“Produce 48” Sees Its Highest Ratings Yet New Realtime Trending Topics

Time Warner, Inc. (NYSE:TWX) Q1 2017 Earnings Call May 3, 2017 8:30 AM ET

Executives

Jessica L. Holscott - Time Warner, Inc.

Jeff L. Bewkes - Time Warner, Inc.

Howard M. Averill - Time Warner, Inc.

John K. Martin - Time Warner, Inc.

Richard L. Plepler - Time Warner, Inc.

Kevin Tsujihara - Time Warner, Inc.

Analysts

Alexia S. Quadrani - JPMorgan Securities LLC

Michael B. Nathanson - MoffettNathanson LLC

Omar Sheikh - Credit Suisse Securities (NYSE:USA) LLC

Jessica Reif Cohen - Bank of America Merrill Lynch

Bryan Kraft - Deutsche Bank Securities, Inc.

Anthony DiClemente - Nomura Instinet

Operator

Welcome to the Time Warner, Inc. First Quarter 2017 earnings call. My name is Rob, and I'll be your operator for today's call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Jessica Holscott, Senior Vice President of Investor Relations. Ms. Holscott, you may now begin.

Jessica L. Holscott - Time Warner, Inc.

Thanks, Rob, and good morning, everyone. Welcome to Time Warner's first quarter earnings conference call. 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 the Investor Relations section of our website.

Second, today's announcement includes certain forward-looking statements that are based on the management's current expectations. Actual results may vary materially from those expressed or implied by these statements. Please see our most recent annual and quarterly reports on Form 10-K and 10-Q and other filings with the SEC for more detail on items that could affect future results or performance.

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

Jeff L. Bewkes - Time Warner, Inc.

Thanks, Jessica, and thanks, everybody, for joining us this morning. We continued our momentum into 2017 and delivered a strong first quarter that sets us up very well to achieve our goals for the year. Our results highlight not just our focus on being home to the world's best video content but also on delivering that content to consumers in new ways and developing new revenue streams that will drive continued growth.

For the quarter revenues grew 6% to $7.7 billion. Adjusted operating income increased 7% to $2.2 billion. And adjusted earnings per share was up 11% to $1.66 a share.

These results reflect the successful execution of the strategy we've discussed with you before and which has served us and our shareholders very well. It starts with investing in great content, whether it's drama like Big Little Lies on HBO; action films like Warner Bros. Kong: Skull Island; comedies such as The Big Bang Theory and The Detour; sports like March Madness and the NBA on Turner; news on CNN; or kids with properties like The LEGO Batman Movie and Powerpuff Girls on Cartoon Network.

Another core part of our strategy is broadly distributing our content, as we move decisively to connect more directly with consumers and to give them new and better ways to experience our content and brands. As you know this consumer focus is an important strategic priority for us. And it's one of the key underpinnings of our merger with AT&T, which we remain on track to close by year end.

As we get closer to joining forces with AT&T, we're increasingly excited about the potential of our organizations to accelerate innovation together and to do it across the entire media and entertainment industry in ways that will excite and benefit consumers in an area where video consumption in is increasingly happening on demand and on multiple platforms.

At the same time we're focused on executing our business plans and doing what we do best. So let me share some recent highlights, starting with Turner, where the tremendous value of our premium high quality sports has been on display in the first part of the year.

As I mentioned we had another very successful presentation of the NCAA Division I men's basketball tournament across platforms. And that's in partnership with CBS, as you know. We posted record revenue, strong ratings growth, and record digital performance. This year was the second most watched NCAA tournament in 23 years, and viewership was up 16% over last year.

And we've transitioned from March Madness right into the NBA Playoffs on TNT, which kicked off a few weeks ago. We're already off to a great start, with viewership through the first round of the playoffs that are up 9%. And we're very excited to be the exclusive home to the Eastern Conference finals later this month.

Our commitment to high quality sports also extends overseas. Turner, in conjunction with Fox, recently announced its acquisition of the rights to First Division soccer in Argentina, further strengthening our leading position in Latin America. And so we're really pleased with our portfolio in a genre that resonates so passionately with both viewers and advertisers. Sports are what makes – are part of what makes TNT and TBS attractive to audience, but so is Turner's increasing focus on bold, exciting original series.

At TBS, we continue to see the benefits of the content refresh we began about a year ago, reinforcing TBS as a preeminent comedy brand. Our returning shows are building on last year's momentum. The new seasons of Angie Tribeca and The Detour have each grown audiences by double digits from last season. And we've already green-lit The Detour for season three. And Full Frontal with Samantha Bee has built tremendous followings, almost doubling its audience since the debut early last year. And with that growth, Samantha Bee ranked as the number one late night show across all networks among adults 18 to 34 in the first quarter.

We're earlier on in the content refresh at TNT, where in coming months we'll be rolling out new originals, including Will – that's a show about a young William Shakespeare – as well as two Warner Bros. productions, the premier of Claws, and the return of Animal Kingdom for its second season.

We also saw Adult Swim maintain its stronghold on millennial audiences. It's the number one ad-supported cable network among adults 18 to 34 for the 36th consecutive quarter. That's nine years. And there's already tremendous buzz for the return of one of Adult Swim's most popular shows, Rick and Morty, later this year. Last month, we unveiled a new virtual reality experience based on the show that lets each of you live the adventures of Rick and Morty. That's a great example of how we're focused on leveraging technology and building experience around our brands in ways that allow consumers to reach across platforms in a variety of devices and ways.

CNN continues to build on its strength as a trusted source for news and analysis in a complex world, growing its total day ratings among adults 25 to 54 by 21% in the quarter, and posting its most-watched first quarter since 2003. And CNN remains the undisputed leader in digital news, continuing to grow its multi-platform uniques and its video starts by solid double digits.

Turner is also one of the founding partners in Open A.P. That's a new platform announced last month that will make it easier and more efficient for advertisers to target audiences in a consistent way across TV networks, and offer our partners important third party verification. This is further evidence of Turner's innovation in the ad space. And advanced advertising is an important area where combining with AT&T can accelerate our progress and improve our chance for success.

Now moving over to Home Box Office. We continue to define what premium television means for the digital age with a mix of groundbreaking originals, Hollywood hits, and a broad range of other distinctive programming. Our limited series Big Little Lies, with a stellar cast, including Reese Witherspoon and Nicole Kidman, was both a critical and a cultural breakout, averaging over 8 million viewers per episode. And the final season of The Leftovers, produced by Warner Bros., has also received tremendous critical acclaim. And viewership for its premiere episode grew 26% from last season. Other standouts in the quarter at HBO were Last Week Tonight with John Oliver, which is having its most-watched season to date, and Real Time with Bill Maher, where viewership is up 22% this season.

Last month, we also had much anticipated returns of new seasons of comedies Veep and Silicon Valley, while Girls wrapped up its run with its most watched season finale since season one. And we're already in development on two new projects with Lena Dunhan. So we're excited about building on the great success of Girls.

We're now putting the finishing touches on season seven of Game of Thrones, which returns in July. And later this year, we'll also premier The Deuce, a new drama from David Simon, creator of The Wire. And that's set in the gritty streets of New York in the 1970s and 1980s, and it stars James Franco.

As I've mentioned before, HBO's originals are so good they can overshadow the powerful lineup of hit Hollywood movies that rounds out HBO's programming lineup, thanks to our output deals with top studios like Warner Bros. In fact, Batman v Superman, The Legend of Tarzan, and Suicide Squad, all three from Warner's, were the most viewed Saturday night film premieres on HBO over the past six months.

And we continue to see big Hollywood hit films like Batman v Superman gross over 20 million viewers during their initial run on HBO. So we're really pleased with the value that HBO is bringing to its subscribers and the exciting lineup that it has planned for the rest of 2017 and the years beyond.

Now let's turn to our studio, Warner Bros., which remains the number one supplier of broadcast television for the current season, which includes the strong results of our lineup on the CW, where total viewing is up 16% this season across all CW platforms.

On the film side at Warner's, the first quarter was highlighted by the strong global performance of Kong: Skull Island and The LEGO Batman Movie. And we're also very excited about Warner's slate for the rest of the year, which includes Dunkirk from legendary director Christopher Nolan and the next two installments in our DC franchise. Wonder Woman comes to theaters June 2 and Justice League will hit theaters in the fall.

As we did highlight before, our focus on franchises like DC Entertainment encompasses not just film and TV but also consumer products and video games. And a great example of that is Injustice 2, which is set for release on May 16. And we anticipate will be one of the cornerstones of a very strong year for our games business.

Finally I want to update you on some of our efforts to harness technology to directly reach audiences. Last month Turner and Warner Bros. jointly launched a new kids subscription VOD service under the Boomerang brand that features our company's deep library of iconic animated content as well as fresh, new originated animated fair that will debut weekly. And lastly, Warner has announced it's developing two series for a DC-branded over-the-top service we plan to launch next year.

These are great examples of how we're investing in both high quality content as well as in the technology and new capabilities to make sure we get that content to consumers wherever and whenever they want.

The Boomerang subscription VOD service and the upcoming DC digital products are both powered by DramaFever, which Warner's acquired last year. Similarly, we've been increasingly leveraging the capabilities of iStreamPlanet, which Turner acquired in 2015, across a range of live sports properties, including March Madness Live and NBA LEAGUE PASS.

Among our over-the-top offerings, the Boomerang service joins FilmStruck, our arthouse film service that Turner launched last year; Warner Archive and DramaFever, both at Warner Bros.; and of course HBO's over-the-top products, which continued to grow subscribers at a very healthy pace in the quarter. These all reflect our growing recognition of the importance of delivering great experiences to consumers alongside our great content and doing it across distribution channels. And so joining with AT&T will expand our capabilities in this area, allowing us to significantly accelerate our efforts to deliver consumers more innovative products.

As you can see we had a very active quarter. And we have a lot of momentum across our businesses. Thanks again for listening, and I'll turn it over to Howard.

Howard M. Averill - Time Warner, Inc.

Thank you, Jeff, and good morning. I'll begin by referring to the first slide of our presentation, which is now available on our website. We are off to a terrific start in 2017, posting our highest quarterly adjusted operating income ever, as we continue to benefit from growing global demand for our high quality content.

Revenues grew 6%, and adjusted operating income was up 7%. Total expenses increased 5% as we continued to make significant investments in content across our businesses. And that was partly balanced by our ongoing focus on constraining overhead costs.

Adjusted EPS grew slightly faster at 11% and included an approximately $0.07 benefit from the adoption of new guidance on the tax accounting of equity-based compensation. So we've carried our operating momentum into 2017 and remain focused on executing our strategy. And we remain on track to deliver on the outlook for high single digit growth in adjusted operating income that we laid out at the start of the year, which I'll touch on more throughout my presentation.

Now turning to the segment highlights. I'll start at Turner, where we continue to benefit from strong subscription revenue trends as we invest in great content, new capabilities, and innovative business models to position the business for long term success. Subscription revenues increased 12% in the quarter. Domestic affiliate revenues were up a robust 13%, marking our fifth consecutive quarter of domestic growth in the teens. And we remain on track for domestic subscription revenue growth to be solidly in the double digits for the remainder of the year.

International subscription revenue grew in the mid-single digits with particular strength in Latin America. Total advertising decreased 2%, and domestic advertising was down a similar amount, both below our expectations. That was in part because of some rating softness.

In addition, during the NCAA tournament, CBS aired games with more favorable matchups, drawing higher viewership than we initially projected. And because of how we account for the NCAA deal, that resulted in Turner recognizing less ad revenue than anticipated related to the NCAA tournament in the first quarter. But keep in mind based on the structure of the collaborative arrangement with CBS, the shift in revenue recognition does not impact our bottom line. So this year's tournament was again very successful with strong ratings growth and record revenues across both linear and digital, further reinforcing the value of our premium sports portfolio.

Moving on. International advertising was up in the mid-single digits and was also led by healthy growth in Latin America as well as in Europe. Turning to the second quarter, we've seen overall market demand moderate a bit relative to the strength we saw over the past year, although scatter pricing remains healthy.

Looking specifically at Turner we expect total advertising revenue to be down this quarter, since we have an approximately 700 basis point negative impact from the shift of the NCAA Final Four and championship games from Turner to TBS. And excluding the NCAA shift, we expect total advertising revenue to be about flat in the quarter.

Adjusted operating income was down 4%. That's a reflection of significantly higher programming costs, investments in new digital initiatives, and higher marketing spend. Programming expenses grew 17% due to the increased costs associated with the first year of our new NBA deal and higher original programming expenses. And as we've discussed, we expect the new NBA deal will also have a material impact on programming costs in the second quarter.

Still, Turner is set up to have another good year. And we're confident that the investments we're making across the business, combined with continued strong execution, leave Turner well-positioned to sustain healthy growth trends long term.

Turning now to HBO, where the strength of the brand and the global demand for its premium content translated into record quarterly profit and is contributing to solid subscriber growth year to date, setting HBO up for accelerating subscription revenue growth. Total subscription revenues increased 5% in the quarter, right in line with our expectations. Domestic sub revenues were also up in the mid-single digits, similar to recent quarters. International subscription revenue increased in the double digits, as we benefited from healthy demand for our OTT products in Europe.

Looking ahead, we're seeing better subscriber performance at our traditional distributors as we begin to benefit from our new affiliate deals. And we expect that to continue improving throughout the year. When combined with continued healthy growth for our OTT products and solid international trends, we expect subscription revenue growth to accelerate into the high single digits in the second quarter, and to remain strong throughout the year. So we're very confident in delivering the high single digit growth for the year that we previously discussed.

Content and other revenues were down slightly in the quarter, due to the timing of home entertainment releases. That was largely offset by healthy growth in international licensing revenues, as demand for HBO's original content around the world remains robust.

Adjusted operating income was up a very strong 22% in the quarter, as total expenses declined 5%. That was related to lower distribution cost associated with the decline in home video revenue and lower programming expenses. Programming costs declined 2% as a result of the timing of the reduction in amortization, which was recognized in the second quarter of 2016. Excluding the lower amortization, programming expenses would have been up high single digits, as we continue to invest in new original content like Big Little Lies and The Young Pope, as well as higher acquired (20:43) programming expenses tied to the delivery of major theatrical titles.

Overall, HBO is off to a great start to the year. And with a strong pipeline of content and accelerating subscription revenue trends, HBO is set up for very healthy growth in adjusted operating income in 2017.

Moving on to Warner Bros., where we also had a tremendous first quarter, with revenues up 8% and adjusted operating income increasing 20%, led by our TV and theatrical businesses. Revenues and associated profits in our TV business grew well into the double digits, as we benefited from strong growth in licensing revenue related to a few catalog titles, including Friends, and continued healthy demand internationally. This reinforces the staying power and value of the biggest hits, which bodes well for Warner Bros. going forward as a leading producer of TV shows.

The strong performance on global demand for hit content is also evident at our theatrical business. In the first quarter, we benefited from the box office releases of The LEGO Batman Movie and Kong: Skull Island. We also posted strong home entertainment results, with revenues up 15%, including over 40% growth in EST [electronic sell through]. That was led by last year's franchise films, with the home entertainment release of Fantastic Beasts and Where to Find Them, as well as carryover revenues from Suicide Squad.

We expect to maintain the momentum in our theatrical business as our franchise release slate continues with Wonder Woman next month and Justice League later this year. And we should continue to see the benefit in home entertainment and TV licensing as these films move through those windows.

Turning to games. We faced difficult comparisons in the quarter. and we did not release any major console games. So as expected, revenues declined. But with two franchise console releases on this year's slate, starting with Injustice 2 later this month, we expect significant growth in our games business in 2017.

So Warner Bros. has great momentum and is executing at a very high level. And with its strong franchise-led theatrical and games slates, combined with healthy trends in the TV business, Warner is positioned to deliver another year of strong adjusted operating income growth.

Turning to the next slide. Free cash flow in the quarter almost doubled compared to last year, totaling close to $1.4 billion. In addition to the growth in adjusted operating income, working capital was a significantly lower use of cash in the quarter. Working capital benefited from the positive impact to accounts receivable from the strong performance of Warner Bros. theatrical and home entertainment slates in the fourth quarter, as well as the timing of production spend. So we had a strong first quarter of cash generation. And we expect another year of healthy free cash flow.

Looking at our balance sheet. We ended the first quarter with approximately $21.8 billion of net debt, down about $1 billion compared to the end of 2016. That's primarily a result of our strong free cash flow generation. As a result, our leverage ratio at the end of the quarter was 2.6 times, below our target leverage ratio of 2.75 times. And we expect our leverage ratio will continue to fall through the year as a result of discontinuing share repurchases in connection with entering into the merger agreement with AT&T.

So overall, we're very pleased with our strong financial results in the first quarter. And that keeps us on pace for the outlook we laid out in February for full year adjusted operating income growth in the high single digits based on current exchange rates. We continue to expect growth for the remainder of 2017 to be weighted to the second half of the year due to the timing of expenses at Turner.

Looking specifically at the second quarter, as we planned for, Turner will see the biggest impact related to its new contract with the NBA. And we expect that to contribute to total programming cost growth of approximately 20%.

We also plan to continue investing in new digital initiatives, including the Boomerang branded SVOD service we recently launched, and in marketing to support upcoming original programming like season two of Animal Kingdom and the debuts of Claws and Will on TNT. So as a result of these factors we expect adjusted operating income to decline in the second quarter for both Turner and the total company with both returning to very healthy growth in the second half of the year.

Overall, we continue to make great progress on our key strategic initiatives across the company. And we're confident that with our continued investments in high quality content and new digital initiatives and business models, we're well-positioned to sustain our momentum and deliver strong financial results in 2017 and for many years to come.

Now I'll turn it back to Jessica for Q&A.

Jessica L. Holscott - Time Warner, Inc.

Great. Thanks, Howard. Rob, we'll take our first question.

Question-and-Answer Session

Operator

Our first question is from the line of Alexia Quadrani with JPMorgan. Please proceed with your question.

Alexia S. Quadrani - JPMorgan Securities LLC

Hi. Thank you. Could you provide a bit more color on the overall ad market? How it is trending in general I guess? And how the current environment might influence the upfronts this year? I know you gave a lot of color on sort of the ratings and what you're seeing specifically there into Q2. I think you might've said you're seeing some moderation in overall ad spend. I guess if I heard that correctly, around what kind of – sort of any color on what's driving that?

Jeff L. Bewkes - Time Warner, Inc.

John, why don't you?

John K. Martin - Time Warner, Inc.

Yeah. Hi, Alexia. It's John. Listen, let me begin by saying that I and Turner team remains pretty optimistic about the health of the overall U.S. ad market for the full year. But I think there are a few factors to consider. So let me just go through them, and I'll do it reasonably quickly.

I mean not to repeat everything that Howard just said. But while the news category in the second quarter remains incredibly, incredibly strong, we have seen, and it'd be particularly in the beginning of the quarter, somewhat of a moderation in a bit of the strength as compared to the year ago. And we think there's a few factors that are contributing to that.

Given some uncertainty in the economy we think that advertisers are holding back a little bit. And they're taking a little bit more of a wait-and-see approach. And in addition, a number of large advertisers saw fewer product launches early in the year, which have impacted categories like tech, autos, and pharma, which were stronger a year ago. So I think that is probably more timing related as opposed to something that's purely cyclical.

We've seen the market move in cycles. But given the reach of TV and our innovative targeting products and high quality programming lineup, we continue to believe we're pretty well positioned.

And also I think interestingly enough in the most recent weeks, as we get deeper into the quarter, we have seen the entertainment marketplace actually improve modestly, as compared to what it looked like in the beginning of the second quarter. And we're experiencing elevated level of activities with continuing strong pricing.

The sports marketplace is a little bit fragmented. There's a lot of inventory. And the heightened political climate continues to benefit CNN, resulting in news market moving early, and there's a lot of demand.

I mean the last thing I would say – because just I listed through a bunch of stuff, so I apologize if I just rambled through it – this time of the year we always see posturing and positioning going into the upfront. So we expect the upfront is going to be healthy. And I think it's hard, particularly in the second quarter, to look at it as being a sustainable trend, because I think a lot of advertisers are looking at their budgets and figuring out how they want to play in the upfront.

So we continue to remain optimistic. And we don't see anything that's going to be problematic for us. And we're going to continue to try to lead the industry with our innovative ad products to try to take as much share as we can.

Alexia S. Quadrani - JPMorgan Securities LLC

Thank you for all that color. Just a quick follow-up. And do you think your open app (sic) [Open A.P.] (29:25) will be a – play a big role in the upfronts this year? Do you think it's too early?

(29:32 – 29:35)

Jessica L. Holscott - Time Warner, Inc.

Open A.P.?

Alexia S. Quadrani - JPMorgan Securities LLC

Yeah, Open A.P.

John K. Martin - Time Warner, Inc.

I mean, look, we're really excited that we've developed this early consortium along with Viacom and Fox because – and we're excited that we were able to announce it ahead of the upfront, because I do think it's going to begin – it's probably not going to have a meaningful impact this year, but it's a beginning.

And it achieves two things that we hope are going to facilitate the adoption of audience based ad buying. And for those who may not realize what audience based ad buying is, it essentially is going to be a big boom to our industry over time, because it'll essentially make us day part agnostic, demo agnostic, and network agnostic, which we think is going to be critical to move the business forward.

The Open A.P. platform provides advertisers with a standardized way to create audience based targets and reporting through an independent third party. So Open A.P. is going to make it more efficient for advertisers to buy audience targeting products at scale across programmers and increases transparency and verification, something the advertising community has been asking for, which has been a shortcoming frankly of a lot of the digital companies.

So far, early days, it's received an incredibly positive response from the ad community. And combined with the benefits of our advanced ad products, we think this initiative is really going to help accelerate advertising.

Alexia S. Quadrani - JPMorgan Securities LLC

Thank you very much.

Jessica L. Holscott - Time Warner, Inc.

Great, thanks. We're ready for the next question.

Operator

Next question is from the line of Michael Nathanson with MoffettNathanson.

Michael B. Nathanson - MoffettNathanson LLC

Thanks. I have two quick ones on strategy. One for Richard and one for John. Richard, there's some reports earlier, I guess this quarter, that HBO was pulling some content off of Amazon Prime. And I wonder if you update us on that relationship? And how you think about Amazon Prime as a home for HBO shows?

And for John, I think earlier this quarter too, you guys bought Champions League football – soccer – for Turner domestically. That's a bit of a switch, given that you've always bought big, high profile U.S. events. So give us a sense of how maybe your sports strategy is changing domestically?

Richard L. Plepler - Time Warner, Inc.

Thank you, Michael. It's Richard. Well, as you know we announced in December our HBO deal distributed through Amazon Prime channels. And we have seen enormous momentum there. As we have by the way across all of our digital platforms, including DIRECTV NOW.

So as we see the progress and the sub-revenue acceleration in our digital business, I don't think you're going to see us extend or expand our relationship with our library of programming on Amazon. And we have no plans to do that beyond the end of the date, which is the end of next year.

Michael B. Nathanson - MoffettNathanson LLC

Thanks.

John K. Martin - Time Warner, Inc.

Thanks, Michael. It's John. Listen, with respect to the soccer rights that you were referring to, unfortunately I can't specifically comment, because at this point it's only press speculation.

But broadly speaking, our sports strategy is unchanged. And it's long focused on high quality, popular sports with the overwhelming majority of the value coming from championship, tournament, or playoff games. And so we're always open to opportunities that would fit that criteria and where we think we can earn an attractive return on investment.

Last point I would make is, as we think about securing sports rights in the future, multi-platform rights are going to become more and more important. So I'll leave it at that.

Michael B. Nathanson - MoffettNathanson LLC

Okay. Thanks, John.

Jessica L. Holscott - Time Warner, Inc.

Thanks, Michael. We're ready for the next question.

Operator

Next question is from the line of Omar Sheikh with Credit Suisse.

Omar Sheikh - Credit Suisse Securities (USA) LLC

Thanks, everyone. Just a couple. Maybe for John to start with, going back to Open A.P. I wonder if you could just give us a sense of sort of what impact you expect the platform to have? Will you be pushing for higher CPMs on the inventory that you're selling that's more targeted? Or will you think – do you think you'll use it to reduce ad loads? Sort of sense of some color on that would be helpful.

And then just a question for Kevin if I could. Kevin, you talked in the past about potentially introducing a premium VOD window domestically. I wonder whether you could just update us on where are your discussions on the circuits? And what you think might be the right model that will get traction going forward? Thanks.

Jessica L. Holscott - Time Warner, Inc.

Why don't...

John K. Martin - Time Warner, Inc.

So, Omar, it's John. And we're laughing here, because if you could witness, we've got these window washers banging and...

Jeff L. Bewkes - Time Warner, Inc.

We can barely hear you.

John K. Martin - Time Warner, Inc.

So we can barely hear the questions. Like, everything is working perfectly here. So I think I heard your question and I'll – and let me address the idea of commercial ad moves.

Overall, we've been talking about how increasingly the consumer experience is critical for us to be able to compete against particularly all platforms. And starting with TNT's Good Behavior and Animal Kingdom last year, and going forward all of our new originals on TNT are going to have limited commercial interruption.

The goal is to offer a much, much more engaging viewer experience and an ad experience for consumers that adds more value for our advertising partners. And so far the results are very, very encouraging. More viewers are watching through the ad breaks. Our research indicates higher consumer satisfaction. Brand awareness and ad recall are up. So we're delivering more value to our partners and viewers.

And separately, starting in the fourth quarter of last year, we reduced our ad loads on truTV in half. And it's been extremely well received by advertisers. And we're seeing better and higher pricing. So the change has been essentially revenue neutral, which we see as a positive. And we expect to continue to experiment more and more with ad loads over time.

Jeff L. Bewkes - Time Warner, Inc.

That was – okay. The other one? What was the...

Jessica L. Holscott - Time Warner, Inc.

Premium viewing.

Jeff L. Bewkes - Time Warner, Inc.

Premium – boy.

Unknown Speaker

Really the windows. (35:44)

John K. Martin - Time Warner, Inc.

Just kind of an update on where we're at? I had a hard time hearing exactly what your question. Could you repeat it please?

Omar Sheikh - Credit Suisse Securities (USA) LLC

Yeah, sure. I noticed you could be vocal, Kevin, in the past about the consumer desire for an earlier window for home consumption of movie content. I'm just wondering where your discussion is right now with the circuits? What do you think is the sort of the model that will get most traction with the circuits?

Kevin Tsujihara - Time Warner, Inc.

Great. So, I don't really have a lot to add to what I've already said. We continue to be having constructive discussions with the exhibitors to create a new window that will be a – as you said, the model will be a premium video on-demand model that hopefully will be beneficial. And we think will be mutually beneficial to both of our businesses, both our business and exhibitors' business. And I think we're making good progress.

We really do believe that, by giving consumers more flexibility and more options when the awareness of the films is the highest, early on, earlier – forward, will actually create, overall, a bigger pie versus a smaller pie. So we're really excited about this opportunity.

Omar Sheikh - Credit Suisse Securities (USA) LLC

Thanks, all.

Jessica L. Holscott - Time Warner, Inc.

Great. Thanks. I think we're ready for the next question.

Operator

The next question is from the line of Jessica Reif Cohen with Bank of America.

Jessica Reif Cohen - Bank of America Merrill Lynch

I have a couple of like questions. On, just going back to the advertising topic, you mentioned AT&T Time Warner ad side – the benefits are from an ad platform. Can you – and actually, I guess, layering on the ad consortium, can you talk about how you see the addressable market developing? Over what timeframe? When will it ramp, and what is – I know, John, you said more of the benefit will be kind of in the – in coming years from the ad consortium. But just wondering how quickly you guys think your advertising focus – I mean not – focus is the wrong word. But addressability will change?

And then the second question is, given that most of the big operators have – distributors have reported, the pay TV sub losses were a little bit surprising this quarter. What are your views on OTT kind of making up for these losses?

Jeff L. Bewkes - Time Warner, Inc.

Oh gosh, (38:01) you ought to do ads.

John K. Martin - Time Warner, Inc.

Yeah. Okay. Hi, Jessica. It's John. Listen, last year in our upfront, we did more than 100 audience-based deals. This year, as part of this year's upfront, we anticipate that that number is going to go up significantly. And we've already set a goal by the year 2020 that we anticipate that half of our advertising is going to be sold based on audiences. So that's a pretty aggressive goal and ambition.

And we think Open A.P. is going to really help facilitate, because everything that we've been hearing from the advertising community is, until you can segment audiences and define them the same way, and until data can somehow be more unified, it's going to be an impediment to the ramping of the way that this type of ad business is going to be sold. It's very difficult for me to forecast beyond what I just said to you, in terms of how fast this is going to ramp. But that's what I would – I mean that goal – I mean we look at 2020. If we're selling half of our advertising based on audiences, we're going to be in good shape.

Jeff L. Bewkes - Time Warner, Inc.

So, Jessica – you're answering a lot, John – is your question on subs for basic cable networks or for pay TV premium?

Jessica Reif Cohen - Bank of America Merrill Lynch

Well, it would take (39:47) for both. And then, just on the advertising, just to clarify. How does the AT&T Time Warner platform combined affect advertising? Like, how do you see that combined platform playing out from an advertising perspective?

Jeff L. Bewkes - Time Warner, Inc.

Well you – in general, you may move towards more information. Supported advertising could allow you to target better, could allow you to do things that viewers find more relevant. And that could reduce ad loads in addition to making it better for consumers and more valuable for advertisers. That's generally the case. John, you want to add?

John K. Martin - Time Warner, Inc.

I think there were even comments made on the most recent AT&T earnings call, where Chairman [Randall] Stephenson said that in their own ad business, they've been essentially targeting customers using their own data. And they're experiencing revenues per impression that are 3x and 4x as compared to what you would traditionally consider for revenue impressions.

So their own experiments within their own company are yielding big results. And we are looking forward to the opportunity of working together with them to figure out what we might be able to bring to each other.

Jeff L. Bewkes - Time Warner, Inc.

On your question, let me start with basic ad supported networks. And then, Richard, you might want to comment on HBO. You got a lot of momentum on all kinds of new distribution.

In the basics, our outlook doesn't really assume a material benefit from these virtual MVPDs to overall sub levels yet. But we do see an opportunity for it. And they're gaining traction. It's mitigating some of the declines at the traditional providers. And it also proves there's consumer demand for smaller video packages with top networks, lower prices, depending what the appetite in a given household is, and better interfaces for VOD, search, and channel surfing.

So if new offerings can combine that kind of attractive pricing and packaging with the sort of new 21st century on-demand platforms, interfaces, and so on, then we think they can definitely attract new subs into the network system. And that's a great opportunity for Turner and every other network to find its natural audience. You want to add anything?

Richard L. Plepler - Time Warner, Inc.

Sure. Hey, Jessica. Look, all of our major affiliate deals are now done. And we're already beginning to see the momentum from those in packaging and marketing. And you're going to see increasing momentum in the second quarter and throughout the second half of the year.

So we couldn't be more excited on the traditional affiliate side, as we are on the digital side. And our sub revenue acceleration for the year is on track, as Howard said, to be in the high single digits.

Jessica Reif Cohen - Bank of America Merrill Lynch

Great. Thank you.

Jessica L. Holscott - Time Warner, Inc.

I think we're ready for the next question, Rob.

Operator

Next question comes from the line of Bryan Kraft with Deutsche Bank.

Bryan Kraft - Deutsche Bank Securities, Inc.

Hi. Good morning. I wanted to ask Richard and Howard each a question. Richard, just wanted to ask you how you think about your plans for continuing to grow the content slate at HBO in terms of genres. Is it more serialized dramas or comedies or kids, et cetera? What's the key to optimizing the slate for growth?

And, Howard, can you just elaborate on the NCAA tournament accounting? It sounded like you were saying that it pressured ad revenue in the quarter if I heard it correctly. Or was that just a reference to CBS capturing their share of the ad revenue? I wasn't sure there. So if you could clarify, that'd be great. Thanks.

(43:28 – 43:32)

Howard M. Averill - Time Warner, Inc.

So it did impact advertising in the first quarter, Bryan. And again it goes back to the root cause of the better matchups were on CBS. So the way the deal and the accounting is set up, the revenue follows basically the rating points. So because they had better matchups, a little revenue went to CBS and less relative went us on the revenue line. But as I mentioned, the collaborative arrangement on a P&L basis, there's no net impact, because it nets out when you get to the total profitability of the property.

Bryan Kraft - Deutsche Bank Securities, Inc.

Okay. Okay.

Richard L. Plepler - Time Warner, Inc.

So, Bryan, it's Richard. Look, we're going to continue to do what we've always done, which is invest in the best premium content possible. Our brand is built around the curation of superior content. And all I can tell you is that the performance of our shows, whether it's Big Little Lies, whether it's Leftovers, recently our movie with Oprah [Winfrey], Henrietta Lacks, did extraordinarily well. [Bernie] Madoff is coming up later this month. Succession, our new show for next year. Here, Now with Alan Ball, our docs, our sports, the vibrancy, the extent and lift on ratings, we couldn't be more pleased.

I say all the time, it has the virtue of truth, which is every Friday there are four or five ideas inside our building that we didn't know about on Monday. So the line at our door with talent, with writers, with producers, it's bigger than it's ever been. We're going to press on that going forward. And fortunately I think we continue to be a place where talent wants to work and do its best work. And we're going to continue to make the kind of investments that we need to to continue our advantage in that area.

Bryan Kraft - Deutsche Bank Securities, Inc.

Great. Thanks.

Jessica L. Holscott - Time Warner, Inc.

I think we have time for one more question.

Operator

And the question will be coming from the line of Anthony DiClemente with Nomura.

Anthony DiClemente - Nomura Instinet

Thanks a lot. And just for John on the Turner network brands, there are examples recently of peers of yours in this space are consolidating their brands and moving kind of to where you guys are in terms of having affiliate fees concentrated in the top five or six flagship networks. As you look out over the next few years, does it makes sense for Turner to undergo any more consolidation in terms of network brands?

And then specifically as it relates to the TNT brand, what's your vision for that particular network's identity and content genre? And how it could evolve over the next few years? Thanks, John.

John K. Martin - Time Warner, Inc.

Thanks, Anthony. I think you – in the way you asked the question, you almost sort of gave me the answer, which is as we look across the landscape – and I've been pretty outspoken over the last number of years that there's a lot of networks that are in existence today that add no value to consumers, yet get paid affiliate fees. And in a perfectly competitive market those are eventually going to go away. That'll be good for us.

We have 10 network brands. We have three of the top 10, four of the top 20. truTV has grown five quarters in a row it's ratings. I think we've gotten incredibly popular networks and the most concentrated portfolio of popular networks in the United States. I don't see any need for further consolidation. I think other network groups are going to need to consolidate.

And as it relates to TNT, I'm really optimistic about the rebranding efforts that Kevin Reilly and the team, Sarah Aubrey is doing with TNT. I think last year was the really big rebrand year for TBS. And I couldn't be more pleased with how successful that's going.

And to reiterate what Jeff said in his proactive remarks, we're seeing returning shows actually grow ratings year on year, which you're not seeing a lot in the television landscape. And I think that's a testament to the quality of the shows themselves, plus the way that we've marketed them.

And this year you're going to see a number of really distinctive unique dramas on TNT that will be a bit of a departure from the type of original programs that were on in the past. They're going to have a much more distinctive voice. They will probably be much more even between male/female. And they'll bring in younger audiences.

And we want TNT to be the place where people want to go to see great distinctive voice dramas. Drama category is very crowded, but I think we've got a great opportunity. We've got scale. And we've got lead position.

Jessica L. Holscott - Time Warner, Inc.

Great.

Anthony DiClemente - Nomura Instinet

Thanks, everyone.

Jessica L. Holscott - Time Warner, Inc.

So that wraps – sorry, did you have – were you going to say something, Anthony?

Anthony DiClemente - Nomura Instinet

I just said thank you.

Jessica L. Holscott - Time Warner, Inc.

Okay. Great. Well, thanks, everyone, for joining our earnings call.

Jeff L. Bewkes - Time Warner, Inc.

Thank you, all.

Operator

Today's call has concluded. Thank you for your participation.

Source : https://seekingalpha.com/article/4068544-time-warner-twx-q1-2017-results-earnings-call-transcript

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