Excellent 2Q for Scripps Networks

Scripps Networks Interactive Inc. (SNI - Analyst Report) has reported robust financial results for the second quarter of 2012. Increased marketing efforts, continuous growth in advertising and affiliate fee revenues and gradual share repurchase are the primary factors for this strong performance. Management has raised its financial outlook for the rest of 2012.

Quarterly GAAP net income from continuing operations was $142.4 million or 93 cents per share, compared with $77.4 million or 78 cents per share in the prior-year quarter. Reported earnings per share of 93 cents were significantly higher than the Zacks Consensus Estimate of 87 cents. Quarterly total revenue of $600.1 million increased 12.5% on a yearly basis, easily beating the Zacks Consensus Estimate of $590 million.

Second-quarter gross profit was $450.1 million compared with $410.7 million in the prior-year quarter. Quarterly gross margin was 74.9% compared with 76.9% in the prior-year quarter.

Second-quarter operating income rose 2.7% year over year to $258.7 million. Operating margin in the reported quarter was 43.1% compared with 47.2% in the prior-year quarter.

In the previous quarter, Scripps Networks repurchased 4.6 million shares of its common stock for $250 million. Furthermore, on July 31, 2012, the Board of Directors authorized a new $1 billion share buy-back plan.

During the first half of 2012, Scripps Networks generated $241.9 million of cash from operations compared with $365.6 million in the prior-year period. Free cash flow (cash flow from operations less capital expenditures) in the first half of 2012 was $222.8 million compared with $340.7 million in the year-ago period.

At the end of the second quarter of 2012, Scripps Networks had $730.6 million in cash & marketable securities and $1,384.1 million of outstanding debt on its balance sheet compared with $760.1 million in cash & marketable securities and $1,383.9 million of outstanding debt at the end of 2011. At the end of the reported quarter, debt-to-capitalization ratio was 0.44 compared with 0.45 at the end of 2011.

Lifestyle Media Segment

Quarterly revenue came in at $591 million, showing an annualized growth of 12.1%. Within this segment, Advertising revenue climbed 11.3% annually to $415.1 million; Network Affiliate fee revenue stood at $166.1 million, up 13.5% year over year, Other revenue jumped 21.1% year over year to $9.9 million. Total segment profit was $284.7 million, up 3.9% year over year.

Brand-wise, HGTV revenue was approximately $205 million, up 8.4% year over year. Total subscriber base was 98.9 million, down 1% year over year. Food Network revenue was $218.5 million, up 16.5% year over year. Total subscriber base stood at 99.6 million, down 1% year over year. Travel Channel revenue was $73.8 million, up 4.9% year over year. Total subscriber base slid 1.4% year over year to 94.7 million.

DIY Network revenue was $33.8 million, up 16.2% year over year. Total subscriber base was 57.8 million, up 6.4% year over year. Cooking Channel revenue was $22.4 million, up 40.6% year over year. Total subscriber base was 59.6 million, up 2.8% year over year. Great American Country revenue was $5 million, down 15.4% year over year. Total subscriber base stood at 62.6 million, up 4% year over year. SN Digital revenue increased 3.4% annually to $28.3 million. Other revenue was $4.5 million, up by a substantial 103.7% year over year.

Corporate Segment

Quarterly total revenue of around $10 million was up 50.4% year over year. However, segment loss was $25.7 million, up 74.4% year over year.

Future Financial Guidance

Management has provided revised guidance for full-year 2012, where total revenue is anticipated to grow 10% -12%. Programming expenses will likely witness 13%-15% jump in order to increase TV audiences.

Non-Programming expenses are estimated to increase 16% to 18%. 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 and $110 million. Interest expense should lie between $45 million and $50 million.

Non-controlling share of net income is expected to range between $170 million and $180 million while Effective tax rate will most likely scale between 28% and 30%.

Recommendation

Despite facingstiff competition from other media companies, such as Discovery Communications Inc. (DISCA - Snapshot Report) and LIN TV Corp. (TVL - Snapshot Report), Scripps Networks has successfully differentiated its offerings on multiple video screens and other platforms including tablets.We maintain our long-term Neutral recommendation onScripps Networks. Currently, ithas a Zacks #3 Rank, implying a short-term Hold rating on the stock.