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Time Warner (NYSE:TWX)

Q3 2012 Earnings Call

November 07, 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

Benjamin Swinburne - Morgan Stanley, Research Division

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

John Janedis - UBS Investment Bank, Research Division

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

Tuna N. Amobi - S&P Equity Research

David Bank - RBC Capital Markets, LLC, Research Division

Richard Greenfield - BTIG, LLC, Research Division

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Vasily Karasyov - Susquehanna Financial Group, LLLP, Research Division

Operator

Welcome to the Time Warner Inc. Third Quarter 2012 Earnings Conference Call. My name is Dawn, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now 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, everyone. This morning, we issued 2 press releases, one detailing our results for the third 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 financial 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 site.

And second, today's announcement include 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 report 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.

Thanks. And with that, let me turn it over to Jeff.

Jeffrey L. Bewkes

Thanks, Doug, and thanks for listening in this morning. Overall, this was another successful quarter for us. As you all know, we face difficult comparisons at Warner Bros. this quarter. But in light of that, I was pleased with our performance. With one quarter left to go, we're on track for another very strong year. To me, the headline this quarter was the continued financial and operational strength at our Networks businesses. Our investments in content and technology over the last few years are clearly paying off, and we expect they'll keep paying off in 2013 and beyond.

John will walk through the financial results in a few minutes, but before that, I'll share with you some of the key operational highlights from the quarter. I'd like to start with Turner, where we're continuing to see good momentum across most of our Networks. This year, TBS is the #1 network on cable for adults 18 to 34, and it's the #2 network for adults 18 to 49. We posted another great quarter, up 35% in prime time in that demo.

The Big Bang Theory was again the #1 syndicated comedy on cable this quarter, and that's creating a great platform to launch new shows like Sullivan & Son and Men at Work, and it's lifting the rest of the schedule. Our Tyler Perry-produced comedies were up double digits this quarter, and Conan is the #1 hour-long talk show in late-night among young adults this year.

We intend to capitalize on our position in coming months as we launch several new originals. We're particularly excited about Cougar Town, which debuts in January. Last month, we announced a new contract with Major League Baseball that provides us TV and expanded digital rights through 2021. Baseball is a marquee property with a long history on TBS. And the post-season games we air are marquee programming for baseball fans and must-have programming for our affiliates.

Along with our NBA and NCAA rights, keeping baseball on TBS into the next decade helps position us very well for our upcoming affiliate renewal cycle. We also saw a continued improvement at TNT this quarter, highlighted by our originals. New shows like Major Crimes, Perception and Dallas were among the top 5 new series on cable this quarter, while The Closer, Rizzoli & Isles and Major Crimes were the top 3 series on all of cable.

Typically, we don't program original series against the launch of the broadcast season in September and October. However, we're excited about the line up over the next few months, which should provide a nice boost to TNT's ratings.

We're thrilled to have the NBA back on TNT after the delayed start that occurred for the season last year. And later this month, we'll also bring back originals like Rizzoli & Isles and Leverage. We'll build on this momentum heading into the first quarter, where we'll have more originals on TNT than ever before, double the number of episodes that we had during the first quarter of 2012.

We're also seeing continued strong performance for most of our other Networks. truTV just completed its best third quarter ever, and Adult Swim once again finished the quarter as the #1 network among young adults on all of cable.

One area of challenge remains CNN. Its ratings have improved in recent months due to its distinguished election coverage. And with unmatched global newsgathering capabilities, CNN continues to be the preferred destination for breaking news. That was evident just last week when CNN more than doubled its audience during its coverage of the hurricane while its competitors were only up modestly or they declined. But CNN can do a better job of attracting and retaining audience when news isn't breaking. As you know, we're actively searching for a new leader there, and I expect we'll be able to announce that hire by the end of the year.

Now I'd shift to our other network business, HBO, which continues to perform at the top of its game. Our big tentpole shows are generating great numbers. Game of Thrones surged to almost 12 million viewers per episode in the second season. True Blood just finished its fifth season, also with 12 million viewers an episode. Boardwalk Empire is pulling in 8 million per episode so far this season, and The Newsroom ended its first season with over 7 million average viewers.

Underscoring the volume of top-quality shows on the network, HBO won 23 Emmy Awards this year. That's more than any other network for the 11th year in a row. In August, we extended our studio output deal with Fox under what we consider very attractive terms for both of us. That helps guarantee HBO's exclusive access to a critical mass of the best Hollywood movies well into the next decade, thanks in large part to the strength of our programming, the consumer appeal of HBO and MAX GO and greater support from many of our affiliates. Right now, we're seeing the best domestic subscriber trends at HBO that we've seen in years.

We're posting even faster growth internationally with HBO subs up about 30% so far this year, and we're rolling out new Networks as well. Earlier this year, we launched HBO Netherlands, which is off to a solid start. Later this year, we will launch HBO Nordic, which includes a linear service and our first direct-to-consumer over-the-top HBO offering. And soon, HBO will debut the first premium network in India.

All the progress we're seeing in our Networks businesses is really the fruit of investments that we've been making for the last few years, investments in content, in technology and investments in our international Networks. And as a result, we've been able to accomplish a lot this year while also closely managing our expense growth. In fact, so far this year, overall operating expenses at our Networks are up only 2%. I'm not saying we're going to be able to hold expense growth that low every year, but this year's performance reinforces our confidence that we'll be able to drive margins higher over time.

I'll shift to Warner Bros. starting with our TV studio. WBTV is off to a terrific start this broadcast season. Our returning comedies continue to dominate with The Big Bang Theory, Two and a Half Men, Two Broke Girls and Mike & Molly, making up 4 of the top 5 comedies on TV. Among our new shows, Revolution is a breakout hit, it's the #1 new show on TV 18 to 49, and Arrow posted the best debut of any show on The CW in 3 years.

As we've talked about with you before, Warner Bros. TV benefits from a powerful virtuous circle. Being the leading independent supplier to all the broadcast Networks makes us the preferred home to the top writers and producers on TV which, in turn, makes us indispensable to those Networks.

Consider this season. WBTV produces the #1 show on television in 18 to 49 on Monday, Tuesday and Thursday nights. In fact, we produce the #1, the #2 and the #3 shows on television on Monday nights. And while many have taken note of NBC's strong performance so far this season, the untold story is that the top 2 non-sports shows on NBC, The Voice and Revolution, are Warner productions.

On our theatrical business, the key highlight this quarter was the fantastic performance of The Dark Knight Rises, which pulled in over $1 billion at the global box office, surpassing The Dark Knight. We're off to a great start in the fourth quarter with Argo. Based on its critical acclaim, A+ cinema score and excellent word-of-mouth, we expect it to have a long run in the theaters. And of course, we have high expectations for The Hobbit, which will premiere next month.

And last, I'll touch on Publishing. Time Inc. is clearly operating on a challenging environment, but we're staying focused on extending our industry leading share, tightly managing our cost base, and of course, maintaining the outstanding quality of our editorial. At the same time, we're positioning the business to grow as it continues to transition to digital. We are leveraging Time Inc.'s core strengths, unmatched scale, a wealth of consumer data and world-class brands to develop new consumer products and new solutions for advertisers.

So all in all, it was another really productive quarter for us and another indication that the plan we put in place 5 years ago is working. Over that time, we've successfully focused on our content businesses, improved our operating efficiency, reallocated those dollars into content, technology and international investments, and we've actively managed our balance sheet in a way that's improved shareholder returns. We'll never be satisfied or complacent about this progress, but I'm very pleased with the progress we have made and very confident about how we were positioned.

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

John K. Martin

Thanks, Jeff, and good morning. During my remarks, I will refer to a presentation that is now available on our website. And the first slide shows the highlights for the quarter. As Jeff mentioned, we knew coming into the year that we'd have very difficult comparisons in the third quarter. And that's because last year, our Film and TV Entertainment segment posted its highest quarterly profits in its history. So in light of that, we're pleased with our results this quarter, and we feel really great about how we're positioned going into both the fourth quarter, as well as into 2013.

We continue to see healthy underlying trends across most of our businesses, and we had a really, really stand-out quarter at the Networks group, which grew adjusted operating income 12% to post its highest profits ever. We were also able to keep consolidated margins for the quarter steady year-over-year at 23%. In fact, margins were actually up about 40 basis points, and that's despite a decline in revenues. That was a result of a $200 million year-over-year decline in expenses this quarter, which is evidence of our continued focus on improving our operating efficiency.

Also keep in mind that FX was a drag on revenue of nearly 200 basis points and on adjusted operating income of nearly 350 basis points. So the negative impact of FX took us from otherwise being up in the quarter to being down in the quarter from an adjusted operating income perspective.

Continuing to move down the P&L, adjusted EPS was up 9% year-over-year, and that's despite the modest decline in adjusted operating income. And that was primarily due to the benefit from our ongoing share repurchase program, as well as a lower effective tax rate. Since we last reported, we've repurchased almost $870 million of our shares, and we paid over $250 million in dividends. So year-to-date, we've deployed about $3.1 billion in dividends and share repurchases, underscoring our commitment to provide ongoing returns to shareholders.

So we're on track to meet our financial objectives for the year, and this morning, we've reaffirmed our full year outlook for low double-digit growth in adjusted EPS. And given our year-to-date performance, that implies that we're going to end the year on a strong note. And in fact, we expect the fourth quarter to be, by far, our strongest of the year in terms of growth in both adjusted operating income and adjusted net income.

Now let me turn to the segment highlights, and I'm going to begin with the Networks group where we had significant margin expansion year-over-year, which drove double-digit adjusted operating income growth at both HBO and Turner and record profits for the group in the quarter.

Subscription revenues were up 7%, and that's despite a drag of about 100 basis points from currency. The increase reflects both higher pricing domestically and international growth, trends that we anticipate will continue moving forward. And as Jeff mentioned, we're also benefiting from domestic subscriber growth at HBO, so we feel good about the trajectory of subscription revenue, and that's before we see the expected benefit from our upcoming domestic renewal cycle at Turner, which will begin to kick in 2014.

Moving over to Advertising. In total for the quarter, it was about flat. Domestic ad revenue was up modestly year-over-year, and domestic growth was hurt by the timing of the Major League Baseball playoffs and our NASCAR line-up, as well as changes to Turner's digital portfolio. Looking through these, domestic growth was in the mid-single digits up year-over-year.

International Advertising revenues were down mid-teens in the quarter, but that was impacted by the previous quarter's shutdowns of Imagine and TNT in Turkey. And if it weren't for those shutdowns, as well as FX movements, Advertising revenue internationally would have been down low-single digits. And that's really primarily due to the ongoing economic challenges in Europe.

Looking ahead to the fourth quarter, domestic scatter appears steady with pricing up in the mid-single digits over the strong upfront. Given the improved programming line-up including the NBA, we expect that will translate into mid to high single-digit growth in domestic Advertising. Outside the U.S., we expect to experience a continued impact of the international shutdowns I just mentioned, as well as negative foreign currency movements. So we anticipate that international Advertising will likely be down again in the fourth quarter.

Moving on, adjusted operating income, as I mentioned earlier, was up a very, very strong 12% in the quarter, and margins were up nearly 250 basis points, reflecting continued strong cost controls, as well as timing of programming and marketing spending. Overall, expenses were flat in the quarter, and they're up only 2% on a year-to-date basis at the Networks segment. And that's despite increased investments in original programming, and as Jeff mentioned, that underscores our confidence in our ability to both aggressively invest in programming, as well as expand margins over time.

Taking that all into account, our Networks businesses remain well on track to grow adjusted operating income faster this year than we were able to do in 2011.

Turning now to film and TV where, as I mentioned, we had very tough comparisons. Last year's third quarter was Warner's highest profit quarter ever. And it benefited from the theatrical release of the final Harry Potter movie, as well as the syndication of The Big Bang Theory and Friends. These comparisons masked a couple of very bright spots for us in the quarter.

The Dark Knight Rises was an absolute blockbuster. It generated in excess of $1 billion at the global box office, and in addition, this quarter, we recognized over $100 million in SVOD revenue, primarily from deals with Netflix and Amazon Prime. And that means that on a year-to-date basis, signed SVOD deals have now risen to be more than $250 million of revenue this year.

Despite the decline at our TV businesses this quarter due to the tough comparisons that I mentioned previously, we feel very, very good about the underlying trends here, and we're seeing some very promising performances from several of our new and returning shows. As a further reflection of the health of the business, our backlog reached a record $6 billion this quarter. So to provide some context here, that's up over 50% over the past 5 years. And backlog, as a reminder, is cash licensing revenue for television and theatrical product that will be recognized at some point in the future.

Looking to the fourth quarter, we're off to a terrific start with the performance of Argo, and we're very optimistic about the theatrical release of The Hobbit next month, and we're also excited about the home video release of The Dark Knight Rises and 2 LEGO-branded video games. So we expect Warner is to have a very strong fourth quarter.

And in thinking about the full year, we continue to expect to be down only modestly at Warner's versus the prior year despite comping against a record year, as I mentioned before, that included a Harry Potter movie, 2 Harry Potter home videos and the syndication of Big Bang. So we expect this year will end up being the second-highest year in profits in the history of Warner Bros. So another very strong year.

Let me move over to Publishing where we continue to see very tough environment. Advertising revenues declined 5% in the quarter, and that reflected declines both domestically, as well as internationally. Subscription revenues fell as we continue to see softness in newsstand sales. And despite the lower revenues, adjusted operating income actually came in a little higher in the quarter, up 2%, and that was a function of both aggressive cost controls, as well as expense savings resulting from the sale of QSP earlier this year.

Looking ahead, expenses should continue to decline year-over-year in the fourth quarter as we remain focused on tightly managing costs at this division, but the revenue environment remains challenged. And the absence of QSP will be a drag given the seasonality of what that business was. So unlike this quarter in the third quarter, we anticipate the fourth quarter -- we don't think that expected cost savings will be sufficient to offset revenue declines at the Publishing unit.

Let me continue to move forward to the next slide, which highlights free cash flow. We had very, very strong quarter of free cash flow generation. We've generated now about $2 billion of free cash flow on a year-to-date basis with a vast majority of that coming in the third quarter, and that's up from a year ago due in large part to lower working capital requirements. And that growth came despite an increase in cash taxes this year. So the decline in working capital is largely a result of the timing of event film reduction, as well as higher reimbursements for co-financed productions. So with our performance through the third quarter, we're on track for another very strong year in terms of free cash flow generation in 2012.

Let me continue now to the next slide, which is the net debt reconciliation. It's our last slide. We ended the third quarter with about $16.7 billion in net debt, and a leverage ratio of 2.5x, which is right in line with our target. As I mentioned earlier, we've deployed about $3.1 billion in dividends and buybacks this year, and that includes $2.3 billion in share repurchases.

It also may be worth mentioning that the other line on this schedule consists primarily of stock option proceeds, and that's tied to the strong performance of our stock this year. Year-to-date, we've also spent about $575 million on M&A activity. And in the third quarter, this activity related primarily to our acquisition of Bleacher Report, which is a leading sports digital property and Alloy Entertainment, which is a leading source of IP for TV and web series. These acquisitions are consistent with our track record of tuck-in acquisitions that support our faster growth and our higher return businesses. So with only one quarter left to go in the year, we're quite pleased with the progress that we're continuing to make on our capital plan.

And with that, I'll turn the call back to Doug, and we'll start the Q&A portion. Thank you.

Douglas Shapiro

All right. Thanks, John. So, Dawn, we'd like to get the Q&A started. [Operator Instructions] Thanks.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ben Swinburne from Morgan Stanley.

Benjamin Swinburne - Morgan Stanley, Research Division

Two questions, Jeff. On HBO, you mentioned you're having some of the best subscriber result in a long time. I'm wondering if you could talk about the revenue outlook for that business at least qualitatively as well. And in that context, how you're thinking about a dollar of investment on originals versus movie output? You mentioned the Fox deal. It certainly seems like original programming is really driving that business now. So I'm wondering how you think about maybe rebalancing that over time? And John, just quickly on The Hobbit. It's a unique relationship with MGM. Anything we should be considering on working cap or P&A as this is a late quarter release. Just any comment that we might need to help us would be great otherwise.

Jeffrey L. Bewkes

Thank you. HBO will see revenue on the programming. The revenue growth has been very steady as you know, and the fact that the subscriber grows domestically, picking back up, and internationally increasing nicely and pretty significant increase in international sub revenue is really helpful for us in terms not just earnings and growth of earnings, but also investment in programming for then further strength of the Subscription service and then further revenues for both electronic sale and international sale of the program. So we're continuously investing. As we said in the prepared remarks, we've got a bigger slate of originals with more success, more hits and more audience for the originals than we've ever had before. We've got really strong growth in demand for our originals from our growing overseas HBO network. And in other countries from other Networks that really like the quality of HBO programming travels very well. So it's a very strong model in terms of revenue growth and in terms of investment in programming. What we're going to do in terms of balancing original versus other kinds of programming is something we're thinking about. There is a pretty strong utility for movies in the right mix or HBO being so many Networks that are 24 hours a day. Having said that, we've got more flexibility in how we judge the balance of movie programming on HBO and Cinemax and original programming than we had before, and so we, basically, are very happy with the trends at HBO, both on the revenue side, on the strength of the brand and on the programming side. And I would just finish by saying we ought to think about HBO GO, Cinemax GO, which are not only here in the United States and increasingly being seen by subscribers of things that are easy to use and they're getting used to using them, but they've now launched the on-demand product over most of the HBO network footprint around the world. So things are just going extremely well in our HBO business.

John K. Martin

So, Ben, let me address your question on The Hobbit, and then I'll come back and maybe make a comment or 2 about overall Warner Bros. fourth quarter expectations where we do expect a very, very strong quarter from Warner's in Q4. So if you look at The Hobbit, let's talk cash versus P&L. On the cash, I think we've mentioned this before, we've been essentially financing the entire production cost of all 3 of the movies, and we have an arrangement whereby we'll recoup the portion of the financing that isn't attributable to us over time, and we'll do that including -- with a financing element in there with the cost of money element in there, too. And we have the distribution rights for The Hobbit. So from a cash standpoint, a lot of the cash has already been spent, which is one of the reasons why we've had some working capital spikes from a usage standpoint. We've said that, that will turn around over time, and it's one of the reasons why we're not worried about increasing capital intensity in the businesses, particularly at studio. If you think about the P&L, when you have these late-in-the-year releases, you are bearing a significant portion of the P&A associated with those. And a lot of the benefits from the release and the movies will come in over time. So a lot of the benefits from the first Hobbit release will be -- will actually be realized in 2013 and then beyond. To put it in perspective, each of The Lord of the Rings movies did at least $1 billion at the box office. We anticipated that this is going to be a blockbuster release, and we were very optimistic for it. Fourth quarter, in general, we think will benefit from The Hobbit, although as I mentioned, more of the benefit will come in over time. But we also have the strong results of Argo, we've got The Dark Knight DVD, we probably will have lower P&A on fewer releases coming out of the studio, and we expect a very strong quarter from our Home Entertainment Group as we expect higher margin mix of product.

Operator

Our next question comes from Michael Nathanson from Nomura.

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

I have one for Jeff and one for John. Jeff, just going back to comments you made the last quarter on your affiliate fee expectations, I wonder if you could talk a bit about how you could use HBO or may not use HBO to negotiate concurrently with Turner. Is that something you're thinking about? And do you have the overlap in the cycle to do that?

Jeffrey L. Bewkes

Yes, well, as you can imagine, we don't really want to discuss our negotiating tactics and strategy with all 300 of you, but I think it's a good question. And please remember, and we did say this, that Turner, on a standalone basis, is one of the largest cable network groups just by itself. And of course, I think as your question implies, if you have Turner and HBO combined, we're the biggest cable network group in the world. So you can imagine that, that does give us some alternatives, I guess. So we, of course, we need to gather continuously to figure out how to best serve our affiliates and make sure that the value of our Networks are recognized and to bring the right scale and the right flexibility to each of the affiliate negotiations. They're not all exactly the same situation, and we try to organize ourselves appropriately for everybody's benefit, including ours.

Douglas Shapiro

There might be another question for John?

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

Yes, John, we had assumed this year, I think, based on your comments, that programming expense of networks will be up mid- to high-single digits. Given your trend so far first 3 quarters, do you still feel that's a good range or maybe the lower end of the range is more appropriate?

John K. Martin

I think the lower end of the range is more appropriate for this year. And thanks for the question. Look, we said coming into the year, a lot of people were asking questions about expense growth overall, programming expense growth. In particular, if you look at the margin enhancement that we had in Q3, and I would suggest that Q4 will probably look similar, we grew margins in a big way at each of HBO and Turner during the quarter. And we'll do so again next quarter. But as we always mentioned to you, quarters, in any particular quarter, things can move around and change. But when you look at annual cycles which is how we plan and run the businesses, we expect the margins for the Networks group this year in 2012 will be up versus last year. And we would anticipate those types of trends continuing in the future. And I would suggest that we are investing fully in the programming of these Networks. We have huge scale programming budgets, which we think is an advantage versus the competition, and we have a lot of elements of our programming line-up that have very modest growth elements included in them. So when you look at the overall average growing in the mid-single-digit range, that does include a meaningful increase in investment in original programming, and we would expect continued ability to have tight cost controls going forward.

Operator

We have John Janedis from UBS.

John Janedis - UBS Investment Bank, Research Division

Jeff, with new MLB deal and what seemed to be some fairly healthy step-ups in sports rights broadly on renewed contracts, can you talk about your view on sports rights going forward at Turner and whether you feel a need to possibly stretch for maybe another franchise if it were to become available?

Jeffrey L. Bewkes

Yes, okay. Look, we think we're in very good position with the sports rights we have now. And the NCAA deal that we did has been a very successful deal in terms of viewership, in terms of Advertising recovery, and we fully anticipate and we've had some experience to support this, that it's going to hold up very well in terms of our affiliate pricing moves. We are well positioned for -- to deal with the renewal of the sports that we already carry, including NBA, and so as we think about other things, and I assume you're asking about potential other decisions like NFL packages, and so forth, it's a little speculative to talk about that. We don't need such a thing, but it's not to say that depending what the package would be, so it might not be something that we could bring an economic advantage for. Sports can be a very important part of the offering in Turner. We just need to have the right ones, and we take out a very -- we think well-balanced arrangement between the sports, the originals and the acquired programming. But if the -- if an NFL package came up, and I think they're considering how they want to handle that, just like the NCAA, we would consider it, but we'd only do something of that size if we were confident that we could monetize it and have it improve our economics. So I know that's a theoretical answer, but it's, at this point, not clear what the choices are.

Operator

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

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

I guess one for Jeff and one for John. Jeff, as the largest TV producer in one of the largest cable network groups, I mean, you're obviously in a position of leadership in the television industry. And I'm just curious on your view of this current season's ratings volatility, which will only be exacerbated by the rollout of TV Everywhere. This lack of appointment in just watching on different devices at different times, how does it affect your different businesses? And what do you think the TV industry will do about it?

Jeffrey L. Bewkes

We see the general trends is good, but let me say why that is. I know there's been a lot of concern about the early broadcast ratings, and as you know, we have a very strong supplier relationship, 25 shows across all the broadcast Networks. We're the only one to have not only one show in every Network, but 2. Our shows are doing great. Some of the biggest hits are from Warner Bros. But it's only been a few weeks, and broadcast audit last year are very strong. Cable ratings because, we had to look at all sides of this, have been stable, and there's a lot of viewing, particularly on cable, that's happening on the VOD side that's getting added to the consumer loyalty and engagement with the shows and with the Networks. So some of the pressure on broadcast ratings is clearly coming from viewing on alternative platforms. And while it isn't being measured as well as it will be soon, I think what you'll see eventually, because VOD does this whether it's VOD on your television, through your cable or telco operator, whether it's VOD that you're using for HBO GO or TV Everywhere, it increases viewership. It increases the value of hit shows. It increases the value of Advertising if you put the Advertising into the right format. So from a Network point of view, these are good trends for us. From the point of view of Warner, as the lead supplier, we think it's fine. And bear in mind, we have a growing business in making shows at Warner for cable Networks and even increasingly for Internet to view as well.

Operator

I have Tuna Amobi from S&P Capital IQ.

Tuna N. Amobi - S&P Equity Research

I have one question for John and one for Jeff. So, John, it would appear to me that the pace of your share buyback program accelerated after the end of the quarter and -- but even if that's the case, it also appears that between buybacks and dividends, you are significantly running behind the last year's pace even as your free cash flow for this year is significantly up. So I'm wondering how much of that is kind of a deliberate policy to slow down your buybacks and potentially now that we have certainty on the presidential elections, how this could skew your capital return program potentially on the dividends by next year. If you can give us physically some peek into your program for next year, that would be helpful. And I have a question for Jeff.

John K. Martin

Thanks, Tuna. Thanks for the question. Look, I think our capital program and our capital plan has been very, very consistent now for a long time. And we have no intention of straying away from that. Last year, you made a comment that the pace of the buyback this year was behind last year's pace. I'd ask you to remember last year, we were in the process of increasing leverage on the balance sheet to try to get to the long-term leverage target of 2.5x. We achieved that, and now for the foreseeable future, we're using that 2.5x leverage as a guide post in figuring out how we're going to deploy capital. I would also say because you said it looks like this pace of the buyback sped up a little bit recently, I would acknowledge that to be true. I think as I mentioned on my proactive comments, we've seen a significant amount of cash proceeds coming in from stock option exercises. So that's given us some excess capacity to deploy, and we still view the stock as being extremely attractive at current levels. And we've been trying to deploy the capital in a way where it's sensitive to shareholder returns, and it's staying within the constraints of our 2.5x leverage target. So I think going forward, that's probably the best benchmark to look to in terms of determining what we're going to do.

Tuna N. Amobi - S&P Equity Research

Okay, that's helpful. So here's the question for Jeff and maybe John, you can also chime in. As I look at the home video and electronics delivery revenues, it appears that there's a secular bifurcation, for lack of a better word, between those 2 categories. Presumably some of that has to do with the discrepancy in Netflix revenues between film and television. But even if you strip out Netflix, I'm trying to understand perhaps if there is indeed a secular bifurcation there and what might be attributable to that, Jeff, in the context of some of the initiatives you're pursuing, whether it's UltraViolet or TV Everywhere.

Jeffrey L. Bewkes

Tuna, do you mind clarifying, you were asking in the home video business, this is physical, electronic sell-through, SVOD, et cetera, whether there's a bifurcation between what and what.

Tuna N. Amobi - S&P Equity Research

Between film, the theatrical and the television product?

Jeffrey L. Bewkes

Film and TV. Boy, we're all thinking about it because we obviously didn't think there was such a thing. Film is the biggest category. It's been interesting, and you had essentially a little stabilization in the overall home video business. The electronic sell-through side has started -- and SVOD side has started to do a little better. To your point on television -- no, no, let me finish film. So film's done a little better. There's been a bit of a shift or, let's say, growing strength in the alternative electronic sales aspects of film, whether it be SVOD or just the FT, a little bit of help in Blu-ray as well on the physical side. But if you then ask if this is your question, whether television products, series product, has done a little well in home video and particularly VOD, yes, it has. That's probably because -- so TV series products has held up better. And that's because probably, in fact, it is because there's been more sale of series per VOD consumption to the subscription services like Netflix and Amazon and Hulu Plus than there was previously. And that is something that as we've talked about on these calls for several quarters, we all expected that to happen. It's a more natural place for, basically, a syndication window, television product to go to subscriptions VOD services. And those are less rational places for kind of first-run films to go.

John K. Martin

The only thing I would add, Tuna, is if you were asking us the question specific to Warner's versus the industry, I would just add that in any particular quarter, those categories can move around quite a bit, and that's really nothing to do with secular. That's just availability of product.

Operator

Our next question comes from David Bank from RBC Capital Markets.

David Bank - RBC Capital Markets, LLC, Research Division

I have 2 questions for anybody that wants to answer them. The first one is on the share count. Sort of despite the big numbers, I think, you put up in terms of the money you spent buying back stock, it looks like the average diluted share count is kind of flattish sequentially versus the prior quarter. So I'm wondering what -- can you help explain what's going on there? And what the trends would look like going forward? And the second question is, could you break out of the $200 million of the SVOD licensing kind of broadly what percent comes from TV licensing and what percent comes from film?

John K. Martin

Sure. Maybe I'll take a crack at both of them. I think in the overall share count, remember what we disclosed are averages, too. So it's being impacted over a period of time. The buyback was being somewhat -- the pace of the number of shares that we were able to buy in was being somewhat impacted by the fact that share price has gone up. So that, in and of itself, would change the velocity of the shares being taken in. And then I didn't know if your question was basic versus fully diluted. Fully diluted would have always had the impact of the options in there, but the options were more in the money. And they've actually now to the extent that they've been exercised, they're actually in the authorization in the issued account.

David Bank - RBC Capital Markets, LLC, Research Division

So has there been an acceleration of exercise that sort of slows the diluted share count decrease or?

John K. Martin

Not if you were looking fully diluted to fully diluted. But the price -- the fact that the price went up would have somewhat of an impact on that. It's the fact that the price went up mechanically is the single biggest driver. They're probably the trend that you're seeing.

Jeffrey L. Bewkes

But there's options in money -- were more in the money before, which is a lot.

John K. Martin

So -- and on your SVOD, just some context in terms of the amount of revenues that we book to-date. We're now north of $250 million. We remain in constructive dialogue and constructive conversations with a number of SVOD companies. So there's a good chance that, that number could go up before the end of the year. But if you look at the $250 million and break it out, roughly 2/3 of it is TV versus film. And Netflix comprises probably around 40% to 45% of the total. We've sold a meaningful amount of product to Amazon and the Amazon-owned LOVEFiLM. So that's about $100 million, and about 2/3 of the money has been domestic with a full 1/3 of it coming internationally. So that'll just give you a little bit of a sense of we are doing business with multiple players. We're doing business around the world, and we see greater opportunities in the future to sell deeper amounts of our product.

David Bank - RBC Capital Markets, LLC, Research Division

And if you look at that 2/3 of TV versus film, is it possible to break that down by the sort of WB-related stuff as opposed to just Warner studio?

John K. Martin

I think I mentioned that Netflix was about 40% to 45% of the total, around $250 million. Most of that is CW, but not all.

David Bank - RBC Capital Markets, LLC, Research Division

CW, I'm sorry.

John K. Martin

Majority of it.

Operator

Our next question comes from Richard Greenfield from BTIG.

Richard Greenfield - BTIG, LLC, Research Division

Just a couple of questions. First, Jeff, you've talked a lot about the need for innovation and adjusting to kind of a change in consumer behavior. We've seen the theatrical, the home video window creep a couple of weeks closer, but it's still months between the 2 distribution platforms. I was wondering, how do you get the industry to affect greater change than what we've seen so far? And then two, I think we're big believers that HBO, it doesn't make sense for HBO to go direct to consumers given its overall model. But you all at Warner Bros. create a tremendous amount of high quality original programming. Why haven't we seen you go direct-to-consumer with a new network kind of aimed at a broadband offering of high-quality content?

Jeffrey L. Bewkes

Thanks, Rich. Let me do them in that order. So in terms of innovation and adjusting to change in consumer habits, we are trying to do what you're saying. And I think you're rightfully asking well, how do you get it faster, how do you get it more massively influential to serve consumers? We've been trying with Blu-ray, with SVOD coming up and cooperating with them, with window experiments I think the Fox early electronic sale window is something that all of us have -- and all of us saw releasing movies to try to see if that will help. For example, last 4 major WB releases have had at least a 2-week ESP window in the United States, and so we are approaching it case-by-case. But we're all moving in that direction as you said. You know it, all of you know it, that there are some very big partners in retail and theatrical that were trying to make sure that they are part of the transition and that their liability as premier platforms is increasingly strong. And let's not forget that the technical quality and experience of people in theaters and of people getting home video now electronically, not just physically, through all those huge systems is very important. What we're trying to do with UV and some of our other plans that we've actually been the leader of is to try to make the choice between rental and sale viable on both. We're trying to make the experience better and easier for both, and we think pricing will follow the convenience and demand that consumers express as they try to adopt these new ways. So that's your first question. The second question, which is, and I agree with you on the HBO decision for now. But given the content we're making at Warner's, the simple answer is that the concept of a subscription broadband network isn't that ready for prime time. If you look at those that exist, Netflix is the biggest, there are several more we all know, they're doing fine. They're clearly adjusting. The utility they seem to bring to consumers is a good interface and really the only real accessible way to get things on demand. What they are less servicing in terms of providing what consumers need is they don't really have fresh programs. And so I think your question goes to that. We are making programming that's on a lot of Internet channels. Some of it's on YouTube. We're trying to figure out what is the best economic house, what's the most monetizable for original programming that's obviously going to be seen on the VOD method. If you were talking about a, let's call it an Internet network on demand that comes out of a producing company, Warner Bros., it's not clear that's the best way to offer genres to customers. I mean, there's plenty of branded Networks that can offer VOD and Internet-delivered programming to consumers where the show when we make it is both more valuable to us and more easy for consumers to use if it comes in the branded network where they expect to see it. Comedies are different than dramas. Doesn't really make sense to us to create an all-genre Network on VOD and put it out over the Internet at this point. And we think it's more likely that the current Networks, which are very successful, they're very strong at developing appropriate programming for consumers where consumers know how to find it, they go to the Food Network expecting something different than where -- what they go to TBS for, MTV, et cetera. We think that's more likely to be where the outlets go.

Richard Greenfield - BTIG, LLC, Research Division

I asked because you were early in the premium cable space. You really defined cable television as the medium took off with HBO that now dominates the space in terms of quality of programming. And it just seems like from a broadband standpoint, we're still so early in the broadband video evolution. It just seems like you have an opportunity to do that or you're in a unique position to do something there.

Jeffrey L. Bewkes

Yes, I'm not -- I don't want to rule it out exactly, but the -- if you think, Rich, of this huge, huge demand for original programming, it's coming from all of the existing Networks and now the SVOD Networks. It's a tremendous kind of demand for us to program to and sell to. And the question I think you're asking is creating Networks with specific either narrow-genre definitions or all-genre definitions, you'd have to figure out which of those 2 things was really the key thing to do. It's not, in our view, because we have the capability of making a lot of programming across all genres. We all know that. We're doing it now, and we're the lead supplier, basically, of everything to every existing Network. So it's -- so far we think that's the better way to play it and we have, as you know, our own Networks, which we can broaden, whether it's TNT or TBS, whether it's truTV, Adult Swim, HBO, Cinemax, et cetera. So we're probably headed in that direction instead.

Operator

Our next question comes from Doug Mitchelson from Deutsche Bank.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

I'm going to switch to some numbers questions for John. I've got a few, but they're all short. You gave a nice breakdown of SVOD revenues. How are you indexing at this point versus competitors? Have you caught up in terms of monetization?

John K. Martin

Doug, I appreciate the question. I actually don't know because while we pay attention to our competitors, I don't know exactly what's in all of their numbers. I would tell you, I don't -- I would guess that we're probably at or near the top. And as I said, there's a lot of constructive discussions continuing. By the way, the numbers that I gave you do not include the revenues that are recorded at The CW, which we're an equity partner in. But The CW did a very significant deal, and there are probably $60 million to $70 million of revenues recorded at The CW this year, too. So we're -- philosophically, we see SVOD as a very, very big opportunity for us. I think we've been very clear about the types of programming that we're willing to sell and in what windows. And I think there's a lot of opportunity ahead.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

What's the cadence? Did the 2012 deals create a tough comp for 2013, or does it smooth out because you do deals every year?

John K. Martin

I don't know exactly. But my strong suspicion is that we're not going to have a big negative comparison next year because a lot of these deals are multi-year, and availabilities are coming in throughout them. I know that's the case with The CW and with Hulu, and some of these smaller deals is probably the same. So we're building in, basically, a recurring revenue stream, and we're hoping to grow off of that.

Jeffrey L. Bewkes

I would just add, since we have more series and movies than basically anybody else, if the SVOD companies are able to grow, then further answer supporting what John said, our revenues will be continuous and go up.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Makes sense, and then lastly, do you see them boosting -- being boosted by the election in 4Q? And I was hoping you would share the entertainment Networks ad pacing for 4Q because that might help us care forward the growth in x news into 2013.

Jeffrey L. Bewkes

Let me just start by saying that CNN won the night last night. And that's always good. In terms of the fourth quarter, you're asking not in news because you started with the election, you're asking about ad revenues for our entertainment Networks in the fourth quarter?

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Yes, John said that it was mid to high-single digits. So and I'm wondering if that's being boosted by CNN or held back by CNN.

John K. Martin

CNN is benefiting from the election, and it's probably pacing in and around that mid to high-single digit overall figure. We obviously have a portfolio of Networks, and the scatter commentary that I gave is overall by definition kind of an average, but we have seen some mixed demand across different and various categories. Domestic entertainment is pretty good. News has been pretty good, boosted by the election. We have seen some light demand in kids, including our Adult Swim. That can change, but that's just been as of late in Q4, and a little bit of a slowdown in sports because there's a lot more inventory in the market this year because of the NBA versus a year ago. So it's a little bit of a mixed bag. Overall, it feels pretty steady though. And CNN's results, clearly, relative to the last 3 quarters, have been boosted by the election.

Operator

Our last question comes from Vasily Karasyov from Susquehanna Financial.

Vasily Karasyov - Susquehanna Financial Group, LLLP, Research Division

I have one on HBO and one on Turner Networks quickly. Jeff, how high quality is the subscriber growth at HBO? I'm just thinking back to 2010 when HBO was penalized for one of your distributors' promotional subscribers rolling off. So if you could tell us probably what you think is driving that because it's certainly not pay TV, total pay TV addressable market growth. And then how confident are you that TBS ratings will hold up now that we are about to start lapping the improvement last December when you put Big Bang Theory on. So if you could give us an idea of how broad the ratings recovery is, and what we should be expecting in terms of comps there?

Jeffrey L. Bewkes

Okay, on HBO, the quality and the mix between HBO and Cinemax and promotional subs and paying subs is quite good. It's normal for us. Basically, there's an overall buoyancy to sub growth at HBO and Cinemax across the affiliate base and across the Networks, that's domestically. International, that's equally true. So just to remind you, when we had the -- I think everybody wondered a few years ago when we had a drop on promotional subs, it had to do with a couple of big affiliate deals that we're renewing and therefore, they were dropping off nonpaying subs. And we always have some of those, but what we're saying in answer to your question is, this is broad-based sub growth across the categories. And so you should view it as representative of the future of the network. On the question you had on where was this on...

Vasily Karasyov - Susquehanna Financial Group, LLLP, Research Division

TBS ratings coming up on The Big Bang Theory?

Jeffrey L. Bewkes

Yes, okay. Well, so as you all know, we've had TBS, a huge ratings success growth 30% plus from that show at TBS. You can't expect to keep doing that once that's in the mix. So we're really confident that The Big Bang Theory will hold up. We have a very strong -- and the reason is, it's not being overexposed. Most viewers of it are watching a couple of episodes a week. It's a completely fresh show for most of our viewers because most of them did not see it on CBS, and so we have no concerns about Big Bang's very strong contribution to the network being erratic are going away. We think it will be very solid and very predictable for us. We also though because of the strength of Big Bang, lifting the rest of the schedule, giving us a place to launch other shows, and I mentioned in my prepared remarks that it lifted, say, the Conan show and some of the rest of the schedule, but just looking at launching new originals, part of the reason that Men at Work and Sullivan & Son succeeded as well as they did is that they were launched on the strength of that audience base that Big Bang provided. And we're going to follow those up with Wedding Band, another original comedy we're launching this month. And we're very excited, as we said, about the arrival of Cougar Town early next year. So that's going to give us original shows added to the mix. We think our acquired shows are going to hold up. We've got several new unscripted shows slated for next year. One of them is called King of the Nerds. And I know all of you will want to turn into that as we will hear. We're also going to get the syndicated run of the Cleveland show next year. Finally, on a longer-term basis, and this is really thinking of the strong balance position that TBS has, both with originals and the strength of acquiring and our access to acquire from the biggest producer of those years, which is Warner Bros., we've got Two Broke Girls coming for 2015. So as we look out over the long run, we plan our original development, we plan our acquired budget, we look out at what is successful on Network TV and which shows we want, we feel that we're in a very good position to keep building at TBS.

Douglas Shapiro

All right thanks, everybody, for dialing in today.

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