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Time Warner (NYSE:TWX)

Q2 2012 Earnings Call

August 01, 2012 10:30 am ET

Executives

Douglas Shapiro - Senior Vice President of Investor Relations

Jeffrey L. Bewkes - Chairman and Chief Executive Officer

John K. Martin - Chief Financial Officer and Chief Administrative Officer

Analysts

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

Spencer Wang - Crédit Suisse AG, Research Division

Michael C. Morris - Davenport & Company, LLC, Research Division

Benjamin Swinburne - Morgan Stanley, Research Division

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Richard Greenfield - BTIG, LLC, Research Division

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Jason B. Bazinet - Citigroup Inc, Research Division

Anthony J. DiClemente - Barclays Capital, Research Division

John Janedis - UBS Investment Bank, Research Division

Operator

Welcome to the Time Warner Inc. Second Quarter 2012 Earnings Conference Call. My name is Donna, and I will be your operator for today's call. [Operator Instructions] Please note that the conference is being recorded. I would now like to turn the call over to your host for today, Mr. Doug Shapiro, Senior Vice President of Investor Relations for Time Warner. Please proceed.

Douglas Shapiro

Thanks, and good morning. This morning we issued 2 press releases, one detailing our results for the second quarter and the other reaffirming our 2012 business outlook. Before we begin, there are 2 items I need to cover. First, we refer to certain non-GAAP financial measures. Schedules setting out reconciliations of these non-GAAP measures to the most directly comparable GAAP financial measures are included in our earnings release and trending schedules. These reconciliations are available on our website at timewarner.com/investors. Reconciliations of our expected future financial performance are also included in the business outlook release that's available on our website.

And 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 subsequent quarterly reports on Form 10-Q. Time Warner is under no obligation 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.

Thank you. With that, I'll turn the call over to Jeff.

Jeffrey L. Bewkes

Before we begin, on behalf of everyone across Time Warner, I want to express our profound sadness about the terrible events at a screening of The Dark Knight Rises in Colorado 2 weeks ago. Our deepest sympathies go out to the victims of this appalling crime, to their families and their loved ones.

We're here today to discuss our quarterly earnings, so let me turn to that, and thanks for -- everybody, for listening in.

Coming into the quarter, we knew we had very difficult comparisons in some of our businesses, and overall, our results came in just about where we expected. John will go through all of that with you in a few minutes, but at the same time, we've seen some very important signs of underlying strength in our businesses over the last few months, particularly at the networks.

At Turner, for example, we're continuing to show a strong ratings momentum across almost all of our networks. This quarter, TNT was the #1 network on cable, driven by another record-setting NBA season and by our new slate of originals. Our regular season NBA coverage was up for the fifth straight year, making it the most viewed season in our 28-year history with the league. And we had great performance from our original programming. On average, our original series attracted over 40% more viewers this summer than last year. Our new shows perception and Dallas are the #1 and #2 series on cable this year. In fact, including The Closer and Rizzoli & Isles, the top 4 scripted shows currently on ad-supported cable are all on TNT.

TBS also had a great quarter. It was up 30% in prime time in its key demo. The Big Bang Theory keeps dominating the charts and was again the #1 sitcom on cable. Importantly, it's continuing to lift other shows on the network, and it provides a great platform on which to launch new programming.

During the last few months, we debuted 2 new shows on TBS, Men at Work and Sullivan & Son, to great success, with Men at Work becoming TBS' most popular original series ever. And rounding out our entertainment networks, truTV was again a top 15 network among men in prime time. It posted its best second quarter ever from men 18 to 49, driven by hits like Hardcore Pawn and Impractical Jokers.

We also had another strong quarter at our animation networks. Adult Swim remained the #1 network among adults 18 to 49. And like last quarter, Cartoon was the only major kids' network to grow in the quarter, up 12% for kids 6 to 11. Let's just look at the delivery of Cartoon compared to Nickelodeon in that demo. In last year's second quarter, Nickelodeon had almost twice the delivery of Cartoon. This quarter, that gap had shrunk to less than 20%.

The exception this quarter was CNN. Although CNN's ratings declined in part due to very difficult comparisons with last year, to be clear, we are not satisfied with CNN's ratings performance and we're focused on fixing it. Within the last few weeks, Turner wrapped up a very successful upfront. Once again, we negotiated CPM and volume increases at the top end of the entire television business among both broadcast and cable networks. That's a powerful testament to the appeal of our branded environments, our content and our ability to offer integrated buys across platforms. So our programming and brands are resonating with viewers and advertisers.

Our third major constituency, course of, is our affiliates. As we've discussed with you before, between 2013 and 2016, we'll enter negotiations with just about every distributor for just about all our basic cable networks, making it our biggest affiliate renewal cycle in years.

Turner has some of the most watched and broadest reach networks in cable and some of the strongest brands. And over the last few years, we've made significant investments in our brands and in our programming, and we've granted substantial additional rights to our distributors. So we believe that the value we're delivering to our affiliates exceeds the value we're receiving. We're focused on correcting that in this next cycle. In fact, based in part on the deals we've already struck, we have every confidence that Turner will grow domestic subscription revenue at a double-digit pace annually between 2013 and 2016.

I'll turn now to HBO, which is also enjoying strong momentum across its businesses. The volume of great shows on HBO right now is without precedent. Game of Thrones has evolved into a bona fide cultural phenomenon, recently finished its second season with over 11 million viewers per episode. And we just debuted the fifth season of True Blood, which keeps going strong as the network's most-watched show. It's on track for more than 12 million viewers per episode this season. And we have a string of new hits, too. The Newsroom is now attracting more than 7 million viewers per episode and viewership is increasing as the season progresses. And both Girls and VEEP have enjoyed solid ratings and great critical acclaim.

Underscoring the quality of HBO's content, a couple of weeks ago, HBO received 81 prime time Emmy nominations. That's the most of any network for the 12th year in a row, and that included outstanding drama nominations for both Boardwalk Empire and Game of Thrones, and outstanding comedy nominations for Curb Your Enthusiasm, Girls and VEEP.

HBO's experiencing some of the most favorable subscriber dynamics it's seen in several years, too. We've already surpassed 100 million subscribers globally this year, faster than we expected. That's been driven primarily by continued rapid growth overseas. But we're also seeing encouraging trends in the U.S., putting us on pace to add more domestic subs this year than we did in 2011.

We've also been very pleased with the rollout of HBO GO. As you know, HBO GO is now available to our entire U.S. subscriber base. And over the last few months, we've extended support to many new devices such as Xbox, Samsung TVs, the Kindle Fire and Android tablets. Although GO has only been available on TVs for a few months, we're already seeing average monthly usage increase. And as we've mentioned before, over 90% of GO users say they're now more likely to keep their HBO subscription. So as penetration and usage climb, we're confident that GO will benefit subscriber growth and increase the subscriber life cycle.

I'll move next to Warner Bros. This was another outstanding quarter for Warner Bros. Television production. During the upfront, we secured orders from the broadcast networks for 16 returning series and 9 new shows, making us the top producer of network TV programming yet again, and the only studio with at least one show on each of the broadcast networks. In addition, we successfully brought both 2 Broke Girls and Mike & Molly to the off-network market, bolstering our syndication pipeline in 2014 and 2015.

During the quarter, we also announced a deal to license Pretty Little Liars and The Lying Game to Netflix. And recently, we struck a deal to syndicate several shows to Amazon Prime, including Fringe and The West Wing.

In our theatrical business, some of our film releases earlier this quarter fell short of our expectations, such as Rock of Ages and Dark Shadows. However, Magic Mike has substantially outperformed our expectations, and The Dark Knight Rises is on pace to surpass $1 billion at the global box office. Batman is now on track to be the second or third highest-grossing franchise of all time. It's another example of Warner's unparalleled ability to manage broad appeal global film franchises. You'll see more evidence of that ability with the first installment of The Hobbit, which we will release in December. The film is already generating tremendous buzz. And earlier this week, we announced that Peter Jackson, in concert with Warner Bros. and MGM, has decided to make The Hobbit as a trilogy rather than 2 films as originally planned.

I'll turn next to Time Inc. As John will describe, even though the environment for print magazines is very challenging, Time Inc. has been increasing its share by capitalizing on its scale, its brands and the quality of its editorial. At the same time, we remain focused on continuing to evolve the model for digital magazines. For instance, during the quarter, Time Inc. struck a deal with Apple to enable sales of digital subscriptions on iOS devices. Although it's still early, so far, over half of the subscribers to our digital editions have never subscribed to our titles before, so that's a very encouraging sign.

Wrapping up, it's been a very productive few months for us. I'm excited about our progress. And with each quarter that passes, I'm even more confident about how we're positioning ourselves.

With that, I'll hand it off to John.

John K. Martin

Thanks, Jeff, and good morning. During my remarks, I'll refer to a presentation that is now available on our website, and the first slide shows the highlights.

The quarter shaped up pretty much as we had expected. Year-over-year growth was held back by very challenging comparisons at Film and TV Entertainment, as well as Publishing, as well as substantial intersegment eliminations. And while the second quarter's financial results were somewhat mixed, we are seeing some healthy underlying trends which I will discuss. And we had a pretty terrific quarter at the Networks group, which posted its highest revenue and adjusted operating income ever for a second quarter. We were also able to maintain consolidated margins at about 18%. That's a reflection of our continued focus on cost efficiency across the company, so that's good.

Moving down the P&L, adjusted earnings per share was almost flat year-over-year despite the decline in adjusted operating income, and that's primarily due to the benefit from our ongoing share repurchase program, which is a significant part of our commitment to provide direct returns to shareholders. And during the quarter, we repurchased $565 million of our shares and we paid more than $250 million in dividends. So that means during the first half of the year, we've returned $1.8 billion to shareholders.

As we look out to the second half of the year, we're in good shape to meet our financial objectives. As a result, we are reaffirming our full year outlook for low-double-digit growth in adjusted EPS.

Turning to the segment highlights, and I'll begin at the Networks, where healthy revenue and adjusted operating income growth were evidenced at both Turner and HBO, and that's what's drove the record second quarter there. Subscription revenues grew 6% and year-over-year growth accelerated from the past couple of quarters, and that's despite a drag of about 100 basis points from FX.

Looking at advertising, revenues were up 2% year-over-year. Now there were a number of moving pieces here. And as we've discussed with you in the past, growth was hurt this quarter by the timing of NCAA games and Easter, as well as the shift of management of our digital sports properties, SI.com and Golf.com, back to Time Inc. Looking through these, domestic growth was very similar to the 6% growth that we had in the first quarter and that was despite a decline at our news operations due to lower ratings.

International advertising revenues were down high-single digits in the quarter, and growth here was hurt by the shutdown of Imagine in India, as well as unfavorable foreign exchange movements.

Let me look ahead now to advertising revenue growth expectations for the rest of this year, and I want to talk a little bit about Q3 versus Q4. As of now, we're currently not expecting to report positive growth in ad revenues in Q3, but we expect a much, much stronger Q4. And there's a number of different factors, and let me just walk through each of those.

The first thing is, please keep in mind that the internal shift of our digital sports properties and the 2 international closures at Turner, Imagine, which I just mentioned, and TNT Turkey, will weigh on ad growth overall for the next few quarters. In addition, in the third quarter, scatter demand is a little slow right now and that's due to money being diverted to the Summer Olympics. And the third quarter is also going to be affected by the timing of the Major League Baseball playoffs, as well as our NASCAR lineup. So we expect to have fewer Major League Baseball playoff games in the third quarter and, due to the schedule, there'll be more MLB playoff games in the fourth quarter. That will help Q4 versus Q3. And also, we have the ALCS this year versus the NLCS, which we had last year. And historically, the ALCS has rated higher than the NLCS.

We also expect growth to be stronger in the fourth quarter as we'll benefit from additional NBA games on TNT, the 2012 presidential election, expectations of improved overall ratings at our other networks in general, some easier comparisons and the expectation of a much stronger scatter market once the Olympics are over.

Moving over to adjusted operating income, where it was up a pretty strong 9% in the quarter at the Networks group, with margins up around 100 basis points. In addition to revenue growth, the margin expansion reflected continued expense control. Non-programming expenses were essentially flat year-over-year, and programming expenses were up just 3%, and that's despite increased investments in original programming. So overall expenses were up low-single digits in the quarter. And as we look ahead, we anticipate that overall expense growth will remain under tight control. While we'll continue to aggressively increase our investment in original programming, we expect other components of our programming spending to rise more modestly and will continue to work hard to constrain growth in all non-programming expenses.

Before I move on, let me just take a moment to discuss the recently announced shutdown of TNT's TV operations in Turkey. This was a result of the same investment discipline that we demonstrated last quarter with respect to Imagine in India. But together, they accounted for approximately $160 million in charges on an unadjusted basis this quarter or $0.14 a share net of tax. In each case, when it became clear that we were not on a path to succeed, we moved quickly to shut our operations to enable management to focus even more on our strongest properties. And we've had great success in many international territories, and we continue to expect international networks to be a key driver of our long-term growth.

Let me turn now to our Film and TV segment. We knew, coming into the second quarter, that year-over-year comparisons here would be extremely challenging. Last year's second quarter benefited from the theatrical release of The Hangover 2 and the home entertainment release of Harry Potter and the Deathly Hallows: Part 1. We also had 2 very successful video game title releases without comparable titles this year. In addition, 2 of this year's releases, Rock of Ages and Dark Shadows, performed well below our expectations.

Having said that, we had a very strong quarter in our television business. TV revenue was up more than 20% year-over-year to more than $1 billion, and operating income was up double digits. And that's the seventh time in the last 8 quarters where we had double-digit growth in TV. So that continues to be a very, very strong business for us, and this quarter's results were driven by the cable syndication sale of The Mentalist and mid-teens growth in revenue from initial telecasts on broadcast and cable. And as Jeff mentioned, our future syndication pipeline got even stronger with the sales of 2 Broke Girls and Mike & Molly. We're also seeing strong demand from SVOD services and that's evidenced by recent new agreements with Netflix and Amazon Prime. So we've now signed deals that bring in almost $250 million in revenue this year alone, and we remain in active discussions with all major SVOD services about additional content packages.

All of that helped our backlog reach a record $5.9 billion this quarter. Backlog, as a reminder, is the unrecognized cash licensing revenue for television and theatrical product that will be recognized in the future. So given that we've reached record levels, that obviously gives us great confidence about the long-term growth prospects for the TV business.

Looking ahead at Warner's to the second half of 2012, we're off to a really great start with the performance of Dark Knight Rises, and we remain optimistic about the performance of our theatrical slate, including releases such as Argo in October and The Hobbit in December. It will also benefit from the continued strong theatrical performance of Magic Mike, which recently crossed the $100 million market at the domestic box office. Just keep in mind that in the third quarter of last year, we had both the theatrical release of the final Harry Potter movie and the syndication of The Big Bang Theory. So as we mentioned to you last quarter, the profit comparisons are more difficult here at the studio in the third quarter versus the fourth. We expect a very strong fourth quarter.

Moving over to Publishing, where difficult industry conditions were joined by tough comparisons this quarter. Last year's second quarter was the only quarter of the year where revenues were actually up, and that was due in part to some strong special issues. Operating income declined over 40% in the quarter, as a 2% reduction expenses were not sufficient to offset the revenue declines. And looking ahead, the environment here remains challenging, both in advertising and at the newsstand. However, as a result of additional cost measures that have already started to be implemented, expenses should continue to decline year-over-year in both the third and fourth quarters, and the comparisons also get easier here in the second half. So we fully expect to see an improvement in adjusted operating income trends beginning in the third quarter.

Let me move on now to talk about free cash flow. Year-to-date, we generated about $520 million in free cash, which is similar to the year-ago period, as higher cash taxes and higher interest expenses were offset in part by lower working capital uses. Let me provide a little bit more context around those figures. As we've discussed with you before, our conversion levels of OIBDA, or operating income before depreciation and amortization, into free cash flow last year and this year are somewhat below historical levels. But we fully expect those conversion percentages to begin to increase next year.

And it's important to look at the key drivers. Over the last few years, our cash taxes have moved to become closer to what the book tax numbers represent, and that's because we've utilized most of our tax attributes. In addition, cash interest costs have risen, in part to fund our share repurchases. Our working capital usage has also risen in the last few years. But unlike cash taxes and interest costs, this should reverse in time. Most of the working capital usage has occurred at Warner Bros. and it's tied to the timing of theatrical production spending and syndication availabilities.

For example, in certain instances, we have been funding the entire production of less than wholly owned films such as The Hobbit and the Pacific Rim, and we recognized the initial sale of The Big Bang Theory in syndication. As those films are released, and as our syndication partners make cash payments over the life of the contract, these working capital figures will turn around and the cash will flow back to us. And as a result, we expect our working capital needs to decline in future years and our conversion should improve.

So let me look at the final slide now, which focuses on our net debt. We ended the second quarter with a little less than $17.5 billion in net debt. That's up about $1.4 billion compared to the end of last year. And that's due to our continued returns to shareholders. During the first half of the year, we returned $1.8 billion, which included around $1.3 billion in share repurchases. Year-to-date, we've also spent a little bit less than $300 million on M&A activities. This was primarily related to a transaction through which we've recently increased our stake in Central European Media Enterprises, or CME, to nearly 50%.

So to help maintain strong liquidity and balance sheet flexibility, we also recently issued $1 billion in long-term debt, and we were able to do that at very, very attractive interest rates. Our leverage ratio increased at the end of the quarter to around 2.6x, which is essentially right in line with our long-term target of 2.5x. So we remain pleased with the progress that we're making on our capital plan and our capital allocation so far this year.

And with that, now let me turn the call back over to Doug and we can begin the Q&A portion of the call. Thanks. Doug?

Douglas Shapiro

All right. Thanks, John. Donna, let's get the Q&A started. [Operator Instructions].

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Michael Nathanson from Nomura.

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

I have 2 quick ones, Doug. One is, just following up on Jeff's comments on the double-digit affiliate growth at Turner, is that on a contract-by-contract basis? Or are you seeing that's going to be the reported growth on the P&L? So just a clarity on what you meant by that.

John K. Martin

Michael, it's John. Let me take that. The comment was meant to indicate that -- well, just to take a half step back. Jeff just wanted to remind everybody that our affiliate renewal rate cycle really is about to begin in force sometime mid-next year. And so to try to clarify and provide a little bit more concreteness with respect to expectations from the beginning of the affiliate rate renewal cycle till the end of the affiliate rate renewal cycle, which is the end of '16, our expectations are to achieve double-digit domestic affiliate revenue increases, subscription revenue increases. And so just to give you a sense, if you look at the cable networks line, which is Turner and HBO, that the comments that Jeff made were specific to Turner. So double-digit at Turner. HBO, continue to have expectations of rate going up mid-single digits. As Jeff said, hopefully, we're going to get some unit increases there as well. And then -- and just to give you a sense, at Turner, domestic affiliate revenues are about 80% of the total, so 20% of that is international. So hopefully, that provides a little more clarity.

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

Okay, cool. And then the other is a follow-up question, I'll be quick, is just you gave us the $250 million of SVOD money this year. Any sense of where that was last year? So what's the year-over-year change for you guys' SVOD money versus the $250 million this year?

Jeffrey L. Bewkes

I don't know.

John K. Martin

Yes, I don't -- so the $250 million of this year is essentially a full year figure of those deals that we've already got inked. So we'd be hopeful that, that number is actually even going up from those levels, but just wanted to at least give you a sense of where we were to date. We booked year-to-date this year approximately $100 million of that, and last year's full year figure for SVOD was less than $250 million, somewhere around $225 million. Those are the consolidated revenue figures for SVOD. Those do not include the revenues recorded by the CW. We expect revenues recorded by the CW to be somewhere around $80 million, $85 million this year. So just as a reminder, we own 50% of that.

Operator

Our next question comes from Spencer Wang from Credit Suisse.

Spencer Wang - Crédit Suisse AG, Research Division

A 2-part question on cable networks, one for Jeff and one for John. First, for Jeff, you mentioned that the ratings softness at CNN and news, I know there was some management changes that have been going on there. Can you just talk a little bit about what the strategy is to reinvigorate ratings at CNN? And secondly, for John, in terms of the ad growth in the fourth quarter from an acceleration standpoint, if you had high-single-digit CPM increases in the upfront, plus the benefit from the NBA coming back, is it possible that ad growth is double digits in the fourth quarter?

Jeffrey L. Bewkes

Spencer, I'll start with CNN. I think, as we all know, it's a great brand. It's got the biggest reach in the news category, and it's very strong overseas. The biggest reach is domestic. And very strong in online. Having said that, obviously, we're not satisfied with the ratings. They do fluctuate with the news cycle, but we're going to do a better job putting on programming that will hold viewers. We've got more people coming. They're not staying as long as we would like. And so we think there's very strong demand. If you ask where we're aiming, how do we plan to do that: strong demand for objective, comprehensive, nonpartisan coverage, really covering all the partisan views as well. But we need to do it in a very compelling, more engaging way than we've been doing of late. And so that's really what we're going to focus on next.

John K. Martin

Spence, it's John. So let me talk about fourth quarter. I think I would say it's too early to tell right now. And let me just give you a few of the things. I mean, I went through them in my proactive remarks. We clearly expect to benefit from the strong upfront results that we had. We're going to benefit from some of the sports timing shifts. We expect to have improved ratings overall, and we have some easier comparisons. And all of that should really drive much, much better advertising revenue growth. Some things to just bear in mind from a reported standpoint though is just, obviously, we're in a situation now where FX translation is a headwind for us. It was a couple hundred basis points of -- well is was actually, for international, it was about 500 basis points of negative growth there in the quarter. And again, that can be fairly volatile and move around, so we don't know exactly where that's going to shake out. And we also have the -- because of the shutdown in Turkey and Imagine, that was -- in terms of advertising revenue, that was about $30 million in the second half of last year that we're going have to comp against. So that's -- again, that's -- we don't have the ad revenues, but we're going to have improved profitability by virtue of not having those networks operating. So yes, I think it's a little too early to predict with a certainty level of specificity, but we feel much better about the advertising trends going into the fourth quarter and, frankly, as we progress into 2013.

Operator

Our next question comes from Michael Morris from Davenport.

Michael C. Morris - Davenport & Company, LLC, Research Division

I just wanted to follow up maybe a little more detail, first of all, on the double-digit outlook for your affiliate growth from 2014 and beyond. Can you maybe split for us a little bit? You have historically talked about the profitability of the NCAA contract and so I'm assuming, and we've analyzed this, that most of those affiliate fee increases will come at TBS, TNT and tru, and that those could be in the mid- to high-teens range. Can you help -- number one, is that where those affiliate increases are primarily coming through? And second of all, how does news factor in? I mean, there is some concern, given the ratings, that maybe you're in a weaker position there as you go into those negotiations. How do you view the potential for news affiliate fee increases?

Jeffrey L. Bewkes

I'll start, Mike. The affiliate subscriber revenue increases will come across all the networks. I think that the premise of what you were just saying about news isn't right. I think there's tremendous upside on the news side. We think, because of the strength of all of our networks and the fact that we are the company that has more networks in the top 10, the top 40 than any other network company, we don't really have any weak networks. But that supports the ability of the networks to increase subscriber revenues the way that we've said. On your specific point on the NCAA, which is carried on the 3 networks, TBS, TNT and tru, yes, there's -- that will support pretty strong revenue increases on those, and I think the -- what you were putting -- I don't want to really be too specific about it, but the increase you were talking about is too low.

Operator

Our next question comes from Ben Swinburne from Morgan Stanley.

Benjamin Swinburne - Morgan Stanley, Research Division

Just sticking on the Networks business. John, could you help us just size up HBO versus Turner? And you mentioned international and domestic, but it seems like if the businesses are relatively similar in size on a subscription front, if you get double digits on Turner, you're going to be pretty close to double digits overall since international, I think, is a pretty nice growth story for you guys as well. Maybe you're very high single sort of '14, '15 and '16. I just wanted to see if you could give us a little more help on the base on that front.

John K. Martin

I'm going to apologize in advance. I think I've given you guys enough help and you can size the specific pieces of the business. And just to repeat, I mean, we clearly expect affiliate fee growth domestically to be faster at Turner over time than HBO. But HBO, we would expect -- because of the characteristics that Jeff described a little bit earlier, we would be hopeful and we would anticipate somewhat of an acceleration of subscription revenue growth there as well once we start seeing the full impact of the improvements that we've made to the service and we start getting some domestic uplift.

Jeffrey L. Bewkes

In terms of volume, domestically and international on top of the rate increase.

John K. Martin

Yes. Remember, HBO's international operations, which in aggregate represent about the same percentage as Turner's, it's about 20% of the revenues. But it's a little bit different in the sense that a portion of HBO's less than wholly owned JVs are in their consolidated figures, while a portion of them are accounted for below operating income, but are in pretax income. Suffice to say, that the HBO international operations have been growing much more quickly than the domestic operations, and we would anticipate that to continue as well.

Operator

Our next question comes from Doug Mitchelson from Deutsche Bank.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

A few questions as well. The first, sort of a clarification on the clarification. So I just want to make sure on the language. Between 2013 and 2016, really means 2014, '15, '16 we'd see double digit. And as part of that, what percentage of distribution do you already have sort of under your belt that gives you that kind of visibility on price? That's sort of the first area of questions.

John K. Martin

Just from a -- I'll just take the mechanics of it. The answer is yes to your question. Our -- since the renewal cycle doesn't begin until next year, our rates for next year are essentially locked from a pricing standpoint. So it would mean '14, '15 and '16. And we're not going to go into any detail as to percentage of who we've done deals with and so on and so forth. We have an NDA surrounding all of those agreements.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

And then second question, on international, given the shutdown of Turkey and previously India, has your outlook for international profitability at Turner changed at all? And if you could remind us where 2011 came out for international EBIT and where you had said that would go over time, that would be helpful.

Jeffrey L. Bewkes

You want to get that?

John K. Martin

Yes, the numbers -- our outlook really hasn't changed all that much for a few reasons. The first is, we had anticipated, coming into this year, a pretty dramatic improvement in the results in each of India and Turkey. And part of the reason why we made the decision that we did is, it was pretty clear early on this year that we weren't going to be anywhere close to what we thought we could achieve. The other thing which is weighing down, again, the reported figures is FX, where we've definitely got a more negative situation in terms of currency translation as compared to what we had thought coming into the year. In terms of international operations in general, let me broaden it out and just repeat what we've said in the past because we still think we're very much on track. Two years ago, we had EBIT, or operating income, of about $500 million internationally in total in our networks. Last year, that grew to $650 million. And we would anticipate that growing to about $1 billion by the end of '14, and we still feel like we're very much on track.

Operator

Our next question comes from Richard Greenfield from BTIG.

Richard Greenfield - BTIG, LLC, Research Division

A couple of questions. First, Turner was -- has long been seen as kind of a visionary in getting out early in the cable network industry as it was kicking off. And I was curious, as you start to see YouTube evolving as a platform, how do you think about staking out territory there? And how do you want to be positioned vis-à-vis YouTube? And then two, on Google Fiber, you're not currently participating. Could you just discuss why you're not currently part of the channel package that they're offering? It would just seem to me that the array of virtual or over-the-top MVP -- D players that are coming to the market would improve your leverage with kind of the Comcasts and FiOSs of the world. Why wouldn't you want to have more distributors over the course of the next 12 or 18 months?

Jeffrey L. Bewkes

Okay. Thanks, Rich. Let's start with YouTube. I think that's a good premise you have. We're paying very close attention to all the alternative platforms, including YouTube. And we've worked closely with YouTube, mostly as a promotional vehicle. If you look at most of our networks, you're going to find a branded environment for our networks on YouTube. And as YouTube shifts to offer more professionally produced content, we'll look to use that to support our existing networks, possibly to launch some new businesses. But remember, our existing content, mostly exclusive content on Turner and HBO, is available to all subscribers and viewers on demand on broadband already. So we think it's great, the extent to which those can have a presence on YouTube to drive viewership on our networks, but that's basically how we look at it at this point. And we're going to watch it closely. And we're in pretty close communication with YouTube to try to understand how we can work together. On Google's facilities-based service, we're in pretty good discussions with them and are optimistic we'll be able to reach a deal. We're very supportive of companies like, in this case, Google, who is investing to make the infrastructure more robust. And I think the one thing I would say about your question, which we all ought to clarify, it's really important to distinguish infrastructure, consumer distribution, more competition, better quality, more choice for consumers, which Google Fiber does. That is not over-the-top, that's not virtual MSOs. That -- those things don't provide quality, they don't provide infrastructure, they don't improve the consumer experience. So we applaud Google for doing that. We're going to continue to see which ways we can work with them. And I think that you ought to be optimistic that we're going to see -- probably, we're going to be able to help them and they'll be able to help us.

Operator

Our next question comes from Jessica Reif Cohen from Bank of America Merrill Lynch.

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

I have 2 topics. One, if you -- on the -- can you talk what the underlying Publishing advertising was if you pull out the addition of SI.com and Golf.com? And on Publishing in general, I know you've been asked over the years why keep it. And can you just give us your current thoughts on that? And then the second topic is, the buyback slowed down a bit. Is this the pace that we should expect in the second half?

Jeffrey L. Bewkes

Okay. I'll start with Publishing. Publishing is a strong content business. While the industry is having certainly headwinds in advertising and a little bit of softness during this recession now in readership, it's not been, on the readership side, anything like what's happened in newspapers and things like that. And so as you look at our Publishing titles, which, in most cases, are gaining shares, and as you look at those titles, think of People, In Style, Real Simple, Sports Illustrated, becoming very vibrant on tablets with much more depth of articles and pictures, moving pictures which means video, it's way too reductive to just think that "Publishing has a constrained future." So we think it can grow again, and we think that our publishing company can lead both the evolution and the share gains. When you get to specific advertising questions, I'm going to turn it over to John.

John K. Martin

Yes, sure. Thanks for the question, Jessica. So let me be a little bit more clear. Second quarter reported ad revenue declined at Time Inc. 7%. The impact of the transfer of SI.com, Golf.com, was about 200 basis points of improvement to Time Inc.'s reported ad growth. So it otherwise would've been down 9%. And that was largely driven by around 8% domestic magazine advertising declines which were pretty broad based. International declined about 4%, and digital was essentially flat for the quarter. So looking into the third quarter, we're seeing fairly consistent advertising trends, maybe a little bit of improved results, digital so far. And we're hoping to get some better results from our non-magazine properties, which were also down in Q2.

Jeffrey L. Bewkes

On cap -- you had a capital question?

John K. Martin

Yes, on the buyback, we -- year-to-date, our pace through the first half of the year is probably a good indication of what we're likely to do for the rest of this year, because we're really being governed now largely by a combination of earnings growth, free cash flow generation, all within the construct of our balance sheet management and we're right sitting on top of our long-term target ratio of net debt to EBITDA of about 2.5x.

Operator

Our next question comes from Alexia Quadrani from JPMorgan.

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

Just 2 questions. One, you mentioned the scatter slowing a bit in the third quarter. I guess, can you give us any color about how significant that slowdown is? And is it consistent with what you've seen in the past Olympics? And then just a second question, sort of clarifying your comments on the international outlook or the headwind. I think, in the second quarter, you said that Imagine generated about $30 million ad revenues a year. Is Turkey notable as well? Or is that included in the $30 million revenue?

John K. Martin

The question on third quarter scatter and the impact of the Olympics, it's really hard, if not impossible, to exactly tell what the impact of the Olympics is. Although based on us being in the market, we will tell you that we have every reason to believe that it's been quite material in the third quarter. And we would anticipate that those dollars would be redirected in the fourth quarter. And right now, our view, which is optimistic but we think realistic, is that fourth quarter scatter could be quite strong. And then on your second question, on international, could you just repeat it quickly because I just want to make sure that I don't quote a wrong number.

Douglas Shapiro

Well I think she was asking -- she said that the Imagine impact was $30 million. How big is the Turkey impact?

John K. Martin

Oh, okay. So look -- I mean, in Q3, the combined impact for advertising is roughly $10 million, $11 million. Q4 is almost $20 million. Like I said, it's about -- full year is $60 million all-in, and that's just ad revenue.

Douglas Shapiro

Look, it's 100 to 200 basis points a quarter, is the way to think about it.

John K. Martin

Yes, yes.

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

For both assets?

John K. Martin

Correct, yes.

Douglas Shapiro

Yes.

Operator

Our next question comes from Marci Ryvicker from Wells Fargo Securities.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Two questions. First, it feels like you don't get much credit from investors for your TV studio performance, given that it's combined with film. I know you break it out in your comments, but any thoughts about separating these into 2 distinct financial divisions so as to maybe unlock some of this value, at least in the eyes of investors? And then the second question is on Netflix. They did make some interesting comments about potentially partnering with HBO. I wouldn't expect this to be a near-term thing, but would this be a consideration at all in the future?

Jeffrey L. Bewkes

Okay, TV production, you're right to say that the TV production business is a very attractive and strong business for Time Warner and Warner Bros. We don't, at this point, think that it really makes sense to separate it and fragment reporting further than we already do. We have said we've made the TV production earnings and so forth very clear for years now. And it's a key part of why we're so consistent at Warner, why our cash flow performance is so good in relation to earnings and why we have such visibility in the studio business having strong earnings predictability going forward. And we do encourage, which I think is in your question, for everybody to always focus and think hard about the TV business when they -- and add to that the scale and the tent-pole strategy in our film business, which also allows us to be more stable, really to have consistently superior performance on earnings and cash flow than the other studios with whom we compete. On the Netflix side, look, we -- the press, particularly, goes running, gets very amplifying on anything we've said about Netflix. We've tried to be very constructive and stable over the last 3 years, saying that we thought there was a good role for subscription video-on-demand. We've always said, because this company invented subscription video-on-demand, it's called HBO, and HBO was the first one to go on-demand, both on televisions and now, it's widely available on broadband, HBO. And it's doing really well. And I think Reed Hastings has been very complimentary at certain times about how -- the high regard they have for HBO. And I think we've been complimentary of them in terms of the great work they've done in both the strength of the interface that they've created and the fact that we've proved that people love on-demand programming. That's been the point we've been trying to make to everyone, not just about HBO GO, but about TNT go, CNN on-demand and so forth. And so given the -- all of that, there are not talks going on now between HBO and Netflix because they certainly -- just like all subscription VOD services, HBO, Showtime, Netflix, Amazon Prime, they all compete. And that's probably the primary way that they have a relationship is as competitors. But as you know, in the television and media business, sometimes there are ways for other relationships to emerge over time. Not now, but we'll see in the future.

Operator

Our next question comes from Jason Bazinet from Citi Investment.

Jason B. Bazinet - Citigroup Inc, Research Division

Yes, I just had a question on HBO GO. Wondering if you could just sort of help us think about how to potentially size the upside to the subscribers if this works? Is it reasonable to assume, over the course of history, that sort of HBO subs have been flat to nominally growing and churn has sort of run in that 4% to 5% range per month? Is that sort of a reasonable proxy?

Jeffrey L. Bewkes

Yes, that has been the general state of subscription services. If you're asking what's the upside from this, which I think you're right to ask about, we're very pleased with the user data and the satisfaction levels because, if the subscribers really value something, we've seen this with multiplex and video-on-demand, now HBO GO on broadband, what will happen is the subscription levels will go up because either churn will moderate, you'll get more people using it because it's more useful for them, they can be more engaged with the programming. Let me give you a few examples of that. Registered accounts for HBO GO are up 50% since the end of 2011. Monthly plays have increased over 150%, and average monthly usage of the service and HBO programming is increasing. It's really a function of the device rollout, particularly the Xbox 360, which just came on, but we think all devices will be hooked up to it in a way that's easier for people to use. So while it's a little early to discern the impact, all those things are positive. They lead to more engagement and utility for a viewer, therefore, they keep the service. And that's not just in the United States. We've now got that rolling out in all the HBO overseas territories. And I think, as we have noted, we also have -- we're selling HBO programming, and it does really well, in 200 countries where there is no HBO service. So the opportunities for HBO there to sell either maybe an unauthenticated broadband-delivered VOD service remain as upside.

Operator

Our next question comes from Anthony DiClemente from Barclays.

Anthony J. DiClemente - Barclays Capital, Research Division

I just wanted to follow up on that last comment. Jeff, I'm wondering if there's any catalyst for an unauthenticated distribution of HBO GO here in the United States? I guess, in the quarter, these online fan campaigns have begun to pop up, HBO fans asking for HBO GO as a stand-alone service. It sounds like this is -- HBO GO is, in some ways, a victim of its own success. And that's why your customers, according to these campaigns, really want HBO GO stand-alone. They say they'd be willing to pay a lot for it as a stand-alone service. I'm just wondering if you can give us an update on how Bill Nelson and his team are thinking about that?

Jeffrey L. Bewkes

Yes. Well, we, as you of course imagine, we know all of that. And we have the ability to do it. And we will do that if we thought it was in our economic best interest. But right now, we don't think that it is. We have a very good relationship with our distributors. They're in the midst of making HBO GO available in an easy, seamless, high-quality way, which everybody forgets. The broadband infrastructure would have a little difficulty doing that in a consistent way that brings the quality that HBO requires. So right now, the other thing -- I think the mistake everybody makes when they think about that is that there aren't that many homes with broadband and no multichannel TV. So the issue really is, it's not that people want to knock out multichannel TV and have HBO. Most -- it's a question that -- most people have multichannel TV, and there's tens of millions of homes with multichannel TV and they will keep multichannel TV and they aren't currently subscribing to HBO. That's the opportunity. And that gets into a question of -- all those people are hooked up to our distributors, and it's a question of how to have that distribution plans market HBO in a more attractive way. So it's easier for people to hook up and they don't have to, for example, buy things that perhaps they don't want to buy. But the whole idea that there's a lot of people out there that want to drop multichannel TV and just have a Netflix or an HBO, that's not right. Look for the data, you won't find them.

John K. Martin

Anthony, do you have a follow-up? We lost you.

Operator

Our last question comes from John Janedis from UBS.

John Janedis - UBS Investment Bank, Research Division

Jeff, you mentioned the Cartoon Network and Nick in your prepared remarks. Can you talk about what you saw in the kids upfront? And have you made any changes at Cartoon in an effort to drive share this year?

Jeffrey L. Bewkes

Yes, we had solid prices in the kids upfront. We're able to take advantage of our ratings growth. News pricing was continuing to trend up in contrast, but the volume was much lighter. So we think that the success of Cartoon lately, and let's not forget the tremendous success of Adult Swim, which is on the channel at night that Cartoon occupies, is a really strong driver for us of advertising. And as -- to get back to the affiliate revenue side, we basically have tremendous upside in the subscriber revenue side of Cartoon Network and Adult Swim.

Douglas Shapiro

Okay, and with that, I think we'll cut it off. And thanks, everybody, for listening in.

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