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Time Warner Inc. (NYSE:TWX)

Q2 2007 Earnings Call

August 1, 2007 10:30 am ET

Executives

Richard Parsons – CEO

Wayne Pace - CFO

Jeff Bewkes - President and COO

James Burtson – IR

Analysts

Michael Nathanson – Sanford Bernstein

Spencer Wang – Bear Stearns

Anthony Noto – Goldman Sachs

Gordon Hodge – Thomas Weisel Partners

Jessica Reif-Cohen – Merrill Lynch

Jason Bazinet – Citigroup

Imran Khan – JP Morgan

Tom Eagan – Oppenheimer

Benjamin Swinburne – Morgan Stanley

Presentation

Operator

Welcome to the Time Warner second quarter 2007 earnings call. (Operator Instructions) Now I will turn the call over to James Burtson, Senior Vice President of Investor Relations. Sir, you may begin.

James Burtson

Thanks, operator and good morning, everyone. Welcome to Time Warner’s 2007 second quarter earnings conference call. This morning, we issued two press releases: one detailing our second quarter results, and the other reaffirming our 2007 business outlook.

Before we begin, there are several items I need to cover. First, we refer to non-GAAP measures, including Operating Income Before Depreciation and Amortization -- OIBDA -- and free cash flow. We use these measures when we analyze year-over-year comparisons. In order to enhance comparability, we eliminate certain items such as non-cash impairments, gains or losses from asset disposals and amounts related to securities litigation and government investigations. We call this measure Adjusted Operating Income Before Depreciation and Amortization, or adjusted OIBDA. Schedules setting out reconciliations of these historical non-GAAP financial measures to operating income and cash provided by operations or the other most directly comparable GAAP financial measures, as applicable, are included in our earnings release or trending schedules. These reconciliations are available on our company’s website at www.TimeWarner.com/investors. A reconciliation of our expected future performance is also included in the business outlook release that is available on our website.

Second, as a result of the sales of the Parenting Group, most of the Time for Media titles, The Progressive Farmer magazine, Leisure Arts and the Atlanta Braves baseball franchise and the pending sales of Teget Communications and Wildseed, the company has presented the financial results of these businesses as discontinued operations for all periods presented.

The 2006 operating results of Time Warner Book Group and the Turner South Network as well as cable systems transferred to Comcast in the Adelphia and Comcast transactions are reflected as discontinued operations.

Third, you’ll see a section in our earnings release that sets out a description of the basis of presentation for Time Warner Cable’s results. Today we will refer to certain pro forma financial results for Time Warner Cable, the pro forma financial information for the second quarter of 2006 presents the result as if the Adelphia and Comcast transactions and the consolidation of the Kansas City pool had occurred on January 1st, 2006. Reconciliations of the pro forma financial information to financial information presented in accordance with GAAP are included in the trending schedules posted on the company’s website.

Finally, 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, strategic 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 reports 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.

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

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Richard Parsons

Thanks, Jim and good morning ladies and gentlemen. We appreciate your joining us today on our second quarter earnings call. Here’s the morning’s agenda. First, as usual, I’ll share my perspective on the overall company and where we’re going. Next our CFO, Wayne Pace, will walk you through the results for the quarter. After that, our President and Chief Operating Officer, Jeff Bewkes will join us for your questions.

Before getting into the details, let me set out for you what I believe are the principal takeaways for the quarter. First is that Time Warner is on track to meet its full year business outlook for adjusted OIBDA growth, free cash flow generation and earnings per share.

The second is that we’re continuing to invest in AOL for sustainable long-term growth and value creation.

Third is that we’re committed to maintaining a healthy level of leverage and we’ll keep using our capacity to return capital directly to our shareholders. I’ll elaborate on each of these as I go through the quarter’s results.

For the quarter, I’m pleased to say Time Warner delivered solid operating results. Our adjusted OIBDA grew 20%, including the impact of the cable systems acquired from Adelphia and Comcast last year. Through the first half of the year, we also generated strong free cash flow, converting 33% or $2 billion of our adjusted OIBDA to free cash. Our adjusted diluted earnings per share in the quarter was $0.22, up 16% from the prior year. As you read in today’s business outlook release, we’re reaffirming our expectation of mid to high teen adjusted OIBDA growth for the full year. Also, we continue to expect to convert 30% to 40% of our adjusted OIBDA to free cash. In addition, we anticipate diluted earnings per share of approximately $1.07, or $0.95 excluding $0.12 of the items detailed in our outlook.

Turning to our businesses, I hope you heard Time Warner Cable’s earnings calls earlier this morning. In the typically seasonally weak second quarter, Time Warner Cable continued to thrive penetration gains in digital video, high speed data and digital phone subscriptions. Altogether, our cable colleagues added over 500,000 net RGUs and they are on track to achieve all of their full year objectives. Overall, triple play penetration now stands at 13%, up from 12% at the end of the first quarter and we see plenty of additional up side to come. We remain very comfortable with Time Warner Cable’s competitive positions and ability to generate compelling growth over the duration of our long term plan.

Our confidence is based on the following business initiatives that provide tangible building blocks but continued strong growth.

First, there is still head room in the existing residential product lines in Time Warner Cable’s legacy footprint.

Second, we have plenty of up side to realize from the acquired Adelphia and Comcast properties.

Third, there are significant medium-term opportunities to gain shares in a sizable small to medium commercial space.

Fourth, we see great longer term potential to create meaningful value through advanced advertising.

With these opportunities we expect cable to continue to be a powerful generator of growth for years to come.

Turning to our film segment, OIBDA was down 24% at the second quarter. As we told you last quarter, a decline was expected due to the timing of releases as well as difficult comparisons to prior year results. We anticipate that this reporting line will be up strongly in the second half of the year, more than enough to deliver significant growth for the full year. We’re already off to a great start in the third quarter.

Since its opening on July 11th, I’m happy to report that the latest Harry Potter movie has generated about $700 million in worldwide box office, and we have Rush Hour 3, the Golden Compass and Iron Legend still to come. We’re looking for a very big year for Warner Brothers and New Line.

Moving to our network segment, we saw a double-digit increase in OIBDA. Fueling this growth were very strong results offset in part by the impact of the planned incremental studio output programming investments at HBO.

At publishing, we’re pleased to return to OIBDA growth, a 12% increase. For the second quarter in row, digital ad revenue more than offset declines in magazine ad revenue and we see this trend continuing throughout the year.

Now to AOL, where the company continued to make progress against its strategy. As you know, we expect AOL’s adjusted OIBDA to grow for the full year and this quarter’s results keep us well positioned to achieve that objective. We also anticipate that AOL will begin growing its page views on a year-over-year basis in 2007 and the business remains on track to do just that. In fact, on a sequential basis, page views were up this quarter for the first time since we started reporting this metric at the end of 2005. Growing page views is a key to sustaining AOL’s advertising success.

As you saw in our earnings release, however, AOL’s advertising growth was 16% in the quarter, a significant slowdown compared to the 40% we generated last quarter. Let me briefly walk you through the reasons why. First, we told you last quarter our advertising growth would dial back as we passed the anniversaries of significant advertising deals launched last year. Second, in the quarter, AOL made significant programming enhancements to many of its main channels, including health, music and autos, as well as improvements to such core products as email and search. All of these changes are aimed at building user engagement and ultimately driving increased monetization, and in the main, AOL management team has been satisfied with the early results.

That said, these kinds of up grades often lead -- at the beginning -- to a slowing in traffic and monetization. When you modify programming for example, uses routinely require a little time to become accustomed to the redesigned pages while advertisers naturally want to see how the new programming performs before reinvesting significantly. In other words, improvements like these to AOL’s programming and products which we’re confidence will yield long term benefits comes with short term disruptions.

Finally, as have others in the industry, we’ve seen advertising demand shift recently toward third-party advertising networks. This puts some pressure on AOL’s display advertising in the quarter. AOL’s well-positioned to compete in this changing dynamic with Advertising.com, a major force among third party advertising networks.

All in all however, while we continue to expect AOL’s page use to increase on a year-over-year basis, and its adjusted OIBDA growth for the full year, we’re stepping back from our expectation that AOL will grow its advertising at or above the domestic industry growth rate this year.

Looking ahead, AOL’s management team will keep making these types of significant programming and product enhancements. In fact, subsequent to closing the quarter, AOL relaunched news, sports and shopping. Just yesterday, the new AOL.com home page became widely available. Next up, we’ll upgrade our real estate and money and finance. In addition, AOL is working to strengthen its already industry leading advertising platform by building own more advanced targeting capabilities. These upgrades will come through the integration of several recent acquisitions such as AdTech, Dakota, LighteningCast and Third Screen Media. All in all, we’ve spend over $0.5 billion on acquisitions designed to extend AOL’s advertising platform capabilities over the last 15 months. Along with Advertising.com, these acquisitions will help AOL to continue to have the leading third party display network worldwide and they will provide substantiate monetization benefits for AOL’s owned and separated network sites as well.

We believe these initiatives to enhance our programming and products as well as our advertising platform are critical to the company’s strong competitive position and its ability to drive increase long-term value. We will pursue these improvements even though they may result in somewhat less visibility into AOL’s advertising growth trends in the near term.

I’ll close by updating you on what we’re doing on the capital allocation front. With the second quarter closing of Liberty Exchange, we essentially completed our $20 billion share repurchase program. In total, we repurchased over 1.1 billion shares, representing more than 23% of our outstanding shares at the start of the program, at an average price of $18.44 per share.

We remain committed to meaning a healthy leverage position of around three times OIBDA. Together, with our OIBDA growth and strong free cash flow generation, we have incremental capital to allocate. We’re pleased to announce that our board has approved a new $5 billion stock repurchase plan. We believe buying Time Warner stock at current prices remains a very attractive use of our capital. We expect to utilize at least half of the new program by the time we report year end earnings in January. In addition, as we announced last week, we increased our existing dividend by almost 14%. Both the new repurchase program and higher dividend reflect our confidence in the sustainability of our strong operating performance going forward.

With that, I thank you again and I’ll turn it over to Wayne to take you through the quarter.

Wayne Pace

Thank you, Dick, and good morning to everyone. The slides that I’ll refer to this morning are now available on our website. We’ll start with a look at our second quarter results. Revenues increased 6% over the prior year to $11 billion. Adjusted OIBDA grew 20% to $3.1 billion and our second quarter margin increased 300 basis points to 28%, due primarily to lower expenses at AOL, the sales of AOL’s European Internet access businesses and the shutdown of the WB Network. This was offset in part by cable whose margin was negatively impacted as expected by the acquisition of Adelphia.

Adjusted diluted EPS rose 16% to $0.22 for the quarter. If you move to the next slide, diluted EPS before discontinued operations and the cumulative effect of accounting change was $0.25 in the quarter compared to $0.20 in 2006. Both years had items that affect comparability.

The current quarter included an approximate $100 million pre-tax gain from the sale of Time, Inc.’s 50% ownership of Book Span and approximately $77 million of tax benefits that related primarily to the realization of tax attribute carry forward and the change of certain tax laws in states that affected our businesses. These items were principally offset by a $34 million non-cash charge relayed to the impairment of the Court TV trade name as a result of the network’s rebranding initiative that we hope you have now heard about. These and other items are detailed in our earnings release and the trending schedules. Adjusting for these items, diluted EPS for the quarter increased $0.03 or 16%, to $0.22.

Looking at free cash flow, this slide shows the usual detail that we give you each quarter. Year-to-date through June we generated $2 billion in free cash flow and converted 33% of our adjusted OIBDA into free cash. We will be happy to discuss the details here during the Q&A, or call us after the call.

As the next slide shows, we ended the second quarter with net debt of $35 billion, up about $1.6 billion from the end of 2006. Contributing to the increase was $3.7 billion in share repurchase, which includes the Liberty transaction. As you recall, we exchanged the ownership interest in Atlanta Braves, Leisure Arts and approximately $960 million in cash for shares in Time Warner. In addition, approximately $400 million in dividend payments contributed to the increase in our net debt.

These increases were offset in part by net free cash flow of $2 billion, and net investment proceeds of $1.4 billion which included proceeds from the sale of AOL’s German Internet access business and at publishing, the sales of The Parenting Group, most of the Time for Media titles and the company’s investments in Book Span.

Finally, the net increase in net debt reflects $940 million of payments related to securities litigation and government investigations, which is captured in the other line item on this slide, resolving substantially all of our remaining securities litigation claims. Since June 30, Time, Inc. has closed on the sale of four Australian magazine titles and on the other side AOL announced the acquisition of Dakota, an online display of advertising network.

Once again, John Martin mentioned in Time Warner Cable’s earnings call earlier this morning that Insight has announced that it is evaluating and exploring strategic alternatives and that Time Warner Cable is participating in this process. As John mentioned, we’re unable to comment further on this process until it is completed.

This next slide highlights the completion of our share repurchase program. In summary, we have repurchased almost $20 billion of our stock, representing 23% of our outstanding shares since we began the program and at an average share price of $18.44 per share. As Dick mentioned to you a moment ago, our board has authorized a new $5 billion share repurchase plan. Again, around our current share price levels, we expect to utilize approximately half of this authorization by the time we report year end earnings at the end of January of next year.

Also as Dick mentioned, we have reaffirmed our full year business outlook. We continued to expect full year OIBDA percentage growth to be in the mid to high teens off a 2006 base of $11 billion. We still expect to convert between 30% and 40% of adjusted OIBDA into free cash flow.

Additionally, we now anticipate earnings per diluted share for the full year to be approximately $1.07 which includes approximately $0.12 per diluted share related to the sales of assets and investments, certain tax benefits and expenses in the first six months related to the securities litigation and government investigations and the Court TV asset impairment charge I mentioned just a few moments ago. Our 2007 EPS guidance also reflects the impact from our share repurchase programs.

I’ll spend the next few minutes on the results of our divisional segments and then we’ll move to the Q&A with you. We’ll start with AOL. Last August we announced a strategy to shift AOL’s business to a primarily advertising-driven model. AOL’s advertising revenues grew 16% in the second quarter due to growth on both the AOL network and partner sites. Display advertising on the AOL network increased 15% while page search on the AOL network was up 6%, and this reflects the one-year anniversary of our revised arrangement with Google.

Advertising on partner sites primarily done through Advertising.com rose 32%, and importantly, this increase reflected the first year anniversary of the expanded relationship with a major customer that began in the second quarter of last year. In the second half we’re expecting advertising revenues to increase at a rate less than that experienced in the first half of 2007 and more if line with the growth rate achieved in the second quarter 2007 due to the shifting of advertising dollars from premium display to third-party networks.

Our subscription renews declined 55%. This reflects AOL’s strategy to make AOL free which resulted in reduced acquisition marketing, and also subscribers turning or converting to free accounts. In addition, AOL subscription revenues were down approximately $400 million due to the previously announced sale of AOL’s Internet access business in the UK, France and Germany. These declines in subscription revenues resulted in a 38 % decrease in total revenues for the second quarter. Adjusted OIBDA was down 2% compared to the prior year as lower revenues were offset by reductions in network and marketing costs.

This next slide highlights AOL’s web metrics. For the second quarter, AOL’s domestic ad revenue less traffic acquisition costs or TAC, was $329 million, up 12% year over year. Average monthly domestic unique visitors for the second quarter were 114 million, up compared to 111 million for the first quarter. Total domestic page views of approximately 52 billion rose 18% from the first quarter. As a result, AOL averaged 152 monthly page views per unique visitor in the second quarter. Page view growth in the current quarter included the impact of certain data tracking improvements which were implemented by comScore. If we were to exclude the impact of these data tracking improvements, it’s our belief that page views grew approximately 4% as compared sequentially to the first quarter.

Domestic ad revenue less TAC per 1,000 page views of $6.32 for the quarter, which included the impact of Advertising.com’s revenue generated on its partner sites, was 19% lower than the first quarter, due primarily to the data tracking improvements as well as the $19 million benefit from a change in the accounting estimate in the first quarter 2007. Please remember this $19 million item was discussed with you in last quarter’s call.

Moving to cable. We’re not going into too much detail here since Time Warner Cable reported its second quarter results earlier this morning, and as Dick said, we hope you had the opportunity to listen in on that call. Time Warner Cable’s revenues increased 59% and its OIBDA grew 52%. As a reminder, these results reflect the impact of the acquisition of certain cable systems from Adelphia and Comcast on July 31, 2006 as well as the consolidation of the Kansas City pool on January 1 of this year. In looking at the second quarter 2000 results compared to the pro forma results for the second quarter of 2006, both revenues and OIBDA grew 9%.

This next slide shows cable subscriber highlights for the quarter. We’ve provided you with additional disclosure in our earnings release detailing subscriber information for the acquired systems as well as the legacy systems. You can also access Time Warner Cable’s earnings release, its business outlook release, earnings presentation and its call replay on its website.

Turning to film. Revenues declined 5% compared to the prior year due mostly to lower revenues from television products, to difficult comparison to the prior year’s home video revenues, and a decrease in television licensing revenues on made for theatrical product. Please remember that the second quarter of 2006 included revenues from the second cycle syndication availability of Friends, the off network availability of the first three seasons of Without a Trace, and home video sales of Harry Potter and the Goblet of Fire. Offsetting these declines in part were worldwide theatrical revenues from Warner brothers Oceans 13 and 300. OIBDA decreased 24% driven by lower contribution from television product, as well as declines in theatrical product due mostly to higher theatrical pre-release print and advertising expenses.

As we had mentioned when we reported to you on the first quarter, our film slate is heavily weighted toward the second half of the year which includes the recent releases of Warner Brothers Harry Potter and the Order of the Phoenix, and New Line’s Hairspray. They will be followed by the upcoming releases of Warner Brothers Fred Clause and I am Legend, as well as New Line’s Rush Hour 3 and His Dark Materials, the Golden Compass. Also, please keep in mind that the second half of 2007 will include revenues from the initial off network availabilities Two-and-a-half Men and George Lopez in the third quarter, and Cold Case in the fourth quarter. So while OIBDA was down in the first half of the year, we expect the film segment OIBDA to be up significantly in the second half. As Dick mentioned overall, we expect results for the film segment to be up for the full year.

Moving on to networks. Revenues declined 1% reflecting the closing of the WB Network’s operations in September of 2006, offset partly by higher subscription, and Turner advertising revenues. Subscription revenues grew 5% due primarily to higher rates and to a lesser extent an increase in subscribers at Turner. Driven by the absence of the WB Network, ad revenues declined 11%. Within these results, Turner’s ad revenues increased 6% led by news and domestic entertainment.

The 10% increase in adjusted OIBDA was driven by the absence of The WB Network net losses incurred in the prior year quarter, and higher subscription and Turner advertising revenues. The prior year quarter included $81 million of shutdown costs related to the WB.

The adjusted OIBDA growth was offset partially by a 12% increase in programming costs at Turner and HBO, as well as $16 million of restructuring and severance charges at HBO in the current quarter. Before moving finally on to publishing, we want to comment on the network’s OIBDA profile going forward. Due to the timing of programming and related marketing expenditures, we expect this segment to be flattish in the third quarter.

Lastly at publishing, revenues were essentially flat compared to the prior year, reflecting higher ad revenues which were offset by lower other revenues. The 1% increase in ad revenues was driven by higher digital revenues led by People.com and CNNMoney.com offset partially by lower print magazine revenues. OIBDA grew 12% as a result of lower restructuring charges and overall growth in non-magazine businesses and domestic magazines.

That concludes our prepared remarks. With that, we’ll go back to Jim to start the Q&A.

James Burtson

Thanks, Wayne. Operator, do we have any questions in the queue?

Question-and-Answer Session

Operator

Your first question comes from Michael Nathanson – Sanford Bernstein.

Michael Nathanson – Sanford Bernstein

Given that you used Google for paid search monetization, can you give more details on the slow down in search? Was the problem in number of queries and what are you doing that?

Second on display I realize compares become more difficult in the second half of the quarter with change in growth rates as the quarter moved along?

Jeff Bewkes

On the search first, I think the short answer is no to your question. But basically as Dick said, we reached the one-year anniversary of our improved Google which had gone into effect last year at the time. What we did during the quarter, basically in May, is we decluttered the search product to try to make it more attractive and drive higher engagement. As Dick said, it started May 10. That led to a brief change in traffic patterns as users tried to get use to it and also to a little bit of kind of wait and see on the ad side. But in the process of doing that, we refined the product and we have now returned at this point to the pre change monetization levels and we now have higher queries per unique as a result of it. That’s essentially what happened to your question.

On the other question, which I look at as page views and display advertising overall, how things progressed during the quarter. Here’s what really happened. I just want to expand on what Dick explained. Page views, we think, will grow on a year-over-year basis. In the second quarter, as Dick said to you, they grew sequentially already and that’s for the first time since we started reporting this metric.

The reason -- and I think this really gets to what you’re asking -- is that the comparisons in the second half in terms of what happened last year is that you had the page views dropping last year because of the reduction in paid subscribers, which as you know, occurred deliberately as we were changing the model to advertising. We essentially have progressively easier comparisons as we go along.

But even having said that, as we said we see page views going up sequentially now, we see equally importantly, engagement gains happening in key categories. Let’s take email. Email we think is a very good leading indicator of overall usage. It was up 27% quarter to quarter at AOL in the second quarter, which is quite a bit more than what happened in email in the industry overall.

Finally, which is really clear to us, because we have this increasing registered user base, as Dick said, we now are up to 21.4 million total users. We’ve got about 10.5 million free users, that’s up 2.4 million to 2.5 million for the quarter. We have just shy of 11 million paying users. It’s down 1.1 million during the quarter. So because you have that steadily increasing user base combined with the increases in engagement that we’re seeing, we just see this as an improving situation. As we continue to upgrade the products, we’ve done search, we’ve now launched the new home page yesterday, we made changes in news and sports; upcoming we’ve got real estate, money and finance. We see progress through the rest of the year, and more importantly we see setting a foundation for growth beyond that.

Michael Nathanson – Sanford Bernstein

Then why change guidance? If you see improvement in paid search and all the metrics that you’ve always watched are going the way you thought, then why change your outlook on advertising for the second half?

Jeff Bewkes

Well, because it’s not clear exactly. We’re going to be pretty close. We’re just not sure exactly where it will be and we want to be free to make the investments and make these improvements as necessary, not be constrained by what we’ve said about the guidance in terms of ad growth in the past. We just think that’s important. We are not sure that we’ll stay exactly inside the fence on it. We might, we might not. I don’t mean to give a speech, but I guess I am giving a speech.

What we’re interested in is improving the products to increase users and engagement, and that’s the things we just said; home page is an important one. We’re very interested and you’re seeing this, as Dick mentioned it, in improving our monetization platform. That’s a big deal. We really think as we add these capabilities, behavioral is the most recent with Dakota, we had AdTech for display advertising we bought back in May, we had LighteningCast for video ad serving, we bought Third Screen for mobile. We just think we’re building a good platform there.

As the demand strengthens in third party, and you can see us picking up an advantage there, we had our third party growth rate which was 32% for the quarter. We just think the combination of those things are auspicious and we don’t want to constrain ourselves too much with the guidance we came up with back when we were making pretty significant changes in the business model last year.

Richard Parsons

This is my recollection. This is the first time in five years that we’ve taken a step back on anything that we’ve said that even approached guidance. So we said earlier in the year we thought AOL would grow, at least as rapidly in online ad space as the market did.

I’ve always said we don’t manage this company for the guidance. We manage the company according to business imperatives and for the long term growth and sustainability of our businesses.

What Jeff just talked to you about was, he has been working with the AOL management and as they’ve been trying to figure out how to get this new strategic really embedded so it works over the long term, they decided they need to make some product improvements and tweak some of their position and offerings online that will create more momentum going forward. That creates some short-term turbulence. So we said let’s not try and manage to a specific guidance metric we put out there, let’s manage this company in a way that gives us all the greatest confidence we’re creating value in the long run.

That’s why we’re just stepping back because we don’t want people -- including inside the company – thinking they’ve got to manage to some artificial metric as opposed to manage the business in a way that is in the long term business interest.

Operator

Your next question comes from Spencer Wang – Bear Stearns.

Spencer Wang – Bear Stearns

I just have one big picture question for Dick and Jeff. As you look out over the next 12 to 18 months, how do you guys see the business portfolio of Time Warner changing? In that context if you could touch specifically on your ownership in Time Warner Cable, your ownership on AOL given Google demand registration rights and also the long run interest in keeping Time, Inc. within Time Warner? Thank you.

Richard Parsons

We get asked this question every quarter. I don’t really have much to add to what we’ve said in the past so I guess what I’ll do is repeat what we’ve said in the past. Which is we like the cable business. We think we have the flexibility now given the structure of our cable company to participate, continue to participate in the ongoing consolidation of that space and business and we’ve got a new currency that we can use in connection with that. So that’s potentially a structural change, I wouldn’t look for, however, something that was driven off of any impulse or initiative other than through the consolidation process within that timeframe you spoke about.

In terms of AOL, we remain confident -- and I’ll let Jeff speak to this in a minute -- that we’re on the right track. We think that the underlying metrics are telling us that AOL is in fact reasserting itself as a leader in the online advertising space, and we’re doing the things that will cement that. The focus is on executing that strategy not for what some people may think is a creative or clever structural alternative. We don’t think that should be the focus at this point in this time.

With respect to the publishing business, I’ve said and say again, we were and are engaged in an ongoing process of pruning the portfolio to make sure we’re focused on the titles, magazine space that have and can have life in the online space and we’re focused on moving those brands into the online space and capturing the advertising dollars, leaving the print space and going into the online space. We think we’re doing a pretty good job on that. That’s where the focus is and will be over the next year to 18 months.

Operator

Your next question comes from Anthony Noto – Goldman Sachs.

Anthony Noto – Goldman Sachs

My question is on AOL in two regards. First while I am on board with the strategy you’ve embarked and the benefits you’ll see from some of the programming changes going forward, the one thing that’s really not in your control is the pricing pressure that you’ve begun to see on the display inventory that I guess is probably legacy and this is due to advertiser’s willingness to buy the lower-priced CPMs. How much more pressure do you think you could see on the CPM other than the high, premium placed advertising?

My second question is reversing the last question. Would you ever think about consolidating another larger portal within Internet space and just not to mince words, Yahoo!. Thanks.

Jeff Bewkes

Starting on the first one, in the area of monetization and price levels, we’ll just follow up what we said before. As we improve the capabilities of our ad platform, including our third party ad platform, we can apply that to increased optimization and efficiency in our traffic generated at AOL itself. We think that will be an increasing ability to take efficiency in advertising and basically increase the dollar price or the yield in every one of the categories if you were looking at the growth in our categories.

Email, which we already mentioned we had gains in our AOL email up 27% in the quarter and that it was a good leading indicator, it outperformed the industry which is more like 9%. So email for us is now accounting for 43% of total page views. That’s up from 41% just last quarter. Email, as everyone knows, has been a difficult thing to monetize up to now. But as you add some of the new monetization capabilities, including behavioral but not limited to that and there may be some other areas that we will add by either building or acquiring them, it will make our ability to monetize email go up. So to your question, we see the monetization future for us as steadily improving.

On swallowing or taking efficiency with other portals and those things. As Dick said it is a question we get asked and we should get asked every quarter. They are good questions because they’re the same questions we ask ourselves internally. We obviously just look at those on a returns basis.

Operator

Your next question comes from Gordon Hodge – Thomas Weisel Partners.

Gordon Hodge – Thomas Weisel Partners

Just a couple question on filmed entertainment. I think you have some TV shows going on syndication in the second half of this year. I’m wondering if you can refresh my memory on what that impact might be. Also, what the pipeline looks like for ‘08 in that area. If you could update us on the VOD test you’re doing at Time Warner and Comcast and if any other studios are participating in your Time Warner Cable test.

Jeff Bewkes

On television, as Wayne said, in the second quarter we recognized the off net syndication revenue from the OC and from One Tree Hill. In the third quarter as I think you said, Wayne, we’re going to be having the recognition for off network syndication on Two-and-a-half Men which is a big pretty show, and George Lopez. And in the fourth quarter, we expect that we’ll take availability on Cold Case, that will go into syndication availability.

As you look ahead to 2008, we don’t want to specify exactly which shows. Some of the things we’re deciding as to when we put them in. In the end, we may not decide to put quite as much inventory, let’s say, into availability in ‘08 as we had in ‘07. But we’re not really ready to solidify that plan or announce what it is.

The VOD trials are actually encouraging and reasonably almost big news. Basically what we’ve got when we do the trials, and we have some that are CW/Time Warner Cable specific and we have some with Comcast, is that the buy rates on video on demand rental over the electronic system, are up roughly 50%. The sell through, which is the point of the test, whether it eroded into sell through, did not go down. It actually went up a little bit; 5%, 10% depending on the test. Comcast had a similar report, I believe, in the part we shared with them.

The reason that happened on sell through is on the one hand it’s not seeming to erode customer demand when people are taking it up on electronic VOD. What was happening before, or in the markets where you’re not doing day and date, is if you think about it, the physical DVD’s were running through the sell through process and then they were showing up at rental stores like Blockbuster as used inventory for sale, people were buying those which was cutting into the trial.

We think the test is pretty auspicious leads to what we have said publicly and around the industry is we think the whole industry should move and adopt this. It could be a very good source of growth, not just in revenue but also customer satisfaction and leading to increased margins. Because what the studios get out of electronic rental on VOD is about three times the margin that they get out of physical rental. So it’s a good trade and it’s easier for consumers. So it seems to be a win all the way around.

Operator

Your next question comes from Jessica Reif-Cohen – Merrill Lynch.

Jessica Reif-Cohen – Merrill Lynch

I have a cable network question. Could you tell us about the upfront across your networks? Also, what kind of political advertising does CNN typically get or would you expect to get? On that flat Q3 guidance, is this increased spending on programming, is that also original programming.

Jeff Bewkes

I may have to follow up with you on that. Let’s do the upfront and the ad sales. Basically the cable upfront, the cable industry for the networks overall is up about mid single-digits. Turner is leading the cable pack and we will be at the high end of that market, fueled mostly by our entertainment networks. So for example, we expect TBS and TNT to be up in the high single-digits to low double-digits. That’s true both of pricing and of dollar volume because we kept the sell out basically roughly where it was.

The one area that’s, well Court TV is also up significantly because it’s had such a strong interest, at the high point of its ratings in the second quarter. The one weaker spot in the up front is the kids upfront which is pacing lower than the prior year. As a result, our Turner Network won’t show improvement over the prior year. So overall it’s a very strong story. We moved the scatter in the first and second quarter. It’s been the same in the third quarter.

To your question on politics, the campaigns which is a good one, it seems that even as early as the end of this year, even though we’re 15 months away, is kind of the beginning of this election. So that’s brought some buoyancy into the ad spending environment, which absolutely benefits all of our networks but certainly including CNN. We don’t break out separately what exactly we’re doing on CNN in terms of dollars. But I would say in terms of ratings, it’s the only news network that had double-digit gains among adults 25 to 54 in every hour from Monday through Friday 9 to 12. It had some strong points in the ratings side as well.

Richard Parsons

On the third quarter, it was looking at the OIBDA for the networks for the third quarter where we said it would be flattish, it’s as planned and it relates to, as you mentioned Jessica, original programming; some of it is entertainment, some of it is sports: basketball, baseball and NASCAR. It also reflects the marketing associated with that programming for the awareness of the enhanced programming we’ve got, both at Turner and the Hollywood output at HBO. All as planned. You expect, on a going forward basis longer term, the type of growth at networks that you’re accustomed to seeing.

Jessica Reif-Cohen – Merrill Lynch

Just one separate question on AOL, could you just discuss what’s going on in the cost side? Is there any more room to cut costs on the network?

Jeff Bewkes

You know, we’re on track to reduce costs by at least $1 billion by the end of 2007. Just to pick an example, in the second quarter, the network related cost, the physical transport and operation of the network, decreased by 80% meaning it’s down to one-fifth of what it was a year ago. So we continue to make progress in cost cutting, which is why as Dick said, you see the profitability at AOL on a steady trend upward.

Operator

Your next question comes from Jason Bazinet – Citigroup.

Jason Bazinet – Citigroup

DVD pricing over the last three quarters or so has been a high teens decline in DVD pricing you guys were reporting. Do you see those trends moderating at the $9 level or do you think there is another leg down? Secondly, is that an intentional effort to exploit price elasticity or is it the competitive nature of the business?

James Burtson

The real thing you see in the industry in terms of price is actually just the weighted average math of current releases. It’s mixed. You’ve got what is obviously a very strong year in terms of box office going on, a lot of the biggest titles are just coming out or still to come out as the year goes on as new releases. Those, you’ve been relying more on catalog in terms of pricing where you have seen pricing pressure over the last couple years but it’s nowhere near I think the magnitude when you get down to the individual, what the retail pricing is per product, you’re talking about in terms of 19%. That’s the result of a mix shift. You’ll see that I think change as the year goes on and I think you’re going to see a very strong fourth quarter across the industry in terms of home video.

Jason Bazinet – Citigroup

As more new releases and less library, did I interpret that.

James Burtson

Exactly, as the big titles come out.

Operator

Your next question comes from Imran Khan – JP Morgan.

Imran Khan – JP Morgan

The first question is specific to Mapquest, I was wondering if you looked at the competition in the landscape Google and Yahoo! and Microsoft investing heavily to drive the traffic investment of their product, what are you doing to drive the product and drive the traffic, maintaining the traffic growth on Mapquest?

Jeff Bewkes

I don’t know specifically what we’re doing in product improvements at Mapquest right now.

Richard Parsons

Traffic overall I think has generally trended up with Mapquest for us. It still has the leading share in terms of mapping and directions. The product has upgraded pretty significantly over the last several months and will continue to do so. I think if you look at it from a traffic standpoint the bigger thing that AOL is doing across it’s programming is better circulation of the traffic and more movement, natural movement of users from one product to another and doing it in a way that doesn’t force them to do but that highlights the products and gives them a convenient option to do so. Traffic overall and their share of that market has actually remained remarkably consistent despite improvement and products at the competitors.

Operator

Your next question comes from Tom Eagan - Oppenheimer.

Tom Eagan – Oppenheimer

Jeff following up on comments you made before in on-demand, is it not the case with the day and date trials, have you seen a pull back in the retail rental? You can see positives in DVDs or pull back in retail rental.

On the on-demand advertising, when are we going to see the investment that needs to be made whether it’s in the on-demand servers or in choosing some kind of industry wide metrics so you can compare across the board?

Jeff Bewkes

First of all, yes, the one area where the successful and auspicious increase in VOD buy through has hurt physical sell through, it has hurt physical rental a little bit. That’s economically a good thing for most of the participants like the major DVD retailers, for the studios, it’s good for the networks in maintaining audience on their VOD channels because if you heard Brian this morning, these new VOD systems allow you to go from the channel so you’re watching TNT off to video on demand, then get back, return to the channel.

Shifting to your question on advanced advertising, it enables increasingly the cable platform to refresh the advertising as you’re using video on demand so that you can have time specific ads for movie releases and so forth.

Your question is really a good one on the common data and interfaces for the ad platform. I think the industry is moving rapidly to put in the servers and lay this all out. It’s not a large technical problem at all to agree on common data that can then be used for national sales. That’s underway right now. I think it will get agreed and installed steadily over the next year or two.

Operator

Your final question comes from Benjamin Swinburne – Morgan Stanley.

Benjamin Swinburne – Morgan Stanley

A question on cable networks. Can you assess what domestic advertising growth was at the networks in the quarter? Are there any changes that you would like to make in terms of commercial loading on the networks or the pods going forward, given what looks like the shift from program ratings to commercial ratings, that better positions Turner relative to its competitors?

Jeff Bewkes

Going forward, the general consensus is that the third quarter ad revenue for the industry will be up around 5%, mid singles. As we’ve said, we’ve been doing in our upfront better than the average in the cable industry. At this point we expect to continue doing that. To your point on the pods, I must admit, I have no idea what you’re asking.

James Burtson

The way units are sold in the upfront. We sold generally a live bus with commercial rating minutes, so do we alter the advertising dramatically again.

Jeff Bewkes

No.

James Burtson

For the quarter Turner was up 6%.

Benjamin Swinburne – Morgan Stanley

Domestic?

James Burtson

Overall but domestic would be most of it. Thanks so much operator. We’re going to conclude our call.

Richard Parsons

Thank you all.

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