Mixed 4Q for Scripps Networks

Scripps Networks Interactive Inc. (SNI - Analyst Report) has reported mixed financial results for the fourth quarter of 2011. Quarterly adjusted revenue of $553.5 million increased 9.5% on a yearly basis, but fell below the Zacks Consensus Estimate of $562 million. The year-over-year revenue growth was primarily driven by higher advertising revenue.

Quarterly GAAP net income from continuing operation was $135 million or 84 cents per share compared with $123.2 million or 73 cents per share in the prior-year quarter. Reported EPS of 84 cents marched past the Zacks Consensus Estimate of 81 cents.

Consolidated costs and expenses were $296 million in the reported quarter, up 6.1% year over year. Higher expenditure in the quarter was mainly responsible for the higher programming amortization expense as well as fees associated with the company’s investment in the UKTV partnership.

Quarterly operating income rose 14.2% year over year to $233.2 million. Operating margin in the reported quarter was 42.1% compared with 40.4% in the prior-year quarter.   

At the end of fiscal 2011, Scripps Networks generated $728.9 million in cash from operations compared with $487.5 million in the prior-year period. Free cash flow (cash flow from operations less capital expenditures) in the quarter was $674.8 million compared with $432.7 million in the year-ago period.

At the end of the fourth quarter of 2011, Scripps Networks had $760.1 million in cash & marketable securities and $1383.9 million of outstanding debt on its balance sheet compared with $549.9 million in cash & marketable securities and $884.4 million of outstanding debt at the end of fiscal 2010. At the end of the reported quarter, debt-to-capitalization ratio was 0.45 compared with 0.33 at the end of fourth quarter of fiscal 2010.

Lifestyle Media Segment

Quarterly revenue of $547.9 million improved 9.4% year over year. Within sub segments, Advertising revenue climbed 11.3% annually to $392.6 million; Affiliates fee revenue stood at $145.4 million, up 5.3% year over year, Other revenue dipped 2.7% year over year to $9.9 million. Total segment profit was $257.5 million, up 13.8% year over year.

Brand-wise, HGTV revenue was $190.6 million, up 8.1% year over year. Total subscriber base was 98.9 million, down 0.5% year over year. Food Network revenue was $204.1 million, up 14.7% year over year.

Total subscriber base stood at 99.6 million, down 0.5% year over year. Travel Channel revenue was $67.2 million, down 1.4% year over year. Total subscriber base slid 0.7% year over year to 94.9 million.

DIY Network revenue was $26.9 million, up 17.8% year over year. Total subscriber base was 56.5 million, up 5.6% year over year. Cooking Channel revenue was $17.8 million, up 13.9% year over year.

Total subscriber base was 58.2 million, up 1.9% year over year. Great American Country revenue was $6.6 million, down 14.9% year over year. Total subscriber base stood at 62.2 million, up 4.9% year over year. SN Digital revenue leaped 4.1% annually to $30.4 million. Other revenue was $4.4 million, up 15.6% year over year.

Corporate Segment

Quarterly total revenue of $5.6 million was up 30.4% year over year. However, segment loss was $23.3 million, up 7.4% year over year.

Future Financial Guidance

Management has provided guidance for full-year 2012. Total revenue is anticipated to grow 8% -10%. Programming expenses will likely witness 13%-15% jump in order to increase TV audiences. Non-Programming expenses are estimated to increase 10% to 12%.

Capital expenditure is anticipated to be in the range of $60 million to $70 million. Depreciation and amortization is expected to be between $100 million to $110 million. Interest expense should lie between $45 million to $50 million.

Noncontrolling share of net income is expected to range between $170 million to $180 million while Effective tax rate will most likely to be 30% to 32%.

Recommendation

Increased marketing efforts by the management, continuous growth in advertising and affiliate fee revenues coupled with channel acquisitions and future share repurchase authorizations will act as growth catalysts for the company going forward. However, management’s decision to increase marketing expenditure in order to expand TV audiences may put pressure on margins in the near term.

Moreover, stiff competition from other media companies like Discovery Communications Inc. (DISCA - Snapshot Report) and Crown Media Holdings, Inc. (CRWN - Snapshot Report) coupled with overall weak advertising market may act as headwinds in the forthcoming quarters.We, thus, maintain our long-term Neutral recommendation onScripps Networks.

Currently, Scripps Networkshas a Zacks #2 Rank, implying a short-term Buy rating on the stock.

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