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Time Warner, Inc. (NYSE:TWX)

Q3 2007 Earnings Call

November 7, 2007 10:30 am ET

Executives

James E. Burtson – Senior Vice-President, Investor Relations

Richard D. Parsons – Chairman, Chief Executive Officer

Wayne H. Pace – Chief Financial Officer, Executive Vice-President

Jeffrey L. Bewkes – President, Chief Operating Officer

Analysts

Michael Nathanson – Sanford C. Bernstein and Co.

Benjamin Swinburne – Morgan Stanley

Tuna Amobi – S&P Equity Group

Jessica Reif-Cohen – Merrill Lynch

Richard Greenfield – Pali Capital

Jason Bazinet – Citigroup

Jonathan Jacoby – Banc of America Securities

Douglas Mitchelson – Deutsche Bank Securities

Anthony Noto – Goldman Sachs

Spencer Wang – Bear Stearns

Operator

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

Now I’ll turn the 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 third quarter earnings conference call. This morning we issued two press releases: one detailing our third quarter results and the other re-affirming 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, or O-EBIDTA, 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 O-EBIDTA.

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, or as applicable, are included in our earnings release for trending schedules. These reconciliations are available on our company’s website at www.timewarner.com/investors. A reconciliation of our expected future financial performance is also included in the business outlook release that is available on our website.

Second, as the 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, and Wildseed, the company has presented the financial results for 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 also 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 third quarter of 2006 presents the results as if the Adelphi-Comcast transaction and the consolidation of the Kansas City Pool had occurred on January 1st, 2006. Reconciliations of the pro forma financial information through financial information presented in accordance with GAAP are included in the trending schedules posted on the company’s website.

Finally, today’s announcement includes 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 maturely 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 findings, including its most recent annual report on Form 10K and quarter reports on Form 10Q. 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.

Richard D. Parsons

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

Let me start by setting out for you what I believe are the three main take-aways for the quarter. The first is that, with nine months of the year behind us, Time Warner is squarely on track to achieve its full-year business outlook and will be well positioned 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, similar to last quarter, we’re continuing to invest in AOL for sustainable long-term growth and value creation. I’ll expand on each of these three points as I go through the quarter’s results.

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

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

As you read in today’s business outlook release, we’re re-affirming our expectations of mid to high teen growth in adjusted O-EBIDTA for the full year. We also continue to expect to convert 30% to 40% of our adjusted O-EBIDTA to free cash. And we continue 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 results position us well for growth next year. Although we’re still in our budgeting process, we’re comfortable in saying that we’re targeting double-digit EPS growth over the next year, as well as through the entire period covered by our long term plan.

Turning to our individual businesses. I trust that you heard Time Warner Cables earnings call earlier this morning. So I’ll just briefly touch upon the highlights.

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

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

With the triple play bundle now available across almost the entire footprint acquired in the Adelphia-Comcast transactions last year, Time Warner Cable is moving to roll out commercial phone aggressively next year. With an attractive commercial video, data and voice bundle, in addition to Time Warner Cable’s existing residential products and bundles, we expect it to generate strong attractive growth for years to come.

Turning to our film segment, O-EBIDTA was up 71%. This very healthy growth was driven by the theatrical releases of Warner Brothers’ Harry Potter and the Order of the Phoenix and Ocean’s Thirteen and New Line’s Rush Hour 3 and Hairspray. This success was augmented by strong home video results, which included the successful world-wide release of Warner Brothers’ 300.

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

Moving to our network segment. O-EBIDTA rose 6%, which is more than we were expecting given the timing of planned investments in programming and marketing at Turner and HBO. This greater than anticipated growth was fuelled by 10% higher advertising revenues at Turner, which benefited from both ratings improvements and a healthy scatter market.

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

In publishing we delivered 12% O-EBIDTA growth. For the third quarter in a row, excluding closed down magazines, growth in Time, Inc.’s ad revenues from its digital operations more than offset declines in print advertising at its magazines. We see this trend continuing into the fourth quarter.

At AOL we have told you to expect adjusted O-EBIDTA growth for the full year and I am pleased to report that AOL is on track to meet that goal. Included in that expectation was adjusted O-EBIDTA being down for the third quarter. Advertising revenue rose 13% in the quarter. Breaking down these results we see the splay recorded weaker 6% growth than the 15% regenerated last quarter. This was the result of a full-quoted impact of the recent trend of advertising demand shifting to a third-party advertising platform and the continued impact of proactive changes in programming and commerce initiatives.

Over the same period, however, search rebounded to 15% year-over-year growth from last quarter’s 6% increase. And gross and partner site revenues totalled a healthy 21%, despite the first full-quarter overlap with last year’s launch of the significant deal with a large advertising client.

Let me say that AOL’s advertising growth may be a little of a disappointment compared to your expectations, but we are pleased with the efforts and the progress that AOL has been making to improve both its own operating usage and its monetization platform. On the monetization front, AOL’s management team is working to integrate the advertising capabilities that we’ve acquired over the last year to create the leading full-service platform for online advertisements. For example, we’re beginning to add the behavioural targeting capabilities of the recently acquired TACODA to our already leading third-party display platforms.

And this morning we announced the acquisition of Quigo. Like TACODA in behavioural targeting, Quigo has what we believe is the industry’s best capabilities for contextual targeting. With Quigo’s capabilities our platform will be able to offer advertisers the most advanced and diverse set of advertising products in the industry.

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

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-- monetization benefits for AOL’s owned and operated –

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-- already begin the process of moving more of its O&O inventory through the third-party platform, which should allow AOL to better capture advertiser demand.

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

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

With that, thank you again and I want to turn the call over to Wayne. But before I do let me say a few words about my colleague and friend. Wayne became CEO of this company in January, on January 1st, 2002. It is not overstatement to say that the six years he has served in that position have been some of the most challenging and turbulent for corporate America in general, and for this company in particular, in memory. Throughout it all Wayne has been a rock. Thoughtful, knowledgeable, thoroughly professional, completely trustworthy, and just a heck of a guy to be around. This will be his last earnings call and I just wanted to say thanks and to publicly acknowledge his contribution 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 you on our website. Let’s start with the first slide which is our third quarter consolidated financial results.

Revenues have increased 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 basis points over the prior year to 28% due mainly to lower expenses at AOL and the sales of AOL’s European internet access businesses. Also, adjusted diluted EPS rose 26% to $0.24 for the quarter.

Moving to the next slide. Diluted EPS before discontinued operations and the cumulative effect 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 gains and they related mostly to the sale of our interest in Time Warner Telecom and the tax benefit from our ability to recognize net operating loss carry forwards under generally accepted accounting principles requirements. These amounts were offset in part by an impairment charge that we took to reduce the carrying value of the WB network’s good will. These and other items are detailed in our earnings release and the trending schedules that we have provided to you.

Adjusting for these prior year items, diluted EPS increased 5%, or $0.05 or 26% compared to the prior year quarter reflecting higher adjusted O-EBIDTA and our lower outstanding share count, offset partly by an expected increase in both depreciation and interest expenses related to the Adelphia and Comcast transactions and the impact of our share repurchase program on our outstanding debt balances.

Turning to the next slide on free cash flow. Through the first nine months of the year we generated $4 billion in free cash flow and converted 42% of our adjusted O-EBIDTA into free cash. This slide shows the usual detail that we give you each quarter. The variation in the working capital line item that you see here is primarily timing on collections for home video receivables and timing on payments for accounts payable.

Moving to the next slide. As it shows, we ended the third quarter with net debt of $35.3 billion. That’s up $1.9 billion from the end of 2006. Reflected in this increase was $5.7 billion in share repurchases and $645 million in dividend payments. Also included was approximately $920 million of payments related to securities litigation and government investigations. These items were offset partly by the $4 billion of free cash flow and we had $1.8 billion of net investment proceeds which included proceeds from the sales of AOL’s German internet access business and is Tegic Communications business. And at the publishing segment the sale of the Parenting Group, most of the Time4 Media titles, that group’s investment in Bookspan, and four non-strategic magazine titles.

Let me remind you, as Dick said, that we completed our $20 billion share repurchase program by the end of the second quarter, buying back over $1 billion shares at an average price per share of $18.44. And in addition, at the beginning of August we announced that our board authorized a new $5 billion share repurchase program. Under that new program we repurchased to date $2.2 billion or 119 million 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 authorization by the time we report our year-end earnings.

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

We also continue 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 the sales of assets and investments, certain tax benefits, expenses in the first nine months related to the securities litigation and in government investigations, and the Court TV asset impairment charge. In addition, please note that our 2007 EPS guidance reflects the impact of our share repurchase programs.

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

Starting with AOL. During the third quarter, AOL advertising revenues rose 13% due to the growth on both the AOL network and partner sites. Eight search on the AOL network 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 significant deal with a large advertising partner, as Dick mentioned in his remarks. Excluding this one relationship, partner site revenues were up 33%.

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

Subscription revenues declined 56%, reflecting AOL’s strategy to offer AOL free of charge to users in the US who have their own internet connection. This strategic shift resulted in reduced advertising marketing and more subscribers turning or converting to free accounts. In addition, the decline in subscription revenues reflects approximately $410 million due to the sales of AOL’s internet access businesses in the UK, France, and Germany. These declines in subscription revenues resulted in a 38% decrease in total revenues for the third quarter.

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

This next slide highlights AOL’s web metrics for the third quarter. AOL’s domestic ad revenue less TAC – traffic acquisition cost – increased 9% to $330 million compared to the prior year quarter. Average monthly domestic unique visitors of 113 million were down 1% compared to the second quarter. Total domestic page views of approximately 48 billion declined 9% from the second quarter and decreased 2% year over year. As a result, AOL averaged 140 monthly page views per unique visitor.

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

Looking ahead to the fourth quarter we still expect page views as reported by media metrics to grow on a year-over-year basis during the quarter. These results will include the benefit of certain reporting changes and improvements that media metrics put into place earlier this year. Without these changes in their methodology for reporting our results, we believe that AOL’s page views would be essentially flat in the fourth quarter in a year-over-year basis.

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

Time Warner Cable’s revenues increased about 25% and O-EBIDTA grew 28%. Keep in mind, please, that 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, 2007. Comparing this quarter’s results with the pro forma results for the third quarter of 2006, revenues climbed 7% and O-EBIDTA rose 12%.

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 both the acquired systems as well as the legacy systems. You can also access Time Warner Cable’s earnings release, its business outlook release, its earnings presentation, and call replay on its website.

Turning to filmed entertainment. Revenues climbed 33% compared to the prior year due to the strong world-wide theatrical performance of Warner Brothers’ Harry Potter and the Order of the Phoenix and Ocean’s Thirteen, as well as New Line’s Rush Hour 3 and Hairspray. Also contributing to the increase were higher home video revenues lead by Warner Brothers’ 300 and higher licensing fees from the initial off-network availabilities of Two and a Half Men, Cold Case, and The George Lopez Show. O-EBIDTA rose 71%, reflecting higher revenues offset partly by higher theatrical valuation adjustments.

Looking forward, our fourth quarter film slate includes a number of significant new releases, including Warner Brothers’ Fred Clause and I Am Legend, as well as New Line’s His Dark Materials: The Golden Compass. In addition, our fourth quarter results will reflect revenues from the home video releases of Warner Brothers’ Ocean’s Thirteen and Harry Potter 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 film segment to show growth in O-EBIDTA for the full year compared to 2006.

Moving on to networks. Revenues grew 6%, reflecting higher subscription revenues and Turner advertising revenues, as well as a 32% increase in content revenues due to higher ancillary sales of HBO’s original programming. This growth was negatively impacted by the closing of the WB network’s operations in September of 2006.

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

Ad revenues declined 3%, reflecting the impact of the closing of the WB network’s operations in September of 2006. This decline was offset partially by 10% growth in Turner’s ad revenues and that was lead by the domestic entertainment networks. Adjusted O-EBIDTA rose 6%, driven by the absence of the WB network shutdown costs and losses incurred in the prior year quarter there and higher subscription and Turner advertising revenues offset in part by a 21% increase in programming expense and a 12% increase in marketing expense at Turner and HBO.

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

And lastly at publishing. Revenues were essentially flat compared to the prior year. Higher other revenues driven by growth at Synapse and Southern Living at Home were mostly offset by lower subscription revenues. Ad revenues were flat compared to the prior year, reflecting higher digital revenues which were lead by People.com and CNNMoney.com, offset by lower print magazine revenues, which included the impact of the closures of Life and Teen People magazines. Adjusted O-EBIDTA, on the other hand, climbed 12% due to increases at Synapse and Domestic magazines, particularly with People and Real Simple.

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

James E. Burtson

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

Question-and-Answer Session

Operator

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

Michael Nathanson – Sanford C. Bernstein and Co.

Thanks and congratulations, Jeff. I want to, I have two only that are interrelated, which is, what are you seeing in the fourth quarter that gives you the sense that growth will slow in AOL advertising? And then for Jeff, looking out at all your metrics at AOL, what then gives you new confidence that, or I guess the same confidence that you have the right AOL strategy and that AOL advertising will begin 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 first part is basically, what are you seeing now in fourth quarter that leads you to again 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 page views 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 think it’ll be up. We think the page views are trending to around flat, so that represents a turnaround in a positive direction given what’s been happening with the paid subs coming off over the last few years.

So to your bigger 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 the third party platform, that’s true of some of the changes at AOL in the brand and the programming protocols – are geared to increase our engagement. So what are we looking at to, you know, what do we as management look for? We look for growing usage. We want to build the monetization platform and we want to build that monetization both for owned and operated inventory and for third-party publishers. So we really ought not to lose sight of the fact that, let’s just go to what Wayne went into in detail and what Dick had in his comments. There were some bright spots in the third quarter on AOL advertising. Particularly the strong 21% growth in partner site third-party revenues. And we had a rebound in search. But it is true that the display growth in advertising is not at the level that we’re targeting for the longer term.

And so why was 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 we think is the future strategy. Things like Gold Rush, some commerce deals. We took those out. But we also changed, and continue to do this in order to improve AOL, some of the programming categories. We changed the home page. We changed the news, sports, money finance page, music, shopping. And we’ve got a few, well, we’ve got a continuing roll out of –

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-- some of the other thing that was going on in display, which is why it was a little on the weaker side than we had hoped, is these recent trends of advertising demands. The third party is part of it. But also we need to do a better job and AOL management is focused on doing a better job in improving the performance of how we essentially deal with our ad inventory between the premium owned and operated stuff and the third party side. And the performance-based stuff. We think it’ll take more than one quarter to see the benefit of those changes, but we 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 you very much. Good morning, gentleman. A lot of us has been speculating about spinning off assets from Time Warner. I’m curious about the potential for acquisitions, especially with the management shift. There are a few companies that might become available, whether it’s Scripps Networks or NBC, among others. If either of these assets come up would they be interesting for Time Warner? And how much more should we be looking for AOL to invest in acquisitions to shore up its ad strategy? Thank you.

Richard D. Parsons

Well, I’ll start, Doug, and then I’ll let Jeff give you his view because obviously we’re in the midst of a transition here and his view is looming larger and larger with each passing day. But you know, one of the things that people have forgotten while we have been so aggressive repurchasing our stock, as we said earlier, to the tune of $22 billion, we’ve also made close to $20 billion of acquisitions 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 returns that we’re looking for in our business and that either tuck into our existing lines of business or strengthen our lines of business. We need to be aggressive out there in terms of growing our company and I think we have been.

We’ve not been undisciplined. We do it in a way or have done it in a way heretofore is that we think the numbers work to give our shareholders fair return on what capital we invest as we allocate capital and acquisitions, but as I said on this previous calls many, many times, there is nothing that moves in our space that we don’t look at. The fact that we haven’t sort of gone after everything that’s moved in our space has been the result of the fact that we’ve looked at it and made a judgement that it either didn’t fit or didn’t have the kind of return characteristics or was overpriced or whatever that, 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, been successful on about $20 billion worth of acquisitions over the last couple of years, which we all, which we think have characteristics that will enhance growth going forward.

So heretofore, we’ve been very active in terms of looking at things in our space and I think we will be, in fact, I’m confident we will be going forward, but I’ll let the man 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’re right about that question. That’s a question we ask ourselves all the time and we’ll be looking at basically anything that can improve our strategic advantage over our competitors that has a good long-term return. That’ll be true for acquisitions or divestitures.

Douglas Mitchelson – Deutsche Bank Securities

All right. Thank you.

James E. Burtson

Thanks, Doug. Operator, next question, please.

Operator

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

Jessica Reif-Cohen – Merrill Lynch

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

Jeffrey L. Bewkes

Well, as I think you saw in all of Dick and Wayne’s presentation, we’ve got pretty strong momentum in our divisions right now and, therefore, going into ’08. So that’s kind of a concrete on-the-ground answer. Generally what we do and will do is we’re going to grow our businesses in each one of the main industries where we’re competing, but we really are going to compete focusing on increasing our strategic advantage through whatever operating decisions we make or whatever we do structurally. We of course are looking at everything as we have been on both a 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 or what we’re going to do. We’ll certainly explain it as we make key decisions and take key actions, but we’re not going to telegraph it in advance.

Jessica Reif-Cohen – Merrill Lynch

Can I just follow up on AOL? I mean, the 10Q you do warn about, I mean, there’s kind of bad advertising in ’08. Can you just discuss what you think the outlook will be without, I mean, there’s a big chunk of advertising that will fall away, what you 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’s likely to go away.

Jeffrey L. Bewkes

Well, remember, you mean in ’08?

Jessica Reif-Cohen – Merrill Lynch

In ’08. I’m just 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 looks pretty clear. I think we all know that. But in any case –

Jeffrey L. Bewkes

It’s essentially something you don’t continue on an apples-and-apples basis. That’s not really important. What’s important is the core operating performance of AOL generally in EBIDTA growth. On that basis what we’re looking at we see reason for optimism and growth. And that’s true in the AOL owned and operated performance 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 grow earnings at AOL next year, as we will grow then at AOL this year.

Wayne H. Pace

Which relates to your cost question, Jessica. I mean, we’ve been pulling costs out, as you know, and we see opportunity to continue to do that going forward. So the cost side 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 line is 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, that they expect Search to pull in, and it does look from COMScore that the metrics weakened a little bit in September. Can you give us a little more color? Is this again, related to all of the tweaks that are going on?

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

And then just secondly, on the cable nets, some of the strengths we’re hearing is from the broadcast on the delivery of the, from the broadcast networks wondering how long you expect that sort of environment to continue to drive strong cable scatter? Thanks.

Jeffrey L. Bewkes

Okay. On Quigo it is a contextual advertising capability, not primarily a behavioural online advertising capability. TACODA’s behaviour, Quigo contextual in terms of what’s on the page you’re looking at. We think it rounds out very nicely the really 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 of that for display ad serving. Lightningcast for video ad serving. Third Screen Media for mobile. TACODA for behavioural. And now Quigo for contextual. So that is a very robust part of our business.

You had a question 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 search relates to just comparisons we think we’re phasing as we come through the fourth quarter. The actual metric, I’m not sure what you’re looking at in terms of the media metrics or core metrics, but on the query volume and things like that they actually were up very strongly year over year as we parsed the numbers. So I don’t necessarily think that it’s an underlying volume issue.

Jeffrey L. Bewkes

And on the television network side, I think you’re correctly said that broadcast ratings were 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 and fairly strong support both in up front from before and in scatter. And given the positions of our networks, TNT at number one in total day and some of the key 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 getting started at Turner from The Closer to Holly Hunter’s show Saving Grace. And then at TBS we have two new sitcoms -- House of Payne and The Bill Engvall Show – are the two top as-supported cable original sitcoms involved. That’s on top of Adult Swim continuing its very strong performance with young audiences.

So I think you asked about the ad climate and how it affects us. Answer, good. And our performance 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 you very much. Jeff, I was wondering if you could talk about your member base at AOL, 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 you can acquire to offset what you’ll lose in the paid side so that you actually have total member growth in 2008?

Second question 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 the site. I was wondering if you could talk a little bit about the weighted average mix of CPMs. Are you still seeing CPM pressure just from the industry transformation 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 going up. When we announced AOL going from paid to free we had 18.5 million roughly paying subs. That had been declining as you all know. We’re now up over, you disclosed? Over 25 in free users. So we got a lot more users or registered users today than we did then. We’re having most of the people, the great majority who go from paid subscriber member access over to broadband are keeping and using AOL. That’s going up. We think it will go up again next year. And it’s the reason why the patrons which had 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 next question, which was on display.

Jeffrey L. Bewkes

So what you got there. It’s interesting. It’s a little on the complicated side. There is pressure on pricing out in the general online ad world to one extent because some of the inventory or some of the buying pressure wants to move from what were “premium” environment buys over into performance targetable and measurable buys. 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 the things which I, in my first very long-winded answer to Michael’s question, when we said we’re working and changing what we’re doing in ad, in our sales process, we have to and we are getting much more conscious and focused on how we assign or move inventory between premium sales, what used to be the AOL owned and operated handling of the inventory, over to performance sales through the third party platform or the performance optimization platform. So that’s a key skill that our company and the other companies we compete with are honing and it’s part of what we intend to improve.

Anthony Noto – Goldman Sachs

Okay. Thank you.

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. Just one question on AOL. Presumably some portion of the paid AOL members are truly using AOL for access. I guess my question is, has your view changed in terms of the 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 or completed 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 a hard one to answer in the sense that the subscribers actually, in terms of the attrition of them has obviously been flattening out. The makeup of their use is multiband for the most part. So the vast majority of them use broadband and use narrowband or some, you know, the question is how much of each. It’s just very hard for us to say how many of them actually rely on AOL for their access to the internet on an absolute basis. Or on a very precise basis. I’m not trying to be evasive to your question. I’m not sure we actually know the answer to that. I would just say that so far I think we’ve been pleased with the trends in terms of the net losses and that they are, as you’ve been able to see, flattening out.

Jason Bazinet – Citigroup

Okay. Thank you 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. I guess this is a question for Jeff. Jeff, as you move, at AOL as you move more of your premium inventories through Advertising.com, what’s the net impact your seeing on pricing? Is that actually helping or hurting pricing for that inventory?

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

Jeffrey L. Bewkes

Well, I think the margins can go up. That question first. On the first one it’s a little complicated because it depends which inventory. I mean, if you take certain module inventory that should have gone to performance and you leave it in “premium” brand environment selling you can put downward pressure on the price of that category. That’s why I was trying to say and it is a skill that our competitors and we are building all the time. It’s figuring out which goes where and what’s the most efficient way to use the premium inventory and what’s the 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 terms of the inventory management is actually shifting inventory over to your question which would capture the demand. So if there is lower demand by definition, particularly I would argue for the non-premium inventory at the portals 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 the demand 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. A question for Jeff. Dick has historically talked about Time Warner Cable and if you were to reduce your ownership that it likely would be through some form of M&A activity in terms of owning less of more. Do you feel differently than Dick does about how you might reduce your ownership and whether you really want to 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 decent growth in your third party. Could you just discuss or view the relative margins that you see on those two business and is there anything that really gives you comfort that display will actually have growth in 2008? Thanks.

Jeffrey L. Bewkes

Well, first of all, I’d like to thank you for all the suggestions you’ve been offering over the past month. We appreciate that. Secondly, good questions. So the margins are 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 sense of the question?

James E. Burtson

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

Jeffrey L. Bewkes

No, no. Not the AOL ones. Correct. So, I hope that answered that question.

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

Richard Greenfield – Pali Capital

I only asked the question because Dick was very specific in kind of talking about the terms of less of more strategy historically and I just wanted to get a sense of whether 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 one of the reasons for going to the structure where we had severally structured cable companies, on one hand it gave us currency to do transactions in a world that I think is going to continue to consolidate. And therefore, the possibility to own less of a bigger thing was there. But also, that cable is migrating in a direction to become a sort of fully robust telecommunications platform and at some point in time the requirements of the balance sheet for that kind of business might require us to separate the two because of conflict between what a telecommunications platform needs in terms of a balance sheet and the proper structure of it and what a content company needs.

So we’ve talked to both sides of the equation and what Jeff is just saying is this is obviously a dynamic world and he’s going to have to sort of figure out how best to 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 for taking the question. Good morning, guys. I just want to go back and ask probably the 30th question on AOL. But when I look at the asset base you’ve put together there you can sort of carve it out between technology assets and content assets. And your growth on the third party side where you’re really getting bigger with Quigo and TACODA is in obviously stark contrast to what’s happening on the content portal websites. Are these two businesses sort of required to be together or do you look at these as two assets that could potentially be split apart down the road? I’m asking the question in the context of, Jeff, as you take over going forward how you might look at reshaping the portfolio in ’08 and beyond.

Jeffrey L. Bewkes

Well, one thing I just want to quibble in the “stark” contrast. There’s some real strength and strong brands and strong performance with audiences on the AOL owned and operated and context sites of AOL. We do right also if we’re building and have a very, you know, trumpeted position in third party performance net platform. So that’s all true. They work pretty well to help each other, which is true at companies like Yahoo as well, but you know, your question is certainly an understandable one and we want to be flexible to capture the value on both sides. As the industry moves along we find the current structure works well to do that and so, you know, we’re aware of that question, but at this point we like our position and the kind of organizational abilities that we are building inside AOL and on the third party side.

Ben Swinburne – Morgan Stanley

Okay. Thank you.

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 you very much. First, Dick, I want to congratulate you on the contributions you’ve made over the past couple of years and wish you the very best for the next chapter of your life.

I wanted to ask about your commentary on the double-digit earnings growth, which I don’t think I’ve heard before in the context of a long-term perspective. If you can perhaps explain how you see that metric excluding Time Warner Cable. Does that double-digit outlook have a lot to do with your outlook for the cable division or do you still see that being the case with or without the cable?

Next would be for Jeff. Jeff, I wanted to get your sense, I know you won’t talk about structurally what the company might look like, but under your stewardship can you comment perhaps on any similarities or differences in terms of your management style, operating philosophy, centralization/decentralization, etcetera?

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

Richard D. Parsons

That’s a heck of a last question, Tuna, but let me start by saying thank you for the generous remarks. I appreciate that.

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

Tuna Amobi – S&P Equity Group

Okay. That’s fair enough.

Richard D. Parsons

Thanks. Jeff?

Jeffrey L. Bewkes

I think you’ve said it.

Richard D. Parsons

No, but he had a bunch of other questions.

Jeffrey L. Bewkes

Oh.

Tuna Amobi – S&P Equity Group

The question was on the management style of similarities and differences, Jeff, between you and Dick.

Jeffrey L. Bewkes

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

Richard D. Parsons

He’s smarter than I am, Tuna.

Tuna Amobi – S&P Equity Group

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

Jeffrey L. Bewkes

We’ve been doing it, I’ve been doing it. So we, here’s what it is. We basically have a pretty 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 is changing fast. It’s going digital, it’s going global. Inside the United States some of the key audiences for our media properties, if you look at the younger people they’re more multicultural than the old 50, 60, 70-year-old audience. So we therefore need to adapt all of our products, our journalist, or how we offer them the kind of advances in community and communication that go along with editorial and entertainment products. And all of that requires a lot of trial and error, a lot of healthy debate, quick movement, and it requires us to be able to change course. So we’ve got kind of an open, ongoing discussion is essentially how we manage the company.

James E. Burtson

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

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Source: Time Warner Q3 2007 Earnings Call Transcript
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