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Time Warner Inc. (NYSE:TWX)

Q4 2007 Earnings Call

February 6, 2008 10:30 am ET


Jim Burtson - Investor Relations

Jeffrey L. Bewkes - President, Chief Executive Officer, Director

John K. Martin - Chief Financial Officer, Executive Vice President


Doug Mitchelson - Deutsche Bank

Spencer Wang - Bear Stearns

Michael Morris - UBS

Michael Nathanson - Sanford C. Bernstein

Benjamin Swinburne - Morgan Stanley

Jason Bazinet - Citigroup

Rich Greenfield - Pali Capital

Anthony DiClemente - Lehman Brothers

Jessica Reif Cohen - Merrill Lynch

Imran Khan - J.P. Morgan


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

Jim Burtson

Thanks and good morning, everyone. Welcome to Time Warner's 2007 full year and fourth quarter earnings conference call. This morning, we issued two press releases -- one detailing our results for the 2007 full year and fourth quarter and the other providing our 2008 business outlook.

Before we begin, there are several items I need to cover. First, we refer to non-GAAP measures, including such measures as operating income before depreciation and amortization, or OIBDA, and free cash flow. We use these measures when we analyze year-over-year comparisons.

In order to enhance comparability, we eliminate certain items, such as non-cash impairments, gains or losses from asset disposals, and amounts related to securities litigation and government investigations. We call this measure adjusted operating income before depreciation and amortization, or adjusted OIBDA. Schedules setting out reconciliations of these historical non-GAAP financial measures to operating income and cash provided by operations or the other most directly comparable GAAP financial measure as applicable are included in our earnings release or trending schedules. These reconciliations are available on the company’s website at A reconciliation of our expected future financial performance is also included in the business outlook release that is available on our website.

Second, as a result of the sales of the parenting group, most of the Time4 Media titles, The Progressive Farmer magazine, Leisure Arts, the Atlanta Braves baseball franchise, Tegic Communications and Wildseed, the company has presented the operating 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/Comcast transaction, are reflected as discontinued operations as well.

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

Finally, today’s 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 is subject to uncertainty and changes in circumstances. Actual results may vary materially from those expressed or implied by the statements herein due to changes in economic, business, competitive, technological, strategic, and/or regulatory factors.

More detailed information about these factors may be found in Time Warner's SEC filings, including its most recent annual report on Form 10-K and quarterly reports on Form 10-Q. Time Warner is under no obligation to and in fact expressly disclaims any such obligation to update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.

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

Jeffrey L. Bewkes

Good morning, everyone. This is my first earnings call as CEO and the start of what I intend to be a straightforward, ongoing dialog with you. I’ll tell you as much as I can about where we are planning to take Time Warner.

Our goal is to increase the value of the company and its stock price on a sustainable, long-term basis and to do that, we have to succeed in three missions. One, operating our businesses with better performance and returns than competitors in the short-term and the long-term. Two, we have to have the right businesses and the right structure and three, we need to manage our balance sheet and deploy capital to the right places, including when appropriate directly to our shareholders.

Pretty much everything we do will be focused on one of these three missions. Let me start with how we’ll run our businesses.

We are working from a good position. As you know, most of our businesses are number one in their sectors but the danger of prior success for us is complacency and we can’t afford that. We need to increase our current margins and profitability by better managing our costs, among other things. And on the cost side, we are going to do that across the company.

And to set the right tone, we are starting here at corporate where we are implementing immediately an initial round of cost reductions of over 15%, thereby reducing our run-rate at corporate by more than $50 million a year.

The other place we’ve identified for near-term cost cuts is New Line Cinema. We know from experience that there’s real value in New Line as an independent label and brand with its own slate of movies and New Line’s had great success with certain genres of films that are not historically in the sweet spot of large studios, particularly one like Warner’s, that appeals to really broad audiences all over the world.

But with the recent trend toward fewer movie releases across the industry and given the greater importance of overseas revenues, there’s the obvious question about whether it still makes sense for us to have two completely separate studio infrastructures at Warner and New Line. So we are reviewing how to operate New Line more efficiently and we expect to take action here fairly soon.

As we go forward, corporate and New Line won’t be the only places where we reduce costs and as it is often said, managing costs isn’t a one-time initiative. It’s a way of doing business. That’s true but cutting costs only goes so far and we have to innovate and invest in the future of our businesses at the same time.

So let’s look at our operating segments. I’ll start with the studios, networks, and publishing taken together. They are all leaders in content creation, packaging, distribution, and branding and they all require constant expansion of these brands and the content, including in the digital area.

Long-term success in these businesses always depends on the ability to make compelling content but increasingly, it will hinge on finding new ways for consumers to use and enjoy the content wherever, whenever, and however they want to do that.

So contrary to some, we see all these new forms of digital distribution as great opportunities for these content businesses, and we’ve had some important early wins in digital, like HBO’s breakthrough success with video-on-demand, CNN’s global lead on the Internet, and Time Warner Cable’s on-demand start-over initiatives.

But frankly, I think we and others in the industry need to be a bit more revolutionary than evolutionary in this area. For some time, I’ve had the strong belief that all linear ad supported networks should make their programming lineups on-demand and on television sets, not just on broadband. It’s a win-win for consumers and networks alike.

So we’re going to be aggressive in putting our own networks on demand so we can show the industry the benefits of this model. We think it will cement the long-term prospects of these businesses.

Now let me talk about AOL, which you all know is undergoing a significant business model transition from a declining ISP subscription business to a growing Internet ad business. By and large, this transition, which took off when AOL began offering its service for free in August of 2006, has been successful. The vast majority of AOL subscribers who switched to free have maintained their usage. And now we’ve stabilized page views and we are working hard to grow usage on AOL's network of websites.

And despite switching to free service, AOL has maintained a substantial base of profits and this is no small feat. It’s grown its earnings during this transition. We have substantially reduced the operating expenses at AOL by well over $1 billion in the past 12 months alone.

But at the same time, while we’ve been actively reducing the costs and redesigning AOL's historic business, we’ve been investing in new higher growth segments of the online industry.

Last year we invested over $900 million in capital to assemble important additional pieces of Platform-A, which you all know is our leading scale display monetization platform and it now includes not only but TACODA and Quigo and a number of other recent important additions.

Looking forward, we’re just trying to grow our customer usage and extend the competitive position of our advertising platform. Doing these two things should allow us to take advantage of the continuing growth in online advertising.

At the same time, we need to complete AOL's business model transition, so we are working on separating AOL's access and audience businesses so we can run them independently. This should significantly increase AOL's strategic options for each of these main business sectors.

Now let’s talk about Time Warner Cable. The business has strong growth prospects in its existing residential business. You heard a lot about that this morning. And now it will add further growth by serving small- to medium-sized commercial customers.

Cable is also working to combine the targeting abilities of the Internet with the impact of television advertising.

The business clearly generates increasing returns because most of the capital spent is tied to new revenue. But Cable does require a consistent level of ongoing capital investment to drive revenue growth.

In many ways, Cable has a very different business profile from our other businesses. And in addition, it also appears that our current ownership structure with Time Warner owning about 84% of Time Warner Cable and with only 16% of its common equity owned by the public, is less than optimal for both companies.

So we are initiating direct discussions with their management and their separate board of directors regarding our ownership in Time Warner Cable. We expect to reach a decision on whether and how to change our ownership level by our first quarter earnings report at the end of April.

Nobody should think that we’ve lost faith in Cable’s business prospects. Quite the opposite. We think it is undervalued -- substantially undervalued. But it doesn’t follow necessarily from that an optimistic view that Time Warner Cable is best-positioned in its current ownership structure within Time Warner.

So we’ve talked about operating improvements and structural changes. Now let me tell you how we are managing the balance sheet. As I see it, we have to do two things very well. First, make sure we maintain healthy leverage while we also maintain an investment grade rating. Second, we have to put our capacity to work in areas that generate the best returns for shareholders. We will constantly evaluate investment opportunities across our businesses within this framework and balance that against returning capital directly to the shareholders.

Summing up, we are going to push for better margins, including by more aggressively managing costs. We are going to move faster to capitalize on emerging opportunities for our businesses. We are working to separate AOL's access business from its higher growth audience, communications, community and ad platform businesses, and we are starting a formal process to resolve our ownership of Time Warner Cable.

I look forward to reporting progress on these fairly soon and I encourage you to keep a close watch on us.

Now let me turn the call over to our CFO, John Martin.

John K. Martin

Thanks, Jeff and good morning, everyone. Today I am going to briefly cover our fourth quarter highlights and I’d encourage everyone to read our earnings release where we provide considerably more detail. And my remarks will also focus on this year, how we think things look currently and where we are trying to take the company in the near-term from a financial perspective.

To help you, there are slides now available on our website.

So looking at the first slide, it shows our consolidated financial results for each of the fourth quarter and full year 2007. From my perspective, the important takeaway here is that Time Warner achieved its full year financial objectives that were laid out at the beginning of last year, and there are three important areas. First, adjusted OIBDA growth in the mid- to high-teens. That was the outlook and the company’s 17% growth rate ended up solidly within the range.

Second, earnings per share of $1.07, which when adjusted for items affecting comparability, translated into an adjusted EPS expectation of approximately $0.95, and we beat that by a penny delivering adjusted EPS of $0.96.

And last, converting between 30% and 40% of its adjusted OIBDA into free cash flow, conversion actually came in at 38%, the higher end of the range, translating into $5 billion of free cash.

Supporting these results was an increase of approximately $2.8 billion in revenues and some very active cost management. Overall margins for the year expanded around 300 basis points over 2006. And another way to think about this is that nearly 68% of the growth in revenues dropped down directly as an increase in adjusted OIBDA.

Moving on, looking at the next slide which shows EPS, 2007 diluted EPS was $1.08 compared to $1.20 for 2006. Both years, however, had a number of items that affected comparability. These are highlighted on this slide and also in greater detail in our earnings release.

Adjusting for these, 2007 EPS increased $0.16 or 20% compared to the prior year, and the increase was driven by our adjusted OIBDA growth and the benefits of the company’s share repurchase programs.

Turning to free cash flow on the next slide, as I mentioned Time Warner generated approximately $5 billion of free cash in 2007. That’s comprised of $12.9 billion of adjusted OIBDA reduced by nearly $3 billion of cash interest and taxes, capital expenditures of $4.4 billion, and $700 million of working capital uses.

The $5 billion generated last year was a little more than $200 million higher than 2006, and that’s because Time Warner delivered almost $2 billion more in adjusted OIBDA but there were a few items that offset that, mainly due to our cable company that was about $550 million of higher interest due to the Adelphia Comcast acquisitions and share repurchases. And lastly, we had $350 million of incremental capital expenditures also mainly due to the Adelphia and Comcast transactions.

So that’s a quick look at the 2007 consolidated results and I’ll move on now to talk to our near-term expectations. So looking at the next slide, we’re laying out here our 2008 business outlook and admittedly, it’s still very early in the year and how things progress this year in many respects will be impacted by lots of different things but we thought it was important to tell you how we see things currently.

We expect full year adjusted OIBDA percentage growth to be in the range of between 7% and 9%. We also expect 2008 free cash flow to be at or above $3.6 billion. Another way to think about it is that’s at least $1 per diluted share. And this is somewhat lower than last year’s free cash flow because, as has been known for some time, the company expects to now be a full cash taxpayer going forward. And to put that in some perspective, the year-over-year increase in cash taxes is probably somewhere in the neighborhood of $1.6 billion.

We hope that our free cash flow outlook proves conservative. At this point, however, forecast variability in areas such as interest, taxes, and working capital are holding us back somewhat from committing to higher levels.

Based on what we see today, we also anticipate earnings per diluted share in the range of between $1.07 and $1.11 and even at the low end, I point out that this represents solid double-digit year-over-year growth.

As you see on the next slide, we start 2008 with a balance sheet that’s in good shape. We’re beginning the year with $35.6 billion of net debt, which is up $2.2 billion from the prior year. The increase is due to $6.2 billion in share repurchases, nearly $900 million in dividend payments, and $912 million in payments related to settling securities litigation and government investigations. The company also spent $1.7 billion on acquisitions, including as Jeff said, almost $900 million at AOL.

Reducing net debt during the year was $5 billion in free cash flow and $2.1 billion in net investment proceeds, which primarily included proceeds from the sales of non-core assets at each of AOL and Publishing.

Going forward, our financial strategy currently considers that we’ll manage our balance sheet to maintain a consolidated three times leverage ratio and at year-end, we were below that I believe at around 2.8 times. And maintaining an investment grade rating, as Jeff said, clearly remains important to us.

Looking over at our equity capitalization for a moment on the next slide, the company continued to repurchase shares under its existing buy-back authorization. Since its initial share repurchase program was announced in August of 2005, Time Warner has reduced over 26% of its outstanding shares. That’s more than 1.2 billion shares. Almost 2.8 of the company’s most recent $5 billion authorization has not been spent and this more than fulfills the promise previously made to complete at least half of the program by today.

Now let’s spend a few minutes talking about our divisional performance and our near-term expectations for each, and let’s start with AOL.

As Jeff mentioned, clearly AOL remains in the midst of a very significant business model turnaround and to begin with, to share some personal perspective coming back to Time Warner, I’ve been very impressed with how AOL has been managing through this financial transition as well, highlighting the fact that AOL was actually able to grow its adjusted OIBDA in 2007 to more than $1.8 billion despite losing over $1.5 billion of organic domestic subscription revenues. That’s quite an achievement in any year.

Margins have improved by over 1,200 basis points here and that underscores AOL's aggressive management of costs.

Looking at the next slide, another key metric is usage. AOL achieved this goal of stabilizing page views late in 2007 and according to media metrics, they actually grew total domestic page views year over year and media metrics reported 49 billion page views in the fourth quarter. That’s up 11% versus the last year and up 3% sequentially from the third quarter.

This reported growth includes the benefit of certain reporting adjustments made by media metrics, so based on our own internal estimates, we believe page views in the fourth quarter were closer to flat as compared to the same period last year.

And as Jeff mentioned, one of AOL's stated goals is to increase usage on its own O&O network and although AOL has stabilized page views despite the continued run-off of access subscribers, they are working very, very hard to grow page views.

Moving over to look at AOL's advertising results, at the next slide advertising revenues grew 10% year over year in the fourth quarter to $620 million and let me provide a little detail as to the components of growth here.

Starting first with its owned and operated network, display advertising was $252 million and that was up 3% year over year. But it’s important to understand what’s really happening here in the reported growth figures. As impression gains were otherwise offset by both trends in the industry as well as strategic decisions made by management.

So what do I mean by that? First, advertising demand is continuing to shift to third-party networks. This is an industry trend. It’s been ongoing and you can see this in the healthy growth rates in AOL's third-party network. This has put some near-term pressure on CPMs, however, on the AOL O&O network and as a result, AOL has responded by adjusting its sales process and integrating more of its inventory with and TACODA, both of which are important components of Platform-A.

Second, growth in display was negatively impacted by a decision made earlier this year to discontinue a number of non-profitable sponsorship initiatives, as well as the natural decline of certain bounty advertising from broadband providers.

To put this in perspective, the fourth quarter of 2006 included $25 million of advertising revenue that did not recur this year.

Looking at paid search for a moment, paid search was $171 million in the fourth quarter. That’s up only 1% compared to the prior year, but there are a few things of note here too. First, paid search in Europe, which represents approximately 20% of AOL's overall paid search business, declined year over year by $8 million. This is primarily due to a change in our European search agreement with Google, which no longer provides AOL with guaranteed payments.

Second, in the U.S. paid search was up mid-single-digits year over year. AOL benefited from the positive ongoing industry-wide search pricing trends, but this was somewhat offset by lower number of users searching and lower average click-through rates.

Moving to AOL's third-party network, advertising revenue was nearly $200 million in the quarter, up almost 30% versus the year-ago quarter.

I think as you know, AOL has been acquiring and building important analytical and measurement capabilities in Platform-A and it’s important to note that nearly half of the quarter growth came from acquisitions that were made during 2007. That’s half the growth of the third-party network.

Having said that, we remain very, very encouraged by the organic growth trends that we are seeing here in this part of the business.

Looking ahead to the first quarter of 2008, we’re expecting overall AOL reported advertising revenues to be essentially flat to down maybe slightly as compared to the year-ago quarter and let me tell you why.

First, as we disclosed to you last year, the first quarter of 2007 benefited from $19 million from a change in accounting estimates. Next, we have approximately $10 million less in revenues from these discontinued or diminished activities, similar to the $25 million that I just talked about in the fourth quarter of 2006.

Lastly, we have a difficult comparison created by the recent change in the Apollo relationship, which contributed $56 million to the first quarter of last year. And as a reminder, Apollo is the large advertiser that we previously pointed to in our public filings and we have reason to believe will spend less money with us this year.

Moving past revenues to AOL's profit for a moment, adjusted OIBDA in the fourth quarter grew a very healthy 29% year over year, despite a 53% in subscription revenues.

During the quarter, AOL reduced its costs by an impressive $344 million compared to the year-ago quarter, including having $81 million of lower restructuring costs.

In 2007, AOL reduced its operating expenses by $1.3 billion.

This year, continuing to successfully execute the business turnaround will remain front and center. As Jeff said, AOL's top priority will be to focus on growing usage while integrating its world-class display advertising network, providing reach with industry-leading analytics targeting an ROI.

Subscription revenues will continue to decline materially, although we believe less than what occurred in 2007. Costs will also continue to be reduce and advertising should continue to grow.

The results of all of this is that we continue to expect AOL to maintain its overall profitability at considerable scale, although they are likely to deliver a somewhat lower level of adjusted OIBDA in 2008 as compared to what they did in 2007. Included in this expectation that AOL's adjusted OIBDA is likely to be down in the first quarter because of the relative size of subscription business.

Turning now to Time Warner Cable and I’m not really going to spend much time here, since Time Warner Cable separately reported its fourth quarter and full year results earlier this morning. In case you didn’t have an opportunity to listen in to their call, I’d encourage you to listen to the replay that’s available through their website.

Let me tell you from my perspective, however, the key takeaways in their report and business outlook are as follows: first, the company met all of its 2007 announced financial objectives -- strong, 13% OIBDA growth compared to pro forma fourth quarter 2006, with really meaningful margin expansion. This allowed Time Warner Cable to achieve a very solid 11% full year growth rate compared to pro forma 2006.

The company continues to generate strong RGU net additions, delivering nearly 600,000 more RGUs with notable progress in its most challenged divisions, Los Angeles and Dallas.

Their outlook in 2008 remains attractive in terms of the expectations of near-term financial growth and at the same time, it considers relatively flat capital expenditure expectations despite aggressive plans to invest in new business initiatives, which should yield future growth such as commercial phone.

So we are expecting improving returns on capital at Cable and that’s very important.

Moving on, the next slide summarizes Cable subscriber results but I’m not going to spend any time here. I’d ask you to keep moving on to the filmed entertainment segment slide.

On this slide, we show that we posted very strong year-over-year OIBDA growth rates in the fourth quarter against some fairly easy year-ago comparisons, but I would note that there were increasing contributions year over year from each of the film and the TV businesses.

Looking into this year, we expect positive year-over-year growth from this segment again, despite very difficult comparisons created by last year’s off-network syndication results from Warner Brothers TV. This view is based on our confidence in both the theatrical and the home video release slates, and so far, we’re off to a really good start with box office success of Warner Brothers “I Am Legend” and “The Bucket List”, which should lead to strong home video releases later this year.

We also have some other significant 2008 releases, including Warner Brothers Get Smart, The Dark Knight, and Harry Potter and the Half-Blood Prince, as well as New Line’s Sex and the City.

Looking over at our network segment for a minute on the next slide, the results in the fourth quarter compared to last year were essentially flat. Please remember that last year included HBO’s domestic cable sale of The Sopranos to A&E, which you can see on the slide was the main driver behind the 46% decline in content revenues. There was also a $31 million accrual reversal in the prior year quarter related to the closing of the WB Networks operations.

The quarter’s results also included a very strong 9% increase in subscription revenues and an even stronger 14% increase in advertising revenue at Turner. The strong ad growth reflected a healthy scatter environment and overall solid ratings and so far this year, the scatter market has remained strong.

Our expectation for the year is that both HBO and Turner will contribute to growth. In fact, taken together they should deliver strong adjusted OIBDA growth in 2008. And the drivers here are expected to be solid overall subscription revenue growth again and a continuing healthy ad environment.

Looking at Q1 specifically for a moment, we expect networks’ OIBDA to be essentially flat due to the timing of recognition of some programming expenses and additional news gathering costs at CNN related to its election coverage.

Moving over to our last division, publishing, both revenues and adjusted OIBDA for the fourth quarter were up modestly. Advertising was up 2% as Time Inc. continued to generate enough online revenue to more than offset declines in print magazine advertising. The results here also reflected the closure of Life and Business 2.0 magazines and an increase, or rather an incremental $13 million of restructuring costs.

Unlike Turner and AOL, Time Inc. is the one business where we’ve seen some current advertising softness due to what we believe is the overall economic environment. And this does somewhat limit our visibility into the rest of the year. Having said that, regardless of the print advertising environment, we expect Time Inc. is going to continue to focus on its priorities of key titles, continue to drive its digital initiatives and aggressively manage its costs.

So with that, let me now turn the call back over to Jim and we’d be happy to answer your questions.

Jim Burtson

Thanks, John. Operator, you can go to the first question.

Question-and-Answer Session


Thank you. Our first question is Doug Mitchelson of Deutsche Bank.

Doug Mitchelson - Deutsche Bank

Thank you very much. Just curious, Jeff, on some of the strategic initiatives you mentioned. Any thoughts on the AOL side as you split the two businesses, what the strategic rationale would be behind keeping the AOL audience business? And any impact of the marketplace that you see from the Microsoft/Yahoo! deal potentially getting done? Thanks.

Jeffrey L. Bewkes

Thanks. We don’t really see a change in the strategy at AOL in the audience business. We, as we said, we’re really excited by both the growth and the resilience of our AOL network of owned and operated and portal and publishing sites. A lot of them have had some very strong page view growth in the last half of this year and the position that we’ve built and are continuing to build on the monetization side is at scale and leading at this point.

As video comes to be more important, we believe that that is going to advantage our position in that platform too. So of course we are, as we always are, open to any strategic moves that make sense. What we are really doing is we are trying to position the different pieces of AOL, particularly in the high growth parts of the Internet business, so that we are poised to succeed.

So we feel pretty good about our position, including in this recent set of events with Microsoft trying to buy Yahoo!.

One thing we should point out -- it does underscore the value of Internet properties with large audience. It does have a beneficial lift really to the value of our eyeballs and inventory, because they are going to be more vibrant competitors for search. And as we’ve said, I think it just verifies the importance of moving to the kind of display and third-party monetization platform that we’ve built.

Doug Mitchelson - Deutsche Bank

Thank you.

Jim Burtson

Thanks, Doug. Operator, next question, please.


Thank you. Our next question comes from Spencer Wang with Bear Stearns.

Spencer Wang - Bear Stearns

Thanks and good morning. I just wanted to focus a little bit more on AOL. Jeff, you alluded to trying to separate the access and the advertising business. Can you just give us a sense of the time table for when you would do that? And also maybe talk a little bit about some of the -- I think you mentioned options, increase in the options there. Talk a little bit more about some of the alternatives you may be looking at.

And then the last thing is, when do you expect AOL advertising growth to start to reaccelerate to further its more comparable to the overall industry? Thank you.

Jeffrey L. Bewkes

I’ll start and give it to John. We are starting and actually actively working on separating the audience and access businesses now. We think it will take several more months because it’s fairly complicated. Having said that, it’s one of our top priorities.

And as for strategic options, it’s simply always a good idea to align your businesses including what investment resources you put into them to match up where your efforts are with where the growth possibilities are, and that’s really what we’re doing.

In doing that, it provides the most advantaged position for any of our operations should they need to make some kind of arrangement with other companies.

And on the growth of advertising, John.

John K. Martin

So we would expect that at AOL, ad growth is going to begin to improve beginning in the second quarter of this year. I thought it was important to sort of walk through some of the mechanics that are going to impact the reported growth rates in Q1 and hopefully I’ve done that with enough transparency. Just to provide some context and perspective, however, AOL is really focusing on building its leading display monetization platform and this is important because it has scale, it’s got the behavioral and context targeting capabilities and this is where we believe demand is going. And we see this as the future of where display demand is going and Platform-A over time once it’s integrated should benefit not only third parties but our own inventory, which is really important as you think about pricing going forward.

So first and foremost, focus on the integration but you should begin to see growth again in Q2 and we’ll build from there.

Spencer Wang - Bear Stearns

Great. Thank you.


Thank you. Our next question comes from Michael Morris with UBS.

Michael Morris - UBS

Thank you. On the content side, it seems that the development of franchises and the ability to exploit content across multiple platforms and markets has benefited some of your competitors. Can you talk a bit about how you view the importance of developing franchises, if it’s going to take additional investment from where you are right now, and maybe if you see certain things in the pipeline that perhaps aren’t obvious I’d say beyond Harry Potter, which is more obvious, but maybe some of the content that is less obvious but it does present a franchise opportunity for you. Thanks.

Jeffrey L. Bewkes

I don’t know whether -- I’ll try. Actually, there’s two ways to think of what you are asking, I think. One is to think of titles like Harry Potter or Batman or to think of individual television shows like Two and a Half Men, or The Closer on TNT. Or some of the hits on Adult Swim at Turner.

All of those kinds of franchises, you know, branded individual shows, clearly are -- probably overstating it to say they are exploding but there is a huge opportunity in those on a global basis across all of these new distribution platforms. That’s true when you are thinking title by title on day-and-date VOD, which Warners is leading the test on. We think it’s working. It’s true on any of these worldwide video releases that go electronically rather than in physical duplication copies.

So that’s one way to say it. And across all of our companies, and you can really drag in publishing for this, we’ve got some individual brand franchises. Think of Harry Potter and then put the Swimsuit Issue of Sports Illustrated and think of it the same way. They go across all of these media and have increasing upside, so hits are evermore important in this world.

But then the second way I think about your question are brands that are literal networks or aggregators, so that would be true of HBO. That would be true of Adult Swim, of CNN, and it would be true increasingly of some of the verticals at AOL. We’ve got, even in the -- you know, what you think of as the publishing sites at AOL, AOL News relaunched in the middle of the year and is now number two in that area. AOL Money and Finance has gotten to number one. Page views are increasing 16% in the one, 24% year over year in the other. So all of these things are ways in which you can extend brands across the world and across all these platforms.

Michael Morris - UBS

Thank you.


Michael Nathanson, Sanford Bernstein.

Michael Nathanson - Sanford C. Bernstein

I have one for John and one for Jeff. Jeff, firstly, given that usage trends at AOL have now stabilized, what gives you confidence that the trends will accelerate going forward? And is increasing usage the key to growing display revenue closer to industry revenue in the coming year? That’s one.

Jeffrey L. Bewkes

All right. Well, first, I guess I was just talking about it coincidentally, we have some reinvigorated publishing sites. That’s one part of AOL. We’ve got very strong positions in communications -- think about AIM and ICQ, and those are benefiting as they get distributed out with the advent of social networking, because they are very connected to the explosion globally on that.

And then, it’s always good and fairly important to have our own owned and operated inventory of impressions coming out of page views, as you just said, but it’s also important that we can monetize other people’s growing page views that they can’t monetize themselves.

And so we have been -- we like to think of it as a very strong business partner for the social networks like MySpace and Facebook and Bebo and any of the others, monetizing traffic. And we think that that’s -- both of those ways are the ways where we will emphasize and try to ride the secular growth in the online ad industry.

Michael Nathanson - Sanford C. Bernstein

Okay, and let me turn to John -- John, now that you are there, I wonder, can you tell me; over the past couple of years, how has return on capital looked within filmed entertainment? And the changes at New Line also are going to be focused on improving returns within New Line?

John K. Martin

The only thing I would add to what Jeff just said is just keep in mind that given that Platform-A was really only put together over the last 12 months, we’re only now beginning to apply behavioral and soon contextual technology to the inventory, so that should help over time improve the monetization as well. And it’s very, very early and in very small numbers, but we’ve seen some exciting and dramatic ramps in CPMs in certain areas. So again, that’s just one other thing to consider as you think about over time what’s going to grow revenues is both usage and monetization.

As it relates to returns on capital and the film business, frankly it’s one of the things that we are going to be focusing on going forward. In full disclosure, being here for four weeks, I haven’t been able to look at every single thing within the company’s portfolio.

Having said that, I would just ask people to think about what Warner Brothers has done over the last several years -- converting virtually 100% if not more than 100% of its earnings into free cash. And so this is a business that is at huge scale, is in leadership positions across all of its primary businesses, is very, very successful, and turns its profit into cash. So that’s a good place to start from.

Michael Nathanson - Sanford C. Bernstein



Thank you. Our next question comes from Ben Swinburne of Morgan Stanley.

Benjamin Swinburne - Morgan Stanley

Thanks. Good morning. John, just a point of clarification on the AOL piece -- I think you said OIBDA would be down year over year. Was that for the first quarter or for the full year 2008?

And along those lines to the comment you just made about usage and monetization driving the top line, where are AOL display CPMs relative to the broader market? Are you above average and is that part of the reason why we’ve seen some CPM or monetization pressure over the last couple of quarters? I realize Platform-A is putting pressure on it because you are putting more revenue through the business, but just curious about the relative pricing between AOL display inventory and some of the competitors.

John K. Martin

I think the first question should be relatively easy. The second one I’ll try to keep at a relatively high level but it’s a little bit more involved. The first one in terms of expectations for near-term financial performance for AOL, in Q1 I just wanted to highlight that we expect adjusted OIBDA to be down. That’s really just the math of the run-off of the subscription business, as well as I went through the mechanics of what’s going to happen to the reported ad growth, so that’s number one.

In terms of the full year, and I would submit that AOL is probably the single hardest division for us to forecast where the adjusted OIBDA is going to be for the full year of 2008, simply because you’ve got really big numbers moving in different directions and we’ve got to accurately forecast the run-off of the subscription business.

Best we can tell right now, Ben, we think that full year 2008, AOL's adjusted OIBDA is going to be approaching what it was in 2007. I mean, it may achieve those levels but it is likely going to be down somewhat.

In terms of display CPMs, maybe just taking it at the top and speaking a little bit more broadly, what’s happening here is basically in premium, we’ve seen CPM pricing go back up. So the pricing really depends on the type of inventory and the trends have existed for some time. But the fact that premium pricing is starting to go back up we view obviously as a positive sign.

However, we’re continuing to see pricing pressure on non-premium inventory as demand is shifting over to the ad networks and that’s in part following audiences in recognition that audiences are fragmenting across the web.

The good news here, just to go back to what I said before, is that the eventual inclusion of meaningful amounts of behavioral and contextual targeting should help reverse the non-premium inventory pricing trend. It’s just hard to predict exactly when that’s going to occur but that’s what we believe is going to happen.

Benjamin Swinburne - Morgan Stanley

Thanks for the color.


Thank you. Our next question comes from Jason Bazinet of Citigroup.

Jason Bazinet - Citigroup

Thanks so much. If I remember correctly, I still think Google has a put provision for the 5% stake they have in AOL and I guess my question is, as you think about potentially separating these businesses, does that pose any complications? And if not, is it just a function of allocating that pro rata potential need of cash based on the value of each of the pieces? Thanks.

Jeffrey L. Bewkes

I’ll start and John, you may want to comment. Yes, Google does have that and it’s not clear at all that they would necessarily want to act on it. And it would be -- it’s fine if they were to act on it. So we probably shouldn’t predict or discuss any ongoing talks, but Google is a fairly close business partner of ours. We talk to them all the time. We just can’t say much about it at this point, but I certainly don’t think you should look at it as any cause for concern for any reason.

John K. Martin

Yeah, it’s not going to affect how we approach the access/audience split. We are going to go ahead and do that. Google, just a quick point of clarification, has basically a registration right and that is in the middle of the year and we have the option to buy out their stake at fair market value.

And at this point in time, we’re not going to guess as to how that is going to come out.

Jason Bazinet - Citigroup

Okay. Thank you.

Jim Burtson

Thanks, Jason. Operator, next question, please.


Thank you. Our next question comes from Rich Greenfield of Pali Capital.

Rich Greenfield - Pali Capital

A couple of questions; one, you talked about splitting off cable or separating out cable. I’m wondering, with Time Warner Cable having dropped its price from a year ago, 42 down to 24, why you don’t think about trying to buy it in, given your positive view and especially John’s experience over at Time Warner Cable? Why not buy it in and take advantage of the weakness in valuation and separate it out at some point the road when valuations recover in the cable industry?

And then two, I’m wondering if you could talk about from the standpoint of New Line whether there is any contractual issues with Michael Lynne and Bob Shaye in terms of their ownership directly of New Line that dates back to when they first came into the Time Warner fold, that would be helpful. Thanks.

Jeffrey L. Bewkes

Thanks. Fair question on Cable. A couple of things on that -- in terms of the timing of why we are talking to you about it now, it didn’t make sense for us to initiate in-depth discussions until we were closer to the time which we now are when we had a fully array of options for changing our ownership, including options that are tax efficient. So that’s just the backdrop.

A reasonable question as to why -- you know, what you’re asking, why not buy it in instead of something else. We’re starting the discussions with Time Warner Cable’s board and we really don’t think it’s advisable to negotiate publicly on what the various choices we have are. We have said and I think there’s a good premise in your question that all of us I think, our board and Time Warner Cable’s board, believe that the Cable position in the cable industry is under-valued.

So certainly we’ll approach whatever we do in that context but we are basically -- what we end up doing is dependent somewhat on the negotiations with the independent board. There’s some considerations that have to be vetted. Some of the notable ones are determining the relative leverage of the cable company and resolving the TW&Y stake. So that’s basically all we can say at this point about what we are going to do in cable.

On the New Line side, good question there, but it’s very clear -- there are not any ownership positions in New Line. Time Warner owns New Line 100% and we have the same relationship with Bob and Mike that we do with all our other executives.

Rich Greenfield - Pali Capital

And just to follow-up on Time Warner Cable, so just to be clear -- you’re not against the concept of buying it in if that’s what you end up determining is the best course of action?

Jeffrey L. Bewkes

We’re doing whatever is the best value creator for both TWX and TWC.

Rich Greenfield - Pali Capital

Thank you.

Jim Burtson

Thanks, Rich. Operator, next question, please.


Thank you. Our next question comes from Anthony DiClemente.

Anthony DiClemente - Lehman Brothers

-- look at the networks, do you see an opportunity for further growth for networks via consolidation? And if you could consolidate any of the scripts discovery or the NBCU cable networks, should any of those come up, would you be interested or what other restructuring moves, i.e. with Cable, preclude you from any of those types of deals?

And then second question, Jeff, you talked at the outset about taking content from linear ad-supported networks and aggressively offering that content on demand on television. So I would assume that you have a strong view that this model would not cannibalize the existing ad-supported businesses, particularly at Turner.

So I’m wondering what gives you that high conviction that digital distribution is incremental to the network model and not cannibalistic? Thank you.

Jeffrey L. Bewkes

Okay, the first one on horizontal consolidation of various cable networks, we are not constrained in any way from doing any of the things you asked, number one. Second, it’s always a -- and it’s a good reason, I think, why you asked it -- it’s always got some pluses when you take another, say in the cable business, cable network and have some horizontal synergies and some ability to take capabilities and spread them across networks.

So in general, it’s a reasonable idea. In terms of us saying which of those specifics -- you mentioned scripts and discovery and NBC and all that -- all of them, as you know, are in various stages of questions being raised or they themselves have said they may do something.

We’re a big media company that has this position in networks and we’re going to look at everything, of course. But we never will or should comment on how we are going to evaluate these kinds of opportunities, so I’m sorry, we can’t say more about it at this point.

On the -- what was the other -- network VOD. I don’t see it as -- I don’t see it -- I see it as the reverse of cannibalizing. It supports viewership in these networks and it actually cements loyalty to the networks and our belief is that it’s really the best way to preserve and increase the advertising and it further gives an opportunity, which you can talk to the cable companies -- ours, Comcast, et cetera -- about to use the targeting of the Internet to make the advertising spots that are going to be on cable TV screens on an on-demand basis even more valuable than they’ve been in the past.

So we think it’s a triple win, more than a double win.

Anthony DiClemente - Lehman Brothers

Thank you.

Jim Burtson

Thanks, Anthony. Operator, next question, please.


Thank you. Our next question is Jessica Reif Cohen of Merrill Lynch.

Jessica Reif Cohen - Merrill Lynch

Thank you. I have a couple of questions. On the spin-off of Cable, which is arguably your fastest growing business, it seems to be driven largely by balance sheet differences. So could you comment on what your comfort level is for leverage for the content businesses once they are separated?

Also, you didn’t really comment on long-term interest in retaining publishing. And then, on the CW write-down, the $73 million write-down, why -- I guess the question is why take the loss now and what do you expect from this asset over the long-term?

John K. Martin

Let me start on the first part, which is the comment on the leverage of what I would say the non-cable company and unfortunately now, I guess we don’t really feel like we are in a position where we should and can comment on that because of what Jeff said before, that we are essentially going to be entering into a discussion which is really a negotiation. So there will be more and we’ll be more transparent and forthcoming as we possibly can.

The second, as it relates to the impairment charge I think you were referring to, this was just basically the accounting rules say that you need to once a year essentially look at all of your assets and determine whether any of them are impaired, comparing their net book value to the fair value. And this was based on a fair value determination, it was -- there was a decision made that we thought that there was an impairment, which essentially required that we had to take the charge. It’s a non-cash charge. It’s a book charge only but it’s something -- it’s an evaluation that we do literally every -- you know, all the assets across Time Warner.

You had a second question in there which I actually don’t think -- at least, Jeff, I don’t know if you heard. I didn’t hear -- I think it was what is our long-term interest in publishing. Would you mind repeating that?

Jessica Reif Cohen - Merrill Lynch

Yeah, that’s exactly it -- what is your long-term interest in publishing?

Jeffrey L. Bewkes

We’re good at publishing. We’re the leader in the industry. It’s a good business we think and as it converts, as it expands out beyond print into digital, which a number of our leading franchises are doing, we think it can turn into a fairly strong growth business in the middle term. And it is growing now and we think it’s got real promise.

So it does depend on our being able to demonstrate that to ourselves and to our investors.

Jessica Reif Cohen - Merrill Lynch

Thank you.

Jim Burtson

Thanks, Jessica. Operator, could we take one more question, please.


Thank you. Our last question comes from Imran Khan of J.P. Morgan.

Imran Khan - J.P. Morgan

Thank you for taking my questions. Two questions -- in terms of the film, what kind of cost saving opportunities do you see in the film division? Is it from overhead or a different approach to film production or distribution? And what kind of profitability are you aiming for and how quickly we can get there?

And then the last question on AOL, I think the search is a very scalable business, so as the market consolidates, how do you think you can grow your search business? How can you maintain your search market share? Thank you.

Jeffrey L. Bewkes

I’ll start on film. We mentioned some structural things that we are looking hard at in terms of getting efficiency between New Line and Warners. That would be one.

Second, we -- John mentioned that at Warners, we have a very high cash conversion to earnings and a very high absolute earnings level. So we are doing a certain amount of I think what is asked in the question, and what we’ll continue to do, we think digital gives an opportunity to do this, is that as we move forward and keep redesigning our production processes, our marketing, and take use of digital distribution -- just to stop on an example. We have a day-and-date test which we are putting some of our titles on on-demand at the same time they are in physical rental. We don’t see any drop in sell-through and the rental shift from physical over to digital moves us to a 70% margin instead of a 30% margin, so that would be one example.

Another example would be on a global basis, coordinating more both in time and in universality, I guess, coining a word, of what the marketing campaigns are. We can both streamline the cost and we think increase the consumer impact of our global marketing activity.

So they are just ongoing things in the evolution of that business and we are and always have been at the very lead of global scale and we think that gives us an advantage in any of those kind of improvements and in our distribution power around the world.

John K. Martin

On your second question, Imran, on search, just a quick reminder -- AOL is really not a principal in search and so when you think about it has an existing relationship with Google and so as you think about how to grow those revenues, it basically comes back to what Jeff was saying at the beginning and it comes back to the strategy -- grow usage, increase the number of searches, drive overall engagement, and then drive monetization, which in part is going to be driven by overall industry trends but in part by what AOL can do and they are working very, very hard to do that. I think some of the examples that Jeff gave in terms of their redesigns and new launches of product and the early success that they are having gives us confidence and optimism that they are actually going to be able to grow and continue to drive search revenue.

As I mentioned, they have an existing Google deal. I’ll just go back to the extent that the search providers in the industry consolidate -- that could also prove beneficial for us, as it could flash the value, so to speak, with respect to our scaled audience. So that’s how I would say it.

Jim Burtson

Thanks, Imran and Operator -- thanks to everyone on the call.


Thank you. That concludes today’s conference. Thanks for your participation.

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