Time Warner (TWX) Jeff Bewkes on Q4 2015 Results - Earnings Call Transcript

| About: Time Warner (TWX)

Time Warner Inc. (NYSE:TWX)

Q4 2015 Results Earnings Conference Call

February 10, 2015, 10:30 AM ET


Michael Kopelman - SVP, IR

Jeff Bewkes - Chairman & CEO

Howard Averill - EVP & CFO

Richard Plepler - Home Box Office, Inc. Chairman & CEO

John Martin - Turner Broadcasting System, Inc. Chairman & CEO

Kevin Tsujihara - Warner Bros. Entertainment, Inc. Chairman & CEO


Alexia Quadrani - JPMorgan

John Janedis - Jefferies

Michael Nathanson - MoffettNathanson

Ben Swinburne - Morgan Stanley

Anthony DiClemente - Nomura Securities

Brandon Ross - BTIG

Jessica Reif Cohen - Bank of America Merrill Lynch


Welcome to the Time Warner Fourth Quarter 2015 Earnings Call.

My name is Mike and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Michael Kopelman, Senior Vice President-Investor Relations. Mr. Kopelman, you may begin.

Michael Kopelman

Thanks. And good morning, everyone. Welcome to Time Warner's fourth quarter and full-year earnings conference call.

This morning we issued two press releases, one detailing our results for the fourth quarter and full-year, and the other providing our 2016 full-year business outlook. Before we begin there are two 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 www.timewarner.com/investors. Reconciliations of our expected future financial performance are also included in the business outlook release that is available on our website.

Second, today's announcement includes certain forward-looking statements, which are based on Management's current expectations. Actual results may vary materially from those expressed or implied by these statements due to various factors. These factors are discussed in detail in Time Warner's SEC filings including its most recent annual report on Form 10-K and 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.

I will now to the call over to Jeff Bewkes, Time Warner's Chairman and CEO, who will be followed by Howard Averill, Time Warner's CFO. After their prepared remarks our divisional CEOs, John Marten, Richard Plepler and Kevin Tsujihara, will join us for our Q&A session. Jeff?

Jeff Bewkes

Thanks Mike. Thanks, everyone, for listening in this morning. We had another strong year in 2015. Our revenues increased 3% to $28.1 billion, adjusted operating income grew 19% to $6.9 billion and adjusted earnings per share grew 14% to $4.75 a share. That's our seventh consecutive year of double-digit growth in adjusted EPS and we've outpaced all of our peers over that time.

We also returned close to $5 billion to shareholders in share repurchases and dividends and our updated $5 billion share repurchase authorization and our 15% increase and the dividend underscore our commitment to disciplined capital allocation and continued direct returns to shareholders.

It's the same combination of strong execution, continued investment in our businesses and disciplined capital allocation that's allowed us to provide superior long-term returns to shareholders.

As we discussed with you last quarter, the shift to on-demand multiplatform consumption of video content is accelerating. Consumers increasingly have greater control over where, when and on what device they watch their favorite content and they're responding by spending more time and money watching video than ever. With more options available they're also demanding great content be accompanied by a great viewing experience.

And while these shifts present challenges, they also create enormous opportunities. In this environment we're convinced that the strongest brands, biggest networks and the best content will take share. Our strategy was designed with these shifts in mind and we're more confident than ever that we are ideally positioned to benefit.

For years we've been investing in the very best video content and using technology to enhance the value of our brands. With our revenue growth is set to accelerate this year, we will be investing more aggressively not only in content, but also in new capabilities in digital products to ensure our brands and content are available wherever and however consumers look for them. And that we can monetize them effectively when they do.

At the same time we will continue to take our brands around the world and operate as efficiently as possible to help fund investments in future growth. Our structure supports this strategy.

We've deliberately reshaped the company to focus on high-quality video businesses with global scale and are well positioned to capitalize on the growing demand for the very best video content.

The combined scale of our businesses is critical to our ability to take advantage of that growth and it's particularly important in distribution and programming, the core of what we do as a company.

The benefits of our strategy and the advantages of our scale and structure were evident in our many successes in 2015. Let me share a few highlights starting at our networks which continued to lead the industry.

Turner was the only programming group with three of the top 10 ad supported cable networks in prime time among adults 18 to 49. And TBS finished as the number one entertainment cable network in that demo for the third consecutive year.

Our operating momentum was strongest at CNN and Cartoon Network. In 2015 CNN was the fastest-growing top 40 cable networks in the U.S. in its key demo and Cartoon network was the only top three kid’s network to grow ratings.

And then when it comes to premium content HBO remains peerless. Its 43 content Emmy awards not only led all networks for the 14 consecutive year, but was also the most Emmys received in a single year by any network in at least 25 years. That included 12 for Game of Thrones setting a record for any series in one year.

We demonstrated the combined strength of our brands and the scale of our network in affiliate negotiations during 2015. Last spring for example Turner and HBO worked together to renew their agreements with Dish and later in the year, Turner completed a deal with one of its largest distributors and now has all of its top 10 affiliates on a new rate card that will drive accelerating revenue growth starting in 2016.

While strengthening its place inside the multichannel ecosystem, Turner has been expanding its presence outside with two of our biggest digital properties CNN Digital and Bleacher Report growing revenue over 25% on a combined basis.

CNN Digital remains the top position in news for multiplatform views and Bleacher Report again finished the year as the number two digital sports destination in the U.S.

HBO also accelerated its efforts outside the ecosystem with the pioneering launch of HBO NOW last April. HBO NOW was a significant contributor to HBOs 2.7 million domestic subscriber additions last year, capping its best two-year period of subscriber additions in the past 30 years. Just as importantly, HBO continue to have positive momentum with its traditional distributors.

Outside the U.S., HBO Latin America introduced a standalone OTT product in Columbia followed recently by Mexico, expanding the international reach of our streaming products.

We also extended high return, low risk licensing agreements in Canada and certain European territories as we continue to execute the multi-model international distribution strategy that we think best monetizes our great content.

At Warner Bros we had a record year in both revenue and profits driven by growth in its television business and a best ever year in video games. While our overall theatrical performance was not as strong as another years, we’re really proud of our two Oscar-nominated films, Mad Max: Fury Road and Creed.

In television we were the leading supplier to broadcast again and we had the top new broadcast show in Blindspot, the top reality program with The Voice, and the top comedy in The Big Bang Theory.

And Warner Bros ended the year as a top three video game publisher in the U.S. and Europe on the strength of Mortal Kombat X, Batman Arkham Knight, and the successful introduction of a new franchise in Lego Dimensions.

Warner has also continued to build its international business to tap into the significant growth opportunity we see in China specifically. Last year Warner entered into an exciting new venture to produce local language films.

Our confidence in the China opportunities that we enforce by the success of Hollywood VIP, an SVOD partnership between Warner' and Tencent, Holiday VIP added more than $5 million new subscribers in 2015 helped by its exclusive access to Warner Bros Movies and HBO's original program.

So 2015 was another very successful year on multiple fronts and thanks for the investments we've been making we're poised for an even better year in 2016 as we roll out richer, more engaging content line ups across the company and accelerate the pace of investment and innovation.

At HBO that includes increasing the hours of original programming by 50% globally. We'll have an unmatched line-up of returning shows including Game of Thrones, Silicon Valley, John Oliver, Ballers and VEEP as well as some of our oldest new programming in years including Vinyl from Martin Scorsese and Mick Jagger which will debut this Sunday, Westworld from JJ Abrams and produced by Warners, and Divorce with Sarah Jessica Parker.

We also have an ambitious roster of new programming geared to the NOW audience, including shows from Jon Stuart, Bill Simmons, Sesame Street and a Daily Vice Newscast.

As we introduce all this new content and further expand distribution, we’re going to step up our marketing reach beyond that. We think the combination of an even stronger original programming line-up and best selection of hit Hollywood movies and ever improving digital products will drive continued subscriber growth both at HBO NOW and with our traditional distributors.

As we renegotiate some of our more important affiliate agreements over the next couple of years, we expect to better monetize those subscribers and accelerate subscription revenue growth at HBO.

We’ll continue to expand HBO streaming products internationally as well. We anticipate significantly expanding our OTT footprint in Latin America and recently we announced plans to launch a standalone streaming product in Spain later this year.

We’re equally excited about everything to Turner has in store for 2016. It’s going to historic year for Turner Sports, which will broadcast the NCAA Men’s Basketball Finals for the first time and we’re rolling out Turner's new E-Sports league in partnership with WME/IMG.

And as we head into the home stretch of delivering 2016 presidential election race, CNN will continue to be the place to find authoritative political coverage and analysis.

In Kids, Cartoon will look to build on its momentum from last year and we’re excited about Boomerang's content refresh and global expansion which is the centerpiece of the Kids partnership between Warner and Turner.

This year we’ll also start the brand refreshes of TBS and TNT. TBS recently kicked off it's near line-up with launches of Angie Tribeca and Full Frontal with Samantha Bee. We're already changing perceptions of what to expect from the network and there is a lot more to come.

TNT will start its own refresh later this year with projects such as Animal Kingdom from producer John Wells and Warner Bros. Good Behavior and The Alienist joining its existing line up of leading original, while it will take some time to fully refresh their line ups, we’re already seeing evidence of a bolt new voice from both networks.

These changes at TBS and TNT are just the latest steps in a multiyear transformation at Turner. Over the last several years, we put in place new management teams at Cartoon Networks, CNN, truTV and Turner's international portfolio and the results give us a lot of confidence in our ability to further strengthen TBS and TNT in the years ahead.

In 2015, CNN and Cartoon significantly outpaced their peers and one year after it’s rebrand truTV's ratings in its key demos returned to growth in the fourth quarter and excluding the impact of FX, Tuners internationals networks have grown profits over 60% since 2013.

2016 is also set to be blockbuster year at Warner Bros. We’re expecting another record performance this time led by our theatrical business. Batman v Superman: Dawn of Justice arrives in theatres on March 25 and its one of the most anticipated films of this or any year. More than just to class between the two iconic super hero’s it will mark the beginning of a multiyear slate of franchise films at Warner’s.

DC will be a significant part of that slate including Suicide Squad this August and Wonder Woman and the First Justice League movie in 2017. Cartoon Network is also launching a new justice league TV show which will join Teen Titans Go, another DC-based program from Warner Bros and the number one show on Cartoon Network.

That underscores both DCs success in television. It has eight shows on air this season and the deepening integration between Warner’s and Turners Kids business.

The strength of our theatrical slide extends far beyond the DC titles. We're just as excited about fantastic pieces and where to find them. The magical return to JK Rowling's world of Harry Potter set for release this November and we’re already looking forward for the return of our Lego franchise in 2017 with and Lego Batman and Ninjago.

As those title migrate into premium and broadcast windows we'll also benefit from them on HBO and Turner's network.

While it's too early in the development season, we're very confident about the prospects of Warner Bros TV and the upcoming TV season. We're expanding and diversifying our slate of programming working to expand our leadership position in broadcast to basic cable, premium cable and OTT services.

That includes some of HBO's and Turner's biggest new shows that I noted before as well as original broadening for SVOD services like 11/22/63 for Hulu and Fuller House for Netflix.

Putting all of this together, I hope you can appreciate why we expect 2016 to be a standout year for Time Warner. We expect the investments we've made in recent years to drive and acceleration in revenue growth.

Along with continued cost discipline that will allow us to invest aggressively in the business while delivering very attractive financial results. All that's reflected in the outlook we released this month.

We're just as confident about our long-term prospects. As I noted earlier, the shift to on-demand consumption is accelerating and we're stepping up our pace of innovation investment to match it.

Because of our industry-leading brands and scale, we're in a great position to take advantage of the many opportunities these shifts are creating and we have clear momentum across the company, so we fully expect to continue delivering industry leading financial results and shareholder returns in many years to come.

Thanks for listening in. I'll turn it over to How.

Howard Averill

Thanks Jeff and good morning. I'll begin by referring to the first slide of our presentation, which is now available on our website.

As you'll recall, 2014's results were affected by significant restructuring and severance charges across the company and programming charges at Turner. Given the nature and size of these items my comments today related to expenses, margins and adjusted operating income for the fourth quarter and full year will exclude these charges from all periods.

Starting with consolidated results, for the year revenues grew 3% or 7% excluding a drag of almost 400 basis points from FX. Adjusted operating income increased 6% or a very healthy 13% absent or more than 700 basis points currency headwind and that came despite a decline in the fourth quarter primarily due to the timing of programming expenses at Turner, programming charges at HBO and difficult comparisons at Warner.

As a result of the restructuring actions we took and ongoing efficiency measures, we limited total expense growth to 2% and increased margins close to a 100 basis points. When we took those actions, we set a goal of $500 million in cost savings.

We recognized the majority of those savings this year and expected to catch our initial target in 2016. Those savings helped find nearly $12 billion in content investments across the company. So we were able to drive margin expansion while still investing aggressively in the business.

Moving down the income statement, adjusted EPS of $4.75 exceeded our outlook for the year and when excluding an FX drag of $0.50, adjusted EPS growth was a very strong 27%.

In addition to our strong operating performance, we also benefited from our share repurchase program. In 2015, we repurchased $3.6 billion of our share. So combined with $1.2 billion in dividend we returned $4.8 billion to shareholders during the year. So we had another really good year in 2015.

That was the result of the same combination of top tier operating performance, relentless focus on efficiency, growth investments and disciplined capital allocation that has allowed us to provide our shareholders with long-term returns well above our peer group average and that's the combination we will continue to strive for in 2016 when we anticipate another year of attractive growth.

That's reflected in our 2016 outlook for adjusted EPS of $5.30 to $5.40 achieving current rates including approximately $0.15 year-over-year headwind from FX. Since that additional FX headwind, our outlook would imply mid to high teens growth in adjusted EPS. I'll provide additional context during our outlook as we go through the presentation.

Now turning to the segment highlights. I'll start at Turner where we grew adjusted operating income double digits in 2015 even in the face of significant FX headwinds and while we continue to invest in the transformation Jeff discussed.

Advertising revenues increased 2% for the year and 5% in the quarter that was ahead of our expectations for the quarter due to the strong domestic ad market and improved ratings trends.

Domestic advertising grew high single digits in the quarter. That was boosted by particularly strong results in news and kids record ratings for MLP Playoff games and comparison for last year's dispute with Dish and the airing of three additional major league baseball playoff games.

International advertising grew low double digits in the quarter excluding an over 18 percentage point drag from FX and the benefit from the consolidation of our sports network in Brazil.

Looking ahead to the first quarter we're seeing a continuation of the recent positive trends. So we expect total advertising revenue to be up in the mid-single digits despite continued FX headwinds and with the scatter pricing pacing up double digits versus the upfront, historically low cancellation levels and great momentum at many of our brands, every indication points to our very strong upfront this year.

Moving on, subscription revenues were up 1% for the year, but looking through the impact of foreign currency would have increased 5%. In the fourth quarter domestic subscription revenues grew in the mid-single digits, which included a benefit of from the top against the dispute with Dish last year and absent a greater than 20 percentage point drag from FX, international subscription revenue grew in the low single digits. A slowdown internationally was due in part to the timing of revenues related to a contract renewal.

Looking to 2016 we now achieved the rate increases we were targeting with all of our top 10 domestic distributors. So we continue to expect domestic subscription revenue growth to accelerate into the low teens starting in the first quarter.

We also anticipate attractive local currency growth at our international networks. So our current rates FX headwinds will prevent a return to reported growth until the later parts of the year.

Adjusted operating income was up 11% for the year. As we anticipated, that included a fourth quarter decline due to 13% programming cost growth, which was mainly a result of higher MLB expenses and the timing of original programming.

For the year, total expenses declined 3% and margins expanded over 300 basis points to the highest level in Turner's history. That was due to continue tight cost control and the benefits of the restructuring we undertook in 2014.

Putting that all together, Turner delivered very strong growth in adjusted operating income while making progress on the multi-year transformation of our core networks. We took share in both news and kids and started the hard work of rebranding our entertainment network. And with the investments we made across the business we laid the groundwork for continued attractive growth in the years to come.

Turning now to HBO where we had another year of strong subscriber growth, while continuing to make the investments necessary to go after the significant global opportunity we see for the business.

Subscription revenues were up 3% for the quarter and 4% for the year. Both periods included about 100 basis point headwind from the combination of foreign exchange and the transfer of HBO's basic cable service in India to Turner.

Domestic subscription revenue increased in the mid-single digits for both the quarter and the year. We continue to see very strong growth in our subscriber base, but subscriber mix remained a constraint on revenue growth.

At the same time, we're pleased with the early progress we're making with HBO NOW who's contribution to subscription revenue increased sequentially throughout the year.

As we move into 2016, we expect the revenue contributions from HBO NOW to increase further as we rollout new programming and expand distribution allowing us to invest even more aggressively in marketing the product and later in the year, we expect to begin renewing some of our affiliate deal, which should result in improved monetization of our subscriber base.

Moving to content and other revenue, which grew 20% in the quarter and 6% for the year, that's mainly due to higher international licensing revenues and is indicative of a strong demand we're seeing globally for HBO's premium content.

Across the HBO's international networks including unconsolidated JVs, revenues increased high single digits for the quarter and year when excluding the impact of FX and transfer of the basic service in India and subscriber growth remained strong especially in Latin America and Europe.

Adjusted operating income was down 3% in the quarter but up 1% for the year. The decline in the fourth quarter was mainly due to higher programming expenses, which increased 11%.

That growth included programming charges primarily related to series and development that HBO decided not to move forward with. Looking through those charges programming cost would have grown 1% in the quarter.

For the full year, total expenses increases 5% reflecting investments in technology and marketing related to the launch of HBO NOW as well higher programming cost.

So 2015 was another successful year for HBO as we maintained the subscriber momentum we had for the past few years and with another year of profit growth and continue to execute our key strategic initiatives including the launch of standalone streaming products in the U.S. and Latin America.

And given the strength of both the global demand for our product and our programming slate, we remain very confident in HBO's ability to accelerate its growth over the next several years.

Moving on to Warner Bros, despite a dip in the fourth quarter, we finished the year with record revenues and profits lead by our TV and games businesses. We achieved that even with a material drag from FX.

On the TV side, revenues increased modestly in the quarter due largely to international growth and for the year, TV revenue grew double-digits that was primarily due to significant growth in licensing revenue including the domestic licensing of 2 Broke Girls, Big Bang Theory, Person of Interest, Seinfeld and Friends.

We also continue to see increasing demand and strong pricing around the globe for Warner's hit content. So we remain encouraged by the strong secular trends in the TV business.

Turning to video games, we have difficult comparisons in the quarter against Lego Batman 3 and Middle Earth Shadow of Mordor. Even so, we posted record video games revenue up close to $1.5 billion for the year and with the great IP and strong franchisee at Warner's we're confident we can continue to grow our games business over time.

We actually knew 2015 would be a challenging year given the lack of any core franchisee releases and the comparison against the end of the Hobbit trilogy, as well as the releases of the Lego movie and Godzilla. So as expected revenues declined for both the quarter and the year.

Looking ahead, 2016 will mark the beginning of an ambitious slate of franchisee movies including at least 17 releases from our DC, Lego and World of Harry Potter franchises through 2020. So we feel great about the outlook for our theatrical business in 2016 and beyond.

Across theatrical and TV, home entertainment revenue declined 10% for the year due to continued weakness and physical sale in particular catalog releases and lower carry-over revenue.

However, digital trends remain healthy with the FT growing in the high teens for Warner's. On the expense side and in line with the enterprise wide focus on cost efficiency, Warner's reduced SG&A by 2% for the year and that included significant savings from the 2014 restructuring actions.

So on the whole Warner's had a terrific year and with a moment at our TV and games businesses and ambitious franchisee film slate for the next several years we're in great position to drive attractive growth at Warner's for the foreseeable future.

Turning to the next slide, we generated very healthy free cash of $3.6 billion in 2015 converting over 90% of our earnings into cash. The year-over-year increase was due to the growth in adjusted operating income and lower cash taxes and not despite the increase in working capital as a result of increased content investments across our division and severance payments related to the restructuring initiatives in 2014.

Our cash taxes declined primarily due to the timing of tax legislation and related payments. Looking to 2016 we expect another year of solid growth and free cash flow driven by strong profit growth and continued high conversion.

Now looking at our balance sheet, we ended 2015 with $21.6 billion of net debt up $1.8 billion from the end of 2014. That's primarily a result of our continued commitment to direct returns to shareholders.

During 2015 we repurchased $3.6 billion in shares and combined with our dividend return $4.8 billion to shareholders. And as Jeff noted earlier the Board authorized a 15% increase in our dividend and up to $5 billion in share repurchases, reinforcing our commitment to provide direct returns to shareholders.

During the year we took advantage of favorable marketing conditions to strengthen our balance sheet by issuing $2.8 billion of long term debt including our first euro denominated debt offering. We also extended the maturity of our revolving bank credit facilities through the end of 2020.

Meanwhile we retired $2 billion of debt in the year as a result of a maturity and a tender offer and redemption of higher price debt and on the investments front, we spent close to $700 million about half of which is related to our real estate project at Hudson Yards. We expect to invest a similar amount in that project in 2016.

We ended the year with a net leverage ratio of approximately 2.85 times just about our target level. Looking forward we plan to return to our target leverage ratio of 2.75 times over the next few quarters and we don’t anticipate a change in either that target level or our capital allocation’s velocity which will remain focused on investment back into our businesses, coupled with M&A and consistent direct returns to our shareholders through dividends and share repurchases.

With that let's move on to the final slide, which looks at our outlook for 2016. 2016 marks the start of what we anticipate will be a strong content cycle across the company and that should translate into an acceleration in revenue and adjusted operating income growth and another year of strong growth in adjusted EPS.

At Turner we expect another strong year as we take advantage of faster revenue growth and continued cost efficiencies to increase investment for the future.

As I mentioned earlier, subscription revenue growth should accelerate meaningfully and advertising revenue should benefit from a strong ad market, continued momentum at CNN, including from its election coverage, and entering the NCAA championship game for the first time.

And at the same time, we are planning for higher programming and marketing expenses tied primarily to the NCAA championship game and the start of our new NBA deal in 4Q as well as election coverage at CNN and investments in originals related to the brand repositioning at both TBS and TNT. We remain focused on continuing to efficiently manage overhead expenses to help fund these initiatives.

At HBO we also expect faster growth in subscription revenue in 2016 driven by continued subscriber gains including from HBO NOW and improved monetization of our subscriber base. Over the next couple of years we would expect that to take HBO subscription revenue growth into the high-single-digits.

That will be balanced against investments associated with HBO's slate of new originals as well as the new programming targeted for digital platforms. We will also continue to invest in marketing and technology to drive growth on HBO's digital platform.

At Warner Bros. we will kick off our slate of franchise films with the release of Batman v Superman, Suicide Squad and the first of Jo Rowling's Fantastic Beasts films and while we are facing challenging comparisons in TV licensing and video games, we expect both businesses to continue to deliver healthy results.

In addition, we remain focused on driving margin expansion through efficiency measures and the transition to digital. So all in all we expect very strong growth and another record year at Warner.

So looking across all three segments we are set up for a very good year from an operating perspective. That is despite an estimated year-over-year FX drag of approximately $125 million on adjusted operating income and approximately $0.15 on adjusted EPS, which we have factored into our outlook.

And if we look back relative to the expectations we shared with you at our Investor Day, the FX drag on adjusted EPS in 2016 is in the range of $0.55 to $0.60. Absent that we would be on track for the close $6 in adjusted EPS we shared with you then.

In terms of the cadence of the year, we expect our earnings to be weighted toward the back half as a result of the timing of both our film slate and marketing investments at HBO and Turner.

Putting all that together, we expect another very good year in 2016, which is reflected in our outlook for adjusted EPS of $5.30 to $5.40. And that incorporates continued investments in high quality video content and new business models and capabilities that should position the Company to continue to drive very attractive growth for the next several years and beyond.

With that I will turn it back to Mike to start the Q&A.

Michael Kopelman

Thanks, Howard. Mike, can we please open up the line for Q&A?

Question-and-Answer Session


[Operator Instructions] Your first question is from Alexia Quadrani from JPMorgan.

Alexia Quadrani

Hi. Thank you. There seems to be a lot of opportunity ahead with HBO, traditional domestic opportunity, HBO NOW and international. I guess can you provide us some color of where you think the most upside is, specifically any upcoming milestones that come to you from the outside, for signs of traction?

I know you mentioned some renewals later this year, I guess any color on when and what to expect there and any more color you can give us on HBO NOW subscribers.

Jeff Bewkes

Hey, thanks, Alexia. This is Jeff, I'm going to turn it to Richard.

Richard Plepler

Alexia, thank you. Look, we had a terrific year in sub growth, 2.7 million additional subs. Quite obviously our mission and our opportunity is now, as we have said, to go capture the revenue that reflects that sub growth toward the end of this year and into next year and we are going to do that.

HBO NOW, where we are just getting started, I think we have made a lot of progress. We are not yet out on two major platforms, PlayStation and Xbox, which, for example, on HBO GO account for over 20% of viewing.

And we've not yet put out the content like Jon Stewart, Bill Simmons, VICE daily news show that we think is particularly suited for those platforms. And that of course will catalyze a great deal of marketing, digitally and otherwise, which we think will drive subscriptions.

So, we are very excited about where we are. I think it is important to punctuate that of the 2.7 million, those are full paying subscribers. Our job now is to go -- as the deal renewal cycles open up at the end of this year and into the next 18 months, to go capture that revenue and we intend to do that.

Jeff Bewkes

Richard, why don't you add a little about international HBO?

Richard Plepler

Sure. Well look, we have three basic tenants of course of profit around the world, one is our networks business in 60 countries, and of course licensing into over 150 countries. And it is not, as we've said to you before, a one-size-fits-all strategy. We look at this market by market where we think we can make the most money and we follow the money.

We just added an OTT service in Spain, doing the cost benefit and decided that that is where the best long-term growth opportunity was for us. We extended a licensing deal in Canada with Bell Canada and Bell Media because that's where we thought the best long-term growth opportunity was.

So we take this market by market, we have a lot of flexibility and the reason I think that we're uniquely suited to exploit these opportunities is because we own our own content and that gives us an enormous amount of flexibility however we choose to pivot around the world.

Howard Averill

Hey, Alexia, this is Howard. Just to clarify one thing. The 2.7 million subs, they are paying consumers, we're just not seeing the benefit, as Richard pointed out. That we need to go and we need to work with our distributors to renegotiate as we go forward so that we capture some of that upside as we move forward.

Alexia Quadrani

And then would you see some of that I assume when you do some of the renewals that you pointed to toward the end of this year as well?

Richard Plepler

Precisely right.

Howard Averill

Yes, that starts this year and it goes over the next 18 months or so.

Jeff Bewkes

Look I can't resist -- this is Jeff. I can't resist adding, this is exactly what we've been telling you and it is on track because, remember what we are all focused on here, particularly at HBO, is that we want to show the value and demonstrate consumer penetration, these are paying subs, the value of the service.

We intended to do that before then aligning the affiliate renewals to capture the money and this is something we do in partnership and in order to incentivize our distributors. And we are pushing HBO out both in traditional distribution and on the NOW platform to cover either of the 70 million basics that don't have pay TV or to go after the 12 million or 13 million broadband only's, again just in the U.S.

But if you look at it across all of those platforms, it's basically quite an advantageous position that HBO is now in to accelerate the revenues, not just in '16, but in '17, '18 and beyond.

Alexia Quadrani

Thank you very much.

Michael Kopelman

Thanks, Alexia. Mike, can we have the next question please?


The next question is from John Janedis from Jefferies.

John Janedis

Hi. Thank you. Just wanted to start maybe with a couple of housekeeping questions. First, can you clarify the programming charges during the quarter by segment? And do you foresee more in the near-term? And then secondly, for the '16 guidance, how much of its driven by the tax rate and do you expect to buy back a similar amount of stock this year?

Howard Averill

Hey, John, this is Howard. So in terms of program impairments, at Turner we had about $130 million in the fourth quarter and that was tied to the TBS and TNT transition which has now started at TBS and we have rolled out some new shows and we are pretty pleased so far with where that is going.

There is another $50 million or so of charges at HBO and that was tied to some series that we decided not to move forward with which happens occasionally. So in the quarter it was about $180 million of charges.

As far as the taxes and the buyback, I would say the tax rate in '16 will actually go up versus '15. That's in part because we saw some fourth quarter benefits that lowered the rate overall for '15. So I think if you look forward you should see a tax rate that might be up a couple hundred basis points, more in line with what we had in the first three quarters of 2015.

In terms of buybacks, as always that's going to depend on what our free cash flow generation is and what other alternative uses of capital are. But given that we ended the year at about 2.85 times, which was above our target leverage of 2.75 times, I would expect that the buyback would come down a bit versus 2015 levels.

John Janedis

Thanks, Howard. And maybe, Jeff, separately. You talked a bit now about potentially retaining rights longer or delaying SVOD sales. Can you give us updated views? And is there any anecdotal evidence that there would be an impact on ratings given how millennials consume content?

Do others need to follow to strengthen the industry broadly and if there is anything to share in the context of partnering in Hulu that would be helpful, thanks.

Jeff Bewkes

That's a lot of questions. Let's start with what you were talking about in terms of either syndication sales, windows, etc. We are not ideological about syndication windows, that depends on evolution and a lot of factors.

But I think the overriding point everybody ought to focus on is that it is becoming crystal clear that consumers want the ability to watch their favorite show, their favorite network on demand across whatever platform they are watching, whatever window it is, whether it's a new show, current season, whether it is one- or two-year-old show they want to see it on demand.

We want to make sure our networks have the flexibility to meet that consumer demand. Now if you look at HBO, a perfect example. HBO has for many years provided on demand access to almost all the content, multiple seasons that it has ever produced. Some of the new entrants in the business that have VOD as a primary feature have also put multiple seasons on.

The Turner networks are committed to delivering more programming on demand across their distribution channels, that is whether you get it in a new bundle over the top, whether you get it through a traditional distributor. And Warner's already sells broad suites of rights when partners are interested in them. And of course Warner sells to every kind of network, broadcast, premium, cable, over the top subscription VOD services.

So the overriding development, which is a good development, is that consumers want VOD on whatever show or window they are watching and we are basically moving to satisfy consumer demand.

Now your second question, which is what has to happen, not just in our company, and I think we have been pretty clear about what we said, is that distributors need to be able to offer more on-demand functionality.

We see them moving quite rapidly now to do that. You can look at interfaces and on-demand offerings at Comcast. You can see new bundles and moves at Verizon or Sling and I think Sony has a new product.

I think you are going to see ever increasing innovation across the distribution platforms over the top and in traditional distribution package offerings. So this consumer demand is going to be satisfied and it is basically going to be good for any brand, any network or any show that has strong consumer residence.

And that is why we think that it's very good for our very concentrated suite of networks at Turner and HBO and we think it's very good for the world's leading producer of TV shows and films, which is Warner Bros. He had one more question, what was it?

Howard Averill

Well I just want to go back to it. I want to just do some housekeeping on your housekeeping question which you talked about are there future plans for charges. There is not any plans for any material charges going forward.

Jeff Bewkes

I think you asked a question about Hulu.

John Janedis


Jeff Bewkes

Yes. Well, as you know, we're not going to comment on someone else's asset or any press speculation. But so putting aside who -- we're actively pursuing opportunities outside the ecosystem. You have heard it at Turner, at HBO, at Warner's.

It is part of our efforts to meet the consumer demand who are looking for more video and more VOD, whether it is HBO NOW, whether it is our Turner networks and all the new over-the-top bundles, whether it is both Turner HBO product or Warner product in overseas markets, basically that is what you are seeing. We think it is a good thing that we have these new entrants offering more on-demand.

Michael Kopelman

Thanks, John. Mike, can we have our next question, please?


Your next question is from Michael Nathanson from MoffettNathanson.

Michael Nathanson

Thank you. I have one for Richard and one for John. Richard, now you are into the first year of life at HBO NOW. I wonder what has surprised you in terms of the roll out. And how have you adjusted your strategies based on that learning?

And then for John, there's been increasing focus by us on minimum carriage agreements between networks and distributors. So if you could talk a bit about how close Turner is to your floors on those minimums and whether or not you have to adjust down any of your minimums in exchange for the better pricing that you received?

Richard Plepler

Michael, thank you, it is Richard. Look, we are learning all the time. We are at this eight months, we are at about 800,000 paying subscribers. We see an enormous amount of opportunity ahead.

As I said to Alexia, we are excited about getting on additional platforms. We're excited about bringing new content to the product which we think is going to draw people in on a daily basis, things like Stewart and VICE News and Simmons and we're going to begin to market more aggressively.

But again, I don't want to bury the lead. HBO NOW is an additive part of our growth strategy. And what we have seen in the ecosystem where we see the vast amount of growth is that we have huge opportunities there as well. So we are going to work on a multifaceted way to expand our sub base and to expand our sub revenue as I discussed earlier.

John Martin

Hi, Michael, it's John. So with respect to your carriage agreement question, for a long time now Turner has paid a lot of attention to it distribution commitments. And I'm not going to speak specifically about any one of our distributors, but we do have protections in all of our agreements and we feel really confident from a contractual standpoint that we will be highly penetrated and remain highly penetrated.

I think more importantly over time what's going to determine the distribution strength is going to be the strength of your brands. And we have now -- and this has been a long time coming for Turner and Time Warner, we've just now completed a distribution rate renewal cycle that we started planning for four years ago and beginning in the first quarter of 2016 we're going to see meaningful acceleration in our domestic subscription revenues.

And we feel great about that, we think it is a tremendous validation of the brands that we have. And I feel very confident that our brands are going to be carried in all and any major programming packages going forward. So we haven't made -- and specifically to your question have we made adjustments down on penetration, the answer is no.

Michael Nathanson

Okay. Thanks John,

Michael Kopelman

Thanks, Michael. Mike, can we have our next question, please?


Your next question is from Ben Swinburne from Morgan Stanley.

Ben Swinburne

Thank you. Good morning. A couple. Howard, I don't know if you would be willing to help us with working capital and cash taxes for '16. And then, John, just picking up on the Turner outlook, as I am sure you are well aware, there is a big focus on domestic affiliate revenue growth across the space.

Now that you have got all of your deals done can you help us with '17 and '18? I think you had guided to low teens again in 2017. But given what you are seeing in subs and sub trends and your deals that are now done, you probably have pretty good visibility so any comfort there you could give us would be really helpful.

And then if I can sneak one more in on HBO. Richard, have you thought about -- I am sure you have thought about it, but are you -- are there any restrictions to changing the price point on HBO NOW? Just wondering if you have considered lowering the price of the over the over-the-top product in the U.S. given where the sort of other over-the-top services are priced? Thanks.

John Martin

Do you want me to start? Hey, Ben, it is John. I will start on the carriage agreements and visibility. Look, I think this is one of the great benefits of being in this business and having the great partnerships that we have with our affiliates is that we have multiple year deals with great visibility on how that is going to translate into revenue.

And so, as I said, we still continue to expect, and we have been predicting this now for a long time, that our subscription revenues are going to accelerate into the low teens in 2016.

I think in 2017 I would expect the growth rate to be in a similar level. We feel really terrific about and confident about our ability to achieve those levels. We have done everything we said we were setting out to do on our rate renewal cycle and we feel great about that.

Ben Swinburne

Thank you.

Richard Plepler

Yes, Ben, you wanted to know about price. Look, we don't have any plans to change the price point at this point. We have a lot of flexibility. But what we are seeing is an enormous amount of growth in the ecosystem. So, listen, we think that our premium price right now makes sense. And we will assess that as we go forward, but right now we have to plans to change it.

Howard Averill

Back to free cash flow, Ben. So as I mentioned, in 2015 we converted at over 90% of our earnings to cash flow. We see strong conversion going forward, nothing really unusual from a working capital standpoint.

I would say with respect to cash taxes, we did see some benefit this year from some legislation. We're going to see continued benefit in '16, but I would expect it might tick up a bit from a cash tax standpoint in 2016.

Ben Swinburne

Thank you all.

Michael Kopelman

Thanks, Ben. Operator, Mike, can we have the next question please?


And your next question is from Anthony DiClemente from Nomura Securities.

Anthony DiClemente

Thanks for taking my questions. I have one for Kevin and one for John. Kevin, of course big film year for Warner's. I wonder if you can also touch on the TV licensing comparisons that Howard mentioned, the large syndication sales that you guys had in 2015 in the prepared remarks.

And given those compares on content licensing, I wonder if you could help us with the swing factors around the growth trajectory for Warners in 2016. So can video games and film kind of more than offset the tough TV licensing comps this year?

And then for John, Howard said just back to restructuring, I know Howard just said that you have no plans for further restructurings as of now, but I was just wondering at Turner what gives you the confidence and do you think the businesses are right sized at this point given the cable TV environment.

Do you have any further cost-cutting for the non-programming expenses planned and just walk us through how you evaluate that on an ongoing basis. Thank you.

Kevin Tsujihara

Anthony, it's Kevin. As Howard mentioned, we do face a very difficult comp from a TV licensing perspective. We don't have -- we had 2 Broke Girls, Person of Interest, Friends and Seinfeld and the second cycle of Big Bang Theory. We don't have similar type product going down the pipeline in 2016.

But I will say that one of the things that we do have we have Monk coming up. And the lumpiness of television licensing has decreased as you have seen more of the SVOD revenue.

Shows like Blindspot, Supergirl, Lucifer and Legends of Tomorrow, which are big first-year shows this year, won't have the same type of one-time kind of lumpiness as you look at how we are recognizing revenue and how we are selling these shows going forward.

'16 and beyond, '16 and '17 are big film years, it's what we talked to you about in October. Feel really good about kind of setting up a film franchise with Batman v Superman, Suicide Squad and Fantastic Beasts look great. And so yes, I do believe that film and games will more than offset the difficult comp in TV and we will have strong growth in 2016.

Anthony DiClemente

Thanks, Kevin.

John Martin

Hay, Anthony, its John. So let's start with where we are at right now, yes we've taken some pretty material restructuring recharges over the last couple of years. As you heard Howard say, no plans on the programming side. Look, I would say -- to take additional restructurings that is.

Look, with regard to expenses overall on an adjusted basis, Turner finished 2015 with the highest margins we have had in its history. And I think our margins are now at or near the top of for the industry is and having said that, we are going to remain incredibly disciplined across the entire Company as it relates to expenses and pay very close attention to how and where we are spending our money.

And we are going to be doing that at the same time that we are going to be investing to improve capabilities and build new businesses. So, I feel terrific about the efficiency of the operations of the Company right now.

I still believe longer term that our programming costs will grow in the high-single-digit range which is what we have been saying now for a long time and our non-programming costs should grow much, much more slowly than that.

Howard Averill

I just wanted to follow on and just point out -- John's discussion of the efficiency at Turner that is a philosophy across the entire company. It is something that we continue to be focused on as we move forward.

Anthony DiClemente

Okay, thanks.

Michael Kopelman

Thanks, Anthony. Mike, next question please.


And your next question is from the line of Richard Greenfield with Deutsche Bank.

Brandon Ross

Ross from BTIG in for Rich. Two questions, one for Jeff and one for Richard. First for Jeff, one of your peers, Facebook, grew mobile ad revenue by $2 billion year over year in Q4 alone, largely on the back of video advertising.

As consumer engagement shifts to mobile away from TV what is your strategy for competing specifically in mobile? Do you need to start new businesses, make acquisitions, or combine with another entity?

Jeff Bewkes

Brandon is this Jeff. Good question. We're focused on that opportunity. And let's break it into a couple of pieces. One is availability and that is we are committed to making our content available across all platforms including mobile. That is why we went out years ago and put the TBE contracts in place for VOD to all of our affiliates. That is why HBO announced On Demand more than a decade ago and now they have NOW.

And so what we have been doing, if you go beyond those two pretty obvious examples, is we've been building more digital businesses that go straight to mobile.

So let's look at them. There is CNN, which is the leader in mobile news and you are seeing very strong growth in CNN in all digital platforms but certainly in mobile and domestically and internationally, by the way.

You have the launch of Great Big Story, that is already with 170 million video views in just the first few months. Bleacher Report -- the number two online sports destination in the country has a very strong mobile presence given the nature of that programming, particularly with its team stream app.

Super Deluxe, which is a new launch at Turner of a digital studio that makes short form video that is very weighted to mobile, is yet another one. So if you take all of those together, that could -- probably should add some -- John, add the cartoons.

John Martin

Yes, just to amplify what Jeff said, the other category where we have a very strong competitive position and we are really focused on growing the business is in kids. We re-launched the mobile app for Cartoon Network in the summer and within two months I think our traffic doubled.

And so, there is going to be consistent innovation as we are going to continue to make our products better and better and better. And I think the monetization of our traffic on all of these platforms is going to begin to improve.

Jeff Bewkes

And then let's go back to HBO. You were asking mostly from the position -- from the point of view of ad revenue. HBO doesn't do that. But we have a lot of sub revenue there that is tied to mobile as well.

So new content like John Stewart, Bill Simmons, the VICE daily show we think is going to thrive on digital platforms. And then not to leave at Kevin, because he is sitting here, with Griffin Studio, that Warner is focused on short form content also for this kind of environment. So we're basically moving with many avenues into this business.

Richard Plepler

Brandon, its Richard. So is that…

Michael Kopelman

Brandon, do have another, I can't remember, do you have another question?

Brandon Ross

Yes, yes. So my second question for you, Richard, was a year ago you thought all the ISPs would be actively marketing HBO NOW. But it seems like they clearly want to protect their legacy video bundle at all costs.

Do you think this is why you only have 800,000 HBO NOW subs? And does it alter your thinking about the economic viability of OTT? And does it change your view on ISP consolidation?

Richard Plepler

The answer to the last two questions are no and no. Let me make a couple of points. First of all, I wouldn't say only 800,000 HBO NOW subs. We are just getting started, as I said earlier. I think we are going to make a lot of progress as we put new content on and get onto new platforms. And listen, our distributors are selling HBO in a variety of different ways.

I had dinner with one of our major distributors the other night. We talked about our growth opportunities. Part of the conversation was HBO NOW and they were very excited about it.

So I reject the notion that our major distributors out of hand don't want to bundle HBO NOW, I don't think that is true. And as our deals come up for renewal I think we will see different kinds of packaging.

But listen, if they want to sell HBO through skinny bundles, fantastic. If they want to sell HBO through triple plays, fantastic. And I think it is very important to remember that in the last four years we have grown eight million subscribers over the 44…

Jeff Bewkes

In just the United States.

Richard Plepler

In just the United States. In the 44-year history of our Company that is 20% of our sub growth. What that tells you is, and I have said before, nobody is doing us any favor selling HBO. They're growing their own businesses by using our brand to grow their different companies.

So, I think this is a win-win. And whether they want to market and bundle NOW or whether they want to do skinny bundles or basic packages or triple plays, there is growth opportunities for them and parenthetical growth opportunities for us. That's what we are excited about.

Michael Kopelman

Thanks Brandon, Operator, Mike, I think we have time for one more question.


The last question is from Jessica Reif Cohen from Bank of America Merrill Lynch

Jessica Reif Cohen

Thank you. I have two questions. We've talked a lot on the call about TV windows. Can you discuss how you are thinking about film windows, how they might change and how that would affect both Warner Bros and HBO?

And the second question is you and all of your peers have talked about the strength of the ad market. What do you think finally drove it back up and how are you feeling going into the upfront market?

Jeff Bewkes

Kevin, you start on it.

Kevin Tsujihara

On the film window question, I think that similar to the conversation that Jeff had on television windows, we are constantly looking at what consumers are looking for, what consumers are asking for and evaluating how to monetize that demand for content earlier and earlier. We obviously have constituents in the film exhibition community that we are trying to also weigh the impact on that as well.

But I think that we continue to look at it. I think the industry is looking at it. And it also would affect the pay-TV window. And Richard and I have had a number of conversations about what that would do to that and how HBO would play potentially even in that world as well.

Jeff Bewkes

Well, let me add something because Richard it's good for HBO; however, that ends up. And one of the reasons is if films get more available in your home on demand and you have got to look at what kind of price will be yielded by that, it is going to make the movie aspect of premium TV, which HBO has the lead of, more valuable from consumer -- in terms of what consumers value they're going to see what they're getting in the HBO subscription just on the movie side, leave out the original program -- as ever more valuable. That's a good thing.

Richard Plepler

Absolutely. I would just add that, because it is often obscured, that our film viewing across all platforms is over 72% of viewing, and on a linear network it is over 77% of viewing. So the truth of the matter is, the film business continues to be an enormous engine of viewership and subscriber satisfaction for HBO.

John Martin

Hey Jessica, it's John. So I will take the advertising question. We were really pleased with how strong 2015 ended. And I'm also pleased, as Howard said, that we have seemed to be continuing a meaningful amount of momentum into the first quarter. And I think there were a number of factors, I think some of them are company specific and I think some of them are market specific.

The company specific factors would be right now our news business is killing it. And we are really taking advantage of the hot news cycle and sports is really strong for us. We're seeing very strong demand for the NBA and for the NCAA men's basketball championship. We are also seeing great strength in the kids market and I think we are taking share there.

In terms of the overall ad market, I think you are seeing a few things that are contributing to the buoyancy and the vibrancy of the market. Number one, the strength of scatter all throughout 2015 means that if you sat out the upfront you paid for it in the scatter market.

So we're looking ahead and we think all indicators would seem to suggest that this year's upfront is going to be particularly strong. And I think that is going to reverse what has been a couple of years of being not so strong.

And I think there is a recognition that TV is still the best reach medium and the most effective option for brand advertisers to convey their message. And so, there is going to be a lot of innovation happening in advertising. We want to lead the market there. But we feel really good about where things are right now.

Michael Kopelman

All right, thanks, Jessica. And thank you, everybody, for joining us today. If you have any follow-up questions please give us a call. Have a great day.


This concludes today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

About this article:

Tagged: , Entertainment - Diversified,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.