good morning. I'll begin by referring to the first side of our presentation which is now available our website. Starting with consolidated results, we're pleased with our operating and financial performance to date and we're on track to exceed the outlook we provided at the start of the year.

Through the first half of the year adjusted operating income was up 3% and adjusted EPS was up 14%, and we delivered that while making significant investments not only in our traditional businesses but also in new capabilities and revenue streams that will drive future growth.

We knew coming into the second quarter that we faced difficult comparisons from the timing of content licensing revenue across our divisions, last year's record gains performance at Warner's and the timing of programming investments at both Turner and HBO. So as we expected, both revenues and adjusted operating income were down in the quarter.

Even so, we were able to keep adjusted operating income margins for the quarter steady year-over-year at 25%. That reflected our mix of revenue, a positive swing in eliminations, and our continued company-wide focus on limiting growth in overhead costs, which were roughly flat in the quarter.

Adjusted EPS was up 3%. That's primarily due to a lower effective tax rate and the benefit of our ongoing share repurchase program. During the second quarter, we bought back around $700 million of our shares and paid close to $320 million in dividends. And year-to-date, we returned about $2.3 billion to shareholders.

So we had a strong first half and we feel great about how this year is shaping up. As a result, we raised our outlook for 2016 adjusted EPS which we now expect to be in the range of $5.35 to $5.45. I'll touch on more of the details of our outlook later in the presentation.

Now turning to the segment highlights, I'll start at Turner where the investments we've been making in the transformation of our core brands contributed to another quarter of very strong revenue growth. Subscription revenues once again grew 11% in the quarter, and that included approximately 150 basis points of headwinds from FX. Domestic subscription revenues were up in the low-teens as we continued to benefit from the rate increases we achieved during our affiliate renewal cycle. And excluding a close to 10 percentage point drag from FX, international subscription revenue growth would have been in the high-single digits.

Advertising revenues increased a solid 6% despite approximately 100 basis points of headwinds from FX. Domestic advertising grew in the high-single digits, marking the third consecutive quarter of healthy growth. That reflected another quarter of double-digit growth in both news and sports, which included the benefit from airing the NCAA National Championship game for the first time this year. International advertising would have been up mid-single digits excluding a close to 10 percentage point drag from FX.

Looking ahead to the third quarter, we expect total advertising revenue growth to be in the low-single digits. The scatter market remains healthy with pricing at our domestic entertainment networks pacing up well into the double-digits over last year's upfront. At the same time, we're going to air significantly fewer hours of original programming across our domestic entertainment networks, and that's partially an effort to stay out of the way of this year's Summer Olympics. The third quarter is also our lightest quarter for sports inventory, and FX remains a headwind.

Moving on, content and other revenues declined 15% in the quarter. That reflects lower licensing revenues due to the comparison of last year's deal with Hulu. Adjusted operating income was flat in the quarter as healthy revenue growth was balanced by continued investments in programming and marketing. Programming expenses increased 11% mainly due to higher sports costs, including the NCAA National Championship game I mentioned earlier and our continued investment in bold, new original programming as part of the rebrand at TBS and TNT. Marketing costs were up mid-teens to support those new original series.

Overall, Turner has great operating momentum and is well-positioned to maintain its strong revenue trends in the second half of the year, putting it on track for another year of solid growth. We're doing that while continuing to make important investments in new initiatives like iStreamPlanet, expanding Bleacher Report and CNN's digital products. And together, we think the investments we're making across the business will allow Turner to deliver attractive results over the long-term as well.

Turning to HBO, where we're pleased with the progress we're making as we continue to invest in the significant global opportunity in subscription video services. Domestic subscription revenue growth was in the mid-single digits in the quarter, and that included a continued sequential increase in the contribution from HBO NOW, where we remain encouraged with our progress.

Content and other revenues decreased 17% in the quarter, mainly due to lower revenues from our licensing deal with Amazon. That was balanced by solid growth in international licensing revenues, highlighting our ability to effectively monetize our original programming around the world.

Across HBO's international networks, including unconsolidated JVs, revenues were up double-digits, and that's a reflection of continued positive international subscriber trends, especially in Latin America and the Nordics.

Adjusted operating income fell 5% in the quarter, and that reflects higher programming expenses, including programming charges and restructuring and severance costs. The programming charges and restructuring and severance costs totaled approximately $100 million, and that's largely related to a change in leadership on the programming front.

Separately, after considering consumer viewing patterns, including increased on-demand access to HBO's content across a wide range of devices and services, we have updated our estimates of the period over which our original programming is used. As a result, most of HBO's original programming will now be amortized over a somewhat longer time period. That reduced amortization this quarter by approximately $95 million. So the combination of reduced amortization, programming charges and restructuring and severance costs did not have a material effect on adjusted operating income in the quarter.

While there will be some impact from reduced amortization in the second half of 2016, most of this benefit was recognized in the second quarter. Excluding the programming charges and benefit from the reduced amortization, programming costs increased in the teens in the quarter, and that was driven primarily by increased investments in original programming.

Looking forward, we're excited about our upcoming programming lineup and combined with the continued investments we're making in the brand and product, we think HBO is very well-positioned to drive substantial growth in the years to come.

Moving on to Warner Bros., where we're also making progress on our multi-year strategy to drive growth across theatrical, television, and games. Coming into the year, we planned for our theatrical business to be the primary driver of profit growth, and that's playing out as we expected through the first half of the year. Looking specifically at the second quarter, we knew we had very difficult comparisons. Last year's quarter was a record for our video games business, led by the successful releases of franchise titles Batman: Arkham Knight and Mortal Kombat X, and we had significant TV licensing revenues from The Big Bang Theory and Seinfeld.

We also had fewer theatrical home video releases and a very difficult comparison against American Sniper and carryover revenues from the final installment of The Hobbit. So as expected, both revenue and adjusted operating income declined in the quarter.

In theatrical, we saw significant benefit from carryover revenue from Batman v Superman. We've also been really pleased with the theatrical performance of more recent releases like The Conjuring 2 and Central Intelligence. And The Legend of Tarzan has already surpassed $300 million in global box office. So while we originally had higher hopes for the film, we do not expect it to have a material impact on profits this year.

Looking ahead, we're very optimistic about the upcoming theatrical releases of Suicide Squad and Fantastic Beasts and Where to Find Them as we continue to lay the groundwork for our multi-year franchise film slate. Combined with the healthy trends and a leading position in TV production and the opportunities at its games business, Warner's is set up to continue delivering strong growth both this year and well into the future.

Turning to the next slide. Free cash flow totaled about $1.9 billion in the first half. That's up from a year ago, largely due to growth in adjusted operating income. Working capital also benefited from the payment of $280 million associated with the CME refinancing. And that was mostly offset by increased content investments, driven by higher production spending at Warner Bros. Given our performance to date and our expectation for strong growth in adjusted operating income, we're on track for another year of very strong free cash flow in 2016.

Now looking at our balance sheet. Since our last call, we took advantage of favorable market conditions to strengthen our balance sheet by issuing $800 million of long-term debt at an attractive rate. And we ended the second quarter with $22 billion of net debt, up around $350 million compared to the end of 2015. That's mostly a result of our ongoing commitment to direct returns to shareholders, which is a key component of our balanced approach to capital allocation.

Looking at investments, we did a very modest amount of M&A in the first half, and as Jeff noted, yesterday we invested $583 million for a 10% stake in Hulu. That payment will hit in the third quarter. Our net leverage ratio at the end of the quarter was just above our target leverage ratio of around 2.75 times, which we're on track to return to by the end of this year. And we remain committed to maintaining a strong balance sheet and our investment-grade credit ratings.

With that, let's move on to the final slide, which looks at our outlook for 2016. We had a solid first half of the year, and we're really pleased with how we're executing across our businesses. And that's reflected in our updated outlook for 2016. As I mentioned earlier, we raised our outlook for adjusted EPS this year to $5.35 to $5.45. And that incorporates around a $0.06 negative impact related to our equity investment in Hulu, including both our share of the losses and PPA.

Turning to the back half of the year, we expect overall revenue growth to accelerate, and that should help drive a nice acceleration on adjusted operating income growth as well.

Looking specifically at the third quarter, we anticipate elevated programming cost growth at HBO from the rollout of new original programming like The Night Of and Vice Principals and the timing of theatric availabilities and we'll again face challenging comparisons in video games and TV licensing at Warner Bros. As a result, we anticipate growth in adjusted operating income to be weighted heavily to the fourth quarter.

So overall, we're on track for another year of very attractive growth, and we believe the significant operating momentum, positive revenue trends and continued investments we're making across the company position us to continue that growth well into the future.

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

Jessica L. Holscott - Senior Vice President, Investor Relations, Time Warner, Inc.

Great. Thanks, Howard. Can we open up the line for Q&A, please?

Question-and-Answer Session

Operator

Yes. Thank you. At this time, we'll be conducting a question-and-answer session. Thank you. Our first question today is coming from the line of Michael Nathanson with MoffettNathanson. Please proceed with your question.

Michael B. Nathanson - MoffettNathanson LLC

Thanks. I have one for Jeff and one for Howard. Jeff, following up on the Hulu investment last night and all you said in the past about windowing and the stacking rights and the need to keep those rights out of SVOD until later in the cycle, I wonder, what was the thinking on recent CW deal with Netflix which gave a lot of Netflix the rights right after the broadcast window ended? So what changed in your thinking relative to The CW versus what you said before?

Jeffrey L. Bewkes - Chairman & Chief Executive Officer

I'm not – I don't think you've characterized what we said before, right? I'll start and Kevin will pick it up. The CW is in a different situation than many other networks or our cable networks in that it doesn't currently receive material carriage fees. And so we made the decision this year not to have an in-season digital partner, which essentially goes along with what we've been thinking, and we instead put more aggressive VOD rights and stacking rights on The CW for the current season. Let's focus on that first, Kevin, and then let's go to the follow-on.

Kevin Tsujihara - Chairman & Chief Executive Officer, Warner Bros. Entertainment, Inc.

The CW is the unique asset, because you don't – not only do you not get material retrans, but we also don't own any. Time Warner doesn't own, but CBS owns some but predominantly don't own the station group that it's being played on. And therefore it has slightly different economics than the other broadcast networks. But what we did was actually give The CW more stacking rights by giving it exclusivity in the year. It has a lot more flexibility in its ability to be able to convey a full season or any number between a full season and five episodes. So it can do, it has a lot more flexibility than it had in the prior deal when The CW had a Hulu in-season deal and a Netflix out of season deal.

Jeffrey L. Bewkes - Chairman & Chief Executive Officer

And let me just add to the philosophical side. Let's all look at the way this actually works and it's working the way it should work. Consumers want, and they expect – particularly for series, where they pick up the series maybe in its first year, maybe some other place – they want more on-demand access to the series, particularly series that become serialized plots over a long period of time. So as consumers want that, networks – and it depends which kind of networks and what kind of shows – networks increasingly want to offer more VOD rights over more episodes to cover story arcs.

So if you look at, for example, networks like in HBO or Showtime, or lately the Netflix business, Amazon. Those kind of networks with their serialize shows have had for years multiple, many episodes going back over long periods of time so you can catch up with the show. If you go to the ad-supported networks, broadcast, cable networks, et cetera, they have been on a path to try to meet consumer demand, and to the extent consumers want to see their favorite show over longer story arcs of episodes, networks increasingly ask for that.

So if you take, say, some of the broadcast networks – Kevin, you might want to comment on this – they've been asking for more on-demand, in current season. What's happened for example in the broadcast networks over the last year?

Kevin Tsujihara - Chairman & Chief Executive Officer, Warner Bros. Entertainment, Inc.

Well we've been conveying and having very good conversations with all the broadcast networks, and we've had an existing deal with Turner for a long time to convey full season stacking rights to those networks.

Jeffrey L. Bewkes - Chairman & Chief Executive Officer

For Turner, but then now you have some broadcast.

Kevin Tsujihara - Chairman & Chief Executive Officer, Warner Bros. Entertainment, Inc.

We're having conversations with the broadcast networks, and we have a couple of deals already in place for the upcoming broadcast season. We had a deal with FOX last year. And so I think that those – you're seeing, from Warner Bros. perspective, we've been conveying those rights, and we will continue to convey those rights.

Jeffrey L. Bewkes - Chairman & Chief Executive Officer

Yeah. So I hope that answers your question.

Michael B. Nathanson - MoffettNathanson LLC

Okay. Thank you.

Operator

Our next question will be coming from the line of Michael Morris with Guggenheim Securities. Please proceed with your questions.

Michael Morris - Guggenheim Securities LLC

Thank you. Good morning. I have a couple more on Hulu. First, did your equity stake give you a strategic leadership role with respect to Hulu's plans going forward? What does the 10% give you there in terms of shaping the future of the product? And then second, with respect to the OTT product, and the relationship with Turner, should we expect that the agreement is similar to an MVPD arrangement and that a smaller distributor and that you'll be paid at the kind of the high end of the pricing range for the Turner networks with escalators that are consistent with other distributors? Or is there something different given your ownership stake? Thanks.

Jeffrey L. Bewkes - Chairman & Chief Executive Officer

Why don't you do the affiliate situation first? Then I'll talk about the...

John K. Martin - Chairman & Chief Executive Officer, Turner Broadcasting System, Inc.

Thanks, Mike. It's John. So with respect to the virtual MVPD component, you should think about the structure and the nature of our arrangement with Hulu being similar with the type of arrangements we have with the virtual MPVDs that we're already in business with, including Sling and Sony Vue. And we're not going to discuss pricing, obviously, but the structure is similar and we're quite pleased with the opportunity to participate in the product when it gets launched.

Jeffrey L. Bewkes - Chairman & Chief Executive Officer

Now on the governance side, we don't have an active role, and coming in as a 10% investor without a board seat, we think it reduces complications around governance. Now we like the asset, and we like it even more if it has better budgets for programming and more resources for platform capabilities. And we think that's helpful.

And as we said – Howard said it, I've said it – we're focused on making investments to capitalize on these opportunities and to help serve consumer demand. They want all kinds of VOD and interface capabilities, and they want more choice of bundles and price points. And we think that this helps it. It's part of a number of other services that, as you know, we either have ourselves, like HBO NOW or other ones overseas, or the partnerships we do with others or the affiliate deals, not just like the one John just described at Hulu but all the ones we've got with Sling and with Sony Vue and with Comcast and Verizon and AT&T and all the other distributors.

So I think what you're seeing here is a resurgence of a kind of investment and health in the entire ecosystem that's going where consumers want, and I think it's going to be a great thing for the diversity of product production and the health of the industry.

Michael Morris - Guggenheim Securities LLC

John, if I could just follow up, are there significant differences between the virtual MVPD arrangements with Sling and Vue and sort of your traditional ones with cable, satellite or telco operators?

John K. Martin - Chairman & Chief Executive Officer, Turner Broadcasting System, Inc.

No.

Michael Morris - Guggenheim Securities LLC

Okay. That's great. Thank you.

Operator

Our next question is from the line of Doug Mitchelson with UBS. These proceed with your question.

Doug Mitchelson - UBS Securities LLC

Thanks so much. I just – one final Hulu question for John, and then a question for Jeff. John, will the Hulu-Turner deal include mobile rights and have a minimum guarantee similar to what we're hearing AT&T has but Sony Vue did not have?

And then for Jeff, with the guidance range you clearly have a line of sight for 2016, and correct me if I'm wrong, but the year is coming in basically where you had hoped when you gave the $6 EPS guidance at the Analyst Day a couple years ago, just less $0.50 or so of currency headwinds.

So my question is, when you look at the growth outlook for 2017 and 2018 relative to your original $8 EPS guide that you previously had out there, other than the currency headwind impact, which should be the same $0.50 or so carried forward, has anything else changed in your growth outlook when you think about the next couple years for the company? Thank you.

Jeffrey L. Bewkes - Chairman & Chief Executive Officer

You start.

John K. Martin - Chairman & Chief Executive Officer, Turner Broadcasting System, Inc.

Hey, Doug, it's John. Let me start. Look, listen, I hope you can appreciate we're not going to get into the details with respect to deal-by-deal in what's included and what's not included. I think just philosophically, though, and we've been very consistent on this point now for some time, having the single most concentrated portfolio of the highest value networks in the country, we would anticipate having carriage in many if not all of the new potential entrants that come into the ecosystem. At the same time, while we intend to fully support our existing partners who are incredibly important to us. So that – but with respect to which rights are in which deals, we're just not going to get into that level of detail.

Jeffrey L. Bewkes - Chairman & Chief Executive Officer

And Doug, on your question about our general performance and earnings track, I love your question. You're right, you're premise is right. But we're not going to go – you know how this – and give formal long-term guidance right now. There's a lot of ins and outs that happen as we've been telling you as we go on year-to-year. But you're right to point out and ask, well, gee, you're on a very good track, very much familiar to those of you who have been following our predictions over the year. So we feel very good about it, and if you look at what we're saying today and our results this year and the raise we just did and some of the strategic moves that we are making and the advances where the industry is now finally to accelerate into a much stronger way of distributing the fantastic content that it already makes, we feel very good about the earnings track for many years.

Doug Mitchelson - UBS Securities LLC

All right. I had to try. Thank you.

Operator

Thank you.

Jessica L. Holscott - Senior Vice President, Investor Relations, Time Warner, Inc.

Operator, next question?

Operator

Yes, our next question is coming from the line of John Janedis with Jefferies. Please proceed with the question.

John Janedis - Jefferies LLC

Hi. Thanks. Maybe I will stick with the Hulu theme here. Can you also speak to the potential to market or bundle HBO on any of the Hulu platforms as a way to further accelerate growth? And then, Howard, does the EPS guidance assume maybe somewhere like a mid-single digit EPS impact for the last five months of the year?

Jeffrey L. Bewkes - Chairman & Chief Executive Officer

You start on that.

Richard L. Plepler - Chairman & Chief Executive Officer, Home Box Office, Inc.

John, it's Richard. Obviously we're in conversations. I have nothing really to add at this time, but we're having constructive conversations and we expect they'll continue.

Howard M. Averill - Chief Financial Officer & Executive Vice President

Hey John, can you repeat your question?

John Janedis - Jefferies LLC

I just wanted to confirm with the PPA and the cost at Hulu that it's a mid-single digit EPS impact for the last five months of the year.

Howard M. Averill - Chief Financial Officer & Executive Vice President

Yeah, that's right, John.

John Janedis - Jefferies LLC

Okay. Great. And then maybe Kevin...

Howard M. Averill - Chief Financial Officer & Executive Vice President

You know, $0.06 that I mentioned.

John Janedis - Jefferies LLC

Okay. Kevin, I know you recently talked about the plan to reduce ad loads by about 50% on new TNT dramas, and I think there's no question that it improves the viewer experience, but as you add more shows, can you talk about your confidence level in your ability to have maybe at least a revenue-neutral outcome and to what extent that was part of the discussion and negotiation in the upfront?

Kevin Tsujihara - Chairman & Chief Executive Officer, Warner Bros. Entertainment, Inc.

I can answer for Kevin Reilly but this is Kevin Tsujihara. I think for Kevin Reilly it would be five more Warner shows. But I'm going to let John Martin take that one.

John K. Martin - Chairman & Chief Executive Officer, Turner Broadcasting System, Inc.

Thanks, John. So just, that's a hard act to follow. So for everybody's benefit, we have announced that beginning in the fourth quarter, we're going to essentially reduce the ad loads on Tru TV in half. But I think what you're referring to is that for the new original shows that are going on to TNT and right now it's really just been Animal Kingdom, but we've made certain commitments to new originals that will be coming on later this year, we are going with those shows with more content and less advertising.

And let me say that the early results are quite encouraging. And I would repeat that it's early. And we're going to be obviously paying close attention to this, but it's all being driven by the fact that we know that we have to have a network that has an experience that can compete with the very best consumer experiences in the world.

So we've reduced the number of ads. We've been engaged with in discussions with our agencies, with our advertisers and what we've been seeing is smaller drop off during ad pods, meaning that we're retaining higher audience levels during advertising commercials, which means higher ratings to the network. We believe the early results indicate that there's even higher recall for the ads that are there.

We're working very, very hard to make the ads more relevant with our native product and our own internal production capabilities to make sure that the advertising is more relevant and contextual with respect to the content itself, and that was very, very helpful during the upfront and extremely, extremely well-received, one of the reasons why we were able to garner double-digit CPM increases and we think we're leading the industry here.

John Janedis - Jefferies LLC

Okay. Thank you.

Jessica L. Holscott - Senior Vice President, Investor Relations, Time Warner, Inc.

Next question?

Operator

And the next question comes from the line of Rich Greenfield with BTIG. Please proceed with your question.

Richard Greenfield - BTIG LLC

Hi. Thanks for taking the question. So you launched on Sling. I think you surprised a lot of people by being one of the early partners when Sling launched their single stream product and you've been a part of their multi stream product. And it's been call it more than 18 months now since Sling has been out. But Sling is still charging the same kind of $20 for their core service. I'm curious, are you getting annual increases that are – I know you're getting double-digits on your legacy MVPDs. Are you getting double-digit increases annually from Sling while they don't raise retail price? How does that work or how are you thinking about virtual MVPDs and the ability to get annual affiliate fee increases, especially with today's news vis-à-vis Hulu?

And then just two, you made an announcement I think last week or the week before about Chuck Lorre from Warner Bros., and I'd love – you've been kind of hesitant before to sell multi-cam comedies, especially Chuck Lorre comedies to Netflix because those are the huge win opportunities that you've gotten on the syndication side, such as Big Bang. And I'm curious why this was the right deal to do to sell something like that and potentially limit your upside versus the massive syndication values you can get off of those type of comedies?

Jeffrey L. Bewkes - Chairman & Chief Executive Officer

John, you do.

John K. Martin - Chairman & Chief Executive Officer, Turner Broadcasting System, Inc.

Thanks, Rich. It's John. I'll start. Listen, I think philosophically the way we're looking at the potential new entrants, the virtual MVPDs, the Slings, whatever you want to call them, is we're looking at them in the exact same way as we're looking at our traditional facilities-based partners. And we have a highly concentrated portfolio of very valuable networks that we intend to get full value for over time, and one of the reasons why we've been able to garner significant pricing increases is we've been starting from a lower base. But you should assume that the deals that we're striking with respect to everyone carries with it similar rate card assumptions and accelerants.

Jeffrey L. Bewkes - Chairman & Chief Executive Officer

Kevin?

Kevin Tsujihara - Chairman & Chief Executive Officer, Warner Bros. Entertainment, Inc.

Hi, Rich. It's Kevin. As it relates to the Chuck Lorre show that we announced going to Netflix, that was really a matter of the subject matter really lent itself to SVOD. Being related to marijuana usage and a marijuana kind of background, it really didn't really lend itself to advertiser-friendly broadcast networks.

Richard Greenfield - BTIG LLC

Fair enough.

Jessica L. Holscott - Senior Vice President, Investor Relations, Time Warner, Inc.

Great. I think we're ready for the next question.

Operator

Yes, the next question is coming from the line of Omar Sheikh with Credit Suisse. Please proceed with your question.

Omar Sheikh - Credit Suisse Securities (USA) LLC (Broker)

Morning, everyone. Thank you. Just a couple of questions. First of all, for Jeff on Hulu again, I wonder if you could just clarify whether or not you will be licensing any of your content to Hulu's SVOD products. I think I read somewhere that you won't be, but some clarity on that would be useful. And then also, on the live streaming product, could you maybe give us a sense of what it might look like in terms of price points, content offering and sort of availability of stacking rights and so on? That would be very helpful.

And then second question is just on for Richard maybe on HBO, I know Jeff said that now it had the strongest quarter yet. I wonder whether you could – I could tempt you into updating us on some numbers there. And then maybe if you could just let us know which international markets you are planning to launch that, the NOW product in, in the second half. Thanks.

Jeffrey L. Bewkes - Chairman & Chief Executive Officer

Richard, why don't you?

Richard L. Plepler - Chairman & Chief Executive Officer, Home Box Office, Inc.

Sure. Omar, I'll start. Obviously, I can't get into numbers other than to say we've had substantial growth in the quarter. We see an enormous amount of momentum. We've lapped our marketing, and the data we're getting is improving all the time. Churn is going down all the time, and we couldn't be more pleased as more and more content suited to digital arrives. Jon Stewart is coming, Vice News is coming, Bill Simmons obviously very conducive to it. We like the momentum we're seeing and I think it's reflected in the progress and in the numbers.

Internationally, early days in Latin America, as you know, with our launch so far in Colombia and in Mexico, and we've announced later in the year launches in Argentina, in Spain, in Brazil. We're very excited about the opportunity there. So again, this just reflects our ability to go multilaterally around the world, our networks business, OTT business, our licensing business, wherever we think we have the best long-term monetization, that's what we're going to pursue. Nordics is a case study in how fast we can improve momentum because the rate of growth in Nordics over the last year has just been tremendous OTT.

Jeffrey L. Bewkes - Chairman & Chief Executive Officer

Omar, if I understood your question, I think it was whether as part of our investment in Hulu we had any individual or content licensing obligations or deals, and the answer is no. There's nothing in there specifically, any particular content license. And so, that's the SVOD service. Now that means that of course we are and we will continue to look at shows, or well and I guess you're asking about individual shows, where SVOD providers or traditional providers come and want to license, whether it's Hulu, Netflix, et cetera, and we will do that on a standalone arm's-length basis. If you go then, I think you asked this, to the MVPD, that we have an affiliation of our networks into the bundle service, but that one, we can't really outline what their strategy and business plan is yet. I think they will be responsible for that.

Omar Sheikh - Credit Suisse Securities (USA) LLC (Broker)

Okay. That make sense. So just as a follow-up maybe, Jeff, if you think about what you've said before about licensing content potentially direct-to-consumer for the Turner networks, or more broadly across the content that you control, how should we think about where Hulu fits into that? Is this now going to be central to your strategy or you're going to continue to look at other ways to monetize your content, perhaps direct?

Jeffrey L. Bewkes - Chairman & Chief Executive Officer

I don't understand the – would you – so the Turner networks, which for example now are available in a number – but they're all, you can get them and the shows-on-demand on every traditional distributor. You can get them on every new virtual distributor of every single package size and price point. If you go to HBO, you can get that through on-demand fully through every distributor basically in the world of any kind, and increasingly, you can get it as a broadband delivered thing. So what is your question in relation to that?

Omar Sheikh - Credit Suisse Securities (USA) LLC (Broker)

So if you look at Hulu's service today, given your investment, do you see that as being central to your strategy for distributing content to consumers? Or when you're looking at the over-the-top strategy? Or do you see alternatives or other ways of distributing direct-to-consumer as well?

Jeffrey L. Bewkes - Chairman & Chief Executive Officer

Well, we just spent the day here talking about how we think our networks, our brands and our shows should be available in essentially as many places and ways for consumers to get them with VOD, et cetera, as we can. And this is an additional way to do that. I don't -that's what we've been saying. So it adjoins all the other distribution methods and that's a good thing.

Omar Sheikh - Credit Suisse Securities (USA) LLC (Broker)

Okay. Okay.

Jessica L. Holscott - Senior Vice President, Investor Relations, Time Warner, Inc.

Thanks

Omar Sheikh - Credit Suisse Securities (USA) LLC (Broker)

Okay. That's clear. Thanks a lot.

Jessica L. Holscott - Senior Vice President, Investor Relations, Time Warner, Inc.

Next question?

Operator

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

Jessica Jean Reif Cohen - Bank of America Merrill Lynch

Hello. Thanks. I have a Turner question and maybe one more after Hulu. On Turner, could you give us a little color on what you're doing in eSports, and how you think that business will grow over time? And actually, one more on Turner. You mentioned that there was a sub decline, but it wasn't specified. Can you say what it is?

John K. Martin - Chairman & Chief Executive Officer, Turner Broadcasting System, Inc.

Sure, Jessica. It's John. On the sub decline, we're seeing continued subscriber declines in the US at a similar rate as we've experienced in the most recent quarter. So call it approaching about 2%. Some networks a little bit less, but no more really than, more than 2%. And all of the guidance that we've provided in terms of subscriber revenue growth continues to assume the continuous level of those types of declines. Although, as I've been saying, hopefully over time as these new virtual MVPDs get to the market with better, smaller packages of better networks we'll be offering consumers different bundles at better price points and could and should result in the stabilization of the subscriber overall levels.

With regard to eSports, which we just concluded the championship of the tournament, we couldn't be more pleased and excited about how we hosted the first-ever eSports tournament on television. We call it ELEAGUE, and across the 10-week tournament between Twitch and TBS, there was almost approaching 1 billion minutes of consumption. It's brought millions of new viewers to the network. The age of the viewers of TBS are right down the strike zone of what we were hoping for: young viewers, heavily skewing male.

We just announced an agreement with a new game, Overwatch. We're going to host that tournament beginning in the fall, and we've announced the second tournament with Counter-Strike, which will air after that. So we love the fact that we own this league in connection with WME and IMG. We think it's a huge area of secular growth. We absolutely intend to participate in a big way in this area, and we couldn't be more pleased with how the first season proceeded.

Jessica Jean Reif Cohen - Bank of America Merrill Lynch

And, John, just a follow-up, which is the Hulu question. It's really for you, and kind of what you said about growing with skinnier bundles. I heard what you said. You was very clear that, you said the affiliates fees structure would be comparable to other deals. Can you talk a little bit about the advertising? In some ways it may actually – it seems like it may be better because it's more targeted. Could you comment on that?

John K. Martin - Chairman & Chief Executive Officer, Turner Broadcasting System, Inc.

Exactly. I think you asked the question, but it was more of a statement that I'll validate. Everything that's happening at Hulu is moving in the same direction as to what we're doing on our traditional ad-supported cable networks, which is trying to improve the consumer experience with less overall advertising, but now we've got our Turner Data Cloud built out full capacity. We're going to have hundreds of, millions of records of data by the end of this year, and one of the reasons why, again, we were so successful in the upfront is we think we're leading the industry with products that can sell audiences rather than just demos and dayparts. So I think your statement is completely accurate.

Jessica Jean Reif Cohen - Bank of America Merrill Lynch

Great. Thank you.

Jessica L. Holscott - Senior Vice President, Investor Relations, Time Warner, Inc.

We have time for one more question.

Operator

Our next question is from the line of Doug Creutz with Cowen and Company. Please proceed with your question.

Doug Creutz - Cowen & Co. LLC

Hey. Thanks. As you mentioned, you guys are having a pretty good year at Warner Bros. Disney's having a pretty good year as well, but I think most of the rest of your peers are having a very difficult year. Do you think there's been any change in audience behavior around the film industry? If so, how are you reacting to that? And do you think that the studio business in general is in need of consolidation to fix some of these problems? Thanks.

Kevin Tsujihara - Chairman & Chief Executive Officer, Warner Bros. Entertainment, Inc.

I think what we're seeing is that the big franchises mean more than ever. If you look at the top six films, they represent approximately 35% of the domestic box office. So when you think about what we laid out a couple of years ago as the strategy, we thought that the slate needed to be kind of anchored by the big franchises like Fantastic Beasts and Where to Find Them, the DC movies and the Lego movies, and we're executing on that.

As it relates to whether we think that scale is required in that environment, I think that we're going to – we are one of the few scale players on the film side, but even more importantly, we're one of the studios, one of the couple of studios that have the big intellectual property that allows us to be able to anchor a slate like that. So if you think about consolidation the way we think about it, I don't think you would need to see consolidation from players that don't have intellectual property merging with other players that don't have intellectual property for scale, per se. What you really need are the big franchises that are going to be able to drive the economics which is what we're seeing and kind of what our strategy is based on.

Doug Creutz - Cowen & Co. LLC

Okay. Thank you.

Jessica L. Holscott - Senior Vice President, Investor Relations, Time Warner, Inc.

So, Jeff, you might want to say a few words to wrap up.

Jeffrey L. Bewkes - Chairman & Chief Executive Officer

All right. So just to wrap up, I hope you all feel the way we do. We're very pleased with our performance, we're encouraged by industry developments and we think the company is very well positioned to bring the best content to consumers in the way they want it. So that makes us excited about the future and we'd like to thank everybody for joining.

Operator

Thank you.

Jessica L. Holscott - Senior Vice President, Investor Relations, Time Warner, Inc.

Thanks.

Operator

Thank you. This will conclude today's teleconference. Thank you for your participation. You may now disconnect your lines at this time.

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