Time Warner Inc. (NYSE: TWX)
Q4 2007 Earnings Conference Call
Wednesday February 6, 2008 at 10:30 AM ET

Corporate Participants

James E. Burtson, Senior Vice President, Investor Relations
Jeffrey L. Bewkes, President and Chief Executive Officer
John K. Martin, Executive Vice President and Chief Financial Officer

Management Summary

Operator

Hello, and welcome to the Time Warner Fourth Quarter 2007 Earnings Call. At this time, all participants are in a listen-only mode. During the question and answer and session, please press star one on your touch-tone phone to ask a question. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I'll turn the call over to James Burtson, Senior Vice President of Investor Relations. Sir, you may begin.

James E. Burtson, Senior Vice President, Investor Relations

Thanks, and good morning, everyone. Welcome to Time Warner's 2007 full year and fourth quarter earnings conference call. This morning, we issued two press releases, one detailing our results for the 2007 full year and fourth quarter, and the other providing our 2008 business outlook.

Before we begin, there are several items I need to cover. First we refer to non-GAAP measures, including such measures as operating income before depreciation and amortization or OIBDA and free cash flow. We use these measures when we analyze year-over-year comparisons. In order to enhance comparability, we eliminate certain items such as non-cash impairments, gains or losses from asset disposals, and amounts related to securities litigation and government investigations. We call this measure adjusted operating income before depreciation and amortization or adjusted OIBDA. A schedule setting out reconciliations of these historical non-GAAP financial measures to operating income and cash provided by operations or the other most directly comparable GAAP financial measure as applicable are included in our earnings release or trending schedules. These reconciliation are available on the company's website at www.timewarner.com/investors. A reconciliation of our expected future financial performance is also included in the business outlook release that is available on our website.

Second, as a result of the sales of the Parenting Group, most of the Time4 Media magazine titles, The Progressive Farmer Magazine, Leisure Arts, the Atlanta Braves baseball franchise, Tegic Communications and Wildseed, the company has presented the operating results for these businesses as discontinued operations for all periods presented. The 2006 operating results of Time Warner Book Group and the Turner South network, as well as cable systems transferred to Comcast in the Adelphia/Comcast transaction are reflected as discontinued operations as well.Third, you'll see a section in our earnings release that sets out a description of the basis of presentation for Time Warner Cable's results. Today, we refer to certain pro forma financial results for Time Warner Cable, the pro forma financial information for full year 2006 presents the results as if the Adelphia and Comcast transactions and the consolidation of the Kansas City Pool had occurred on January 1, 2006. The pro forma financial information for the fourth quarter of 2006 presents the results as if the consolidation of the Kansas City Pool had occurred on January 1, 2006. Reconciliations of the pro forma financial information to financial information presented in accordance with GAAP are included in the trending schedules posted on the company's website.

Finally, today's announcement includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations or beliefs and are subject to uncertainty and changes in circumstances. Actual results may vary materially from those expressed or implied by the statements herein due to changes in economic, business, competitive, technological, strategic and/or regulatory factors. More detailed information about these factors may be found in Time Warner's SEC filings, including its most recent annual report on Form 10-K, and quarterly reports on Form 10-Q. Time Warner is under no obligation to and the in fact expressly disclaims any such obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

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

Jeffrey L. Bewkes, President and Chief Executive Officer

Thanks, Jim. Good morning, everyone.

This is my first earnings call as CEO and the start of what I intend to be a straightforward ongoing dialog with you. I'll tell you as much as I can about where we are planning to take Time Warner. Our goal is to increase the value of the company and its stock price on a sustainable long-term basis. And to do that, we have to succeed in three missions. One, operating our businesses with better performance and returns than competitors in the short-term and the long-term; two, we have to have the right businesses and the right structure; and three, we need to manage our balance sheet and deploy capital to the right places, including when appropriate directly to our shareholders. Pretty much everything we do will be focused on one of these three measures.

Let me start with how we will run our businesses. We are working from a good position. As you know, most of our businesses are number one in their sectors, but the danger of prior success for us is complacency, and we can't afford that. We need to increase our current margins and profitability by better managing our costs among other things, and on the cost side, we are going do that across the company. And to set the right tone, we are starting here at corporate where we are implementing immediately an initial round of cost reductions of over 15%, thereby reducing our run rate at corporate by more than $50 million a year.

The other place we've identified for near-term cost cuts is New Line Cinema. We know from experience that there is real value in New Line as an independent label and brand with its own slate of movies. And New Line's had great success with certain genres of films that are not historically in the sweet spot of large studios, particularly one like Warner's, that appeals to really broad audiences all over the world. But with the recent trend towards fewer movie releases across the industry and given the greater importance of overseas revenues, there is an obvious question about whether it still makes sense for us to have two completely separate studio infrastructures at Warner and New Line. So, we were reviewing how to operate New Line more efficiently and we expect to take action here fairly soon. As we go forward, corporate and New Line won't be the only places where we reduce costs. And as it is often said, managing costs isn't a one-time initiative; it's a way of doing business. That's true, but cutting costs only goes so far, and we have to innovate and invest in the future of our businesses at the same time.

So, let's look at our operating segments. I'll start with the studios, networks and publishing taken together. They are all leaders in content creation, packaging, distribution and branding, and they all require constant expansion of these brands and the content, including in the digital area. Long term success in these businesses always depends on the ability to make compelling content, but increasingly it will hinge on finding new ways for its consumers to use and enjoy the content, wherever, whenever and however they want to do that. So, contrary to some, we see all these new forms of digital distribution as great opportunities for these content businesses, and we've had some important early wins in digital like HBO's breakthrough success with video on demand, CNN's global lead on the Internet, and Time Warner Cable's on demand start over initiatives.

But frankly, I think we and others in the industry need to be a bit more revolutionary than evolutionary in this area. For some time, I have had the strong belief that all linear ad supported networks should make their programming line ups available on demand and on television sets, not just on broadband. It's a win-win for consumers and networks alike. So, we're going to be aggressive in putting our own networks on demand, so we can show the industry the benefits of this model. We think it will cement the long-term prospects of these businesses.

Now let me talk about AOL, which you all know is undergoing a significant business model transition, from a declining ISP subscription business to a growing Internet ad business. By and large, this transition which took off when AOL began offering its service for free in August of 2006 has been successful. The vast majority of AOL subscribers who switched to free have maintained their usage. And now we've stabilized page views and we're working hard to grow usage on AOL's network of websites. And despite switching to free service, AOL has maintained a substantial base of profits, and this is no small feat. It's grown its earnings during this transition. We have substantially reduced the operating expense at AOL by well over $1 billion in the past 12 months alone.

But at the same time, while we've been actively reducing the cost and redesigning AOL's historic business, we've been investing in new higher growth segments of the online industry. Last year, we invested in over 900 million in capital to assemble important additional pieces of Platform A, which you all know is our leading scale display monetization platform and it now includes not only Advertising.com, but TACODA and Quigo and a number of other recent important additions.

Looking forward, we are just trying to grow our customer usage and extend the competitive position of our advertising platform. Doing these two things should allow us to take advantage of the continuing growth in online advertising. At the same time, we need to complete AOL's business model transition. So, we're working on separating AOL's access and audience businesses, so we can run them independently. This should significantly increase AOL's strategic options for each of these main business sectors.

Now let's talk about Time Warner Cable. The business has strong growth prospects in its existing residential business. You heard a lot about that this morning. And now, we'll add further growth by serving small to medium size commercial customers. Cable's also working to combine the targeting abilities of Internet with the impact of television advertising. The business clearly generates increasing returns because most of the capital spent is tied to new revenue, but Cable does require a consistent level of ongoing capital investment to drive revenue growth.

In many ways, Cable has a very different business profile from our other businesses. And in addition, it also appears that our current ownership structure with Time Warner owning about 84% of Time Warner Cable and with only 16% of its common equity owned by the public, is less than optimal for both companies. So, we are initiating direct discussions with their management and their separate Board of Directors regarding our ownership in Time Warner Cable. We expect to reach a decision on whether and how to change our ownership level by our first quarter earnings reports at the end of April. Nobody should think that we have lost faith in Cable's business prospects; quite the opposite, we think it is undervalued, substantially undervalued. But it doesn't follow necessarily from that an optimistic view that Time Warner Cable is best positioned in its current ownership structure within Time Warner.

So, we've talked about operating improvements and structural changes. Now let me tell you how we are managing the balance sheet. As I see it, we have to do two things very well. First, make sure we maintain healthy leverage while we also maintain an investment rating. Second, we have to put our capacity to work in areas that generate the best returns for shareholders. We will constantly evaluate investment opportunities across over businesses within this framework and balance that against returning capital directly to the shareholders.

Summing up, we are going to push for better margins, including by more aggressively managing costs. We are going to move faster to capitalize on emerging opportunities for our businesses. We are working to separate AOL's access business from its higher growth audience, communications, community and ad platform businesses, and we are starting a formal process to resolve our ownership of Time Warner Cable. I look forward to reporting progress on these fairly soon and I encourage you to keep a close watch on us.

Now, let me turn the call over to our CFO, John Martin.

John K. Martin, Executive Vice President and Chief Financial Officer

Thanks, Jeff, and good morning, everyone.

Today, I am going to briefly cover our fourth quarter highlights and I would encourage everyone to read our earnings release where we provide considerably more detail. And my remarks will also focus on this year, how we think things look currently and where we are trying to take the company in the near term from a financial perspective. To help you, there are slides now available on our website.

So, looking at the first slide, it shows our consolidated financial results of the fourth quarter and full-year 2007. From my perspective, the important takeaway here is that Time Warner achieved its full year financial objectives that were laid out at the beginning of last year, and there are three important areas. First, adjusted OIBDA growth in the mid to high teens, that was the outlook, and the company's 17% growth rate ended up solidly within the range. Second, earnings per share of $1.07, which when adjusted for items affecting comparability translated into an adjusted EPS expectation of approximately $0.95, and we beat that by a penny, delivering adjusted EPS of $0.96. And last, converting between 30 and 40% of its adjusted OIBDA into free cash flow, conversion actually came in at 38%, the higher end of the range, translating into $5 billion of free cash. Supporting these results was an increase of approximately $2.8 billion in revenues and some very active cost management. Overall margins for the year expanded around 300 basis points over 2006, and another way to think about this is that nearly 68% of the growth in revenues dropped down directly as an increase in adjusted OIBDA.

Moving on looking at the next slide which shows EPS, 2007 diluted EPS was $1.08 compared to $1.20 for 2006. Both years, however, had a number of items that affected comparability, these are highlighted on this slide and also in greater detail in our earning release. Adjusting for these, 2007 EPS increased $0.16 or 20% compared to the prior year, and the increase was driven by our adjusted OIBDA growth and the benefits of the company's share repurchase programs.

Turning to free cash flow on the next slide, as I mentioned, Time Warner generated approximately $5 billion of free cash in 2007. That's comprise of $12.9 billion of adjusted OIBDA, reduced by nearly $3 million of cash interest and taxes, capital expenditures of $4.4 billion, and $700 million of working capital uses. The $5 billion generated last year was a little more than $200 million higher than 2006, and that's because Time Warner delivered almost $2 billion more in adjusted OIBDA, but they worked through a few items that offset that, mainly due to our cable company that was about $550 million of higher interest due to the Adelphia/Comcast acquisitions and share repurchases. And lastly, we have $350 million of incremental capital expenditures also mainly due to the Adelphia/Comcast transactions.

So, that is a quick look at the 2007 consolidated results, and I will move on now to talk to our near term expectations. So, looking at the next slide, we are laying out here our 2008 business outlook. And admittedly, it's still very early in the year and how things progress this year in many respects will be impacted by lots of different things, but we thought it was important to tell you how we see things currently. We expect full year adjusted OIBDA percentage growth to be in the range of between 7% and 9%. We also expect 2008 free cash flow to be at or about $3.6 billion; another way to think about it is that is at least $1 per diluted share. And this is somewhat lower than our last year's free cash flow, because as has been known for some time, the company expects to now be a full cash taxpayer going forward. And to put that in some perspective, the year-over-year increase in cash taxes is probably somewhere in the neighborhood of $1.6 billion. We hope that our free cash flow outlook proves conservative. At this point, however, forecast variability in areas such as interest taxes and working capital are holding us back somewhat from committing to higher levels. Based on what we see today, we also anticipate earnings per diluted share in the range of between $1.07 and $1.11, and even at the low end, I point out that this represents solid double-digit year-over-year growth.

As you see on the next slide, we start 2008 with a balance sheet that is in good shape. We are beginning the year with $35.6 billion of net debt, which is up $2.2 billion form the prior year. The increase is due to $6.2 billion in share repurchases, nearly $900 million in dividend payments, and $912 million in payments related to settling securities litigation and government investigations. The company also spent $1.7 billion on acquisitions, including as Jeff said, almost $900 million at AOL. Reducing that debt during the year was $5 billion in free cash flow and $2.1 billion in net investment proceeds, which primarily included proceeds from the sales of non-core assets at each of AOL and publishing. Going forward, our financial strategy currently considers that we will manage our balance sheet to maintain a consolidated three times leverage ratio, and at year-end, we were below that I believe at around 2.8 times. And maintaining an investment grade rating, as Jeff said, clearly remains important to us.

Looking over at our equity capitalization for a moment on the next slide, the company continues to repurchase shares under its existing buyback authorization. Since its initial share repurchase program was announced in August of 2005, Time Warner has reduced over 26% of its outstanding shares. That is more than 1.2 billion shares. Almost 2.8 of the company's most recent $5 billion authorization has now been spent, and this more than fulfils the promise previously made to complete at least half of the program by today.

No, let's spend a few minutes talking about our divisional performance and our near term expectations for each, and let's start with AOL. As Jeff mentioned, clearly AOL remains in the midst of a very significant business model turnaround. And to begin with, to share some personal perspective coming back to Time Warner, I've been very impressed with how AOL has been managing through this financial transition as well, highlighting the fact that AOL was actually able to grow its adjusted OIBDA in 2007 to more than $1.8 billion despite losing over $1.5 billion of organic domestic subscription revenues. That's quite an achievement in any year. Margins have improved by over 1,200 basis points here, and that underscores AOL's aggressive management of its costs.

Looking at the next slide, another key metric, it's usage. AOL achieved its goal of stabilizing page views late in 2007, and according to MediaMetrix, they actually grew total domestic page views year-over-year. And MediaMetrix reported 49 billion page views in the fourth quarter; that's up 11% percent versus the last year and up 3% sequentially from the third quarter. This reported growth rate includes the benefit of certain reporting adjustments made by MediaMetrix. So, based on our own internal estimates, we believe page views in the fourth quarter were closer to flat as compared to the same period last year. And as Jeff mentioned, one of AOL's stated goals is to increase usage on its O&O network, and although AOL has stabilized page views despite the continued run off of access subscribers, they are working very, very hard to grow page views.

Moving over to look at AOL's advertising results at the next slide, advertising revenues grew 10% year over year in the fourth quarter to $620 million, and let me provide a little detail as to the components of growth here. Starting first with its owned and operated network. Display advertising was $252 million, and that was up 3% year over year. But, it's important to understand what's really happening here in the reported growth figures, as impression gains where otherwise offset by both trends in the industry as well as strategic decisions made by management. So, what do I mean by that? First, advertising demand is continuing to shift to third-party networks. This is an industry trend, it's been ongoing, and you can see this in healthy growth rates in AOL's third-party network. This has put some near term pressure on CPMs, however, on the AOL O&O network, and as a result, AOL has responded by adjusting its sales process and integrating more of its inventory without Advertising.com and TACODA, both of which are important components of Platform A.

Second, growth in display was negatively impacted by a decision made earlier this year to discontinue a number of non-profitable sponsorship initiatives as well as a natural decline of certain downy advertising from broadband providers. To put this in perspective, the fourth quarter of 2006 included $25 million of advertising revenues that did not recur this year. Looking at paid search for a moment, paid search was about $171 million in the fourth quarter, that's up only 1% compared to the prior year. But there are few things of note here too. First, paid search in Europe, which represents approximately 20% of AOL's overall paid-search business declined year-over-year by $8 million. This is primarily due to a change in our European search agreement with Google, which no longer provides AOL with guaranteed payments. Second in the US, paid search was up mid-single digits year over year. AOL benefited from the positive ongoing industry wide search pricing trends, but this was somewhat offset by lower number of users searching and lower average click through rates.

Moving to AOL's third party network, advertising revenue was nearly $200 million in the quarter, up almost 30% versus the year ago quarter. I think as you know AOL's has been acquiring and building important analytical and measurement capabilities in Platform A and it's important to note that, nearly half the third quarter growth came from acquisitions that were made during 2007, that's half the growth of these third party networks. Having said that, we remain very, very encouraged by the organic growth trends that we're seeing here in this part of the business.

Looking ahead to the first quarter of 2008, we are expecting overall AOL reported advertising revenues to be essentially flat to down, maybe slightly as compared to the year ago quarter, and let me tell you why. First, as we disclosed to you last year, the first quarter of 2007 benefited from $19 million from a change in accounting estimates. Next, we have approximately $10 million less in revenues from these discontinued or diminished activity similar to the $25 million that I just talked about in the fourth quarter of 2006. Lastly, we have a difficult comparison created by the recent change in the Apollo relationship, which contributed $56 million to the first quarter of last year. And as a reminder, Apollo is the larger advertiser that we previously pointed to in our public filings, and we have reason to believe will spend less money with us this year.

Moving past revenues to AOL's profit for a moment, adjusted OIBDA in the fourth quarter grew up very healthy 29% year over year, despite a 53% decline in subscription revenues. During the quarter, AOL reduced its costs by an impressive $344 million compared to the year ago quarter, including having $81 million of lower restructuring costs. In 2007, AOL reduced its operating expenses by $1.3 billion. This year continuing to successfully execute the business turnaround will remain front and center. As Jeff said, AOL's top priority will be to focus on growing usage, while integrating its world class display advertising network, providing reach with the industry leading analytics targeting and ROI. Subscription revenues will continue to decline materially, although we believe less than what occurred in 2007. Costs will also continue to be reduced and advertising should continue to grow. The results of all of this is that we continue to expect AOL to maintain its overall profitability at considerable scale, although they are likely to deliver a somewhat low level of adjusted OIBDA in 2008 as compared to what they did in 2007, included in this expectation that AOL's adjusted OIBDA is likely to be down in the first quarter, because of the relative size of subscription business.

Turning now to Time Warner Cable, and I am not really going to spend much time here since Time Warner Cable separately reported its fourth quarter and full year results earlier this morning. In case you didn't have an opportunity to listening into their call, I'd encourage you to listen to the replay that's available through their website. Let me tell you from my perspective, however, the key takeaways in their report and business outlook are as follows. First, the company met all of its 2007 announced financial objectives, strong 13% OIBDA growth compared to pro forma fourth quarter 2006, with really meaningful margin expansion. This allowed Time Warner cable to achieve a very solid 11% full-year growth rate compared to pro forma 2006. The company continues to generate strong RGU net additions, delivering nearly 600,000 more RGUs with notable progress in its most challenged divisions, Los Angeles and Dallas. Their outlook in 2008 remains attractive in terms of the expectations of near term financial growth. And at the same time, it considers relatively flat capital expenditure expectations despite aggressive plans to invest in new business initiatives which should yield future growth such as commercial phone [ph]. So, we're expecting improving returns on capital at Cable and that's very important.

Moving on, the next slide summarizes Cable subscriber results, but I'm not going to spend any time here. I would ask you to keep moving on to the filmed entertainment segment slide. On this slide, we show that we posted very strong year over year OIBDA growth rates in the fourth quarter against some fairly easy year-ago comparisons, but I'd note that there were increasing contributions year over year from each of the film and the TV businesses. Looking at it this year, we expect positive year over year growth from this segment again, despite very difficult comparisons created by last year's off-network syndication results from Warner Brothers TV. This view is based on our confidence in both that theatrical and the home video release slate and so far we are off to a really good start with box office success of Warner Brothers' I Am Legend and The Bucket List which should lead to strong home video releases later this year. We also have some other significant 2008 releases including Warner Brothers' Get Smart, The Dark Knight and Harry Potter and the Half-Blood Prince, as well as New Line's Sex and the City.

Looking over at our network segment for a minute on the next slide, the results in the fourth quarter compared to last year were essentially flat. Please remember that last year included HBO's domestic cable sale of The Sopranos to A&E which you can see on the slide was a main driver behind the 46% decline in content revenues. There was also a $31 million accrual reversal in the prior year quarter related to the closing of the WB Networks' operations. The quarter's results also included a very strong 9% increase in subscription revenues, and an even stronger 14% increase in advertising revenue at Turner. The strong ad growth reflected a healthy scattered environment and overall solid ratings, and so far this year, the scatter market has remained strong. Our expectation for the year is that both HBO and Turner will contribute to growth; in fact, taken together, they should deliver strong adjusted OIBDA growth in 2008, and the drivers here are expected to be solid overall subscription revenue growth again, and a continuing healthy ad environment. Looking at Q1 specifically for a moment, we expect network's OIBDA to be essentially flat due to the timing of recognition of some programming expenses and additional news gathering costs at CNN related to its election coverage.

Moving over to our last division, publishing, both revenues and adjusted OIBDA for the fourth quarter were up modestly. Advertising was up 2% as Time Inc. continued to generate enough online revenue to more than offset declines in print magazine advertising. The results here also reflected the closure and Life and Business 2.0 magazines, and an increase of rather an incremental $13 million of restructuring costs. Unlike Turner and AOL, Time Inc. is the one business where we've seen some current advertising softness due to what we believe is the overall economic environment, and this does somewhat limit our visibility into the rest of the year. Having said that, regardless of the print advertising environment, we expect Time Inc. is going to continue to focus on its priorities of key titles, continue to drive its digital new initiatives and aggressively manage its costs.

So, with that, let me now turn the call back over to Jim, and we'll be happy to answer your questions.

James E. Burtson, Senior Vice President, Investor Relations

Thanks, John. Operator, we can go the first question.

Q&A

Operator

Thank you. Our first question is Douglas Mitchelson of Deutsche Bank. Your line is open.

Douglas Mitchelson, Deutsche Bank Securities

Thank you very much. Just curious to ask, saw the strategic initiatives you mentioned. Any thoughts on the AOL side as you split the two businesses what the strategic rationale would be behind keeping the AOL audience business, and any impact to the market place that you see from the Microsoft-Yahoo deal potentially getting done? Thanks.

Jeffrey L. Bewkes, President and Chief Executive Officer

Thanks. We don't really see a change in the strategy at AOL on the audience business. We, as we said, we're really exited by the... both the growth and the resilience of our AOL network of owned and operated and portal and publishing sites, a lot of them have had some very strong page view growth in the last half of this year. And the position that we've built and are continuing to build on the monetization side is at scale and leading at this point. As video comes to be more important, we believe that is going to advantage our position in that platform too. So, of course, we are, as we always are opened to any strategic moves that makes sense. What we are really doing is we are trying to position the different pieces of AOL, particularly in the high growth parts of the Internet business, so that we are poised to succeed. So, we feel pretty good about our position, including in this recent set of events with Microsoft trying to buy Yahoo. One thing we should point out, it does underscore the value of Internet properties with large audience, it does have a beneficial lift really to the value of our eyeballs and inventory, because they are going to be more vibrant competitors for search. And as we said, I think it just verifies the importance of moving to the kind of display and third party monetization platform that we've built.

Douglas Mitchelson, Deutsche Bank Securities

Right. Thank you.
Jeffrey L. Bewkes, President and Chief Executive Officer

Thanks, Doug. Operator, next question please.

Operator

Thank you. Our next question comes from Spencer Wang of Bear Stearns. Your line is open.

Spencer Wang, Bear Stearns

Thanks and good morning. I just wanted to focus a little bit more on AOL. Jeff, you alluded to trying to separate the access and the advertising business. Can you just give us a sense of the timetable for when you would do that and also maybe talk a little bit about some of the... I think you mentioned options, increasing the options there, talk a little bit more about some of the alternatives you may be looking at. And then last thing is when do you expect AOL advertising growth start to reaccelerate to growth rates more comparable to the overall industry? Thank you.

Jeffrey L. Bewkes, President and Chief Executive Officer

All right. I'll start and give it to John. We are starting and actually actively working on separating the audience and access businesses now. We think it will take several more months because it's fairly complicated. Having said that, it's one of our top priorities. And as for strategic options, it's simply always a good idea to align your businesses, including what investment resources you put into them, to match up where your efforts are with where the growth possibilities are, and that's really what we were doing. In doing that, it provides the most advantage position for any of our operations should they need to make some kind of arrangement with other companies. And on the growth of advertising, John?

John K. Martin, Executive Vice President and Chief Financial Officer

So, we would expect that at AOL, ad growth is going to begin to improve beginning in the second quarter of this year. I thought it was important to sort of walk through some of the mechanics that are going to impact the reported growth rates in Q1, and hopefully, I've done that with enough transparency. Just to provide some context in perspective, however, AOL is really focusing on building its leading display monetization platform, and this is important because it has scale, it's got the behavioral and context targeting capabilities, and this is where we believe demand is going, and we see this as the future of where display demand is going. And Platform A, over time, once it's integrated should benefit not only third parties but our own inventory, which is really important as you think about pricing going forward. So, first and foremost, focus on the integration, but you should begin to see growth again in Q2 when we build from there.

Spencer Wang, Bear Stearns

Great, thank you.

Operator

Thank you. Our next question comes from Michael Morris with UBS. Your line is open.

Michael Morris, UBS

Hi, thank you. On the content side, it seems that the development of franchises and the ability to exploit content across multiple platforms of market has benefited some of your competitors. Can you talk a bit about how you view the importance of developing franchises, if it is going to take additional investments from where you are right now, and maybe if you see certain things in the pipeline that perhaps aren't unobvious, I'd say beyond Harry Potter, which is more obvious, but maybe some of the content that is less obvious that it does prevent -- present a franchise opportunity for you. Thanks.

Jeffrey L. Bewkes, President and Chief Executive Officer

Thanks. I don't know whether -- I will try it. Actually, there is two ways to think of what you are asking, I think. One is to think of titles like Harry Potter or Bat Man or to think of individual television shows like Two and a Half Men or The Closer on TNT, or some of the hits on Adult Swim at Turner. All of those kinds of "franchises," branded individual shows clearly are probably overstating, I have to say they are exploding, but there is a huge opportunity in those on a global basis across all of these new distribution platforms. That's true when you are thinking title by title on day-and-date VOD, which Warner's is leading the tests on. We think it's working. It's true on any of these worldwide video releases that go electronically rather than in physical duplication copies. So, that's one way to say it. And across all of our companies, and you can really drag in publishing for this, we have got some individual brand franchises. Think of Harry Potter and then put the Swimsuit Issue of Sports Illustrated and think of it the same way. They go across all of these media and have increased on upside. So, hits are ever more important in this world. But then the second way I think about your question, our brands that are literal networks or aggregators, so that would be true of HBO, that would be true of Adult Swim of CNN, and it would be true increasingly of some of the verticals at AOL. We have got even in the -- what you think of as the publishing sites at AOL. AOL news re-launched in the middle of the year and is now number 2 in that area. AOL Money & Finance has gotten to number one. Page views are increasing 16% in the one, 24% year-over-year on the other. So, all of these things are ways in which you can extend brands across the world and across all these platforms.

Michael Morris, UBS

Thank you.

Jeffrey L. Bewkes, President and Chief Executive Officer

Thanks, Mike.

Operator

Michael Nathanson of Sanford Bernstein. Your line is open.

Michael Nathanson, Sanford Bernstein

Thanks. I have one for John and one for Jeff. Jeff, firstly, given that usage trends at AOL have now stabilized, I mean what gives you confidence that the trends will accelerate going forward and that increasing usage is the key to growing display revenue closer to initial revenue in the coming year? That's one.

Jeffrey L. Bewkes, President and Chief Executive Officer

Right, well. First, I was just talking about it coincidentally. We have some reinvigorated publishing sites that is one part of AOL. We've got very strong positions in communications. Think about AIM and ICQ and those are benefiting as they get distributed out with the advent of social networking because they are very connected to the explosion globally on that. And then, it's always good and fairly important to have our owned and operated inventory of impressions coming out of page views as you just said. But it's also important that we can monetize other people's growing page views that they can't monetize themselves. And so, we have been... we like to think of it as a very strong business partner for the social networks like MySpace and Facebook and Bebo, any of the others monetizing traffic. And we think that that's -- both of those ways are the ways that we will emphasize and try to ride the secular growth in the online ad industry.

Michael Nathanson, Sanford Bernstein

Okay. And let me turn to John, John, now that you are there, I wonder, can you tell me over the past couple of years how has return on capital looked within filmed entertainment, and [indiscernible] New Line also going to be focused on improving returns within New Line?

John K. Martin, Executive Vice President and Chief Financial Officer

Yeah. Hey, Michael. The only thing I would add to what Jeff just said is just keep in mind that given that Platform A was really only put together over the last 12 months, we are only now beginning to apply behavioral and soon contextual technology to the inventory. So, that should help over time improve the monetization as well, and it's very, very early on and very small numbers, but we've seen some exciting and dramatic ramps in CPMs in certain areas. So again, that is just one other thing to consider as you think about over time, what is going to grow revenue is usage and monetization. As it relates to returns on capital and the film business, frankly it's one of the things that we are going to be focusing on going forward, and full disclosure being here for four weeks, I haven't been able to look at every single thing within the company's portfolio. Having said that, I would just ask people to think about what Warner Brothers has done over the last several years converting virtually 100%, if not more than 100% of its earnings into free cash. And so, this is a business that has huge scale, is in leadership positions across all of its primary businesses, is very, very successful and turns its profit into cash. So, that's a good place to start from.

Michael Nathanson, Sanford Bernstein

Thank you.

Operator

Thank you. Our next question comes from Ben Swinburne of Morgan Stanley. Your line is open.

Benjamin Swinburne, Morgan Stanley

Thanks. Good morning. John, just a point of clarification on the AOL piece, I think you said OIBDA would be down year-over-year. Was that for the first quarter or for the full year 2008? And almost aligned to the comment you just made about usage and monetization driving the topline, where are AOL display CPM's relative to the broader market? Are you above average and is that part of the reason why we've seen some CPM or monetization pressure over the last couple quarters, that realized Platform A is putting pressure on, and you putting more revenue through the ad.com business, but just curios about those relative pricing between AOL display inventory and some of the competitors?

John K. Martin, Executive Vice President and Chief Financial Officer

So I think the first question should be relatively easy to second one. I'll try to keep it at a relatively high level, but it's a little bit more involved. The first one, in terms of expectations for near-term financial performance for AOL, in Q1 I just wanted to highlight that we expect adjusted OIBDA to be down. That's really just the math of the runoff of the subscription business, as well as I went through the mechanics of what is going to happen to the reported ad. So, that's number one. In terms of the full year, and I would submit that AOL is probably the single hardest division for us to forecast where the adjusted OIBDA is going to be for the full year of 2008, simply because you have got really big numbers moving in different directions, and we have got to accurately forecast the runoff of the subscription business. Best we can tell right now, Ben, we think that full year 2008 AOL's adjusted OIBDA is going to be approaching what it was in 2007. It may achieve those levels, but it's likely going to be down somewhat. In terms of display CPMs, maybe just taking it at the top and speaking a little bit more broadly, what's happening here is basically in premium, we have seen CPM pricing go back up. So, the pricing really depends on the type of inventory and the trends have existed for some time. But the fact that premium pricing is starting to go back up, we view as obviously as a positive sign. However we are continuing to see pricing pressure on non-premium inventory as demand is shifting over to the ad networks and that's in part following audiences in recognition that audiences are fragmenting across the web. The good news here, just to go back to what I said before is that the eventual inclusion of meaningful amounts of behavioral and contextual targeting should help reverse the non-premium inventory pricing trends. It's just hard to predict exactly when that is going to occur, but that's what we believe is going to happen.

Benjamin Swinburne, Morgan Stanley

Thanks for the color.

Operator

Thank you. Our next question comes from Jason Bazinet of Citi. You may ask your question.

Jason Bazinet, Citigroup

Thank you so much. If I remember correctly, I still think Google has a put provision for the 5% stake they have in AOL. And I guess my question is, as you think about potentially separating these businesses. Does that pose any complications, and if not, is it just a function of sort of allocating that pro rata potentially need of cash based on the value of each of the pieces? Thanks.

Jeffrey L. Bewkes, President and Chief Executive Officer

Well I'll start and John, you may want to comment.

Yes, Google does have that, and it is not clear at all that they necessarily would want to act on it, and it would be... it's fine, it's a virtue [ph] act on it. We probably shouldn't predict or discuss any ongoing talks. The Google is fairly close business partner of ours. We talk to them all the time. And we just can't say much about it at this point, but I certainly don't think you should look at it as any cause for concern for any reason.

John K. Martin, Executive Vice President and Chief Financial Officer

Yeah, it's not going to affect how we approach the access audience split, we are going to go ahead and do that. Google, just a quick point of clarification, has basically a registration right, and that is in the middle of the year, and we have the option to buy out their stake at fair market value, and at this point in time it's... we are not going to guess as to how that's going to come out.

Jason Bazinet, Citigroup

Okay, thank you.

Jeffrey L. Bewkes, President and Chief Executive Officer

Thanks, Jason. Operator, next question please.

Operator

Thank you. Our next question comes from Rich Greenfield of Pali Capital. Your line is open.

Richard Greenfield, Pali Research

Hi. A couple of questions. One, you talked about splitting off cable or separating out the cable. Wondering with Time Warner Cable having dropped from... it's a tight [ph] year ago, 42 down to 24. Why you don't think about trying to buy it in, given your positive, you and especially, John's experience over Time Warner Cable. Why not buy it in and take advantage of the weakness in valuation and separate it out at some point down the road when valuations recover in the cable industry? And then two, wondering if you could talk about from the standpoint of New Line, whether there is any contractual issues with Michael Lynne and Bob Shaye in terms of their ownership directly of New Line that dates back to when they first came into the Time Warner fold, that would be helpful. Thanks.

Jeffrey L. Bewkes, President and Chief Executive Officer

All right thanks. A fair question on cable. A couple of things on that. In terms of the timing of why we're talking to you this about it now. It didn't make sense for us to initiate in-depth discussions until we were closer to the time, which we now are when we had a full array of options for changing our ownership, including options that are tax-efficient. So, that's just a kind of backdrop. Reasonable question, as to why... what you're asking, why not buy it instead of something else. We're starting with the discussions with Time Warner Cables' Board and we really don't think it's advisable to negotiate publicly on what the various choices we have are. We have said and I think there is a good premise in your question that all of us, I think, our Board and Time Warner Cable's Board believe that the Cable's position in the cable industry is undervalued. So, certainly we'll approach whatever we do in that context. But, we're basically... what we end up doing is dependent somewhat on the negotiations with the independent Board. There is some considerations that has to be vetted. Some of the notable ones are determining the relative leverage of the cable company and resolving the TW in NY [ph] stake. So, that's basically all we can say at this point about what we're going to do in cable. On the New Line side, good question there, but it's very clear. There are not any ownership positions in New Line. The Time Warner owns New Line 100%. And we've the same relationship with Bob and Mike that we do with all our other executives.

Richard Greenfield, Pali Research

And just to follow up on Time Warner Cable, so just to be clear, you're not against the concept of buying it in, if that's what you end up determining is the best course of action.

Jeffrey L. Bewkes, President and Chief Executive Officer

We're doing whatever is the best value creator for both TWX and TWC.

Richard Greenfield, Pali Research

Thank you.

James E. Burtson, Senior Vice President, Investor Relations

Thanks Rich. Operator next question please?

Operator

Thank you. Our next question comes from Anthony DiClemente. Your line is open.

Anthony DiClemente, Lehman Brothers

If you look at the networks, you see an opportunity for further growth for networks via consolidation. And if you could consolidate any of the scripts, Discovery or the NBCU Cable Networks, should any of those come up, would you be interested? What other restructuring moves, are you -- cable preclude you from any of those types of deals. And then second question, Jeff, you talked at the outset about taking content from many of your ad supported networks and aggressively offering that content on demand on television. So, I would assume that you have a strong view that this model would not cannibalize the existing ad supported businesses, particularly at turns [ph]. So, wondering what gives you that high conviction that digital distribution is incremental to the network's model and not cannibalistic. Thank you.

Jeffrey L. Bewkes, President and Chief Executive Officer

Okay. The first one on horizontal consolidation of various cable networks. First one, we are not constrained in anyway from doing any of the things you asked, number one. Second, it's always a... and it's good reason I think why you asked it, it's always got some plusses when you take another, say, in the cable business, cable network and have some horizontal synergies and some ability to take capabilities and spread them across networks. So, in general, it's a reasonable idea. In terms of us saying which of those specifics you mentioned, Scripts and Discovery and NBC and all of that, all of them, as you know, are in various stages of questions being raised or they themselves have said they may do something. We're a big media company that has its position in networks, so we're going to look at everything, of course, but we never will or should comment on how we're going to evaluate these kind of opportunities. So I'm sorry we can't say more about at this point. On the... what was the other one? Network BOD. I don't see it as cannibal... Actually it's the reverse of cannibalizing, it supports viewership in these networks and it actually summons loyalty to the networks, and our belief is that it's really the best way to preserve and increase the advertising and it further gives an opportunity which you can talk to the cable companies, ours, Comcast etcetera about to use the targeting of the Internet, to make the advertising spots that are going to be on cable TV screens, on an on-demand basis even more valuable than they have been in the past. So we think it's a triple win not... more than a double win.

Anthony DiClemente, Lehman Brothers

Thank you.

James E. Burtson, Senior Vice President, Investor Relations

Thanks. Operator next question please.

Operator

Thank you. Our next question is Jessica Reif-Cohen of Merrill Lynch. You may ask your question.

Jessica Reif-Cohen, Merrill Lynch

Thank you. I have a couple of questions. On the spin-off of Cable, which is arguably your fastest growing business. It seems to be driven largely by balance sheet differences. So could you comment on what you're comfort level is, leverage for the content businesses, once they are separated, and also you did really comment on long-term interest in retaining, publishing. And then on the CW write-down, the $73 million dollar write-down, why... I guess, the question was, why take the loss now and what do you expect on this asset over the long-term?

John K. Martin, Executive Vice President and Chief Financial Officer

Let me start, Jessica, it's John, on the first part, which is the comment on the leverage of what I would say the non-cable company, and unfortunately now, I guess we don't really feel like we're in a position where we should and can comment on that because of what Jeff said before, is that we're essentially going to be entering into a discussion, which is really a negotiation. So there will be more and will be more transparent and forthcoming as we possibly can.

Jessica Reif-Cohen, Merrill Lynch

Okay.

John K. Martin, Executive Vice President and Chief Financial Officer

The second, as it relates to the impairment charge, I think you're referring to, this was just basically, the accounting rule say that you need to, once a year, essentially look at all of your assets to determine whether any of them are impaired comparing their net book value to the fair value and this was based on the fair value determination that was a decision made that we thought that there was an impairment, which essentially required that we had to take the charge. It's a non-cash charge, it's a book charge only. But it's something, it's an evaluation that we do literally every... all the assets across Time Warner. You
had a second question in there, which I actually don't think, at least Jeff, I don't know... I think it was what is our long-term interest in publishing, would you mind repeating that?

Jessica Reif-Cohen, Merrill Lynch

Yes, that's exactly that, what is your long-term interest in publishing?

Jeffrey L. Bewkes, President and Chief Executive Officer

Well, let me take it. We're good at publishing, we're the leader in the industry, it's a good business, we think. And as it converts, as it expands out beyond print into digital, which a number of our leading franchises are doing, we think it can turn into a fairly strong growth business in the middle term, and it is growing now, and we think it's got real promise. So, it does depend on our being able to demonstrate that to ourselves and to our investors.

Jessica Reif-Cohen, Merrill Lynch

Thank you.

James E. Burtson, Senior Vice President, Investor Relations

Thanks Jessica. Operator, we'll take one more question please.

Operator

Thank you. Our last question comes from Imran Khan of J.P. Morgan. Your line is open.

Imran Khan, J.P. Morgan

Yes, hi. Thank you for taking my questions. Two questions. In terms of the film, what kind of cost-saving opportunities you see in the film division? Is it from overhead or different approach to film production or distribution, and what kind of profitability you are aiming for and how quickly we can get there?. And then the last question on AOL, I think the search is a very scalable business. So, as the market consolidates, how do you think you can grow your search business? How can you maintain your search market share? Thank you.

Jeffrey L. Bewkes, President and Chief Executive Officer

I'll start on film. We mentioned some structural things that we're looking hard at in terms of getting efficiency between New Line and Warner, that would be one. Second, we... John mentioned that at Warners, we have a very high cash conversion to earnings, and a very high absolute earnings level. So, we're doing a certain amount of I think what is asked in the question. And what we'll continue to do, we think digital gives us an opportunity to do this is that, as we move forward and keep redesigning our production processes, our marketing, and take use of digital distribution... just to stop on an example, we have a day-and-date test which we are putting on some of our titles on demand at the same time there and physical rental. We don't see any drop in sell through. And the rental shift from physical over to digital moves us to a 70% margin instead of a 30% margin, so that would be one example. Another example would be on a global basis, coordinating more both in time and in universality I guess coining a word. But what the marketing campaigns are, we can both streamline the cost and we think increase the consumer impact of our global marketing activity. So, they're just ongoing things in the evolution of that business, and we are, and always have been, at the very lead of global scale, and we think that gives us an advantage in any of those kind of improvements and in our distribution power around the world.

John K. Martin, Executive Vice President and Chief Financial Officer

On your second question, Imran, on search, just a quick reminder, AOL is really not a principal in search. And so when you think about, it has an existing relationship with Google. And so as you think about how to grow those revenues, it basically comes back to what Jeff was saying at the beginning and it comes back to [indiscernible] strategy, grow usage, increase the number of searches, drive overall engagement and then drive monetization, which in part is going to be driven by overall industry trends, but in part by what AOL can do, and they're working very, very hard to do that. I think some of the examples that Jeff gave in terms their redesigns and new launches of product and the early success that they're having, gives us confidence and optimism that they're actually going to be able to grow, and you do get to drive search revenue. As I mentioned, have an existing Google deal, I'll just go back to the extent that the search providers in the industry consolidate, that could also prove beneficial for us as it could flash the value so to speak with respect to our scaled audience. So, that how I see it.

James E. Burtson, Senior Vice President, Investor Relations

Thanks, Imran. Operator, thanks to everyone on the call.

Operator

Thank you. That concludes today's conference. Thank you for your participation.

Analysts

Douglas Mitchelson, Deutsche Bank Securities
Spencer Wang, Bear Stearns
Michael Morris, UBS
Michael Nathanson, Sanford Bernstein
Benjamin Swinburne, Morgan Stanley
Jason Bazinet, Citigroup
Richard Greenfield, Pali Research
Anthony DiClemente, Lehman Brothers
Jessica Reif-Cohen, Merrill Lynch
Imran Khan, J.P. Morgan