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Time Warner (NYSE:TWX)

Q4 2005 Earnings Conference Call

February 1st 2006, 8:30 AM.

Executives:

James Burtson, Vice President of Investor Relations

Dick Parsons, Chairman and Chief Executive Officer

Wayne Pace, Chief Financial Officer

Jeff Bewkes, Chairman Entertainment & Networks Group

Analysts:

Lowell Singer, SG Cowen

Spencer Wang, JP Morgan

William Drewry, Credit Suisse

Anthony Noto, Goldman Sachs

Douglas Shapiro, Banc of America

Doug Mitchelson, Deutsche Bank

Thomas Eagan, Oppenheimer

Tuna Amobi, Standard & Poors

Katherine Styponias, Prudential

Raymond Katz, Bear Stearns

Operator

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

James Burtson, Vice President of Investor Relations

Thanks and good morning, everyone. Welcome to Time Warner’s 2005 full year and fourth quarter earnings conference call. This morning we issued two press releases. The first, detailing our full year and fourth quarter results and the second providing our 2006 business outlook. Let me remind you that our business outlook was not our historical results, reflects the impact of expensing stock options for both 2005and 2006, and keeping with the company’s adoption of Financial Accounting Standard statement 123R, share based payment effective January 1, 2006.

Before we begin there are a two other items I need to cover. First, we refer to non-GAAP measures, including operating income before depreciation and amortization, or OIBDA and free cash flow. We use these measures when we analyze year-over-year comparisons, in order to enhance compatibility; we eliminate certain items such as non-cash asset impairments, gains or losses from asset disposals, amounts related to securities litigation and government investigations. We call this measure adjusted operating income before depreciation and amortization, or adjusted OIBDA.

During the fourth quarter of 2005 we revived our definition of adjusted OIBDA and free cash flow to exclude all of the amounts associated with securities litigation and SEC/DOJ government investigations. So in addition to legal reserves that have been previously excluded, Adjusted OIBDA now excludes legal and professional expenses and insurance recoveries related to the securities litigation and government investigations. Similarly, in addition to payments related to securities litigation that have been previously excluded, free cash flow now excludes legal and professional expenses and insurance recoveries related to the securities litigation and government investigations and payments for settlements related to the government investigations. These revised definitions have been applied for all periods presented on the trending schedule. Also included in trending schedules are reconciliations of historical non-GAAP financial measures to operating income or cash provided by operations as applicable. Also in connection with the adoption of FAS 123R in 2006, going forward the definition of free cash flow will add back excess tax benefit from the exercise of stock options which under FAS 123R are no longer included in cash provided by operation. In addition to the historical trending schedules the company has provide a second set of trending schedules which include the affects of adopting FAS 123R and should be used for analyzing the company’s 2006 business outlook.

The trending schedules are available on our company’s website at www.timewarner.com/investors. Reconciliations of the non-GAAP financial measures to the most comparable GAAP financial measures are included in the press releases which are posted on the company’s website and the reconciliations are also included in the trending schedules.

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

Dick Parsons, Chairman and Chief Executive Officer

Thanks, Jim, and good morning, ladies and gentlemen. We appreciate your joining us today. Here’s the morning’s agenda, I am going to take along to share my view on the overall Company and where we’re headed. And then turn it over to our President and COO Jeff Bewkes who will provide you with this perspective on the operations and priorities of each of our businesses. And finally our CFO Wayne Pace will take you through the results of the quarter and the full year. Naturally there was plenty of time for your questions at the end of the, those presentations.

Now as you seen from our release this morning, 2005 was a very solid year in terms of our company’s financial and operating performance. For the year we met all of our full year financial expectations. Our revenues were nearly $44 billion and our adjusted operating income before depreciation and amortization or adjusted OIBDA grew 8% right in line with our outlook. We achieved this growth despite the expected decline in filmed entertainment segment. This decline was due primarily to the difficult comparisons created by the contribution of The Lord of the Rings trilogy in 2004.

But this solid performance grew strengthen across all of our businesses with that by double digit gains by Time Warner Cable and in our Network segment. Our adjusted earnings per diluted share were $0.80, up 16% from 2004 and our strong operating performance translated into $4.4 billion of free cash flow for the year. This mark a 24% increase for the 2004 and put us at the upper end of our range for guidance. Very importantly in my view on an operating basis each of our businesses stayed one held at leadership position 2005. Time Warner was once again the leading the producer of Film Content in the world. In fact Warner Brothers led all studios in terms domestic and worldwide box office, home video sales and television output.

The Turner Entertainment Network, TNT and TBS were once again number one and number two on the ad-supported cable networks. HBO was once again well, well HBO the preeminent, premier television network with the best original television programming in the world. Time Warner cable was an industry leader in every product line, with a record revenue generating unit gain of more than 200, excuse me of more than 2.5 million of larger use. These results conclude the significant gains in our digital phone offering, we will end at the year with over 1 million subscribers. Time Inc., continue to lead all magazine publishers and leadership and advertisement share. And also may have set the record in its book publishing group with 69 titles on the bestseller list.

And lastly AOL took significant step towards improving its competitive profile by launching aol.com. And then began setting a new standard for online video programming with this summer’s record sending Live Eight Production. Now come back to our priorities for AOL in the minute because I want to say another word about it. But first Wayne will take you through our financial outlook for 2006. Looking forward we continue to have a great deal of confidence in our management our underlying business operations and their respective competitive positions. As detailed in this morning’s business outlook release for 2006 we expect to achieve high single digit growth in adjusted OIBDA and a 35%, 45% rate of converting our growing adjusted OIBDA to free cash. The gross and adjusted OIBDA will result from both top line revenue growth as well as the key focus on managing expenses.

In terms of 2006 our top priority, has been and will remain providing a highly competitive near term return while positioning our businesses to create meaningful long term value for our shareholders. To do this we will be focused on the following 4 key objectives this year. First we must maintain or improve the leading the competitor divisions and follow our traditional media businesses and then increasingly on digital landscape. Each of our businesses is a leader today in that respective sector and I am confident that we will expand our leadership positions as the world becomes even more digital, after many years who follow forecast. Convergence in the media business is actually here. I am happy to report that at least Time Warner we’ve been preparing for this for this time and we will see it as the great opportunity for our unique set of asset, to prosper and create value. Although advances in technology is always besides challenges before expect to enhance our competitive advantages and our financial prospects as a digital evolution company. No matter how I look at it, as long as we continue to create superior content branded environments and innovative services we can only prosper as a result of technological developments that will allow us to reach more customers in more ways. 2006 was the year which I expect all of our media business to allocate more resources and focus toward making a great content of brands even more relevant in a digital environment. The effective execution will return with me, seeing my challenges to some into real opportunities for us.

Second on focus, we need to enhance AOL’s competitive profile, and take even greater advantage of continuing strong secular online trend. During the past 3 years AOL rebuilds its business processes and system to bring them inline with the leading online platform. This allows the AOL management teams not only to stabilize the company’s financial profile but also to embark on the strategy invade us beyond of 2004, bringing AOL’s great content and functionality out sponsor the real goodwill. These efforts have exceeded our expectations. And now we feel a little more confident perusing a more aggressive path to create value at AOL, robust at subscription and advertising business initiatives.

Now Jeff will take you through the detail but just briefly top line, AOL is recently announced broadband DSL, Time Warner Cable and a verity of DSL providers by a significant step in moving the AOL business forward. We expect the same kind of progress from AOL enhanced Google relationship, as we announced in December. I am happy to report that we’re in track, the complete percentage of document for the enhanced operating agreements with Google as well as for their $1 billion investment at AOL. This expanded relationship will both drive incremental audience to AOL’s online property and increase the capability of AOL’s advertising sales force.

Third we will stay focus on completing the acquisition and integration of the new cable system from Adelphia and Comcast, thereby enhancing Time Warner Cable’s prospect of value creation. I’m particularly pleased with the across the board operation in Time Warner cable. The subscriber trends continue to be very powerful and they’ve wanted to boost our confident and the strategy behind our pending Adelphia and Comcast transaction. We continue expect to close these transactions in the first half of this year, most likely in the second quarter. Our cable business is exceptionally well positioned over the next 3 or 5 years. And we have every expectation that it would be a far more resilient business when the investment community seems to expect given current trading values. What we must do now is to ensure the Time Warner Cables competitive position stays as strong as possible and be at, follow our long term plan. As we invest in this business we’ve capitalize full on technological and continued trends that we believe are constantly improving the cables industries competitive position and increasing its value.

Fourth and finally we must drive incremental returns to shareholders through the efficient allocation of our capital. In early November we increased our share repurchase, repurchase program to $12.5 billion. Our program was a largest announced last year and one of the largest buybacks ever. To date in total we have repurchased $3 billion worth of our start, 2.2 billion of its simply last reported earnings on November 3 of last year. We’ve done so by utilizing a 10B5-1 program, which allows us to purchase shares on the relatively consistent basis throughout the period between our earnings announcements. That could, outpace the stock repurchases at more than 700 million promoted over the last 3 months. Given the current prices, Time Warner stock, however we’ve made decisions to repurchase our stock more aggressively. Simply stated we believe that the secular concern that a way on media stock and ours in particular are over glow. This opinion is based on that our assessment that our competitive position and the secular trends that we see was in each of the sectors of which we compete, want us accelerating our program. As the result at current price level we expect to roughly double the pays of our repurchases over the next 3 months. I want to make it very clear however while we see our stocks at these prices as a very attractive investment for our capital. We will maintain our previously stated comfort level of leverage around a three times debited EBITDA leverage ratio.

In closing 2005 was a very good year for the company and its own, but was one glaring and frustrating exception, our current stock price. As all of you know the media industry overall is treated down over the past years. Largely because of the concerns about this long term growth prospects, now I can’t speak for the entire industry, but I can tell you that from Time Warner’s perspective we are very confident about the health of our company over the short and longer term. We have a unique combination of assets which provides us with competitive advantages in larger landscape, and no one, if I can be allowed one moment in the modest, no one, can run these business, better than the current management is running it. Over time we believe the benefits of this arrangement and this management will be reflected in the market value of our shares. And the management team recognize the need to run continue to run our business is creatively in aggressively. As I do said, we have considered and we will continue to consider manage strategic alternatives and initiatives to achieve even higher and more sustainable increases in share value. However we cannot and will not experiment with the flavors a day in the mere hope that it might work for simply because we are impatient with the market pacing, and recognizing the intrinsic value of our related business. Our Board of Directors and management are confident that they we were on the right course to provide a highly attractive return while building businesses will have enduring value for all of our shareholders we use to come. With that I think I will turn you over to Jeff to take through his view on the business.

Jeff Bewkes, Chairman Entertainment & Networks Group

Thanks Dick and good morning everybody. I would like to briefly review how our businesses are positioned in competitive way and how we planed with the good deal of confidence as Dick said and move them forward into 2006. Like to start with the networks, where we grew an adjusted OIBDA of 11% and that was after a 20% increase in 2004. Starting with Turner, we delivered another year of ratings leadership among that ad supported networks for the third consecutive year TNT lead in adults 18 to 49 and 25 to 54 in both prime time in total day. And TBS was number one again in prime time delivery for adults 18 to 34. In March 2005 Adults Swim began individually rated network, in other extent it is lead and total day delivery of adults 18 to 24 and man 18 to 24, which means it’s delivering the most ever young adult viewers on ads reported cable networks that’s quite an accomplishment. And CNN US and CNN Headline News scored greater audience gains in the adults 25 to 54 they are more than any other 24 hour news network this year.

So for 2006 our priority starts with continuing to grow our strong core television businesses through investments in high quality program. Each of this programming that would drive the audiences and revenue growth as well as enhanced value of our networks to our distributors. Our next priority is to keep driving audience and ad dollars from broadcast to cable networks. And we are more than doing our part. Jack Myers has an annual survey some of you may know which rank 79 national TV sales organizations that was released today, and in their respective, the CNN ads sales group ranked number one. The Turner Entertainment sales group ranked number one. Turner sports sales ranked number one and Cartoon Network sales ranked number one. I can was just bringing about what they’ve done, they are ahead of all the broadcast and cable competition.

And finally we will continue to deliver new branded media environments, for emerging platforms and make them available to our viewers and consumers where ever they go. We build on our new broadband networks which already includes CNN pipeline that a gain to have. And will keep our offering compelling content on our branded website such as cnn.com, which have the highest usage share of the online news sites for the year. And cartoonnetwork.com exceeded 2 billion game players in 2005. So we would expand used things and also our VOD or high definition or DVD and mobile product offerings all of which come off of these programs and networks. And we will extend Turner global reach via local language branded network and product offerings, like the new CNN headline news in Latin America.

Turning to HBO, we are continuing to extend its leadership over other premium cable networks. HBO’s striving to a strategy starting with the biggest library of acquired films, and to that we had ground-breaking, original-programming and sports events. HBO keeps building on its momentum; the first episode of Rome this year was HBO’s highest rated show since the 2004 premier of “6 Feet Under”. Entourage which will be back for third season is one of the most talked about shows on television, particularly with younger audience. Sopranos returns in March, Edward comes back in the middle of the year, and terms of new shows, we will be premiering Big Love with Tom Hanks as its executive producer, in the timeslot right after Sopranos. We have big hopes for Big Love; it’s a story of a polygamist and his 3 wives. Talk about the real desperate housewife. So you can see that we are continuing to broaden our brand leadership and reputation for producing the highest quality original programming on television at HBO. And as the emerging technologies expand distribution capabilities and create new business opportunities, HBO will leverage its brand and programming strength to create new revenue strands. Just one case of that this year is HBO has recently announced agreement to provide customized content to Cingular’s mobile phone customers.

Moving to the last network that we have, and its changing dramatically, the WB move to become the CW. And just to mention this new broadcast network we planned to form a venture with CBS, and create for CW as you all know by know. We believe that this will be a very strong and viable best broadcast television network. The CW, we think will give us the same strategic value and maybe more as an outlook to our programming with the WB gain. But it will have much more attractive and much more secure financial under practice.

So next let’s move to film, entertainment and our studios where we had a great year, once again we led the industry in terms of box office. US home video sales TV programming and importantly, most importantly earnings. Do you want these results from New Line included its performance this year, with the unexpected, beyond expectations success of Wedding Crashers, and some continued contributions from The Lord of the Rings Trilogy particularly in Video, but that means the New Line will continue to face difficult comparisons next year in 2006, sorry, this year in 2006.

Warner Brothers delivered another record year, setting records again in 2005 with growth in both revenues and adjusted OIBDA. We set a new record with 3 films crossing the 200 million domestic box office line and if you add New Line’s Wedding Crashers, Time Warner had four of this seven films that surpassed 200 million in 2005. In addition to that, the Warner’s are in first place in both domestic and international box office and Warner home video ranked number one for the fifth consecutive year with over 21% share of US home video sales. The fourth quarter became one of our strongest home video quarters ever with over a 1.8 billion in revenue alone led by the releases of Batman, Batman Begins, The Polar Express, Charlie and the Chocolate Factory, The Dukes of Hazzard and The March of the Penguins, just to name a few.

This coming year Warner’s will continue to grow its diversified revenues from our film television and home video businesses and combined with our extensive film and TV libraries and our industry leading global distribution system. Of course, we are staying focused on making Warner’s products available to audience as there’s through as many channels and platforms and devices as possible. For example, Warner and AOL completed a new online service called In2TV which will offer some of Warner Brothers library of catalog TV shows, on-demand and ad-supported on AOL.

At publishing of Time Inc., we delivered a solid year with adjusted OIBDA climbing 5% and we achieved that growth despite some industry wide challenges and certain magazine categories, where our advertisers been under pressure in their own businesses, particularly of the US car company. Our lifestyle magazines had another great year with real simple people and certain living all showing solid growth. For the 15th consecutive year people ranked number one in PIB ad revenue and it now reaches a record 40 million readers each week.

Book Group which is part of that line had its best year ever in 2005 it put out a record 60 long titles on the New York Times bestseller awards. And we continue to execute on our digital strategy for example, si.com had 65% growth and unique users in 2005, over the year before. So whether it’s by acquiring existing properties like dove.com, core leveraging existing brands as we did with cnnmoney.com which we launched last month. We are going to continue to invest in businesses that allow Time Inc. to revolve the on-print to a company that delivers branded content to whatever platform consumers demand. We have the best collection of print brands in the world. And that will be extremely important in this more digital landscape. Among Time Inc.’s key priorities for 2006 is driving growth across our magazine properties by continuing to leverage our superior brands, capitalize on online advertising and manage of costing. And we work to launch new strategic businesses and make further target of that acquisition as we saw a few this year.

Cable, at Time Warner Cable, I’m happy to say that the team nearly exceeded our expectations across the board. They achieved a 11% growth in OIBDA in 2005 and their fourth quarter marked the 20th consecutive quarter of double digit growth in subscription ARPU. That underscores the strength and stability of these customer relationships. Wayne will walk you through the impressive details. But as I look at Time Warner Cable, I can’t help it, be pleased with the underlying precision that we’ve built with our customers and the growing momentum across every product line.

In a testament to the success of all the new services, our company Time Warner Cable grew its revenue generating units in 2005 by 2.5 million more than ever before. This is an 83% increase from the net additions that we did in 2004. We reversed the trend, the negative trend in basic subscribers adding 73,000 in 2005. And we accelerated net additions to be digital and high-speed data services, we layer on top of that our newest product line Digital Phone which ended the year at over 1 million subscribers. And all of these subscriber relationships result in an increasingly stronger position with our customers. That’s why as we look to 2006 Time Warner Cable, will continue to focus on locking up as many subscription relationships as we possibly can. We’re stressing our bundle, which has a halo effect on all our product categories by reducing overall churn and creating implemental stickiness among our subscribers. And now with the announced joint venture with Sprint Nextel to add a wireless offering to our bundle, we’ll complete the quadruple play.

From our perspective, the pending Adelphia and Comcast transactions, there’s simply an opportunity to increase the value creation potential that we’ve already been realizing across our existing footprint. Along these lines in 2006, we’ll also manage subscriber and financial growth effectively scaling our operational capacity to meet rapidly growing demand. And finally, we’re continued to innovate, based squarely on consumer research. Our model is to match technological development to consumer needs with the appropriate level of investment. And we’ll continue to bring innovative and compelling new products to all of our customers.

Finally at AOL, we grew adjusted OIBDA 9% in the phase of continued declining subscription revenues. But more importantly as Dick just said, we made great progress in positioning AOL for the future. In my view, AOL is bringing great strategic assets and competitive advantage, advantages into 2006. For example, it still has the largest online subscriber base with 19.5 million in the US and 6 million in Europe. We successfully introduced aol.com as a hub for our network of online sites, offering the best video content and functionality that’s available free to all web users. AOL’s network of properties ended the year with about 110 million average monthly domestic unique viewers, that’s the second largest domestic audience on the Internet. And our aim product is by far the leader in instant messaging with over 50% of the US business. So as I look at AOL’s bills for 2006, they’re really quite simple first we’re going to move more of our subscribers proactively to broadband, with simple straight forward offers that allow our customers to continue to get the services they like best from AOL.

The partnerships we announced last week with the nationwide group of broadband access providers will be a key to our ability to accomplish this goal. I can’t do what I just described but Time Warner Cable, this initiative will solidify AOL’s base of customer relationships by growing broadband subscriptions and by increasing, increasing the opportunities for AOL to sell more subscription services at scale. These out first to grow broadband subscribers not only we’ll benefit our subscription business but also we’ll benefit our advertising business, which is our second priority.

We continue to improve or we did continue to improve our ad performance in 2005. AOL increased its organic advertising revenue growth 20% for the year and in the fourth quarter we saw significant improvement advertising growth went from mid to high single digit growth in the first nine months of the year to 17% growth in traditional ad revenue on the fourth quarter. For this trend to extend into 2006, we remained to continue to drive traffic to and usage of AOL’s network of online properties and then to be able to monetize that audience through the sale of advertising and direct to consumer premium services. The expanded relationship with Google, which we announced in December will augment those efforts by driving increased traffic to AOL’s programming and by completing the suite of ads and advertising that we can offer directly to our advertising partners.

So in closing, the focus across all our businesses will be on driving efficiencies and optimally managing our capital to generate significant levels of cash flow and ultimately to drive higher returns for you and our shareholders.

With that, let me turn the call over to Wayne.

Wayne H. Pace, Chief Financial Officer and Executive Vice President

Thank you Jeff and good morning everyone. As usual, the slides that I’ll refer to this morning are now available on our website. The first slide highlights our results for the fourth quarter and all of 2005. Fourth quarter revenues increased $778 million or 7% over the prior year to 11.9 billion. Adjusted OIBDA grew 18% in the quarter to 2.9 billion reflecting double digit increases at film, networks, cable and publishing. Full year revenues increased 4% to $43.7 billion. Adjusted OIBDA grew 8% to 10.7 billion right inline with our full year guidance, this growth was led primarily by cable and networks which grew double digits overall. Margins expanded slightly up more than 90 basis points from last year.

Moving to the next slide, 2005 full year diluted EPS was $0.62 compared to $0.68 in 2004. Note that both years had items that affected comparability. 2005 income was reduced by $2.9 billion in net expenses due to Securities Litigation and Government investigations. That was offset in part by $925 million gain on the sale of an investment in Google. 2005 also included other end of additional items of less significance. Please note that these items as well as those that affected 2004 are detailed in our press release and in the trending schedules that you have. In 2005, these items had the effect of lowering our earnings by $0.18 per share.

Looking at free cash flow, where once again we had a very strong year, we had free cash flow of $4.4 billion that’s more than any other media company. Our conversion of adjusted OIBDA in the free cash was at the high end of our guidance range of 30% to 40%. These results also included $200 million contribution the end of the year to pre-fund our pension plans. As Jim noted in his introduction, these amounts do exclude $2.8 billion in payments related to Securities Litigation and Government investigations.

This next slide shows a normal detail that we give to you on how free cash flow is computed. As you can see adjusted OIBDA growth was a primary contributor to the considerable improvement in free cash. Payments for the Litigation and Government investigations are reflected in the significant increases in uses of working capital shown here for 2005 and then we added back to get free cash flow once again as we have explained to you.

As this next slide, shows we ended 2005 with net debt of $16.1 billion and that’s roughly comparable to where we ended 2004. Our trailing 12 months leverage ratio was 1.5:1. This ratio will increase as we continue our share repurchase program and as we move towards closing the Adelphia acquisition. Our significant free cash flow was offset by a few items, the 2.8 billion in payments I just referred to, our $2.2 billion per share purchases throughout 31 and $470 million in dividend payments to our shareholders.

This next slide highlights as Dick discussed our current outlook for 2006. With the company’s adoption of FAS 123R, this outlook reflects the impact of expensing stock options for both 2005 and 2006. Therefore, the 2005 base from which we are providing our 2006 outlook is now $10.3 billion, again reflecting expensing of stock options in that year.

For my closing few minutes, I would like to give you some financial and operating highlights for the 2005 results for each of our segment as Jeff just framed for you. We’ll start with cable, where we posted very strong operating and financial results both for the quarter and the full year. Revenues grew 13% in the fourth quarter; these results included a robust high-speed data revenue growth of 23%, higher Digital Phone revenues and 17% rise in enhanced digital video revenues. These gains were partly offset by 4% decline in advertising revenues due mainly the softness in local and national activity, which in fact is continued into the first quarter.

In the fourth quarter, average monthly revenue per basic subscriber was $89 or a 13% increase from the prior year’s fourth quarter. For the full year, average monthly revenue per basics have climb to 12% to approximately $85. OIBDA was up 11% for the quarter reflecting higher revenues offset by higher general operating expenses. Programming costs were up only mid single digits in the quarter reflecting a net benefit of approximately $25 million primarily associated with certain changes in our programming estimates of portion of which were accrued earlier in the year. To exclude this benefit, our organic programming expenses growth would have been in the low double digits. For the full year our programming costs increased 10%.

The fourth quarter also reflected $9 million in merger related and restructuring charges primarily related to Adelphia acquisition activities and certain reorganization efforts. Merger related and restructuring costs were $42 million for the full year. As you might expect, we’re deep into the planning process for the Adelphia acquisition. Additional merger related cost will be incurred as we continued to prepare for the acquisition. And we expect these costs will continue after closing as we integrate the Adelphia systems into our operations.

We’ll look for a moment at subscribers. Total revenue generating units grew by almost 2.5 million in 2005 an excellent 83% increase over 2004 net ads. Basic subscribers grew 34,000 during the fourth quarter and 73,000 for the full year. Notably, we experienced year-over-year improvements in basic subscribers, basic subscriber net addition in all four quarters of 2005. Sales of enhanced digital video services also remained robust. Digital video customers were up 199,000, our best quarterly result in 2005 and the largest fourth quarter increase since 2002. Despite being almost 50% penetrated to our basic subscriber base, this quarter’s performance reflects a significant acceleration and improvement over the prior year.

Residential high-speed data subscribers grew 265,000 in the quarter, that’s also the largest fourth quarter increase since 2002. And I should point out that this quarter was our fourth consecutive quarter with more than 200,000 net ads. Demand for digital phone service remains strong and resulted in 246,000 net new subscribers added during the quarter. This brings our total customers to 1.1 million, which represents about 7% of service ready homes. Also in the fourth quarter, we added 219,000 digital video recorder customers, a 63% increase over our third quarter net ads. This is the largest quarterly increase in DVR net ads ever. We now have 1.5 million DVR households or about 27% penetration to our digital subs.

On the film where we had an outstanding fourth quarter, do partly to easing comparisons and also the timing of certain releases. We achieved revenue and adjusted OIBDA increases of 11% and 42% respectively. Warner Brothers had a stellar fourth quarter led by the theatrical release of Harry Potter and The Goblet of Fire, which brought in over $800 million in worldwide box-office receives, through New Year’s weekend.

In addition Warner Home Video recognize significant revenue gains from new home video releases during which included The Polar Express, Batman Begins, Charlie and the Chocolate Factory, The Dukes of Hazzard and March of the Penguins. Our revenue gains at Warner Brothers during the quarter were offset partly by lower revenues at New Line due to tough year-over-year comparisons related to the fourth quarter of 2004, home video release of ELF as well as higher prior year revenues from the Lord of the Rings Trilogy.

Fourth quarter adjusted OIBDA rise 42%. This increase was related primarily to high margin the attributed contributions from Warner Brothers Harry Potter and The Goblet of Fire and new home video releases as well as higher margins at Warner Brothers Television. The strong growth was partly offset by the difficult comparisons at New Line and also $33 million in restructuring charges primarily at Warner Brothers.

For the full year film revenue increased $71 million to an 11.9 billion and adjusted OIBDA decline 13% to 1.3 billion. Warner Brothers was up in both revenue and adjusted OIBDA, but New Lines difficult comparisons more than offset Warner Brothers full year adjusted OIBDA growth. Through Warner Brothers record performance and continued contributions from the Lord of the Ring Trilogy, and New Line 2005, our film segment were once again faced difficult comparisons in 2006.

Turning to networks, revenues increased 6% for the fourth quarter. Subscription revenues increased 8% due primarily to higher rates into a lesser extent, subscriber gains at both Turner and at HBO. Advertising revenues grew 6% that reflects a strong 12% growth at Turner offset partly by decline at the WB. Adjusted OIBDA growth of 22% in the quarter was driven by higher revenues and flat expenses raising margins over 4 points from last year’s fourth quarter. Full year results included 6% revenue and a 11% adjusted OIBDA growth 2005 adjusted OIBDA benefited from solid subscription revenue growth at both Turner and HBO and double digit advertising gains at Turner.

Moving to AOL, fourth quarter and full year revenues declined 8%, and 5% respectively, compared to the prior year periods. The revenue decreased during the quarter related mainly to a 13% decline in subscription revenues. This resulted primarily from a continued fall off in AOL domestic brand members. AOL’s advertising revenue improved 21% in the fourth quarter driven by 29% gain in page search, 18% growth in advertising.com our ad advertising.com, and a 17% increase in traditional advertise. Adjusted OIBDA increased 5% for the quarter and 9% for the full year. Reflected in the fourth quarter adjusted OIBDA growth where advertising revenue gains, reduction in network and marketing cost and impacts from restructuring charges of $15 million in 2005, compare to $52 million in the prior year quarter.

Network cost declined by 14%, also as a reminder to you the fourth quarter of 2004, included a $56 million benefit from the reversal of a reserve related to the Internet Tax Nondiscrimination Act. For the full year AOL Europe’s adjusted OIBDA $132 million was 26% higher than 2004. Although we are not giving any specific quarterly guidance AOL’s adjusted OIBDA profile is likely to drop at the beginning of 2006, intend to increase as the year progresses. This is as a result of the smaller subscriber base the proactive steps that we are taking to grow broadband subscriptions as Jeff discussed, and the expected growth in the advertising throughout the year.

Lets turn for a moment to AOL subscribers and move on to share some of our key audience metrics. AOL’s overall US brand subscriber base declined 625,000 fourth quarter, 19.5 million. Monthly ARPU declined slightly to $18.82. AOL Europe ended the fourth quarter with just over 6 million subscribers. As Jeff mentioned the next slides sets out AOL audience metrics. Going forward we planed to update these key metrics each quarter, and include them for our trending schedules. In the fourth quarter AOL’s domestic ad revenues less traffic acquisition cost were $259 million. Average monthly domestic unique visitors neared 109 million the second largest domestic online audience. And total domestic page views where 53.5 billion. As a result we averaged 164 monthly page views per unique visitor.

Looking at publishing revenues improved 5% for both the quarter and the year driven by higher advertising and content revenues, including the impact of the acquisitions of Essence and Grupo Editorial Expansión, and the contributions from recent magazine launches. Advertising revenues rise 6% in the fourth quarter benefiting from the acquisitions and launches that were just mentioned, as well as gains at some of our major titles including People and Real Simple. These gains were offset and part by continued softness at certain magazines, including Sports Illustrated.

Content revenues increased 14% driven by another outstanding quarter of growth at Time Warner Book Group, with the release of Nicholas Sparks, At First Sight and Michael Connelly’s The Lincoln Lawyer, as well as continued robust sales of Joel Osteen’s Your Best Life Now, and its companion Daily Readings from Your Best Life Now. In the fourth quarter other revenues increased 17% due primarily to growth at, Synapse.

Subscription revenues decline 4% in the quarter due mostly to the timing of subscription allowances. Adjusted OIBDA was up 11% for the quarter and 5% for the year. The primary contributors to the fourth quarter results were gains at Synapse in the Time Warner Book Growth, growth of certain magazine primarily Real Simple and People, and lower start up losses. Fourth quarter adjusted OIBDA also reflected $28 million in restructuring charges.

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

James Burtson, Vice Preisdent of Investor Relations

Thanks, Wayne. Operator, go to the first question.

Operator?

Questions-and-Answer Session

Operator

Operator Instruction

The first question is from Lowell Singer of SG Cowen.

Q - Lowell Singer

Thanks good morning Jeff, I have a question for you about the film business as you look at our the next 5 years, what do you think the change will be in the revenue pie of a film specifically, where do you see growth and where do you see pressure on that revenue number particularly as it relates to home video? Thanks.

A - Jeff Bewkes

Thanks Lowell, nobody can predict the worldwide DVD home video business continues to, the global outside the United States continues to increase, because the penetration of DVD is out there, just a couple of year on United States. So that will increase it’s share. The US DVD market and home video market is still growing but its slowing in its growth. Like we all know because you attracted that the domestic box-office has been and will continue a gentle secular decline although the concerns in the middle of this year will over blown and you saw the whole thing come back to basically a 4% to 5% decline by the year-end, a lot of it, thanks to Warner Brothers, where you really I think asking is how fast this high definition DVD come in, and what kind of contribution shifts to Video on Demand and online downloads. I don’t think anybody knows exactly but remember as we look at this, the, you’ve got the revenue changes which you will also have pretty dramatic cost improvements that occur when we gave this media product which is of road show of bits and bytes product and eliminate increasingly difficult for us. So I think we are optimistic in the long-term and the mid to short term about revenue growth in the business overall.

A - James Burtson

Operator thanks Lowell operator next question please.

Operator

The next question is from Spencer Wang of JP Morgan.

Q - Spencer Wang

Thanks and good morning just one question on Time Warner Cable, looks like CapEx in ’06 was up about 15%, can you give us a sense of why CapEx may look like in or if you think the CapEx in ’05, can you tell us what, the expected CapEx was look like in ’06 versus ’05, and maybe break it down between CPE and line extensions in other parts, thanks?

A - Jeff Bewkes

Right, we think just to got your 2005, was up about 15% that was a good thing because it related to an increase in success based capital meaning valuable cost of equipment that goes in and supports these new subscription levels to tie everywhere, parts of the bundle to our subscriber relationships. So that’s great, we think that the fixed product capital will be similar in ’06 to ’05. And we frankly think that the overall capital will probably be similar in cable ’05 to ’06. And if it varies up it would be good. Because it would when we had increases in revenue in long term asset value for the cable company, and it’s, in its relations with its customers. But basically we will see it following what we had in ’05.

Q - Spencer Wang

Thank you.

A - James Burtson

Operator, next question please.

Operator

The next question is from William Drewry, of Credit Suisse.

Q - William Drewry

Thanks very much. A question on AOL, and on Turner, on AOL Jeff I was just wondering if you could talk what you think in 2006, and then maybe over the next 2 to 3 years as well. How much of the mix shift you will start to see in the revenue composition from advertising to or from subscription to advertising and how that might impact margins. And then I was just wondering, also from Turner if you could talk about the current scatter market conditions and through the outlook from a near term there?

A - Jeff Bewkes

Okay back on AOL, we, what I’m going to provide specific guidance on the division’s revenue. In terms of your general question on mix we think that our advertising revenue growth is going to be competitive and increasing in relation to what its been we obviously because of the effect of the narrowband subscribers, shifting down and over to broadband. If the subscriber revenue, will follow the reducing itself is quite of that mix, in the near term however we should not count out the growth its potential that we have in broadband and premium service subscription and even though the dollar amounts of those could be less they will provide a potentially increasing set of customer relationships where you not only have subscriptions revenues stabilizing and being more valuable because those customer last better overtime we have better cost dynamic associated with them also and then they provide a good base for advertising businesses and of course we want to add the non member, non subscriber advertising traffic to that. Like it’s a network based business, so the more people that are using AOL, service, coming from free or coming at its members, the more robust our products become.

Q - William Drewry

Got it.

A - Jeff Bewkes

Scatter, scatter is moving along steadily I want to just break it quickly that entertainment scatter, yeah it’s a little scatter but actually it is turns out it was all the thing. TBS and TNT are seeing pricing basically in the mid single digits above we are at the upfront work. Cartoon Network could scatter it is moving in a steady pace and also above the upfront levels. News is moving steadily but because of the calendar upfront deals closing later than prior years, is a little less than but very steady. So we think scatter indicates a pretty healthy ad market for us and we expect again some robust growth at AOL, Turner is that which you are asking about in the ad side.

Q - William Drewry

All right thank you very much.

A - James Burtson

Thanks Bill. Operator, go to the next question and reiterate among them constantly if focus on keep to one question each.

Operator

The next question is from Anthony Noto of Goldman Sachs.

Q - Anthony Noto

Thank you very much. My question involves the AOL division and the growth rate that Wayne had pointed out. Specifically we’re really focused on one revenue growth will return to the AOL business given the distribute string factor evaluation, and when you are comment put in the fact that you expect that EBITDA to be down in the first half of the year and then up in the second half of the year. I was wondering if you clarify, you mean that on a year-over-year basis up in the second half of the year, are you seeing relative to the first half of the year either big step down, and then you starting to move up from there sequentially and also if you comment on what you met by revenue growth thanks?

A - Wayne pace

That was, my comment was framing OIBDA and we had 5% growth in the fourth quarter and 9% for the year. So we are straining half of that fourth quarter and last year and the first quarter profile will go down from both of those and then as the year progresses we would see improvement over that but the timing as to second, third and fourth quarter depends on lot of the proactive steps that Jeff was talking about and when those actually take place, so, which we’re really talking about the early part of year, and less predicting about the later part of the year.

A - Dick Parsons

Since because Jeff suggested in his comments we are trying to actually accelerate the transition of our narrowband customers who are and trying to lead for broadband anyway. We now have all of the broadband relationships in place throughout the country. And we are actually going to push them, into those new broadband relationships. So when we think first of all even though the impacts of that in the short-term on that whatever it is download pressure. These customers actually will last longer. And overtime you make more on them. And secondly as Jeff indicated keeping them in our house and in our network and in our universe from an advertising perspective make sense. So that’s the dynamic of the two. Think about it as you build your model.

Q - Anthony Noto

Right now I complete when I think that make sense and that create the increased value. We are trying to get the sense for could that, could be out of that benefit from that quicker than we are saying, are you take big shift quickly and then revenue growth to start in the back half of the year. That was really what I trying to get I’m sorry apologize for that clarification question Jim?

A - Wayne Pace

No problem Anthony, I mean one thing I want to make is, I think right now we are not in a position that we are going to not only give specific guidance on that and how trends will work I want to see how it will falls, as we roll out the programs.

Q - Anthony Noto

Great, thanks.

A - James Burtson

No problem thank you, Operator turn to next question.

Operator

The next question is from Douglas Shapiro with Banc of America.

Q - Douglas Shapiro

Yeah I have question about the profitability of VoIP I think at one point as long as a year ago, you’d indicate that you loss something 50 million in ’04. And as you said that you anticipated being breakeven in ’05. I was just curious whether or not you achieve that goal, and whether that implies that VoIP was actually a contributor in the fourth quarter?

A - Jeff Bewkes

Okay when we talked about profitability we talk more in terms of a typical division breaking even in the second year ramp up and then starting to contribute to operating income beyond that and what we are finding on the divisional basis early days but the pick up of the product as you’ve seen is really a much better, than we had built our business case on and that translates into improved profitability. So it’s a least as good as we had thought it would be when we built the business case. So it is we’re optimistic that it will be better than we thought going in. But the guidance and the communication was basically what a typical division to us, and in its rolling out very well.

Q - Douglas Shapiro

Okay, great thank you.

A - James Burtson

Thanks Doug. Operator next question please.

Operator

Next question is from Doug Mitchelson of Deutsche Bank.

Q - Doug Mitchelson

Thanks my question is (indiscernible). The, you noted in your trend schedule new RG use for cable 752, 000 in the first quarter. But new customers only want to buy 64,000, so that’s tells me as you are not yet doing a get job targeting non video customers with your telecom product sale. The question is when will your marketing efforts turn more aggressively towards your non video subscriber base? Thanks.

A - Dick Parsons

I wouldn’t say we were not doing good job at that I would say what we doing is focusing on our bundle and on increasing our subscriber relationships with our most valuable customers. And I think you should focus on just how powerful those relationships are when we have somebody for video, digital high speed data and then now following and possibly wireless as we go into the long term future. That makes a lot more sense in terms of marketing efforts and capital deployments then going after what it been optimistic hard to get a marginal video customer. So it’s a deliberate on our park and our numbers in everyone of those categories which lead every other cable operator are the testament to the success of that decision.

A - Wayne Pace

Thanks Doug.

Q - Doug Mitchelson

Thanks.

A - James Burtson

Operator next question please.

Operator

Next question is from Thomas Eagan of Oppenheimer.

Q - Thomas Eagan

Great thank you very much. Question on cable, essentially what let me view the next steps specifically when we may see some products and services coming out of the Sprint joint venture and when may the Time Warner cable division be spun out after the close of Adlephia? Thanks.

A - Wayne Pace

I didn’t understand the first question.

A - Jeff Bewkes

What was the first, when they’re going spread a fee actual wireless product offering based on the Sprint which will be,

A - Wayne Pace

Broadly later part of the year and on the, the nature of the transaction when we close Adelphia, the plan would be as part of that closing that effectively the spin occurs and the conclusion that’s closing all well the lawyers will tell you that, that thing because of the bankruptcy court has ultimate control of the timing of all this. And we want to make sure that the creditors write, however they are defined or being appropriately superintended and protected and allocated between them, it may not happen simultaneously so, we’ll just have to wait and see till we close this exact timing at the spin of the company.

Q - Thomas Eagan

Okay, thank you.

A - James Burtson

Operator next question please?

Operator

The next question is from Tuna Amobi of Standard & Poors.

Q - Tuna Amobi

Thank you very much, just real quick on the Google deal, want to find out if the deal involved any minimum revenue guarantee and as you look toward 2008 for possible IPO, Dick I was trying to get a roadmap of some of the factors that you expect to put in place towards that goal. For example, these broadband relationships which adjusted month, is that the first of a possible series of steps that will get you toward the IPO that you already talked about?

A - Dick Parsons

Are you talking, you’re talking about AOL?

Q - Tuna Amobi

Yes. I’m talking about AOL.

A - Dick Parsons

Well first on your quest on your Google deal no there or not, its new guarantees on that and we’re not giving specific aspects of certain points of the deal, I can’t hear the rest of this, what was…

Q - Tuna Amobi

On the AOL, I think you made a filing recent, I think that was in December, kind of about the possible IPO by 2008, so I’m just trying to get a sense of the…

A - Dick Parsons

Okay, all right I understand. That is because when Google having made this deal with us, we’re want to participate in equity growth at AOL which is why they invested $1 billion for a 5% piece, they wanted someway to know that eventually they could monetize or realize it so, at that point they would have the right to cause that to happen on us, and they have the right to demand that, and at which we even have the right to decide whether the IPO the assets, forward to pay them to buy out their interest for stock or for cash. So we’ve got all kinds of flexibility and so don’t read more into that filing when was intended.

A - Wayne Pace

Well as for the broadband deals we believe that a number of other broadband providers, other phone company geographic participants and other cable operators will join up on term similar to those that we announced in the first swap of deal.

Q - Tuna Amobi

Thank you very much.

A - Jeff Bewkes

Thanks Tuna.

A - Wayne Pace

Just saw this clarity was respect to the last question about the cable IPO I assume, and my answer to that we’re talking about the taking public of the 16% that the company won’t own, the partial spend if you will. And that will be owned initially by the creditors who were in the Adelphia case.

A - James Burtson

Thanks Tuna, operator next question please?

Operator

The next question is from Katherine Styponias of Prudential.

Q - Katherine Styponias

Hi thanks. My question was also related to cable, there’s been a lot of whatever extent both the cable and the telephone industry regarding the ability to manage your systems efficiently both operationally as well as financially. Such that if there are providers of internet content but and there’s some bytes travel over your systems that you might be able to provide faster service if they’re willing to pay more for it. I was just wondering if you’ve outlined or if you can outline for us how big you think that opportunity could be and how quickly you think we might se it starting to show up in cable revenues. Thanks.

A - Wayne Pace

Right, that goes to normally out of the hanging of the network net rally policy. At this point, everyone’s awaiting to see the market determine what would be necessary for infrastructure providers whether their phone DSL or cable broadband two handle the increasing traffic that users are placing on the systems and no one knows the answer to that yet. We are not going to comment on what we think the outcome, or what the opportunity there is. Well, it will obviously be true that if networks have undue burdens placed on them, crash selected users that are using just proportionate amount of traffic I mean is to be some way for the system to assign the cross burden to those users.

A - Dick Parsons

I think, I want to add to that of Kevin is that, this is something that’s going to unfold over the next 12 to 18 months and our view is that this is such new territory and the desirability of having the underlying systems, investment in those continue to come forward throughout of the country becomes increasingly new way and suggest that it should be worked out in the marketplace, there’s lot of them to beat around this typically debate down in Washington but we think it will, the best place for all of these issues to be worked out within the market because otherwise what we’ll do is we could end up, closing or backup with the system in terms of people not understanding what the going forward investments looks like for a point of year of returns and if the Government gets too actively evolved in all this and we think its actually on a good path right now without a lot of help from non-market course, I’ll put it that way.

Q - Katherine Styponias

Thanks you.

A - James Burtson

Operator, you can take out one more question please?

Operator

The last question comes from Raymond Katz of Bear Stearns.

Q - Raymond Katz

Yes good morning, question on cable, your basic sub ads, could you throw color to that regarding what it was on the growth side versus reduction in churn and could you tell us are you anywhere taking subs to the best of your knowledge from the satellite providers?

A - Wayne Pace

I think we said it Ray, we’re out of severance 3,000 basics, we added about 600,000 digitals 900,000 data and same amount of voice really. As between a churn and acquisitions, our churn is basically improved slightly improved and continues to be improving due to the bundles and packages that were offerings that’s very good news for us, economically. We think that points us very much in the right direction.

Q - Raymond Katz

Was there, what was last part of my question.

A - Dick Parsons

We’re taking…

A - Wayne Pace

Satellite, as we’ve, our cables the Time Warner Cable has certain divisions that are mostly we didn’t loose the satellite we gained and we have certain divisions like in Texas, around Houston where we did gain from satellite so, I think we have well in the cable industry relatively superior performance vis-à-vis satellite as compared to the other most of the cable operators.

A - Dick Parsons

I think Ray, if you look at our space in Houston where we were, less one point, the management was not ours, Houston was losing subs to satellite, we got hold to the management of their joint venture we’ve been taking those subs back from satellite, it gives us a lot of confidence as we look at the LA market, we get Adelphia thing done because we basically gone into a market that was emerging and losing subs relative to satellite and turned it around, we think we’d do that again. In LA and that’s one of the reasons we’re anxious to get that deal close and get going.

Q - Raymond Katz

Thank you.

A - Wayne Pace

Thanks.

A - Jeff Bewkes

Thanks Ray.

A - James Burtson

Thanks everyone, operator conclude the call.

Operator

That concludes today’s conference you may disconnect at this time.

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Source: Time Warner Q4 2005 Earnings Conference Call Transcript (TWX)

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