Blockbuster 3Q for Scripps Networks - Analyst Blog

Scripps Networks Interactive, Inc. (SNI) today reported a highly impressive third quarter of 2010 financial results. Quarterly consolidated revenue of $508.7 million was an improvement of 40% year-over-year and well above the Zacks Consensus Estimate of $484 million. Interestingly, even excluding the contribution from newly acquired Travel Channel, organic revenue increased 22% year-over-year.

Quarterly GAAP net income was $101.7 million or 61 cents per share compared to a net income of $65.3 million or 39 cents per share in the prior-year quarter. However, excluding one-time special items, Scripps Networks' second quarter 2010 EPS was 59 cents, far ahead of the Zacks Consensus Estimate of 51 cents.

These fabulous performances were primarily attributable to double-digit growth in advertising and affiliate-fee revenue of the company's flagship Lifestyle Media business together with a surprising top-line increase of Interactive Services. 

Quarterly operating income was $193.6 million, up 57.8% year over year. In the reported quarter, total segment profit (excluding special items) was $223.8 million, up a whopping 55.1% year over year.

During the first nine months of 2010, Scripps Networks generated $345.5 million of cash from operations compared to $400.8 million in the prior-year period. Free cash flow (cash flow from operations less capital expenditures) in the same period was $293.5 million compared to $343 million in the year-ago period.

At the end of the third quarter of 2010, Scripps Networks had $462.1 million of cash & marketable securities and $884.4 million of debt outstanding on its balance sheet compared to $254.4 million of cash & marketable securities and $884.2 million of outstanding debt at the end of fiscal 2009. At the end of the third quarter of 2010, debt-to-capitalization ratio was 0.33 compared to 0.37 at the end of fiscal 2009.

Lifestyle Media Segment

Quarterly total revenue of $462.5 million was an improvement of 42.1% year over year. Out of this, Advertising revenue was $316.4 million, up 33.7% year over year, Affiliates fee revenue was $139 million, up 71.4% year over year, and Other revenue was $7.1 million, down 9.5% year over year. Excluding the contribution from the Travel Channel, Lifestyle Media segment generated $414 million, up 23% year over year.

Quarterly total expense was $230 million, up 31% year over year. Out of this, Programming expense was $98.7 million, up 24% year over year and Non-Programming expense was $131 million, up 38% year over year. Total segment profit was $232 million, up 55% year over year.

Brand wise, HGTV revenue was $173.6 million, up 14% year over year. Total subscriber base is now 100 million, up 1% year over year). Food Network revenue was $160.4 million, up 35.3% year over year. Total subscriber base is now 100.4 million, up 1.1% year over year. Travel Channel revenue was $62.3 million, up 14% year-over-year. Total subscriber base was 96.1 million, up 0.8% year over year.

DIY Network revenue was $22.8 million, up 29.1% year over year. Total subscriber base is now 54 million, up 3.6% year over year. Cooking Channel revenue was $12.2 million, up 9.3% year over year. Total subscriber base is now 58.1 million, up 4.3% year over year. Great American Country revenue was $7.6 million, up 18.3% year over year. Total subscriber base is now 59.6 million, up 4.2% year-over-year. SN Digital revenue was $21.6 million, up 22.9% year over year.

Interactive Services Segment

Quarterly total revenue of $41.8 million was up 7.2% year over year. Operating expenses were $34.7 million, up 6.4% year-over-year. However, segment profit was $7.1 million, up 11% year-over-year.

Future Financial Guidance

Management has provided guidance for full fiscal 2010. Total affiliate fee revenue is expected to be around $550 million. Travel Channel represents about $100 million of the total affiliate fee revenue. Interactive Services Segment profit from the company's Shopzilla comparison shopping business is expected to be $33 million – $35 million.

Programming expenses are expected to be $380 million – 400 million. Travel Channel programming expense will be within the range of $30 million - $40 million. Non-programming expenses are expected to be $550 million - $560 million, including one-time transition costs related to the Travel Channel.

Recommendation

We maintain our long-term Neutral recommendation for Scripps Networks. Currently it is a short-term Zacks #2 Rank (Buy) stock. We believe both advertising revenue and network affiliate fee revenue will remain strong in near-future due to an improving U.S. economy. Scripps Networks has successfully hiked fees it charges cable operators. These are the main reasons for the Zacks short-term Zacks #2 Rank (Buy).