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Time Warner Inc. (NYSE:TWX)

Q1 2008 Earnings Call

April 30, 2008 10:30 am ET

Executives

Doug Shapiro - Vice President, Investor Relations

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

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

Analysts

Michael Nathanson - Sanford C. Bernstein

Benjamin Swinburne - Morgan Stanley

Spencer Wang - Bear Stearns

Jessica Reif Cohen - Merrill Lynch

Michael Morris - UBS

Doug Mitchelson - Deutsche Bank

Anthony DiClemente - Lehman Brothers

Operator

Hello and welcome to the Time Warner first quarter 2008 earnings call. (Operator Instructions) Now I will turn the call over to Doug Shapiro, Vice President of Investor Relations. Sir, you may begin.

Doug Shapiro

Thank you and good morning, everyone. This morning we issued two press releases, one detailing our results for the first quarter of 2008 and the other updating our 2008 business outlook. Before we begin, there are two items I need to cover.

First, we refer to certain non-GAAP financial measures schedule setting out reconciliations of these historical non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release or trending schedules. These reconciliations are available on our website at www.timewarner.com/investors. A reconciliation of our expected future financial performance is also included in the business outlook release that is available on our website.

Second, today’s announcement includes certain forward-looking statements which are based on management’s current expectations. Actual results may vary materially from those expressed or implied by these statements due to various factors. These factors are discussed in detail in Time Warner's SEC filings, including its most recent annual report on Form 10-K and quarter report on Form 10-Q. Time Warner is under no obligation to and in fact expressly disclaims any obligation to update or alter its forward-looking statements whether as a result of new information, future events, or otherwise.

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

Jeffrey L. Bewkes

Thanks, Doug. Good morning, everyone and thanks for joining us. Today I would like to start off with an update on what we’ve accomplished since the last earnings call and then John will walk us through the financial highlights, after which we will be happy to take your questions.

On last quarter’s call, I outlined for you three major objectives. First was having the right businesses in the right structure; second was improving the returns of our operating businesses and third, we want to actively manage our balance sheet by maintaining the right level of leverage and balancing the opportunities to invest against returning capital directly to shareholders.

So I would like to communicate in that structure to you and let me start with the structure points. In February, we said that we intended to reach a decision on whether and how we would change our ownership level in Time Warner Cable and we said we would do that by the time we reported first quarter results.

As you saw this morning in our release, we have now decided that under the right circumstances, a complete structural separation is in the best interest of both Time Warner shareholders and Time Warner Cable shareholders.

We continue to be very optimistic on the prospects of the cable company and the cable industry. We just believe that the two entities would ultimately be more valuable if separated rather than kept in the current structure.

So over the last few months, we have been engaged in extensive discussions with Time Warner Cable's management and its board and as you also heard from Time Warner Cable this morning, we are close to reaching an agreement on the terms of a separation. We expect to finalize that very soon and look forward to sharing the specifics with you when we are finished.

So turning to the structure, staying on the structure points of AOL, we also told you in February about our intention to separate the AOL access and audience businesses from both a financial and an operating perspective. By the end of the current quarter, we expect to have made all the key financial and operating decisions that will enable us to run the two units separately.

Remember we are doing this for two reasons. First, to increase the accountability and operational focus of each of those businesses and second, and just as important, to enhance our strategic flexibility.

Next I want to bring you up to date on New Line. As you’ll recall, on our last earnings call we identified New Line as a potential source of cost savings. Since then, we’ve completely restructured New Line’s operations and now effectively we are running it under the Warner Brothers umbrella with a fraction of the historical costs. This quarter’s results reflect $116 million in related restructuring costs at New Line and we project another $20 million to $30 million in charges over the remainder of the year, which would be about a total of say $140 million, what we expect as eventual restructuring charges.

And we expect that the reorganization will generate substantial cost savings, and mostly because we will retain international rights, revenue improvements so that once completed, the annual benefit of this should be in excess of this $140 million level that we think will be the restructuring total.

Finally, we’ve completed our plan to reduce our corporate costs by over $50 million annually, or 15%, compared to year-ago levels, and we expect to realize two-thirds of those savings during this year.

Next I’d like to emphasize a few points about our operating results, beginning with our content businesses, networks, filmed entertainment, and publishing. Each of them faced different opportunities and challenges but a common thread in our operating philosophy is to use economies of scale to drive innovation and efficiency, both of which will improve our competitive position.

As I touch on some of our first quarter highlights, I will give you a few examples of that. At networks, the good news in the quarter was very strong advertising growth at Turner, which was up 13%, driven by both pricing and volume. The scatter market was strong, with double-digit price increases above the up-front levels, and we are seeing continued strength in the second quarter with CPMs remaining up solidly double-digit increases above the up-front.

In a strong quarter for cable TV overall, each of our largest networks -- TBS, TNT, CNN -- grew delivery of its key demos faster than any of its peers. In fact, CNN surpassed Fox News on television in its key demo for the first time in six years.

I mentioned how we think about the importance of scale. While some network groups have invested in niche networks over the past few years, we’ve funneled our resources primarily into expanding our big reach existing brands. In a fragmenting world, we think brands will increasingly matter more, not less, and reinforcing our confidence in that view is the recent success of TBS and TNT. The team at Turner has succeed in its goal of turning TBS into a widely recognized comedy brand. It now airs eight of the top 10 comedies on cable, including the top original comedy. And that’s not only boosted ratings but it’s also positioning TBS with a demo that skews 10 years younger than any major broadcast network.

TNT is also using its leading position to pursue an aggressive original programming strategy. Within the next two years, for example, TNT plans to air an all-original lineup in prime-time Mondays through Wednesdays. It’s increasingly attracting top-name talent. Currently we’ve got scripts in development with Ridley Scott, Ray Romano, Mark Burnett, among others.

You may have noticed that this year Turner’s up-front is scheduled for the same week as the broadcast up-front. That is not a coincidence. We believe Turner is now positioned better than ever to challenge the broadcast networks. This argument is increasingly resonating with advertisers and agencies and we expect to see that reflected in this up-front.

Turning to filmed entertainment, we also posted very strong results in the quarter. Excluding the New Line restructuring charges, OIBDA was up 19% year over year. Warner Brothers also is using scale to extend its industry leadership. Let me give an example of that.

We believe that ultimately all packaged media will move to digital distribution, not only in the U.S. but globally. That should have positive margin implications and we believe it will boost consumption too. It will take time but we are using our position in the industry to lead this transition.

In January, we decided to support the Blu-Ray format exclusively after our current deal with HD-DVD expires in May, and since then Blu-Ray sales are up dramatically. We now expect industry software sales to approach $1 billion this year, up from our estimate of $700 million to $800 million just a few months ago. And our sales of Blu-Ray discs substantially over-indexed relative to our theatrical revenue, if you compare Warner’s to the other studios that support the Blu-Ray format.

Similarly, in contrast to the other studios, we are aggressively moving toward releasing films to VOD day-and-date, which offers us much higher margins than traditional rental. After an extensive trial, that much of which has reported to you last year, we plan to release essentially all our titles to VOD day-and-date this year. Based on our history with pioneering DVD sell-through, we think that moving first will also enable us to capture disproportionate VOD share on this move as well.

Publishing is the one business that we are currently seeing a negative impact from the economy on, but even with this added pressure in the first quarter, Time Inc.’s online ad revenue grew fast enough to offset the decline in print advertising. Time Inc. is using its powerful brands and scale to build a substantial web presence. Considering that Time Inc. grew its unique visitors almost 30% year over year to $27 million and grew page views 25% year over year to 2 billion in the current quarter, with web users increasingly seeking out content directly and few competitors match Time Inc.’s resources and breadth or depth of content, we think we are very well-positioned there.

Next let me turn to AOL. AOL has made great progress since we announced the strategy shift in August 2006, and this quarter included some very promising signs that the strategy is not only working but gaining momentum. There were some things we could have done better and intend to do -- I’ll discuss that, but first two items I want to underscore were really successful and point the way to the future. The first is increasing usage and the second is our very strong growth in third-party advertising.

Starting with the usage, which is an important indicator of the underlying health of the business and future trends, page views in our content verticals were up 22% for this quarter year over year, fueling much of our overall page view growth. Media Metrics now ranks AOL as a top three website by unique visitors in many of the top primary programming verticals, including entertainment, news, health, money and finance, celebrity, movies, music, and TV.

Another highlight was the strength in our third-party ad network. As John will explain in more detail, revenue at our partner sites grew very strongly year over year if you exclude both the impact of acquisitions and our revised relationship with one major advertiser, Apollo.

Platform A has the greatest reach of any ad network -- 94% of web users, and now delivers 3 billion ad impressions per day.

With our recent launches of both Tacoda and Quigo targeting technologies across Platform A, as well as new automated products for both advertisers and publishers, we expect strong continued growth. And while we are very pleased with our ability to grow the high value inventory in our content verticals and the continued strength of our third-party network, we were not satisfied with the performance of display advertising on our owned and operated inventory, which declined compared to last year’s first quarter.

This was due primarily to our own execution challenges. In particular, we didn’t integrate our Platform A acquisitions fast enough and that created a sales channel conflict. In recent weeks, we’ve moved quickly to address these problems. We’ve put in a new sales management. We have integrated the disparate ad network sales organizations with the AOL brand sales group to create one sales team that is able and motivated to sell across all of Platform A. This will also enable advertisers to purchase media across both the AOL and third-party networks for the first time through one sales content.

We are executing these changes now so we don’t expect to see the full benefits in the current quarter, but we are optimistic that this dislocation is largely behind us.

Last, moving to cable, I hope you were able to listen to this morning’s Time Warner Cable call. We are really pleased with how Time Warner Cable started the year and I’ve just basically two key takeaways for you. First, Time Warner Cable posted very strong subscriber growth, including record triple play net adds and solid gains in customer relationships. Second, it remains on track to deliver its financial outlook, including substantial free cash flow growth, even while it is investing in some new business initiatives that you heard them discuss.

I’ll close with our third main objective -- actively managing our balance sheet. As you saw in the release, we haven’t bought back any stock since our February call. We decided in light of all that we’ve got going on right now, it would be prudent for us to stay out of the market.

That said, we consider the stock inexpensive and we remain committed to balancing our investment opportunities with the alternative of returning capital directly to shareholders, whether through stock repurchases or how stock market conditions warrant.

To sum up, we’ve made significant progress on our structural objectives in a fairly short period of time. As we progress in our efforts to separate Time Warner Cable and split the AOL businesses, we’ll keep you posted about significant developments.

We will continue to use scale to build on the performance and competitive position of our content businesses. At the same time, we’ll be increasingly tightly managing our operating practices and our capital cost efficiency and that will be an ongoing way of doing business for us.

We have an aggressive agenda and a lot of work that we’ve mapped out for this year but we believe we are taking the right steps to deliver increasing shareholder value and with that, I thank you and I will hand off the call to John.

John K. Martin Jr.

Thanks, Jeff and good morning. Let me begin by mentioning that there are slides that are now available on our website and hopefully that will help you follow along with my remarks. And today, I will walk through the highlights of our first quarter.

Overall, we are very satisfied with how the year has started. Our consolidated year-over-year growth rates in the first quarter were admittedly modest but for a variety of reasons that I’ll discuss, we think it masks the underlying strength in several of our businesses, particularly the cable networks and film divisions, which represent around 85% of our company’s OIBDA. And as you saw in our outlook release this morning, our results give us confidence to reaffirm key elements of our full-year guidance.

So let’s begin by looking at the consolidated first quarter financial results, which are on the first slide. And on this slide, let me highlight four important observations. The first, beginning with consolidated revenues, which grew $233 million year over year, or 2% in the quarter -- growth as expected was affected by the year-over-year declines in AOL subscription revenue. That was $334 million in this quarter alone, and if you consider only the rest of Time Warner's businesses, revenues actually climbed 5.5%, or $567 million.

The second observation is that there were a handful of items that resulted in a modest 1% reported year-over-year decline in adjusted OIBDA. The first, despite strong fundamentals, we reported a decline in our film line and as Jeff mentioned, this was due to $116 million in restructuring charges at New Line Cinema. This charge alone negatively impacted consolidated OIBDA growth by nearly 400 basis points.

The second is that AOL’s adjusted OIBDA declined 25%, which we did expect, and that was due primarily to some tough comparisons, and I’ll talk more about that in a minute.

And lastly, in the networks line, OIBDA was negatively affected by the timing of recognition of programming expenses, and I’ll get into that in a few minutes in more detail.

The third observation, looking at adjusted earnings per diluted share, you will see that it was flat to the year-ago quarter at $0.22. The New Line charge is in there and it has the impact of reducing the number by $0.02.

Lastly, I’d mention that we converted a very, very high 58% of adjusted OIBDA into free cash in the quarter, $1.8 billion and that’s a terrific start to the year for us.

Let’s move on to the next slide. I will very, very briefly cover EPS. There is some detail on this slide which shows you how we reconcile down to the adjusted diluted EPS figure. Diluted EPS was actually $0.21 this quarter. That compares to $0.30 for the first quarter of 2007 -- both quarters had notable items affecting comparability. These are highlighted on this slide and in greater detail in our earnings release.

Adjusting for these, the quarter’s EPS was flat compared to the prior year at $0.22 and as mentioned, the current quarter includes the New Line charge, which reduced EPS by $0.02.

Turning to the next slide, which provides considerable detail for free cash flow, the company delivered $1.8 billion in the quarter. This is almost two times or twice the level we delivered in the year-ago quarter and the increase was helped by a favorable swing in working capital due mostly to lower receivables in our film division related to cash collections on home video receivables.

The $3.1 billion in adjusted OIBDA and $200 million of positive working capital this quarter was offset partially by nearly $500 million in cash interest and taxes, as well as almost $1 billion of capital expenditures, and I’d mention that roughly 85% of our CapEx was at our cable company.

The next slide shows you our 2008 revised outlook. Earlier today we issued a press release that updated this outlook and we focus here on three financial measures. We reaffirmed our expectations that adjusted OIBDA will grow in a range of 7% to 9% this year. Please keep in mind that the $116 million New Line restructuring charge, which we did not include in the outlook that we provided to you in February, is equivalent to about one percentage point of negative growth. So we are now incorporating that charge and as a result, based on what we know today, we would expect that our full year OIBDA growth is more than likely coming out at the lower end of our previously provided outlook range.

In addition, we reaffirmed that expect diluted EPS to be in the range from $1.07 to $1.11, and taking into account the items that affect comparability, this range would represent, even at the low end, solid double-digit EPS growth over last year.

We are also highlighting some higher expectations for free cash flow, which is obviously good news. We raised free cash flow to at least $4.5 billion -- that’s $900 million higher than the outlook we provided to you last quarter, when we said that we expected free cash to be at least $3.6 billion. The higher expectations reflect both the expected cash tax benefits from the recently passed Economic Stimulus Act, as well as lower interest expense expectations.

Turning to the next slide, balance sheet, we ended the quarter with $34.6 billion of net debt. That’s about $1 billion lower than where it was at year-end just three months ago, and the decrease was due to the $1.8 billion in free cash flow generation offset in part by $332 million in share repurchases, $258 million in acquisitions, and $224 million in dividend payments.

At quarter end, nearly $2.8 billion of our $5 billion stock repurchase authorization had been used and as Jeff mentioned, while we believe the stock is under-valued, we have been out of the market now for some time due to the structural alternatives we are considering.

So now let’s move on to the divisions, where I will briefly comment on the operating performance of each, and I’d ask you to turn the slide -- let’s start with AOL. As Jeff mentioned, we did see some very encouraging underlying trends this quarter and financial metrics, however, were somewhat mixed, which was a reflection of some near-term sales integration challenges, so let’s focus first on advertising.

Total advertising revenues in the quarter were up 1% to $552 million. That’s consistent with our expectations and where we told you we thought we’d end up for the quarter, and the year-over-year comparisons were held back by three things, so let me just briefly mention those. There was a $19 million change in accounting estimates that benefited the prior year, and we disclosed that.

The previously disclosed change in our relationship with Apollo, which is a large advertiser -- last year, for example, Apollo spent $56 million in the first quarter compared to only $17 million this year, so that’s a $39 million swing.

And lastly, there was another $10 million or so related to the decline of bounty payments for broadband providers and the discontinuance of certain unprofitable sponsorship programs like Gold Rush.

So let’s go into the components of ad growth now. Display advertising on AOL’s owned and operated network declined 18% to $191 million. The majority of the decrease came from the $19 million accrual last year and the approximately $10 million in discontinued programs that I just mentioned. So of the $42 million year-over-year decline, that represented $29 million of it.

Global search revenue grew 4% year over year, which is about what we had expected, and search for the domestic AOL brand was up higher, in the high single digit range. We continue to see strong search results on AOL.com, which grew search revenue 89% year over year, and this was offset by declining usage on the client.

The performance of AOL’s third-party network was a clear standout in the quarter. Revenues were $188 million. That’s up 25% versus the year-ago quarter. Keep in mind please that this figure does take into account both acquisitions and a change in the Apollo relationship, so what does that mean? Excluding the impact of the acquisitions and Apollo, third-party network revenues actually grew substantially faster than the 25% that I just mentioned.

Looking into the second quarter, we expect total AOL advertising growth to improve versus the first quarter. We also expect a continued mix shift towards third-party network revenues and away from the AOL owned and operated network, and as Jeff said the new sales management efforts and all of the changes that are being executed now as a result of the timing of those changes being executed, we can expect to see the full benefit of those in the current quarter.

As a result, despite the fact that we expect overall advertising to improve, we expect display advertising, which is a subset of that, will likely again decline year over year compared to the second quarter of 2007. And we don’t have great visibility really beyond that, but we firmly believe that management is taking the right steps to improve this part of the business.

Moving to AOL’s profit for a moment, adjusted OIBDA in the quarter was $405 million. That’s down 25% versus the year-ago period. Please keep in mind that 2007’s first quarter was the highest quarter of the year for AOL in terms of adjusted OIBDA, so that by the math provides the toughest comparison for us this year.

AOL took a lot of costs out of the business very quickly after it announced its strategy shift and the Access business revenue base was much, much higher at the time and that’s what benefited the prior year’s first quarter.

Adjusted OIBDA is also reflecting the continuing mix shift toward the third-party network, which has resulted in higher traffic acquisition costs, or what we call TAC.

For the full year, we continue to expect that AOL will deliver a lower level of adjusted OIBDA as compared to 2007 and in the second quarter, we expect adjusted OIBDA to decline in a range similar to that in the first quarter. Year-over-year comparisons should improve beyond that as we head through the year and that should be a reflection of benefits from the integration of Platform A being realized. We continue to reduce the cost structure at AOL and our comparisons just get easier as we progress through the year.

So let me quickly highlight some key audience metrics -- AOL really succeeded in growing usage in the first quarter and that’s been one of its chief operational goals now for some time. According to Media Metrics, AOL had 52 billion page views in the quarter and based on our internal estimates, we think total page views were 6% higher than last year’s first quarter and 8% higher as compared to the fourth quarter. That marks the first time since our change in strategy that page views have actually been up year over year.

As Jeff said, most of this growth was driven by our content verticals. Page views there were up 22% and we’re clearly benefiting from last year’s redesign and relaunch of all key programming verticals; in almost every case, traffic has grown since.

And while for overall AOL, unique visitors were relatively flat versus last year, we estimate that user engagement, which we measure as page views per unique visitor, that figure rose 6% year over year and 6% sequentially. In fact, in March, AOL set a record for traffic highs in terms of reach and engagement and that’s the sixth straight month where both UVs and PVs grew sequentially.

After reversing a declining audience trend in e-mail and homepages in the fourth quarter of 2007, AOL also grew its audiences for these important products during the first quarter.

Looking briefly at the other side of the AOL business for a moment, and as a last point, AOL saw lower-than-expected churn in its paying subscriber base of the still very large Access business. As of March 31, AOL had 8.7 million domestic subscribers. They lost 647,000 in the quarter. That’s fewer than it lost in the fourth quarter and the first quarter did see lower churn on this declining base.

Moving over to cable, Time Warner Cable reported its results a little bit earlier this morning. If you did not have an opportunity to listen to the call, I would encourage you to access the replay that is available on their website, and to reinforce what Jeff said, Time Warner Cable is really, really off to a terrific start this year. They reaffirmed the full-year OIBDA and EPS expectations and raised their free cash flow outlook and Time Warner Cable now expects free cash flow to grow at least 40% compared to 2007.

Subscriber metrics on the next slide were really particularly strong. Continuing to grow the customer base here is a key priority. Time Warner Cable set a record in terms of triple play customer net additions in the quarter, adding nearly a quarter-of-a-million. They added 55,000 basic video customers, their best result in two years and this quarter represented the 12th quarter in a row of more than 500,000 revenue generating unit net additions. In fact, it was the second-best quarter ever in terms of RGU net additions, so we feel really good about these results and we think they highlight the health of the business and our ability to compete effectively.

Moving over to film on our next slide, as Jeff said Warner Brothers has begun the operational reorganization of the New Line business which resulted in a $116 million charge. That’s in the numbers. We expect to incur about another $20 million to $30 million for the remainder of this year.

In addition, the first quarter results we recognized $50 million in expenses during the quarter related to current claims on films released in prior periods. Excluding the restructuring charge, OIBDA rose a strong 19% in the quarter and that was due to very healthy box office results from films like 10,000 B.C. and Fool’s Gold, theatrical carryover from I Am Legend and The Bucket List, as well as the DVD performance of I Am Legend and the carryover from the Harry Potter and the Order of the Phoenix DVD.

OIBDA also benefited from lower film valuation adjustments, as well as a decline in print and advertising expenses primarily due to fewer releases.

Excluding the restructuring costs, we continue to expect and we are confident that there will be positive year-over-year growth from this segment in 2008. And this view is based on our confidence in both the theatrical and home video release slates. Among our most promising upcoming releases are Speed Racer, Get Smart, and Sex and the City in the second quarter, as well as The Dark Knight and Harry Potter and the Half-Blood Prince in the second half of the year.

Looking at the network segment, as we stated on our last earnings call, we expected OIBDA in the quarter to be essentially flat compared to the prior year, and this was due to the timing of NBA programming amortization expenses at TNT, higher original programming expenses at HBO and Turner, as well as additional news gathering costs at CNN related to the election coverage.

OIBDA rose to $958 million, as higher-than-anticipated revenue growth was offset by an unanticipated $21 million impairment related to HBO’s decision not to proceed with an original series. The quarter’s results included 10% subscription revenue growth and a continued strong performance in Turner’s ad sales and ad revenues, which climbed 13% and reflected double-digit advertising growth in both its entertainment and news segments. This robust advertising growth was driven by an increase in the overall number of ad units sold, higher CPMs, and audience growth.

Primetime ratings improved in the adults 18 to 49 demo 11% at TNT, 19% at TBS, and a stellar 84% at CNN.

Focusing on OIBDA, we continue to anticipate that HBO and Turner taken together will deliver strong growth this year. The drivers are expected to be solid overall subscription revenue growth, steady audience delivery growth at Turner, and continuing healthy ad growth at the cable networks.

Lastly, at our publishing division, revenues were essentially flat in the quarter as a 3% increase in subscription revenues was offset by a 1% decline in advertising revenues. The ad revenue decline was primarily a function of print magazine closures over the past year, including Life and Business 2.0. Excluding these, total ad revenues actually rose modestly as online ad revenue growth more than offset declines in domestic print magazine advertising. The 3% growth in subscription revenues was driven by higher domestic and international newsstand sales.

Despite flat revenues, OIBDA rose over 70% due to lower restructuring charges, magazine closures, and expense reductions. We continue to see softness in print advertising demand due to the economic environment, particularly in the auto and pharmaceutical categories, and this somewhat limits our visibility into advertising growth for the rest of the year in this segment. And although Time Inc. continues to aggressively manage its costs, we don’t expect the same degree of cost savings for the remainder of the year as what we experienced in the first quarter. Consequently, achieving OIBDA growth for the remaining nine months of the year may prove challenging in this business but please keep in mind that [inaudible] reaffirmation of our business outlook already considers this.

So thanks for listening and let me turn the call back over to Doug, who will start the Q&A portion of the call.

Doug Shapiro

Thanks. Wendy, could you please open up the Q&A? I’m going to ask everyone to try to keep your questions to one or two.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Michael Nathanson. You may ask your question and please state your company name.

Michael Nathanson - Sanford C. Bernstein

Sanford Bernstein. I have two on AOL to Jeff -- you guys mentioned the sales channel issues at AOL. Can you give me a better understanding of what was the problem and did it impact volume or price, and what -- has that remedied itself?

And then on the market’s concern about social networking, you bought Beebo in the last quarter. Why do you feel that’s a good acquisition for AOL and how are you going to integrate that?

Jeffrey L. Bewkes

Okay, on the first one, we were in the process of integrating Tacoda, Quigo, which had several aspects to it. One is we had several sales forces and we had not yet put them all together into one connected sales force, so that led to not being able to optimize the owned and operated inventory to the extent that we think we are starting to do now.

To your question on price versus volume, we think it was more that we missed some opportunities on pricing and we hadn’t really put in place the incentives that we now have for our sales force. So those essentially were the fixes. John may want to add to that.

On Beebo, basically our previous acquisitions have been focused on improving monetization capabilities and filling out the ability to sell both owned and operated premium or committed inventory and performance based inventory. With Beebo, we gained the opportunity to also grow usage. And we think that because we have the unique advantage of the AIM and ICQ instant messaging base that we can bring a lot of vigor both to those instant message capabilities and through those to Beebo’s social networking.

Doug Shapiro

Next question, please.

Operator

Thank you. Benjamin Swinburne, you may ask your question and please state your company name.

Benjamin Swinburne - Morgan Stanley

Good morning, guys. I wanted to dig in a little more into the strong Turner results, both subscription and on the advertising front. Jeff, you guys had some margin compression in the quarter. Could you help us think about how much of that was the NBA programming timing versus original programming investments?

And as you look out into the second half of this year and even into ’09 at Turner, and specifically TBS and TNT, you are moving more and more into original programming, investing more and more in those areas -- at what point do you expect to see more of an EBITDA pull through on the margin front from all these investments, just from a timing perspective?

And then if I could ask just one point of clarification -- was the decision not to buy back more stock in the quarter a legal regulatory comfort decision or was it more than that?

Jeffrey L. Bewkes

On the Turner point, your first question was how much of what happened in the quarter on costs was the sports part -- quite a -- considerable -- you know, most of it. In terms of looking at the year, which is what you ought to look at, Turner results have been and will be and continue -- on a continuing basis will be very strong on a year basis, including margin expansion. So we are able to do that at Turner while we continue to invest increasingly in original programming and what I was trying to get at in the opening remarks is the success rate of what Turner is doing in original programming is very strong for us. So it’s leading to continued profit growth, if that answers your question, on how does this show up in earnings growth. It’s been strong and it will be strong.

The margins will continue to increase as a result basically of the dynamic of even though you invest in original programming, it has kind of a -- a somewhat of a fixed cost aspect.

The revenue growth at Turner, both on the ad side and the affiliate carriage side, has been and we project to be quite strong and therefore, that will enable us even as we invest in those programming assets to increase the margins.

If you get some pretty big hits off of that and we are pretty much on the track to do that at Turner, as we have done at HBO, you can then see even further margin improvement when you get the DVD and digital sales from those programs, and that’s increasingly part of the economics at all of these networks.

So if that was the Turner -- was there any more on Turner -- just the question on the buy-back?

John K. Martin Jr.

The only thing I would add on Turner, just to put a little quantification around it, Turner’s programming costs in the quarter were up 24%, and while the NBA represented about a quarter of the overall programming costs, it was about half of the growth, so that was really -- that was that and that should give you some sense as to why margins should grow, because we don’t expect that type of programming costs to sustain itself.

I think the other question was on stock buy-back.

Jeffrey L. Bewkes

On stock buy-back and you may want to finish it -- we basically didn’t buy stock for the reasons that I gave you at the outset. We just thought given everything we have going on in structural change that it was advisable for us to keep our resources, our powder dry in this environment. And that is not to say that we -- as we also said in our remarks, we keep in mind very much maintain the right level of leverage in order to support returns, but we just didn’t think given what is going on with us right now -- a little bit of the environment out there but not mostly that -- that it was not a good time for us to be buying stock this quarter.

Benjamin Swinburne - Morgan Stanley

Okay. Thank you.

Doug Shapiro

Next question, please.

Operator

Thank you. Our next question is from Spencer Wang. You may ask your question and please state your company name.

Spencer Wang - Bear Stearns

Thanks. Just one question, I guess, Jeff -- if you look at Time Warner's guidance for 7% to 9% EBITDA growth and then you take out Cable’s guidance for 9% to 11% EBITDA growth, that obviously implies that at least for ’08 the core content businesses and AOL will grow probably mid-single-digits in terms of EBITDA. So the question is do you think that is the right kind of sustainable level of cash flow growth for the core Time Warner businesses? If not, how do you plan to reaccelerate growth and how important are acquisitions to doing that? Thank you.

Jeffrey L. Bewkes

No, I don’t. We think that the secular growth rate of the ongoing content businesses, and then we’ve got to add AOL, the advertising and audience business of that, are improving and increasing. And so there are a number of reasons -- the network business basically is strong on a secular earnings growth basis. We think our film business is similarly in that position and that as digital happens and as our film company continues to focus its slates, both in TV and on the theatrical side -- as well as redesigning the cost structure, which we’ve been doing, you saw a bit of that with New Line -- that we can move off even this high earnings base in our film side into growth in the future.

If you go to publishing, we’ve got some publishing business -- some of our biggest franchise titles, like People, Sports Illustrated, Real Simple, et cetera, that are growing in the double-digit earnings -- double-digit earnings growth now. And as we continue to take our entire magazine portfolio and move it into digital, we think that the growth rates in that business can be quite healthy and can overcome what may be the kind of flatness in print over time.

Finishing with AOL, the audience business, the advertising business grows quite a bit higher than double-digits in the kind of statutory way. And what you are seeing when you ask that question is essentially the effect of the declining access subscription business mixed into the numbers. If you separate that, and as we’ve said, part of the reason for us to get it separated and operating separately is to give all of you a clear view of essentially the future discounted cash flow off of that business. Then you are going to have, when you look at the core Time Warner, a pretty healthy growing OIBDA business and a very healthy EPS growing business. If you throw dividends on top, you’d have a very attractive, steady future return.

John K. Martin Jr.

The only thing I would add, Spencer, you know, if you listen to the way Jeff spoke about the company, it was basically in three buckets. You have cable, AOL, and then the other three divisions, which are the content businesses. If you look at our first quarter numbers and you separate out cable and AOL for a minute, and if you exclude the restructuring charge at New Line, because clearly that is a one-time event, we actually grew 10% in the first quarter OIBDA. And if you think about the full year outlook, I would suggest that the implied growth rates are higher than what you suggested, so something to think about.

Spencer Wang - Bear Stearns

Thank you.

Doug Shapiro

Next question, please.

Operator

Thank you. Jessica Reif, you may ask your question and please state your company name.

Jessica Reif Cohen - Merrill Lynch

Thanks. Hi, Jeff. I was hoping you could comment on long-term, what do you think -- long-term meaning let’s say three to five years -- what do you think Time Warner will look like, as you are repositioning the company clearly without Cable and the AOL Access business? Meaning, do you need to own all of the publishing assets? How core is AOL? In a nutshell, can you comment on acquisitions plus dispositions? And if possible, why is Cable taking so long?

Jeffrey L. Bewkes

Well, first on the -- let’s do the cable one first. It’s not taking so long. We’ve made a lot of progress, I think you heard it in the Cable call today and in ours. We have made a decision to separate. Remember that there are governance issues. We are talking with a special committee of independent directors that represent public shareholders and we want to make sure that all of the -- and both sides want to make sure that all the shareholders on all sides are treated to exactly the right process to get to the right structure, so that when we have the terms of such a move finalized, that’s when we will be in a position to give you the specifics on it. As we’ve said, we think it will be very soon. It just doesn’t happen to be today.

On the question that you are asking about the rest of Time Warner, we just got into it in the last question. We think that the branded content, the content brands that we’ve got in our networks, in our publishing titles, in some of our AOL stable, are very strong, are of a scale and with an operating management that knows how to succeed and basically compete vigorously out there in the market. And so we think that we can put ongoing, reliable, fairly strong growth performance into that remaining or core business of Time Warner's.

Jessica Reif Cohen - Merrill Lynch

But the question -- you’ll have a pretty healthy balance sheet. Do you look to acquire things? If you do, what areas?

Jeffrey L. Bewkes

Oh, all right. Well, what we will always do is be looking to essentially make the statement I just had true. We’d like superior brands and superior position in scale, in attracting talent, in running cost economies optimally. That’s basically our position in film and in networks and in publishing. It’s a position we’ve been trying to build in online and what we would do in acquisitions for any of those positions is look at horizontal opportunities to increase basically that competitive advantage.

So you won’t see us doing any transformative or kind of odd and philosophical vertical acquisitions. We would be looking only at horizontal things that we really knew we could execute and add to what we currently do.

Doug Shapiro

Thank you, Jessica. Can we move to the next question, please?

Operator

Thank you. Our next question comes from Michael Morris. You may ask your question and please state your company name.

Michael Morris - UBS

I believe you mentioned that you had a contribution of about $17 million in revenue from Apollo in the current quarter. Can you comment on is that a run-rate that you are expecting from that partnership going forward?

And then second of all, just going back to the Beebo acquisition, can you talk a little bit about the due diligence on that acquisition? What level of management is involved in the approval of an $850 million acquisition? And also, can you provide any financial data around it? You know, what’s your outlook for revenue, returns -- anything like that would be helpful. Thanks.

John K. Martin Jr.

On the financial -- maybe I’ll take the financial part first, just because it’s easy -- we haven’t -- first of all, we haven’t even closed the acquisition yet and we haven’t released what the financial impact is but you should assume it’s not going to be material for the company’s numbers.

Michael Morris - UBS

In terms of revenue from Beebo?

John K. Martin Jr.

Yes, that’s correct -- revenue, profitability, and the first question was more along -- did you ask about the diligence?

Michael Morris - UBS

Yeah, just -- about Apollo and is that a good run-rate? Specifically back to Beebo though, the due diligence around that acquisition, I mean, what -- how high up the management chain does that go in terms of being approved?

Jeffrey L. Bewkes

I don’t understand that.

John K. Martin Jr.

Well, I’ll just take a shot. There was --

Doug Shapiro

Well, it’s really two different concepts. There’s the diligence that is actually done at Beebo, which was performed by AOL with some Time Warner supervision. And then there is the approval process which went all the way up Time Warner.

Jeffrey L. Bewkes

You mean who -- did I approve acquiring Beebo, is that the question?

Michael Morris - UBS

Exactly.

Jeffrey L. Bewkes

Yes.

John K. Martin Jr.

And it also received board of director approval.

Jeffrey L. Bewkes

And the board, right.

John K. Martin Jr.

The last thing on Apollo, they don’t have any legal obligation in terms of continuing to advertise with us. Is it a good run-rate what we had in the first quarter, $17 million? Hard to tell. As a basis of comparison, however, last year Apollo was about $215 million on a full-year basis.

Michael Morris - UBS

Okay but this year, there’s no certainty around whether it’s $17 million going forward is kind of standard or what you can expect?

John K. Martin Jr.

That’s correct.

Michael Morris - UBS

Okay. All right, thank you.

Operator

Thank you. Doug Mitchelson, you may ask your question and please state your company name.

Doug Mitchelson - Deutsche Bank

Thanks. So one clarification and two quick questions -- the NBA I would think would be amortized in line with your forecast for revenue growth, John, so I would not think there would be margin compression as a result of the NBA contract. I mean, did you air more games in 1Q08 than 1Q07, or are you underperforming against your ad estimates? Because otherwise I am not sure I understand the amortization schedule. And maybe we’ll do that and I’ll ask the other two.

John K. Martin Jr.

Sure. Let me start with that. So the way that these, because these are multiple year, long-term contracts and the way that the cost gets amortized is you’re right, Doug. It’s essentially matched up against estimates of revenues.

We happen to be in a period of time because as you can imagine, these are based on estimates and they need to be trued up over time, we’re at a period of time where we are right at the tail end of an existing NBA contract which ends in the second quarter, and then the new NBA contract begins with the third quarter.

So from an accounting perspective, what we were required to do is recognize the remaining costs that were left under the old or existing contract and so it just happens to be that you had the expenses go up in this quarter. So it is not necessarily based on the number of games. It’s based on a revenue ultimate model and it’s not a perfect science, and you have to true-up and recognize over time.

Keep in mind the second quarter also there will be a fair amount of amortization of the NBA. It’s also we have the West Coast finals, which actually we’re eight or nine games in and the audience levels have been outstanding, where we’ve been up every night and in key demos, audiences are 30%, or in excess of 30% higher than what we delivered in the year-ago.

Doug Mitchelson - Deutsche Bank

Right, so it sounds like it’s not a persistent issue, so --

John K. Martin Jr.

That’s correct. By the way, that’s one of the reasons why Jeff could speak with confidence as to margin direction going forward for the rest of the year as well.

Doug Mitchelson - Deutsche Bank

So two quick questions for Jeff; first, you talked about Turner and its up-front strategy going after broadcast budgets this year. What’s the pricing gap at this point between the Turner Networks and broadcast networks?

And second, you talked about going day-and-date this year with all of your releases, which is a pretty big announcement. What did your tests imply the revenue and profit opportunity will be overall for your film division in making this switch? Thanks.

Jeffrey L. Bewkes

On the first one, I’m not sure I can -- you know, the gap between what you get in CPMs on Turner are leading basic cable and they are doing probably better than anyone in the CPMs and sell-out and all those measurements. It varies from show to show, period to period. In general, I think it’s in the -- they are in the 60%, 70% of broadcast side I think and Turner would be leading most of -- probably all of the cable networks except for the very niche ones that do a small volume.

So there is quite a bit of upside for that reason because it’s such an efficient reach play and as the audience moves off broadcast network, where is it going? It’s going to the big reach cable networks. We’ve got two of them, TBS and TNT. It’s more than that though because the environment that the major advertisers are looking to duplicate as the broadcast networks kind of lose their ability to provide it is the kind of quality environment that the Turner, TBS, TNT have with acquired shows that are proven hits and with the strong originals that they’ve got. All of that leads to an advantage for Turner in pricing.

So that’s kind of the general there. On the margin question on day-and-date, the test has been pretty clear that it hasn’t hurt the sell-through rates; in fact, they went up a little because you are not seeing competition from used rental inventory when you do this. And the margins on taking a customer and moving that person from rental physical over to VOD day-and-date, it’s like a 60%, 70% margin instead of 20% to 30%, so it’s about a three-to-one trade. Very good for the film company.

Doug Mitchelson - Deutsche Bank

Great. Thank you.

Doug Shapiro

Next question, please. I think this might be our last one.

Operator

Thank you. Anthony DiClemente, you may ask your question and please state your company name.

Anthony DiClemente - Lehman Brothers

Two quick ones for John and then one for Jeff; John, other Internet companies have talked about the pricing gap narrowing between premium and non-premium display inventory. Are you seeing that at all at AOL and if so, can you help us quantify that?

And then also, advertising at Turner up 13% in the 1Q -- you talked about in the 10-Q EBITDA acceleration throughout the year but do you expect comparable advertising growth in the 2Q?

And then finally for Jeff, you talked about the secular growth by division. I was wondering if you could comment how the actual separation of Cable and possible AOL might help you and your management team specifically focus on the margin efficiencies at film or at the networks, maybe in terms of having a currency that your line managers could see more of a direct impact on -- maybe you could just comment on any other ways that that would help. Thanks.

John K. Martin Jr.

I’ll take the two questions, the first was the pricing gap, whether it was increasing or decreasing on premium versus non-premium. I would actually say it is tough for us to answer that this quarter. The revenues were negatively affected, as we said, by some of the challenges on the integration of the acquired businesses. More inventory moved into the ad networks away from our ad sales and so we clearly had overall CPM compression on a blended and average basis, but we think that this was largely an issue of our own yield management. And hopefully you should see us begin to rectify that going forward.

On your second question, advertising, we too were very pleased with the strength in Turner’s advertising this year in the first quarter, and I would say that we -- frankly the first quarter our advertising numbers at Turner are ahead of our own plan and ahead of our expectations and we don’t have the best visibility to say that that’s going to sustain at that rate. But I don’t think it has to sustain at that rate in order for us to achieve our margin objectives and our growth objectives.

So to the extent that it does, it may provide even upside to our own plans.

Jeffrey L. Bewkes

On your question on the vigor, I guess, or the focus of the ongoing brand network, film, publishing, AOL businesses, of course we always try to focus, we have been. I think on margins, we need to all remember that earnings and returns are more important than margins. Of course it’s good to raise any margin to a higher number and make more money but you constantly have to look at making sure you don’t have apples and oranges, so we’ve got a lot of things underway, some of which we mentioned to increase margins, whether it be cost control and redesign at films, restructuring the New Line and infrastructure issues, focusing the slates in TV and films, constantly working on overall cost efficiency in networks and in the publishing group -- we’ll continue to do that.

But the one thing to keep in mind is some of our businesses because of the lead scale, have opportunities to acquire programming and distribute it, and if we can do that and take on a marginal piece of business and do it at 20% or 30% with no investment, we are going to do that and add the earnings with an infinite return to the company. That would of course average down the margins which sometimes are in the 40s for certain of our business lines.

So there is really a lot going on there. We are working at all that with a lot of vigor but what we are mostly focused on, it includes margins, of course, it’s mostly returns on capital.

Doug Shapiro

All right. With that, thank you very much, everyone, for tuning in and we’ll talk to you next time.

Operator

Thank you. This concludes today’s conference. Thank you for participating. You may disconnect at this time.

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