Time Warner Inc. Reports Third-Quarter 2008 Results

Time Warner Inc. (NYSE:TWX) today reported financial results for its third quarter ended September 30, 2008.

Chief Executive Officer Jeff Bewkes said: "The quarter’s solid earnings and superior free cash flow show the resilience of our businesses – in spite of the challenging economic environment – reflecting both our diversified revenue streams and our ability to make compelling branded content consistently. Importantly, our balance sheet remains very strong in terms of liquidity and capacity. And we’ve continued to make progress on our structural objectives, including our separation of Time Warner Cable, that will move us closer to our goal of becoming the industry’s leading pure content company.”

Company Results

In the quarter, Revenues were essentially flat compared to the same period in 2007 at $11.7 billion, with increases at the Cable and Networks segments.

Adjusted Operating Income before Depreciation and Amortization rose 9% to $3.5 billion. Growth at the Networks, Cable and Filmed Entertainment segments more than offset declines at the Publishing and AOL segments. Operating Income was up 10% to $2.3 billion.

For the first nine months, Cash Provided by Operations was $8.1 billion, and Free Cash Flow totaled $5.0 billion (representing a 51% conversion rate of Adjusted Operating Income before Depreciation and Amortization). As of September 30, 2008, Net Debt was $33.6 billion, down $2.0 billion from $35.6 billion at the end of 2007, due primarily to the generation of Free Cash Flow, offset in part by acquisitions.

Diluted Income per Common Share from Continuing Operations was $0.30 for the three months ended September 30, 2008, compared to $0.24 in last year’s third quarter. The current and prior year amounts included certain items affecting comparability that are described in detail in the Consolidated Reported Net Income and Per Share Results section below. The net impact of such items was to decrease the current year quarter’s results by $0.01 per diluted common share and had no meaningful impact on the prior year quarter’s results.

Segment Performances

Presentation of Financial Information

The schedule below reflects Time Warner’s financial performance for the three and nine months ended September 30, by line of business (millions).

In the presentation of financial information in this release, Adjusted Operating Income (Loss) before Depreciation and Amortization excludes the impact of noncash impairments of goodwill, intangible and fixed assets, as well as gains and losses on asset sales and amounts related to securities litigation and government investigations. Operating Income includes these amounts in their respective periods. Refer to the reconciliations of Adjusted Operating Income (Loss) before Depreciation and Amortization to Operating Income (Loss) before Depreciation and Amortization and the reconciliations of Operating Income (Loss) before Depreciation and Amortization to Operating Income (Loss) in this release for details.

Presented below is a discussion of Time Warner’s segments for the third quarter of 2008. Unless otherwise noted, the Dollar amounts in parentheses represent year-over-year changes.

AOL

Revenues decreased 17% ($207 million) to $1.0 billion, due to a 26% decline ($165 million) in Subscription revenues and a 6% decrease ($33 million) in Advertising revenues. The decline in Subscription revenues reflects mainly a decrease in domestic AOL brand subscribers, related primarily to AOL’s strategy to offer its e-mail and other products free of charge to Internet consumers. Driving the decrease in Advertising revenues were declines in display advertising on AOL Network sites and sales of advertising on third-party Internet sites, offset partially by an increase in paid-search advertising.

Adjusted Operating Income before Depreciation and Amortization declined 7% ($30 million) to $398 million, resulting from lower revenues and higher traffic acquisition costs ($21 million), offset partly by lower personnel and overhead costs as well as reduced marketing, network and other expenses.

Operating Income decreased 9% ($27 million) to $268 million, due primarily to lower Adjusted Operating Income before Depreciation and Amortization.

Key Operating Metrics

During the quarter, AOL had 110 million average monthly domestic unique visitors and 54 billion domestic page views, according to comScore Media Metrix, which translates into 165 average monthly domestic page views per unique visitor.

As of September 30, 2008, the AOL service had 7.5 million U.S. access subscribers, a decline of 634,000 from the prior quarter and 2.6 million from the year-ago quarter, reflecting subscriber losses due partially to AOL’s strategy to prioritize its advertising business.

CABLE (Time Warner Cable)

Revenues increased 8% ($339 million) to $4.3 billion. Subscription revenues grew 9% ($336 million) to $4.1 billion. Video revenues rose 4% ($109 million) to $2.6 billion, driven by continued growth in digital video services and video price increases. High-speed data revenues increased 12% ($114 million) to $1.1 billion, as a result of continued high-speed data subscriber growth. Voice revenues were up 37% ($113 million) to $421 million, reflecting growth in Digital Phone subscribers. Advertising revenues grew 1% ($3 million) to $224 million.

Operating Income before Depreciation and Amortization rose 9% ($126 million) to $1.6 billion, benefiting from revenue growth, offset partially by higher employee, video programming and voice costs. Employee costs grew, resulting primarily from headcount and salary increases. Video programming expenses rose 8% ($68 million) to $949 million, due to contractual rate increases and a higher percentage of basic video subscribers who also subscribe to expanded tiers of video services. Voice costs climbed 25% ($29 million), reflecting primarily growth in Digital Phone subscribers. Operating Income before Depreciation and Amortization also included a $13 million benefit due to changes in estimates of previously established casualty insurance accruals and a $10 million negative impact as a result of service outages and damage to plant infrastructure caused by Hurricane Ike. Additionally, the current year period included restructuring expenses of $8 million, compared to merger-related and restructuring expenses of $4 million in the prior year period.

Operating Income was up 16% ($107 million) to $788 million, due to higher Operating Income before Depreciation and Amortization, offset in part by increased depreciation expense ($17 million).

Key Operating Metrics

Revenue generating units ("RGUs”) totaled 34.2 million at September 30, 2008 – reflecting net additions of 522,000, the 14^th consecutive quarter of RGU growth exceeding 500,000. Customer relationships were 14.7 million, and Triple play subscribers approached 3.0 million (or 20% of total customer relationships), benefiting from 168,000 net additions during the third quarter.

FILMED ENTERTAINMENT (Warner Bros. Entertainment)

Revenues declined 9% ($297 million) to $2.9 billion, as the standout theatrical performance of The Dark Knight and the home video release of Sex and the City: The Movie faced difficult comparisons to the prior year quarter’s theatrical releases of Harry Potter and the Order of the Phoenix, Rush Hour 3 and Hairspray and the home video release of 300. Another driver of the decrease was lower television licensing fees, due mainly to the prior year quarter’s initial off-network availability of Two and a Half Men and Cold Case. These declines were offset partially by growth in interactive video games, due primarily to LEGO Indiana Jones and LEGO Batman.

Operating Income before Depreciation and Amortization rose 6% ($22 million) to $381 million, reflecting lower film valuation adjustments, reduced print and advertising expenses and lower overhead costs related to the operational reorganization of the New Line Cinema business, offset in part by the impact of lower revenues and higher restructuring costs ($17 million), which was also related largely to the operational reorganization of the New Line Cinema business.

Operating Income increased 3% ($7 million) to $275 million, due primarily to an increase in Operating Income before Depreciation and Amortization, offset partly by higher amortization expenses ($10 million).

NETWORKS (Turner Broadcasting & HBO)

Revenues climbed 7% ($176 million) to $2.7 billion, with growth of 10% ($156 million) in Subscription revenues and 9% ($63 million) in Advertising revenues, offset partially by a 17% decline ($46 million) in Content revenues. Subscription revenues benefited mainly from higher rates at both Turner and HBO and, to a lesser extent, more subscribers for Turner’s networks, as well as the impact of international expansion. Driving the increase in Advertising revenues were Turner’s domestic networks, reflecting largely higher CPMs (advertising rates per thousand viewers) and audience delivery, as well as Turner’s international networks, reflecting primarily an increase in the number of units sold. The decrease in Content revenues was due to lower ancillary sales of HBO’s original programming, as well as lower syndication revenues associated with HBO’s Everybody Loves Raymond.

Adjusted Operating Income before Depreciation and Amortization grew 21% ($178 million) to $1.0 billion, fueled largely by increased revenues and lower programming expenses, offset in part by higher marketing and election-related newsgathering expenses. Programming expenses declined 4% to $854 million, due primarily to lower original programming costs at HBO and Turner and a decrease in sports programming costs at Turner, offset partially by higher programming costs associated with international expansion and higher licensed programming costs at both HBO and Turner.

Operating Income rose 21% ($158 million) to $909 million, resulting mainly from the increase in Adjusted Operating Income before Depreciation and Amortization, offset partly by increased depreciation ($7 million) and amortization ($10 million) expenses.

PUBLISHING (Time Inc.)

Revenues decreased 7% ($81 million) to $1.1 billion, due to declines of 8% ($51 million) in Advertising revenues, 18% ($30 million) in Other revenues and 1% ($3 million) in Subscription revenues. The decrease in Advertising revenues reflected lower domestic print magazine revenues, offset in part by higher online revenues ($13 million), led by SI.com, People.com and CNNMoney.com. Other revenues decreased, due to lower sales at Synapse, Southern Living At Home and Oxmoor House, offset partly by the impact of the acquisition of QSP, Inc. in August 2008.

Adjusted Operating Income before Depreciation and Amortization declined 19% ($57 million) to $241 million, due primarily to the decreases in domestic print magazine Advertising revenues and Other revenues, offset partially by lower overhead expenses.

Operating Income decreased 35% ($89 million) to $162 million, resulting from a decline in Adjusted Operating Income before Depreciation and Amortization and a $30 million noncash asset impairment related to a sub-lease with a tenant that filed for bankruptcy in September 2008.

CONSOLIDATED REPORTED NET INCOME AND PER SHARE RESULTS

For the three months ended September 30, 2008, Income from Continuing Operations and Net Income were both $1.1 billion, or $0.30 per diluted common share. This compares to Income from Continuing Operations in the prior year quarter of $900 million, or $0.24 per diluted common share, and Net Income in the prior year quarter of $1.1 billion, or $0.29 per diluted common share.

Certain pretax items in the current year quarter affected comparability, including $55 million of direct transaction costs (e.g., legal and professional fees) and financing costs, related to the planned separation of Time Warner Cable from the Company, a $30 million noncash asset impairment at the Publishing segment related to a sub-lease with a tenant that filed for bankruptcy in September 2008 and the $30 million recognized by the Company as its share of a gain on the sale of a Central European documentary channel of an equity method investee.

Certain pretax items in the prior year quarter similarly affected comparability, including $14 million in other net investment gains and $12 million of tax benefits related mainly to the realization of tax attribute carryforwards.

In the aggregate, these items affecting comparability had the net effect of decreasing the current year quarter’s Income from Continuing Operations by $49 million (net of taxes), or $0.01 per diluted common share, and increasing the prior year quarter by $18 million (net of taxes), with no meaningful effect per diluted common share. Excluding such items, Income from Continuing Operations increased, reflecting growth in Adjusted Operating Income before Depreciation and Amortization and lower interest expense, offset partly by higher amortization expense. Excluding such items, Diluted Income per Common Share from Continuing Operations increased in the current year quarter compared to the prior year quarter, driven by the increase in Income from Continuing Operations, as well as a decrease in average diluted common shares as a result of common stock repurchases made under the stock repurchase programs.

STOCK REPURCHASE PROGRAM UPDATE

From the announcement of the Company’s $5 billion stock repurchase program on August 1, 2007, through November 4, 2008, the Company repurchased approximately 154 million shares of common stock for approximately $2.8 billion. These amounts are unchanged from those reported in the Company’s second-quarter 2008 earnings release issued on August 6, 2008.

Use of Operating Income (Loss) before Depreciation and Amortization, Adjusted Operating Income (Loss) before Depreciation and Amortization and Free Cash Flow

The Company utilizes Operating Income (Loss) before Depreciation and Amortization, among other measures, to evaluate the performance of its businesses. The Company also evaluates the performance of its businesses using Operating Income (Loss) before Depreciation and Amortization excluding the impact of noncash impairments of goodwill, intangible and fixed assets, as well as gains and losses on asset sales, and amounts related to securities litigation and government investigations (referred to herein as Adjusted Operating Income (Loss) before Depreciation and Amortization). Both Operating Income (Loss) before Depreciation and Amortization and Adjusted Operating Income (Loss) before Depreciation and Amortization are considered important indicators of the operational strength of the Company’s businesses. Operating Income (Loss) before Depreciation and Amortization eliminates the uneven effect across all business segments of considerable amounts of noncash depreciation of tangible assets and amortization of certain intangible assets that were primarily recognized in business combinations. A limitation of this measure, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in the Company’s businesses. Moreover, Adjusted Operating Income (Loss) before Depreciation and Amortization does not reflect gains and losses on asset sales or amounts related to securities litigation and government investigations or any impairment charge related to goodwill, intangible assets and fixed assets. Management evaluates the investments in such tangible and intangible assets through other financial measures, such as capital expenditure budgets, investment spending levels and return on capital.

Free Cash Flow is Cash Provided by Operations (as defined by U.S. generally accepted accounting principles) plus payments related to securities litigation and government investigations (net of any insurance recoveries) and excess tax benefits from the exercise of stock options, less cash flow attributable to discontinued operations, capital expenditures and product development costs, principal payments on capital leases and partnership distributions, if any. The Company uses Free Cash Flow to evaluate its businesses and this measure is considered an important indicator of the Company’s liquidity, including its ability to reduce net debt, make strategic investments, pay dividends to common shareholders and repurchase stock. A limitation of this measure, however, is that it does not reflect payments made in connection with the securities litigation and government investigations, which reduce liquidity.

Operating Income (Loss) before Depreciation and Amortization, Adjusted Operating Income (Loss) before Depreciation and Amortization and Free Cash Flow should be considered in addition to, not as a substitute for, the Company’s Operating Income, Net Income and various cash flow measures (e.g., Cash Provided by Operations), as well as other measures of financial performance and liquidity reported in accordance with U.S. generally accepted accounting principles.

About Time Warner Inc.

Time Warner Inc. is a leading media and entertainment company, whose businesses include interactive services, cable systems, filmed entertainment, television networks and publishing.

Information on Time Warner’s Business Outlook Release and Conference Call

Time Warner Inc. issued a separate release today regarding its updated 2008 full-year business outlook.

The Company’s conference call can be heard live at 10:30 am ET on Wednesday, November 5, 2008. To listen to the call, visit www.timewarner.com/investors or AOL Keyword: IR.

Information on Time Warner Cable’s Releases and Conference Call

Time Warner Cable issued separate releases today regarding its third-quarter 2008 results as well as its updated 2008 full-year business outlook.

Time Warner Cable’s conference call can be heard live at 8:30 am ET on Wednesday, November 5, 2008. To listen to the call, visit www.timewarnercable.com/investors or AOL Keyword: TWC IR.

Caution Concerning Forward-Looking Statements

This document 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, the planned separation of Time Warner Cable from the Company and other factors affecting the operation of the businesses of Time Warner Inc. More detailed information about these factors may be found in filings by Time Warner with the Securities and Exchange Commission, 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 expressly disclaims any such obligation to, update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.