Overall: 2008 outlook not good. EBITDA growth slow, free cash flow down, AOL a disaster (EBITDA down for full year, ad revenue down in Q1). Jeff and John do sound credible and competent, though. Jeff’s view of video industry evolution (all will be on demand) is refreshing.
10:34: Call begins
Jeff: “GOOD MORNING!”
Goal: increase value of stock price
operate better than competitors
deploy capital intelligently
Keys to Operating Well
- No complacency
- Increase margins (fire people). Starting here at corporate, cutting costs 15%Other place we’re going to whack people: New Line Cinemas
- Other place we’re going to whack people: New Line Cinemas
- Find new ways for consumers to consume content (Praise The Lord)CNN, Time Warner Cable, etc.Need to be REVOLUTIONARY, not evolutionaryAll video programming needs to be on-demand (PTL)
- CNN, Time Warner Cable, etc.
- Need to be REVOLUTIONARY, not evolutionary
- All video programming needs to be on-demand (PTL)
- Decision to go fee pretty successful
- Spending lots of money buying stuff
- Need to complete transitionSeparating ACCESS and AUDIENCE, will run separately
- Separating ACCESS and AUDIENCE, will run separately
Cable: Will resolve ownership (presumably, spin off)
Free cash flow much lower in 2008 than 2007 because now a full taxpayer. (This clears up mystery)
$36 billion in net debt (3X EBITDA, but yikes)
–Will maintain 3X ratio, investment grade rating.
–stabilised pageviews (FLAT y/y)
–One goal: increase usage on AOL, working very hard
–Ads up 10% to $620 million
–Display: $252, up only 3%
–Impression gains offset by trends (shift to third-party networks) and management decisions
–We have adjusted sales process, integrated ad sales w/ Tacoda, etc.
–Discontinued some crappy deals ($25mm)
–Paid search, $170mm, up only 1%
–Europe paid search, 20% of whole, declined 8% due to change in Google deal
–US up mid- single-digits (lower users, lower click rates)
–Platform A Ad revs $200mm, up 30%.
–Half of this growth from acquisitions
–Still, encouraged by organic growth
–in Q1, ad revenue WILL BE FLAT TO DOWN
–last year benefit $19mm one-time
–more discontinued crappy deals
–Apollo deal restructured
–In Q1, operating income will be down
–loss of subscribers starting to hit operating income
AOL and Turner: Have not seen economic weakness as factor.
HOWEVER….at Time, Inc. seeing economic weakness hitting ads.
Separating AOL Access and Audience…in part because makes easier to do deals with other companies (such as selling them off).
AOL advertising…when will it be growing again? You should see some growth in Q2, and we’ll build from there. [Again, remember that Platform A network revenue is much lower margin ad revenue than owned-and-operated properties ad revenue. So mere growth of network revenue won’t necessarily drive EBITDA growth]
Why confident can ever grow AOL again? Some reinvigorated publishing sites. Strong in communications: AIM/ICQ. Those are benefiting from social networking. Also important that we can monetise other people’s pageviews (so we’re a strong business partner for the social networks). We think both of those ways will ride secular growth. Also, keep in mind Platform A less than year old. Only now beginning to apply behavioural, etc. Have seen some exciting ramps in CPMs in certain areas.
AOL OIBIDA: Down in Q1 and probably down for full year 2008.
CPMs: Premium prices are going back up, but still seeing pressure on non-premium prices. Adding behavioural, etc, should reverse this trend eventually.
Google’s Right to Force an AOL IPO: They haven’t told us they want to use this. Won’t have any impact on our separating the Access and Audience business.
Why not buy back Cable if so undervalued? Fair question. We’re starting the discussions. We don’t think advisable to negotiate publicly on the choices. All of us believe that the cable industry’s position is undervalued, but what we end up doing is dependent on the negotiations. Considerations have to be vetted. Relative leverage of cable, resolving TWNY stake. [Worth noting: Question comes from Rich Greenfield, an AOL critic who the old regime used to stiff on the calls]
Q4 and Outlook
Time Warner’s Q4 EBITDA growth was fine (16%, vs. 17% for the full year), but guidance was weak: only 7%-9% for full-year 2008. Q4 growth was driven by Filmed Entertainment, Cable, and AOL, the latter of which benefited modestly from the mass layoffs earlier in the quarter. AOL ad revenue was weak: up only 10%. Across the company, advertising revenue rose 6% year over year. Release.
WaPo says Time Warner will announce the full spin-off of the cable business.
AOL: AOL ad revenue only rose 10% year-over-year, another deceleration (from 13% in Q3 and 16% in Q2). On the positive side, the defection rate of paying subscribers is starting to slow, with the company losing 740,000 in the quarter versus about 900,000 last quarter and more than 1 million in each quarter last year. Web traffic was basically flat year over year. (See our AOL model here).
NOW WATCH: Tech Insider videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.