Time Warner Q3 2007 Earnings Call Transcript

Nov. 7.07 | About: Time Warner (TWX)

TimeWarner, Inc. (NYSE:TWX)

Q32007 Earnings Call

November 7, 2007 10:30 am ET

Executives

JamesE. Burtson – Senior Vice-President, Investor Relations

RichardD. Parsons – Chairman, Chief Executive Officer

WayneH. Pace – Chief Financial Officer, Executive Vice-President

JeffreyL. Bewkes – President, Chief Operating Officer

Analysts

MichaelNathanson – Sanford C. Bernstein and Co.

BenjaminSwinburne – Morgan Stanley

TunaAmobi – S&P Equity Group

JessicaReif-Cohen – Merrill Lynch

RichardGreenfield – Pali Capital

JasonBazinet – Citigroup

JonathanJacoby – Banc of America Securities

DouglasMitchelson – Deutsche Bank Securities

AnthonyNoto – Goldman Sachs

SpencerWang – Bear Stearns

Operator

Hello andwelcome to the Time Warner third quarter 2007 earnings call. (Operator Instructions)Today’s conference is being recorded. If you have any objection you maydisconnect at this time.

Now I’ll turnthe call over to James Burtson, Senior Vice-President of Investor Relations.Sir, you may begin.

James E. Burtson

Thanks,Operator, and good morning, everyone. Welcome to Time Warner’s 2007 thirdquarter earnings conference call. This morning we issued two press releases:one detailing our third quarter results and the other re-affirming our 2007business outlook.

Before webegin there are several items I need to cover. First, we refer to non-GAAPmeasures, including operating income before depreciation and amortization, orO-EBIDTA, and free cash flow. We use these measures when we analyzeyear-over-year comparisons.

In order toenhance comparability we eliminate certain items, such as non-cash impairments,gains or losses from asset disposals, and amounts related to securitieslitigation and government investigations. We call this measure adjustedoperating income before depreciation and amortization, or adjusted O-EBIDTA.

Schedulessetting out reconciliations of these historical non-GAAP financial measures tooperating income and cash provided by operations or the other most directlycomparable GAAP financial measures, or as applicable, are included in our earningsrelease for trending schedules. These reconciliations are available on ourcompany’s website at www.timewarner.com/investors.A reconciliation of our expected future financial performance is also includedin the business outlook release that is available on our website.

Second, asthe result of the sales of the Parenting Group, most of the Time4 Media titles,The Progressive Farmer magazine,Leisure Arts, the Atlanta Braves baseball franchise, Tegic Communications, andWildseed, the company has presented the financial results for these businessesas discontinued operations for all periods presented. The 2006 operatingresults of Time Warner Book Group and the Turner South network, as well ascable systems transferred to Comcast in the Adelphia and Comcast transactionsare also reflected as discontinued operations.

Third, you’llsee a section in our earnings release that sets out a description of the basisof presentation for Time Warner Cable’s results. Today we will refer to certainpro forma financial results for Time Warner Cable. The pro forma financialinformation for the third quarter of 2006 presents the results as if theAdelphi-Comcast transaction and the consolidation of the Kansas City Pool hadoccurred on January 1st, 2006. Reconciliations of the pro forma financial informationthrough financial information presented in accordance with GAAP are included inthe trending schedules posted on the company’s website.

Finally,today’s announcement includes certain forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995. Thesestatements are based on management’s current expectations or beliefs and aresubject to uncertainty and changes in circumstances. Actual results may varymaturely from those expressed or implied by the statements herein due tochanges in economic, business, competitive, technological, strategic, and/orregulatory factors. More detailed information about these factors may be found inTime Warner’s SEC findings, including its most recent annual report on Form 10Kand quarter reports on Form 10Q. Time Warner is under no obligation to and infact expressly disclaims any such obligation to update or alter itsforward-looking statements, whether as a result of new information, futureevents, or otherwise.

With thatcovered I’ll thank you and turn the call over to Dick.

Richard D. Parsons

Thanks, Jim.Good morning, ladies and gentlemen. We appreciate your joining us today on ourthird quarter earnings call. Here is our agenda for this morning. First, asusual, I’ll share my perspective on where the company stands and where we’reheaded. Next, our CFO, Wayne Pace, will take you through the results for thequarter. After that, Jeff Bewkes, who as you all know by now will become ourCEO in the new year, will help us answer your questions.

Let me startby setting out for you what I believe are the three main take-aways for thequarter. The first is that, with nine months of the year behind us, Time Warneris squarely on track to achieve its full-year business outlook and will be wellpositioned for 2008. The second take-away is that we’re targeting sustainable,double-digit EPS growth as we look out into the next year. The third, similarto last quarter, we’re continuing to invest in AOL for sustainable long-termgrowth and value creation. I’ll expand on each of these three points as I gothrough the quarter’s results.

I’m pleasedto say that Time Warner delivered solid operating performance in the quarter.Our adjusted operating income before depreciation and amortization, or asyou’ve heard, adjusted O-EBIDTA, was up 15%, including the impact of the cablesystems acquired from Adelphia and Comcast.

Through thefirst nine months of the year we generated a very healthy level of free cashflow, converting 42% or $4 billion of our adjusted O-EBIDTA to free cash. Andour adjusted diluted earnings per share in the quarter was $0.24, up 26% fromthe prior year.

As you readin today’s business outlook release, we’re re-affirming our expectations of midto high teen growth in adjusted O-EBIDTA for the full year. We also continue toexpect to convert 30% to 40% of our adjusted O-EBIDTA to free cash. And wecontinue to anticipate diluted earnings per share of approximately $1.70, or$0.95 after excluding the 12% of items covered in our outlook release.

These resultsposition us well for growth next year. Although we’re still in our budgetingprocess, we’re comfortable in saying that we’re targeting double-digit EPSgrowth over the next year, as well as through the entire period covered by ourlong term plan.

Turning toour individual businesses. I trust that you heard Time Warner Cables earningscall earlier this morning. So I’ll justbriefly touch upon the highlights.

Managementindicated they are on track to achieve all of their full-year financialobjectives. Similar to last quarter, Time Warner Cable continued to driveincreases in digital video, high speed data, and digital phone subscriptions.Taken together, our cable colleagues added over 500,000 net RGUs for the 10thquarter in a row.

Overall,triple play penetration now stands at 15%, up almost 2 more percentage pointssince last we reported earnings. Although its operating results have been somewhathampered by the turnaround divisions of L.A. and Dallas, we’re pleased with theprogress that Time Warner Cable is making, as well as the competitive positionthat they maintain. In particular, as their management team described thismorning, they are beginning to see improvements in both the L.A. and Dallasdivisions and expect those to continue going forward.

With thetriple play bundle now available across almost the entire footprint acquired inthe Adelphia-Comcast transactions last year, Time Warner Cable is moving toroll out commercial phone aggressively next year. With an attractive commercialvideo, data and voice bundle, in addition to Time Warner Cable’s existingresidential products and bundles, we expect it to generate strong attractive growthfor years to come.

Turning toour film segment, O-EBIDTA was up 71%. This very healthy growth was driven bythe theatrical releases of Warner Brothers’ HarryPotter and the Order of the Phoenix and Ocean’sThirteen and New Line’s Rush Hour 3and Hairspray. This success wasaugmented by strong home video results, which included the successfulworld-wide release of Warner Brothers’ 300.

As we’ve toldyou, we anticipate that our filmed entertainment reporting line will be up forthe full year. With the very, several very exciting theatrical and home videoreleases coming up in the fourth quarter we’re confident that it will be up forthe full year.

Moving to ournetwork segment. O-EBIDTA rose 6%, which is more than we were expecting giventhe timing of planned investments in programming and marketing at Turner andHBO. This greater than anticipated growth was fuelled by 10% higher advertisingrevenues at Turner, which benefited from both ratings improvements and ahealthy scatter market.

In thequarter, TNT ranked number on among ad-supported cable networks and total daydelivery of its key demos of adults 18-49 and adults 25-54, while TBS rankednumber two in prime time delivery of adults 18-24.

In publishingwe delivered 12% O-EBIDTA growth. For the third quarter in a row, excludingclosed down magazines, growth in Time, Inc.’s ad revenues from its digitaloperations more than offset declines in print advertising at its magazines. Wesee this trend continuing into the fourth quarter.

At AOL wehave told you to expect adjusted O-EBIDTA growth for the full year and I ampleased to report that AOL is on track to meet that goal. Included in thatexpectation was adjusted O-EBIDTA being down for the third quarter. Advertisingrevenue rose 13% in the quarter. Breaking down these results we see the splayrecorded weaker 6% growth than the 15% regenerated last quarter. This was theresult of a full-quoted impact of the recent trend of advertising demandshifting to a third-party advertising platform and the continued impact ofproactive changes in programming and commerce initiatives.

Over the sameperiod, however, search rebounded to 15% year-over-year growth from lastquarter’s 6% increase. And gross and partner site revenues totalled a healthy21%, despite the first full-quarter overlap with last year’s launch of thesignificant deal with a large advertising client.

Let me saythat AOL’s advertising growth may be a little of a disappointment compared toyour expectations, but we are pleased with the efforts and the progress thatAOL has been making to improve both its own operating usage and itsmonetization platform. On the monetization front, AOL’s management team isworking to integrate the advertising capabilities that we’ve acquired over thelast year to create the leading full-service platform for onlineadvertisements. For example, we’re beginning to add the behavioural targetingcapabilities of the recently acquired TACODA to our already leading third-partydisplay platforms.

And thismorning we announced the acquisition of Quigo. Like TACODA in behaviouraltargeting, Quigo has what we believe is the industry’s best capabilities forcontextual targeting. With Quigo’s capabilities our platform will be able tooffer advertisers the most advanced and diverse set of advertising products inthe industry.

Over time, inaddition to the significant revenue opportunities from third parties –

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-- monetizationbenefits for AOL’s owned and operated –

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-- alreadybegin the process of moving more of its O&O inventory through thethird-party platform, which should allow AOL to better capture advertiserdemand.

While wepursue these improvements, as we told you last quarter, we’ll have lessvisibility into AOL’s advertising growth trends in the near term. But we remainconfident in our ability to create long-term value with AOL.

I’ll close byupdating you on the progress we’ve made on our share repurchases. Taking ourtwo programs together, we have spent over $22 billion in total to repurchasemore than 1.2 billion shares. This represents more than 25% of our outstandingshares since the start of the first program. When we last reported earnings inearly August we indicated we would spend at least have of the $5 billion programthat we announced earlier by the time we reported year-end earnings. And we’rewell on our way to doing so. So far, under this newer program we have spentover $2.2 billion repurchasing shares.

With that,thank you again and I want to turn the call over to Wayne. But beforeI do let me say a few words about my colleague and friend. Wayne became CEOof this company in January, on January 1st, 2002. It is not overstatement to say that the six years he hasserved in that position have been some of the most challenging and turbulentfor corporate America in general,and for this company in particular, in memory. Throughout it all Wayne has been arock. Thoughtful, knowledgeable, thoroughly professional, completelytrustworthy, and just a heck of a guy to be around. This will be his lastearnings call and I just wanted to say thanks and to publicly acknowledge hiscontribution to our success over those years. Thanks, Wayne.

Wayne H. Pace

Thanks, Dick.I have to tell you it’s been an honour and a privilege.

Good morning,everyone. The slides that I’ll refer to this morning are now available for youon our website. Let’s start with the first slide which is our third quarterconsolidated financial results.

Revenues haveincreased 9% over the prior year to $11.7 billion. Adjusted O-EBIDTA grew 15%to $3.2 billion. Our third quarter margin increased approximately 150 basispoints over the prior year to 28% due mainly to lower expenses at AOL and thesales of AOL’s European internet access businesses. Also, adjusted diluted EPSrose 26% to $0.24 for the quarter.

Moving to thenext slide. Diluted EPS before discontinued operations and the cumulativeeffect of an accounting change was $0.24 in the quarter, and that’s compared to$0.33 in 2006. As a reminder, the prior year included pre-tax investment gainsand they related mostly to the sale of our interest in Time Warner Telecom andthe tax benefit from our ability to recognize net operating loss carry forwardsunder generally accepted accounting principles requirements. These amounts wereoffset in part by an impairment charge that we took to reduce the carryingvalue of the WB network’s good will. These and other items are detailed in ourearnings release and the trending schedules that we have provided to you.

Adjusting forthese prior year items, diluted EPS increased 5%, or $0.05 or 26% compared tothe prior year quarter reflecting higher adjusted O-EBIDTA and our loweroutstanding share count, offset partly by an expected increase in bothdepreciation and interest expenses related to the Adelphia and Comcasttransactions and the impact of our share repurchase program on our outstandingdebt balances.

Turning tothe next slide on free cash flow. Through the first nine months of the year wegenerated $4 billion in free cash flow and converted 42% of our adjustedO-EBIDTA into free cash. This slide shows the usual detail that we give youeach quarter. The variation in the working capital line item that you see hereis primarily timing on collections for home video receivables and timing onpayments for accounts payable.

Moving to thenext slide. As it shows, we ended the third quarter with net debt of $35.3billion. That’s up $1.9 billion from the end of 2006. Reflected in thisincrease was $5.7 billion in share repurchases and $645 million in dividendpayments. Also included was approximately $920 million of payments related tosecurities litigation and government investigations. These items were offsetpartly by the $4 billion of free cash flow and we had $1.8 billion of netinvestment proceeds which included proceeds from the sales of AOL’s Germaninternet access business and is Tegic Communications business. And at thepublishing segment the sale of the Parenting Group, most of the Time4 Mediatitles, that group’s investment in Bookspan, and four non-strategic magazinetitles.

Let me remindyou, as Dick said, that we completed our $20 billion share repurchase programby the end of the second quarter, buying back over $1 billion shares at anaverage price per share of $18.44. And in addition, at the beginning of Augustwe announced that our board authorized a new $5 billion share repurchaseprogram. Under that new program we repurchased to date $2.2 billion or 119million shares at an average price per share of $18.64. We continue to expect,based on current price levels, to utilize at least half of this authorizationby the time we report our year-end earnings.

As Dick alsomentioned, we have re-affirmed our full-year business outlook. We continue toexpect full-year adjusted O-EBIDTA percentage growth to be in the mid to highteens of the base of $11 billion and to convert between 30% and 40% of adjustedO-EBIDTA into free cash flow.

We alsocontinue to anticipate earnings per diluted share for the full year to be approximately$1.07, which includes approximately $0.12 per diluted share related to thesales of assets and investments, certain tax benefits, expenses in the firstnine months related to the securities litigation and in governmentinvestigations, and the Court TV asset impairment charge. In addition, pleasenote that our 2007 EPS guidance reflects the impact of our share repurchaseprograms.

We’ll spendthe next few minutes on the results of each of our divisions and then we’llmove back to Q&A with you.

Starting withAOL. During the third quarter, AOL advertising revenues rose 13% due to thegrowth on both the AOL network and partner sites. Eight search on the AOLnetwork was up 15% while display advertising on the AOL network increased 6%.Advertising on partner sites primarily through Advertising.com climbed 21%,despite the first full-quarter overlap with last year’s launch of a significantdeal with a large advertising partner, as Dick mentioned in his remarks.Excluding this one relationship, partner site revenues were up 33%.

As detailedin our 10Q filing this morning, we now expect advertising growth in the fourthquarter to grow at a lower rate than we experienced in the third quarter.

Subscriptionrevenues declined 56%, reflecting AOL’s strategy to offer AOL free of charge tousers in the US who havetheir own internet connection. This strategic shift resulted in reducedadvertising marketing and more subscribers turning or converting to freeaccounts. In addition, the decline in subscription revenues reflectsapproximately $410 million due to the sales of AOL’s internet access businessesin the UK, France, and Germany. Thesedeclines in subscription revenues resulted in a 38% decrease in total revenuesfor the third quarter.

AdjustedO-EBIDTA decreased 23% compared to the prior year quarter due to lowersubscription revenues offset in part by lower expenses, including reductions innetwork and marketing costs, as well as growth in advertising revenues.

This nextslide highlights AOL’s web metrics for the third quarter. AOL’s domestic adrevenue less TAC – traffic acquisition cost – increased 9% to $330 millioncompared to the prior year quarter. Average monthly domestic unique visitors of113 million were down 1% compared to the second quarter. Total domestic pageviews of approximately 48 billion declined 9% from the second quarter anddecreased 2% year over year. As a result, AOL averaged 140 monthly page viewsper unique visitor.

Domestic adrevenue less TAC for 1000 page views of $6.93 for the quarter, which includedthe impact of Advertising.com’s revenue generated on its partner sites, was 10%higher than it was in the second quarter.

Looking aheadto the fourth quarter we still expect page views as reported by media metricsto grow on a year-over-year basis during the quarter. These results willinclude the benefit of certain reporting changes and improvements that mediametrics put into place earlier this year. Without these changes in theirmethodology for reporting our results, we believe that AOL’s page views wouldbe essentially flat in the fourth quarter in a year-over-year basis.

Moving on tocable. As Dick said, we won’t go into much detail here given that Time WarnerCable reported its third quarter results earlier this morning. We do hope youhad the opportunity to listen in on that call.

Time WarnerCable’s revenues increased about 25% and O-EBIDTA grew 28%. Keep in mind,please, that these results reflect the impact of the acquisition of certaincable systems from Adelphia and Comcast on July 31, 2006, as well as the consolidation of the Kansas City Pool on January 1, 2007. Comparingthis quarter’s results with the pro forma results for the third quarter of2006, revenues climbed 7% and O-EBIDTA rose 12%.

This nextslide shows cable subscriber highlights for the quarter. We’ve provided youwith additional disclosure in our earnings release detailing subscriberinformation for both the acquired systems as well as the legacy systems. Youcan also access Time Warner Cable’s earnings release, its business outlookrelease, its earnings presentation, and call replay on its website.

Turning tofilmed entertainment. Revenues climbed 33% compared to the prior year due tothe strong world-wide theatrical performance of Warner Brothers’ Harry Potter and the Order of the Phoenixand Ocean’s Thirteen, as well as NewLine’s Rush Hour 3 and Hairspray. Also contributing to theincrease were higher home video revenues lead by Warner Brothers’ 300 and higher licensing fees from theinitial off-network availabilities of Twoand a Half Men, Cold Case, and TheGeorge Lopez Show. O-EBIDTA rose 71%, reflecting higher revenues offsetpartly by higher theatrical valuation adjustments.

Lookingforward, our fourth quarter film slate includes a number of significant newreleases, including Warner Brothers’ FredClause and I Am Legend, as wellas New Line’s His Dark Materials: TheGolden Compass. In addition, our fourth quarter results will reflectrevenues from the home video releases of Warner Brothers’ Ocean’s Thirteen and HarryPotter and the Order of the Phoenix, as well as New Line’s Hairspray and Rush Hour 3. And as Dick said, we continue to expect the filmsegment to show growth in O-EBIDTA for the full year compared to 2006.

Moving on tonetworks. Revenues grew 6%, reflecting higher subscription revenues and Turneradvertising revenues, as well as a 32% increase in content revenues due tohigher ancillary sales of HBO’s original programming. This growth wasnegatively impacted by the closing of the WB network’s operations in Septemberof 2006.

Subscriptionrevenues growth of 7% was due primarily to the higher rates at both Turner andHBO and, to a lesser extent, an increase in subscribers at Turner.

Ad revenuesdeclined 3%, reflecting the impact of the closing of the WB network’soperations in September of 2006. This decline was offset partially by 10%growth in Turner’s ad revenues and that was lead by the domestic entertainmentnetworks. Adjusted O-EBIDTA rose 6%, driven by the absence of the WB networkshutdown costs and losses incurred in the prior year quarter there and highersubscription and Turner advertising revenues offset in part by a 21% increasein programming expense and a 12% increase in marketing expense at Turner andHBO.

Lookingahead, we’d like to remind you that we will have tough comparisons in thefourth quarter in this segment. Last year’s fourth quarter includedcontributions from the domestic cable sale of HBO’s The Soprano’s to the A&E network.

And lastly atpublishing. Revenues were essentially flat compared to the prior year. Higherother revenues driven by growth at Synapse and Southern Living at Home weremostly offset by lower subscription revenues. Ad revenues were flat compared tothe prior year, reflecting higher digital revenues which were lead byPeople.com and CNNMoney.com, offset by lower print magazine revenues, whichincluded the impact of the closures of Life and Teen People magazines. AdjustedO-EBIDTA, on the other hand, climbed 12% due to increases at Synapse and Domesticmagazines, particularly with People and Real Simple.

That is theend of our prepared remarks and we’ll go back to Jim to start the Q&Aprocess with you.

James E. Burtson

Thanks, Wayne. Operator,could we turn to the first question?

Question-and-Answer Session

Operator

Thank you. Wehave Michael Nathanson at Sanford Bernstein. Your line is open.

Michael Nathanson – Sanford C. Bernstein and Co.

Thanks andcongratulations, Jeff. I want to, I have two only that are interrelated, whichis, what are you seeing in the fourth quarter that gives you the sense thatgrowth will slow in AOL advertising? And then for Jeff, looking out at all yourmetrics at AOL, what then gives you new confidence that, or I guess the sameconfidence that you have the right AOL strategy and that AOL advertising willbegin to grow or accelerate in 2008?

Richard D. Parsons

All right,Michael, just, what’s the first part of the first question?

Michael Nathanson – Sanford C. Bernstein and Co.

The firstpart is basically, what are you seeing now in fourth quarter that leads you toagain to suggest that there’s going to be a deceleration in AOL advertising.

Jeffrey L. Bewkes

All right,let me, we’ll start with that. We’re pretty confident that we should see pageviews starting to go up a little in the fourth quarter. And as Wayne said,excluding the reporting fixes made by media metrics on that basis we thinkit’ll be up. We think the page views are trending to around flat, so thatrepresents a turnaround in a positive direction given what’s been happeningwith the paid subs coming off over the last few years.

So to yourbigger question of what do we see, are we optimistic, which generally we are,we think that our programming and functionality changes – that’s true on thethird party platform, that’s true of some of the changes at AOL in the brandand the programming protocols – are geared to increase our engagement. So whatare we looking at to, you know, what do we as management look for? We look forgrowing usage. We want to build the monetization platform and we want to buildthat monetization both for owned and operated inventory and for third-partypublishers. So we really ought not to lose sight of the fact that, let’s justgo to what Wayne went into indetail and what Dick had in his comments. There were some bright spots in thethird quarter on AOL advertising. Particularly the strong 21% growth in partnersite third-party revenues. And we had a rebound in search. But it is true thatthe display growth in advertising is not at the level that we’re targeting forthe longer term.

And so whywas that? Well, some of it was due to changes in programming. In other words,we had some things in AOL that weren’t really profitable or part of what wethink is the future strategy. Things like Gold Rush, some commerce deals. Wetook those out. But we also changed, and continue to do this in order toimprove AOL, some of the programming categories. We changed the home page. Wechanged the news, sports, money finance page, music, shopping. And we’ve got afew, well, we’ve got a continuing roll out of –

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-- some ofthe other thing that was going on in display, which is why it was a little onthe weaker side than we had hoped, is these recent trends of advertisingdemands. The third party is part of it. But also we need to do a better job andAOL management is focused on doing a better job in improving the performance ofhow we essentially deal with our ad inventory between the premium owned andoperated stuff and the third party side. And the performance-based stuff. Wethink it’ll take more than one quarter to see the benefit of those changes, butwe believe they’re in the right direction.

Michael Nathanson – Sanford C. Bernstein and Co.

Okay. Thanks.

Operator

Thank you.Next, Doug Mitchelson, Deutsche Bank. Your line is open.

Douglas Mitchelson – Deutsche Bank Securities

Thank youvery much. Good morning, gentleman. A lot of us has been speculating aboutspinning off assets from Time Warner. I’m curious about the potential foracquisitions, especially with the management shift. There are a few companiesthat might become available, whether it’s Scripps Networks or NBC, amongothers. If either of these assets come up would they be interesting for TimeWarner? And how much more should we be looking for AOL to invest inacquisitions to shore up its ad strategy? Thank you.

Richard D. Parsons

Well, I’llstart, Doug, and then I’ll let Jeff give you his view because obviously we’rein the midst of a transition here and his view is looming larger and largerwith each passing day. But you know, one of the things that people haveforgotten while we have been so aggressive repurchasing our stock, as we saidearlier, to the tune of $22 billion, we’ve also made close to $20 billion ofacquisitions over that same period of time. We think, and I certainly believe,that if we can find acquisition opportunities that give us the kind of returnsthat we’re looking for in our business and that either tuck into our existinglines of business or strengthen our lines of business. We need to be aggressiveout there in terms of growing our company and I think we have been.

We’ve notbeen undisciplined. We do it in a way or have done it in a way heretofore is that we think the numbers work to give ourshareholders fair return on what capital we invest as we allocate capital andacquisitions, but as I said on this previous calls many, many times, there isnothing that moves in our space that we don’t look at. The fact that we haven’tsort of gone after everything that’s moved in our space has been the result ofthe fact that we’ve looked at it and made a judgement that it either didn’t fitor didn’t have the kind of return characteristics or was overpriced or whateverthat, and therefore, we have refrained. Gone after some things, as you know,and dropped out because it’s gotten too pricey. And we’ve, as I said, beensuccessful on about $20 billion worth of acquisitions over the last couple ofyears, which we all, which we think have characteristics that will enhancegrowth going forward.

So heretofore,we’ve been very active in terms of looking at things in our space and I thinkwe will be, in fact, I’m confident we will be going forward, but I’ll let theman who’s going to have the helm going forward talk about that himself.

Jeffrey L. Bewkes

Well, I would(inaudible) what Dick said and I think your question is good. I think you’reright about that question. That’s a question we ask ourselves all the time andwe’ll be looking at basically anything that can improve our strategic advantageover our competitors that has a good long-term return. That’ll be true foracquisitions or divestitures.

Douglas Mitchelson – Deutsche Bank Securities

All right.Thank you.

James E. Burtson

Thanks, Doug.Operator, next question, please.

Operator

Thank you. Nextis Jessica Reif-Cohen, Merrill Lynch. Your line is open.

Jessica Reif-Cohen – Merrill Lynch

Oh, thankyou. Yes, I wanted to ask you as the incoming CEO if you would discuss what youthink the choices of growth for ’08 will be and what do you think the companywill look like structurally, either at the end of ’08 or over the next fewyears?

Jeffrey L. Bewkes

Well, as Ithink you saw in all of Dick and Wayne’s presentation, we’ve got pretty strongmomentum in our divisions right now and, therefore, going into ’08. So that’skind of a concrete on-the-ground answer. Generally what we do and will do iswe’re going to grow our businesses in each one of the main industries wherewe’re competing, but we really are going to compete focusing on increasing ourstrategic advantage through whatever operating decisions we make or whatever wedo structurally. We of course are looking at everything as we have been on botha long-term strategic operation basis and on a structure of the company basis,but we are not going to in advance discuss how we look at our alternatives orwhat we’re going to do. We’ll certainly explain it as we make key decisions andtake key actions, but we’re not going to telegraph it in advance.

Jessica Reif-Cohen – Merrill Lynch

Can I justfollow up on AOL? I mean, the 10Q you do warn about, I mean, there’s kind ofbad advertising in ’08. Can you just discuss what you think the outlook will bewithout, I mean, there’s a big chunk of advertising that will fall away, whatyou can count on the plus side?

Jeffrey L. Bewkes

What? In ’08?What was that question?

Jessica Reif-Cohen – Merrill Lynch

Well,there’s, you have a comment on your 10Q about a big chunk of advertising that’slikely to go away.

Jeffrey L. Bewkes

Well,remember, you mean in ’08?

Jessica Reif-Cohen – Merrill Lynch

In ’08. I’mjust wondering –

Jeffrey L. Bewkes

There’s one,we’ve got new members working for you in this club. There’s one piece in there,Apollo – oh, did we name it?

Wayne H. Pace

No.

Jeffrey L. Bewkes

Ha.

Jessica Reif-Cohen – Merrill Lynch

But it lookspretty clear. I think we all know that. But in any case –

Jeffrey L. Bewkes

It’sessentially something you don’t continue on an apples-and-apples basis. That’snot really important. What’s important is the core operating performance of AOLgenerally in EBIDTA growth. On that basis what we’re looking at we see reasonfor optimism and growth. And that’s true in the AOL owned and operatedperformance as well as in clearly the third party business that we’re building.So we’ve said a lot of things like that before and we do expect to growearnings at AOL next year, as we will grow then at AOL this year.

Wayne H. Pace

Which relatesto your cost question, Jessica. I mean, we’ve been pulling costs out, as youknow, and we see opportunity to continue to do that going forward. So the costside of the equation, we haven’t plaid that last card in that deck either.

James E. Burtson

Thanks,Jessica. I believe we can move to the next question.

Operator

Thank you.Next, Jonathan Jacoby, Bank of America. Your lineis open.

Jonathan Jacoby – Bank of America Securities

Good morning. Thanks for taking the questions.First, a little bit more on AOL. It sounds like also, from reading the Q, thatthey expect Search to pull in, and it does look from COMScore that the metricsweakened a little bit in September. Can you give us a little more color? Isthis again, related to all of the tweaks that are going on?

Secondly, thepurchase of Quigo, I’m no expert. It looks like another sort of targeted,EBIDTA targeted advertising platform. How does this fit with TACODA andeverything else at Ad.com.

And then justsecondly, on the cable nets, some of the strengths we’re hearing is from thebroadcast on the delivery of the, from the broadcast networks wondering howlong you expect that sort of environment to continue to drive strong cablescatter? Thanks.

Jeffrey L. Bewkes

Okay. OnQuigo it is a contextual advertising capability, not primarily a behaviouralonline advertising capability. TACODA’s behaviour, Quigo contextual in terms ofwhat’s on the page you’re looking at. We think it rounds out very nicely thereally important set of capabilities we’ve got in our third-party ad platforms,starting with ADTECH. Excuse me, Ad.com. Remember, we’ve put ADTECH on top ofthat for display ad serving. Lightningcast for video ad serving. Third ScreenMedia for mobile. TACODA for behavioural. And now Quigo for contextual. So thatis a very robust part of our business.

You had aquestion on search. Did you understand the question?

James E. Burtson

Yeah. John,it’s James. The disclosure in the cue relates to partly on regarding the searchrelates to just comparisons we think we’re phasing as we come through thefourth quarter. The actual metric, I’m not sure what you’re looking at in termsof the media metrics or core metrics, but on the query volume and things likethat they actually were up very strongly year over year as we parsed thenumbers. So I don’t necessarily think that it’s an underlying volume issue.

Jeffrey L. Bewkes

And on thetelevision network side, I think you’re correctly said that broadcast ratingswere a little bit down. Cable share viewing was off as Turner, when Dick said,we had pretty strong ad growth at 10% up for the quarter. We’re doing well andfairly strong support both in up front from before and in scatter. And giventhe positions of our networks, TNT at number one in total day and some of thekey adult demos, TBS number two in 18-34, and some very strong, very important,as we’ve said, over many quarters a regional programming franchise is gettingstarted at Turner from The Closer toHolly Hunter’s show Saving Grace. Andthen at TBS we have two new sitcoms -- Houseof Payne and The Bill Engvall Show– are the two top as-supported cable original sitcoms involved. That’s on topof Adult Swim continuing its verystrong performance with young audiences.

So I thinkyou asked about the ad climate and how it affects us. Answer, good. And ourperformance within it is even better.

James E. Burtson

Thanks,Jonathan. If we could move to the next question.

Operator

Thank you.Next, Anthony Noto, Goldman Sachs. Your line is open.

Anthony Noto – Goldman Sachs

Thank youvery much. Jeff, I was wondering if you could talk about your member base atAOL, paid and free, in 2007 will be a year of growth of paid and free members.As we go into 2008 do you think there’s enough additional free members that youcan acquire to offset what you’ll lose in the paid side so that you actuallyhave total member growth in 2008?

Secondquestion I have is, on the display side, 6% year-over-year growth versus 15%last quarter. You attributed the deceleration mostly to sort of usage on thesite. I was wondering if you could talk a little bit about the weighted averagemix of CPMs. Are you still seeing CPM pressure just from the industrytransformation into lower price CPM inventory? Thank you.

Jeffrey L. Bewkes

All right.First is, I guess, registered users and members. The answer is, they’re goingup. When we announced AOL going from paid to free we had 18.5 million roughlypaying subs. That had been declining as you all know. We’re now up over, youdisclosed? Over 25 in free users.So we got a lot more users or registered users today than we did then. We’rehaving most of the people, the great majority who go from paid subscribermember access over to broadband are keeping and using AOL. That’s going up. Wethink it will go up again next year. And it’s the reason why the patrons whichhad been declining are now stabilizing and we believe will begin to increase.So that’s, I hope, what you were looking for on that question.

James E. Burtson

The nextquestion, which was on display.

Jeffrey L. Bewkes

So what yougot there. It’s interesting. It’s a little on the complicated side. There ispressure on pricing out in the general online ad world to one extent becausesome of the inventory or some of the buying pressure wants to move from whatwere “premium” environment buys over into performance targetable and measurablebuys. And so that does affect, as people look for that, some of the pricing.Having said that, as you saw in our disclosure, our kind of RPMs went up.That’s an interaction of how we dealt with inventory and, frankly, one of thethings which I, in my first very long-winded answer to Michael’s question, whenwe said we’re working and changing what we’re doing in ad, in our salesprocess, we have to and we are getting much more conscious and focused on howwe assign or move inventory between premium sales, what used to be the AOLowned and operated handling of the inventory, over to performance sales throughthe third party platform or the performance optimization platform. Sothat’s a key skill that our company andthe other companies we compete with are honing and it’s part of what we intendto improve.

Anthony Noto – Goldman Sachs

Okay. Thankyou.

James E. Burtson

Thanks,Anthony. Operator, we can move to the next question.

Operator

Thank you.Next, Jason Bazinet from Citi. Your line is open.

Jason Bazinet – Citigroup

Thanks. Justone question on AOL. Presumably some portion of the paid AOL members are trulyusing AOL for access. I guess my question is, has your view changed in terms ofthe number of sort of permanent AOL dial-up subs that are using it for access?When do you think we hit that point where you sort of, you know, milked orcompleted most of the migration that’s under way right now?

James E. Burtson

Hi, Jason.It’s Jim. It’s hard. The answer to your question, it’s a good question. It’s ahard one to answer in the sense that the subscribers actually, in terms of theattrition of them has obviously been flattening out. The makeup of their use ismultiband for the most part. So the vast majority of them use broadband and usenarrowband or some, you know, the question is how much of each. It’s just veryhard for us to say how many of them actually rely on AOL for their access tothe internet on an absolute basis. Or on a very precise basis. I’m not tryingto be evasive to your question. I’m not sure we actually know the answer tothat. I would just say that so far I think we’ve been pleased with the trendsin terms of the net losses and that they are, as you’ve been able to see,flattening out.

Jason Bazinet – Citigroup

Okay. Thankyou very much.

James E. Burtson

Thank you,Jason. Can we move to the next question, Operator?

Operator

Thank you.Spencer Wang of Bear Stearns. Your line is open.

Spencer Wang – Bear Stearns

Thanks. Iguess this is a question for Jeff. Jeff, as you move, at AOL as you move moreof your premium inventories through Advertising.com, what’s the net impact yourseeing on pricing? Is that actually helping or hurting pricing for thatinventory?

Secondly, onAOL margins you’ve seen a big uplift during the kind of mid to high 30% arearight now. How much higher do you think that can go and over what time frame?Thank you.

Jeffrey L. Bewkes

Well, I thinkthe margins can go up. That question first. On the first one it’s a littlecomplicated because it depends which inventory. I mean, if you take certainmodule inventory that should have gone to performance and you leave it in“premium” brand environment selling you can put downward pressure on the priceof that category. That’s why I was trying to say and it is a skill that ourcompetitors and we are building all the time. It’s figuring out which goeswhere and what’s the most efficient way to use the premium inventory and what’sthe most efficient way to use the performance capability that we’re building.

James E. Burtson

And Spence,the only thing I would add to that is, part of what Jeff is getting at in termsof the inventory management is actually shifting inventory over to yourquestion which would capture the demand. So if there is lower demand bydefinition, particularly I would argue for the non-premium inventory at theportals because that’s available at the networks and the performance networks.Then you’re certainly no worse off by moving that inventory over to where thedemand actually is.

Spencer Wang – Bear Stearns

Right. Okay.

James E. Burtson

Thanks,Spencer. Operator, if we could move to the next question.

Operator

Thank you.Next, Rich Greenfield, Pali Capital. Your line is open.

Richard Greenfield – Pali Capital

Hi. Aquestion for Jeff. Dick has historically talked about Time Warner Cable and ifyou were to reduce your ownership that it likely would be through some form ofM&A activity in terms of owning less of more. Do you feel differently thanDick does about how you might reduce your ownership and whether you really wantto keep it at the current levels other than through M&A.

And then,too, just on the issue of the slowdown and display while you still have decentgrowth in your third party. Could you just discuss or view the relative marginsthat you see on those two business and is there anything that really gives youcomfort that display will actually have growth in 2008? Thanks.

Jeffrey L. Bewkes

Well, firstof all, I’d like to thank you for all the suggestions you’ve been offering overthe past month. We appreciate that. Secondly, good questions. So the marginsare lower on some of the third party efficiency performance ads, as you know.So I’m not sure what more I can tell you about that. Do you have a better senseof the question?

James E. Burtson

Well, they’relower for the third party, but they’re not lower when for the AOL inventory.

Jeffrey L. Bewkes

No, no. Notthe AOL ones. Correct. So, I hope that answered that question.

The other oneon what Dick and I think and what does the company think on what we’re going todo with our interest in cable and how to deal with it going forward. We, Ithink as we’ve said, it’s not really appropriate for us to describe our viewnow. So we obviously are aware – you know, it’s interesting as you read all thecommentary you can get advice in almost every direction. We’re obviously awareof it all. We’ll consider it and make decisions in due course. We can’t reallysay what we’re going to do at this point.

Richard Greenfield – Pali Capital

I only askedthe question because Dick was very specific in kind of talking about the termsof less of more strategy historically and I just wanted to get a sense ofwhether you saw a difference or a potential for change from that looking out.

Richard D. Parsons

Actually,Rich, what I said many times, at least as I recall as many times, was that oneof the reasons for going to the structure where we had severally structuredcable companies, on one hand it gave us currency to do transactions in a worldthat I think is going to continue to consolidate. And therefore, thepossibility to own less of a bigger thing was there. But also, that cable ismigrating in a direction to become a sort of fully robust telecommunicationsplatform and at some point in time the requirements of the balance sheet forthat kind of business might require us to separate the two because of conflictbetween what a telecommunications platform needs in terms of a balance sheetand the proper structure of it and what a content company needs.

So we’vetalked to both sides of the equation and what Jeff is just saying is this isobviously a dynamic world and he’s going to have to sort of figure out how bestto sort of play his cards as the world unfolds.

Richard Greenfield – Pali Capital

Very helpful.Thanks.

James E. Burtson

Thanks, Rich.Operator, can we move to the next question, please?

Operator

Thank you.Next is Ben Swinburne, Morgan Stanley. Your line is open.

Benjamin Swinburne – Morgan Stanley

Thanks fortaking the question. Good morning, guys. I just want to go back and ask probablythe 30th question on AOL. But when I look at the asset base you’veput together there you can sort of carve it out between technology assets andcontent assets. And your growth on the third party side where you’re reallygetting bigger with Quigo and TACODA is in obviously stark contrast to what’shappening on the content portal websites. Are these two businesses sort ofrequired to be together or do you look at these as two assets that couldpotentially be split apart down the road? I’m asking the question in thecontext of, Jeff, as you take over going forward how you might look atreshaping the portfolio in ’08 and beyond.

Jeffrey L. Bewkes

Well, onething I just want to quibble in the “stark” contrast. There’s some realstrength and strong brands and strong performance with audiences on the AOLowned and operated and context sites of AOL. We do right also if we’re buildingand have a very, you know, trumpeted position in third party performance netplatform. So that’s all true. They work pretty well to help each other, whichis true at companies like Yahoo as well, but you know, your question iscertainly an understandable one and we want to be flexible to capture the valueon both sides. As the industry moves along we find the current structure workswell to do that and so, you know, we’re aware of that question, but at thispoint we like our position and the kind of organizational abilities that we arebuilding inside AOL and on the third party side.

Ben Swinburne – Morgan Stanley

Okay. Thankyou.

James E. Burtson

Thanks, Ben.Operator, if we could take one more question, please.

Operator

All right.Thank you. Tuna Amobi, S&P Equity Group. Your line is open.

Tuna Amobi – S&P Equity Group

Thank youvery much. First, Dick, I want to congratulate you on the contributions you’vemade over the past couple of years and wish you the very best for the nextchapter of your life.

I wanted toask about your commentary on the double-digit earnings growth, which I don’tthink I’ve heard before in the context of a long-term perspective. If you canperhaps explain how you see that metric excluding Time Warner Cable. Does thatdouble-digit outlook have a lot to do with your outlook for the cable divisionor do you still see that being the case with or without the cable?

Next would befor Jeff. Jeff, I wanted to get yoursense, I know you won’t talk about structurally what the company might looklike, but under your stewardship can you comment perhaps on any similarities ordifferences in terms of your management style, operating philosophy, centralization/decentralization,etcetera?

And if I canfollow up with AOL, I know there’s been a lot of questions already, but I wasjust curious on what might have caused the deceleration in the US web metricsthat you describe. It’s not like a month ago. The trends there were healthywhen you talked about the verticals, the unbundling strategy. I was just kindof curious if those unbundling metrics that you’re tracking are still trendingwell for the long-term given the comments that you made. Thank you very much.

Richard D. Parsons

That’s a heckof a last question, Tuna, but let me start by saying thank you for the generousremarks. I appreciate that.

Secondly,what I said in my remarks were we are confident of double-digit earnings growthin terms of earnings per share growth in ’08 and beyond. I said the period ofour long-term plan. And that’s something both Wayne and Jeff and I have talkedabout and looked at and I wouldn’t have said it if we didn’t have confidencearound it. I will tell you that that’s based on the current long-term plan, thebudget for next year and the long-term plan, which includes and does notexclude the cable. As we go forward one of Jeff’s challenges will be to sort offigure out how to keep us in that zone because we think that’s the zone thatultimately investors expect and ultimately will be rewarded by the market placegiven the other opportunities that he has to look at the assets and deploy themin ways that may be different than the way they’re deployed now. But that wasnot included in my comments or that was not anticipated in my comments. Mycomments were based on Time Warner as we know it today and our plan and budgetand long-term thinking about that collection of assets.

Tuna Amobi – S&P Equity Group

Okay. That’sfair enough.

Richard D. Parsons

Thanks. Jeff?

Jeffrey L. Bewkes

I thinkyou’ve said it.

Richard D. Parsons

No, but hehad a bunch of other questions.

Jeffrey L. Bewkes

Oh.

Tuna Amobi – S&P Equity Group

The questionwas on the management style of similarities and differences, Jeff, between youand Dick.

Jeffrey L. Bewkes

Oh, I don’tknow. I really don’t know how to answer that.

Richard D. Parsons

He’s smarterthan I am, Tuna.

Tuna Amobi – S&P Equity Group

I was justtrying to get a sense of are you more of a decentralization guy or more of ahands on, I know you’ve been deeply involved with AOL, so I’m just trying toget a sense now that you’re going to be running the total company, are yougoing to decentralize more of the day-to-day responsibilities at AOL and so onto the other divisions?

Jeffrey L. Bewkes

We’ve beendoing it, I’ve been doing it. So we, here’s what it is. We basically have apretty lively debate and we, which is not to say that we’re down in the weeds,but we believe in a pretty, this company has to move fast. The world ischanging fast. It’s going digital, it’s going global. Inside the United Statessome of the key audiences for our media properties, if you look at the youngerpeople they’re more multicultural than the old 50, 60, 70-year-old audience. Sowe therefore need to adapt all of our products, our journalist, or how we offerthem the kind of advances in community and communication that go along witheditorial and entertainment products. And all of that requires a lot of trialand error, a lot of healthy debate, quick movement, and it requires us to beable to change course. So we’ve got kind of an open, ongoing discussion isessentially how we manage the company.

James E. Burtson

And Tuna, ifit’s all right, I’m going to take your question on the specific usage metricsoff line. With that I’d like to say thanks, everyone, for listening in todayand we look forward to talking with you soon.

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