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Here’s the entire text of the prepared remarks from Time Warner’s (ticker: TWX) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Executives:

Jim Burtson, Vice President

Dick Parsons, Chairman and Chief Executive Officer

Wayne Pace, Chief Financial Officer

Don Logan, Chairman Media & Communications Group

Jeff Bewkes, Chairman Entertainment & Networks Group

Analysts:

Vijay Jayant, Lehman Brothers

Spencer Wang, J.P. Morgan

Kathy Styponia, Prudential Equity Group

Anthony Noto, Goldman Sachs

William Drewry, Credit Suisse First Boston

Doug Michelson, Deutsche Bank

Jessica Reif-Cohen, Merrill Lynch

Richard Greenfield, Fulcrum Global Partners

Ray Katz, Bear Stearns

Michael Nathanson, Sanford Bernstein

Presentation

Operator

Hello and welcome to the Time Warner Third Quarter 2005 Earnings Call. At this time all participants are in a listen-only mode. During the question and answer session please press “*”, “1” on your touch tone phone to ask a question. Today’s conference is being recorded, if you have any objections you may disconnect at this time. Now I will turn the call over to Mr. James Burtson, Vice President of Investor Relations for Time Warner. Sir, you may begin.

Jim Burtson, Vice President

Thanks and good morning, everyone. Welcome to Time Warner’s 2005 third quarter earnings conference call. This morning we issued two press releases. The first, detailing our third quarter results. The second, reaffirming our 2005 business outlook. Before we begin there are a few items I need to cover. First, we refer to non-GAAP measures, including operating income before depreciation and amortization, or OIBDA and free cash flow. We use these measures when we analyze year-over-year comparisons. In order to enhance compatibility, we eliminate certain items such as non-cash asset impairments, gains or losses from asset disposals, legal reserves related to government investigations, and securities litigation. We call this measure adjusted operating income before depreciation and amortization, or adjusted OIBDA.

Schedules setting out the reconciliations of historical non-GAAP financial measures to operating income and cash provided by operations are included in our trending schedules. These reconciliations are available in today’s earnings release and on our Company’s website at www.timewarner.com/investors. A reconciliation of our expected future financial performance is also included in the press release that is now available on our website.

Next, today’s announcements include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations or beliefs and are subject to uncertainty and changes in circumstances. Actual results may vary materially from those expressed or implied by the statements herein, due to changes in economic, business, competitive, technological, and/or regulatory factors. More detailed information about these factors may be found in Time Warner’s SEC filings, including its most recent annual report on Form 10-K and quarterly report on Form 10-Q. Time Warner is under no obligation to and, in fact, expressly disclaims any such obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

And, finally, today’s presentation will include an update on certain discussions that the Company is engaged on, engaged in regarding its AOL business. In the future, we do not plan to update you on or comment on rumors regarding the status of these discussions, until we have something definitive to say.

With that covered, I’ll thank you and turn the call over to Dick.

Dick Parsons, Chairman and Chief Executive Officer

Thanks, Jim, and good morning, ladies and gentlemen. We appreciate your joining us today. Here’s the morning’s agenda, just so we all start off together. I’ll share my perspective on the Company and where we’re headed. And then, Wayne Pace will take you through the quarter’s results in his usual level of detail. And then we’ll have plenty of time for your questions at the end of those two presentations. Don Logan and Jeff Bewkes will join Wayne and me for the Q&A session. So let’s begin.

I believe our third quarter results and expansion of our stock repurchase program to $12.5 billion underscore the fundamental operating strength of our businesses and our growing momentum. In short, our Company is strong and getting stronger. Creating shareholder value has always been the cornerstone of how we run our businesses, and our ongoing operating performance gives us a solid foundation and the flexibility to enhance our capital allocation to deliver greater value to our shareholders. Going forward, we will build on our operating by focusing on a few key priorities that I’ll discuss shortly. Those priorities are completing the Adelphia transaction and growing the value of our cable operation, increasing the return of capital to shareholders by expanding our share buy-back program, and accelerating the transition of AOL.

Let me first review our third quarterly results. In a word, they are good. As you may have seen in our earnings release this morning, we grew our revenues by a healthy 6% and delivered impressive 9% growth in adjusted operating income before depreciation and amortization. Just as importantly, we’ve generated $3.3 billion so far this year in free cash flow. This amounts to 42% of our adjusted OIBDA. This performance puts us firmly on track to achieve our full year outlook, which we reaffirmed this morning in a separate release. For the full year, we continue to expect adjusted OIBDA growth in the high single-digits and a convert between 30% and 40% of our adjusted OIBDA into free cash flow.

We’re particularly pleased with the results at Time Warner Cable, where we’re benefiting from continuing powerful subscriber trends. We had our largest third quarter increases in digital video and high-speed data subscribers since 2002. Digital phone now represents 5% of eligible homes passed and we are comfortably on track to have over one million residential phone customers by year’s end. Importantly, three quarters of our digital phone subscribers take our triple-play bundle, which also includes the video and high-speed data services. The strength in subscriptions is also translating into improved financial performance. Wayne will take you through the details, but organic growth of our adjusted OIBDA at cable has improved quarter-after-quarter this year. These excellent results also serve to bolster our confidence in the strategy behind our Adelphia and Comcast transactions, which we look forward to closing in the first half of next year.

Let me remind you of why we decided to do these acquisitions. First, they will expand our cable footprint at an attractive price. Second, they will improve the clustering of our cable systems, which will provide us with efficiencies and enable to us better serve and market our customers. And finally, these transactions will provide us with a tax-efficient way to unwind our relationship with Comcast. We will, we look forward to creating value from integrating the acquired systems into our own well-run operations. Obviously, this is the top priority for Time Warner Cable. As you would hope, they are devoting the appropriate focus and resources to get ready to take over the new systems and to become a separate publicly traded company at the time we conclude these transactions, and these efforts will only intensify as that date approaches.

There’s been a good deal of discussion about how much or how little Time Warner should ultimately own of Time Warner Cable. We’ve looked at many alternatives before we entered into the Adelphia and Comcast transactions and, again, since then. We continue to view cable as a strategic asset for Time Warner. As I have mentioned, our priority is to complete these transactions as currently structured, and realize the value they will create for Time Warner Cable. Once we have accomplished these near-term priorities, we will then have the flexibility to further modify our ownership structure, in the event that real opportunities to increase shareholder value dictate doing so.

This morning we also announced that we are increasing our existing share repacs, repurchase program to $12.5 billion, up from $5 billion. We expect to complete this buy-back over the same period of time as the original program, or about 21 months from today. To date we have repurchased about 800 million of our stocks since announcing the $5 billion program, a quarter ago. We made this change because our board and senior management determined it was the right thing to do.

As many of you know, we faced significant challenges over the past three years. During that time, we put a premium on rebuilding and then maintaining financial flexibility to protect the Company’s long-term viability, as well as our shareholders interests. But, with most of those challenges now behind us, we’ve had the opportunity to step back and reevaluate how we can best allocate our capital. We’ve spoken to a majority of our large shareholders and today, like many of them, we see buying our shares as the most compelling use of our capital. As a result, we’re refining our capital allocation to incorporate more leverage.

Reinforcing this decision is our continued confidence in our businesses and their ability to generate free cash flow. Importantly, going forward we expect to use excess capital either to fund higher return on investments or to return directly to our shareholders through new share repurchase programs and increased dividends. In our opinion, this increase in leverage will not change Time Warner’s strong investment grade credit profile. At this level, we should continue to have a strong balance sheet, robust free cash flow generation and the earnings growth necessary to deliver near-term returns to our shareholders, while still having sufficient capacity to invest in our businesses to build sustainable long-term value.

Before I turn things over to Wayne, I’d like to update you on the status of AOL, which we continue to believe represents one of our most significant opportunities for long-term value creation. We are now working to accelerate the transition of AOL’s business model. We’re moving from a business model based primarily on subscription revenues to one that is more driven by advertising revenue generated from both its network of free websites and subscribers. Once this transition is complete, we’ll have a higher growth, higher margin business going forward. As many of you know, the secular trends in online advertising growth are very compelling. This year, AOL will have one of only four companies to garner more than $1 billion of online advertising revenue annually. And that makes Time Warner the only diversified media company with a major online advertising business.

We’re going to maximize the growth in value creation of our audience platform, which is many valuable online properties anchored by aol.com. We can achieve this objective in many ways. With a subscriber base that is still far and away the industry’s largest and its growing web audience, AOL has a substantial asset base required to accomplish this transition and create shareholder value on its own, I do, however, want to update you regarding one matter related to AOL. Over the past few weeks, there have been a great, there has been a great deal of speculation and reporting by the media related to discussions that we are rumored to be conducting with a wide range of significant parties.

It is true that we are engaged in a series of exploratory discussions involving AOL with a number of strategic partners, many of who have had a, who have been identified in the press coverage. The discussions cover a range of potential commercial and other strategic relationships and transactions. Because the discussions are fluid, we don’t know that if they, if they will result in any transaction, or what form any transaction would take. I can assure you all; however, that these discussions will result in a transaction only if we determine it can enhance our competitive profile and our prospects for increasing value.

In closing, our board of directors and management are confident that we’re on the right course to build sustainable long-term value, optimize our capital allocation and leverage, and deliver an attractive return for all our shareholders.

And with that, I think I’ll turn it over to Wayne.

Wayne Pace, Chief Financial Officer

Thanks, Dick, and good morning, everyone. The slides that I will refer to this morning are available on our website, and we’ll start with Time Warner’s consolidated results. Total revenues for the third quarter of $10.5 billion increased 6% compared to the prior year. They were driven by growth at cable networks, film entertainment and publishing segments. Adjusted OIBDA increased 9% to $2.6 billion and our margin improved to approximately 25%. Third quarter adjusted OIBDA reflected strong double-digit growth at the networks and cable segments and also gains at AOL and publishing. This growth was offset partially by an expected decline at film entertainment.

Moving to the next slide, this year’s reported diluted EPS for the third quarter was $0.19 compared to $0.10 in the third quarter of 2004. Please note that last year’s results included certain items affecting comparability that are detailed in our press release and the trending schedules that you have. The net effect of these items decreased the prior year’s earnings by about $0.05 per share.

Turning to free cash flow. During the first three quarters of the year, we converted 42% of our adjusted OIBDA into free cash or close to $3.3 billion. Included in the year-to-date free cash flow were higher CapEx and product development costs. The increase was driven by the cable segment, due to continued strong demand for its new services. Also, as a reminder, year-to-date free cash flow was reduced by the $300 million payment that we made in the first quarter in connection with our previously announced settlement with the SEC.

Moving to the next slide, our strong free cash flow generation led to a reduction in our net debt to $12.4 billion at the end of the quarter, and that resulted in a trailing 12-month leverage ratio of 1.2 to 1. However, going the other way, we did make a $2.4 billion payment after the end of the third quarter, related to our securities litigation settlement. And again, we had set up reserves for this payment in prior periods. With today’s announcement to increase our share repurchase program up to $12.5 billion and our up-coming Adelphia and Comcast transactions, our leverage will increase to a level that we believe should not change Time Warner’s strong investment grade profile. In view of our strong free cash flow and our continuing operating performance, we’re comfortable in maintaining leverage of around three-to-one, going forward. Under our previously announced share buy-back plan, we’ve repurchased approximately 45 million shares from the beginning of August through October 31, at a cost of just over $800 million.

Turn to the next slide. Here we’re reaffirming our 2005 full-year business outlook. We continue to expect high single-digit percentage growth and adjusted OIBDA, with gains across our operating segments in the fourth quarter. In addition, we expect to convert 30 to 40% of our adjusted OIBDA into free cash for the full year. I will take you through the results for each of our segments for the remainder of our prepared remarks and then we will go to Q&A.

Starting with cable, we had a very strong quarter. We again achieved double-digit growth in revenues, OIBDA and monthly ARPU. Revenues grew 13%, driven by high-speed data revenue growth of 24%, higher digital phone revenues, a 16% increase in revenue from enhanced digital video services, and higher basic cable rates. Average monthly revenue per subscriber rose 13% to $86, the seventh consecutive quarter of double-digit year-over-year growth. OIBDA rose 15%, as higher revenues were offset partly by a 9% increase in video programming costs and higher general operating expenses. This quarter results included a $10 million benefit, which has been reflected in programming costs related to the resolution of terms with one of our programming vendors, as well as an $11 million reduction in accrued expense associated with changes in certain estimates. If you exclude these and certain other very small items, organic OIBDA growth was closer to 12%.

Looking at subscribers, basic subscribers grew by 18,000 this quarter, and they are up 39,000 year-to-date. Enhanced digital services continued to perform well. Digital video customers were up 149,000, the largest third quarter increase since 2002, and digital penetration improved 130 basis points to 48%. Residential high-speed data subscribers climbed 234,000 in the quarter, the third consecutive quarter with more than 200,000 net adds and, again, the third, the best third quarter performance since 2002. Demand for digital phone service remains robust, as we added 240,000 new subscribers during the quarter, bringing our total customers to just over 850,000 or 5% of service-ready homes. These results put us firmly on track to exceed one million customers by the end of the year. We also added 134,000 digital video recorder customers this quarter, for a total of 1.3 million or 24% of our digital customers.

Moving next to film. Revenues increased 6%, led by the domestic box office success of Warner Brothers ‘Charlie and the Chocolate Factory’ and ‘Batman Begins,’ and New Line’s ‘Wedding Crashers,’ as well as higher revenue from home video and international sources of our television programming. On the other hand, OIBDA declined 30%, as these revenue gains were more than offset by expected difficult year-over- year profit comparisons. As a reminder, last year’s third quarter included significant higher margin contributions from the international theatrical releases of ‘Harry Potter and the Prisoner of Azkaban’ and ‘Troy.’ In addition, the third quarter of 2004 included contributions from the television syndication of the final season of ‘Friends,’ as well as the broadcast network run and syndication of the final season of ‘The Drew Carey Show.’ These too are very high margin products.

At our networks, revenue and OIBDA achieved double-digit growth of 10% and 21% respectively. Revenue increases were led by a 38% growth in content revenue, which was due to HBO’s broadcast syndication sales of ‘Sex and the City’ and higher international sales of HBO’s original programming. Subscription revenues rose 5% or about $69 million, resulting mainly from higher rates at Turner and HBO and to a lesser extent, an increase in the number of subscribers at Turner. In addition, advertising revenue was up 8%, with 12% growth at Turner. OIBDA increased 21% led by the revenue gains, which were offset partially by higher programming expenses at Turner, as well as additional costs at HBO related to the broadcast syndication sales of ‘Sex and the City.’

Moving to AOL. Revenues declined $100 million or 5%, as the 28% increase in advertising revenues were more than offset by 10% lower subscription revenues. The improvement in advertising revenue was due to 38% growth in paid search, and an increase of $31 million at advertising.com, which was acquired on August 2, 2004. On a pro forma basis, including advertising.com’s prior year results, advertising was up 20% versus the reported 28%. Adjusted OIBDA increased 7% to $481 million related, in part, to a 23% decline in network expenses and lower acquisition marketing expenses. We expect domestic network expenses in the fourth quarter to decline at a slower rate than they declined in the first nine months of this year. I’d like to turn for a moment to AOL subscribers. AOL continues to exercise discipline in managing the narrow band business, and they’re directing their marketing efforts to adding subscribers that generate positive life-time value. In the quarter, US brand subscribers declined 678,000, versus the previous quarter, due primarily to losses in the $15 and over category. These losses were offset partially by subscriber gains in the under $15 category.

Moving to publishing. Revenues grew 3% in the third quarter, benefiting from 10% growth in content revenue, as well as higher other revenues. Subscription and advertising revenues rose 3% and 1% respectively during the quarter. These increases were attributable to the acquisition of ‘Essence’ and recent magazine launchings. Advertising revenues also reflect gains at ‘Real Simple,’ which were more than offset by lower ad revenues by core magazines, including ‘Sports Illustrated’ and ‘Time.’ The negative trends that we’ve been seeing at certain of our significant men’s titles continued to overall, to impact our overall core ad revenue growth. However, several of our women’s titles, such as ‘Southern Living,’ ‘Parenting’ and ‘Cooking Light,’ continued to perform well.

The 10% increase in content revenues was driven by Time Warner Book Groups release of James Patterson’s ‘The Lifeguard’ and continued reorders of Elizabeth Kostova’s ‘The Historian’ and Joe Osteen’s ‘Your Best Life Now’ and Malcolm Gladwell’s ‘Blink.’ OIBDA improved 9%, due mostly to growth at Synapse, ‘Real Simple’ and Time Warner Book Group, as well as contributions from our acquisition of ‘Essence. These items were offset partially by lower results at some of the core magazines and higher start-up losses from magazines launched in the past year.

With that, we’ll go back to Jim to set up the Q&A.

Jim Burtson, Vice Preisdent

Thanks, Wayne. Operator, we’re ready to take questions now.

Question-and-Answer Session

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