Scripps Networks Interactive, Inc. (SNI) today reported mixed financial results for fourth quarter of 2010. Quarterly consolidated revenue of $573 million was an improvement of 33.3% year over year and also above the Zacks Consensus Estimate of $561 million. Interestingly, even excluding the contribution from the newly acquired Travel Channel, organic revenue increased 20% year over year.

Quarterly GAAP net income was $130.6 million or 77 cents per share compared with a net income of $94.4 million or 57 cents per share in the prior-year quarter. However, excluding one-time special items, Scripps Networks’ fourth quarter 2010 EPS was 68 cents, a penny short of the Zacks Consensus Estimate.

The striking top-line performance was primarily attributable to double-digit growth in advertising and affiliate-fee revenue at the company’s flagship Lifestyle Media business together with an equally impressive performance at Interactive Services. 

Consolidated costs and expenses were $326.1 million in the fourth quarter, up 17.4% year over year. Despite the rise in expenses, quarterly operating income rose 69.6% year over year to $216.3 million. In the reported quarter, total segment profit (excluding special items) was approximately $247 million, up a whopping 62.5% year over year.

During fiscal 2010, Scripps Networks generated $487.5 million of cash from operations compared with $522.3 million in fiscal 2009. Free cash flow (cash flow from operations less capital expenditures) in fiscal 2010 was $410.5 million compared with $432.3 million in fiscal 2009.

At the end of fiscal 2010, Scripps Networks had $598.4 million of cash & marketable securities and $884.4 million of debt outstanding on its balance sheet compared with $254.4 million of cash & marketable securities and $884.2 million of outstanding debt at the end of fiscal 2009. At the end of fiscal 2010, the debt-to-capitalization ratio was 0.32 compared with 0.37 at the end of fiscal 2009.

Lifestyle Media Segment

Quarterly total revenue of $501 million was an improvement of 31.8% year over year. Among the sub segments, Advertising revenue was $352.8 million, up 22.8% year over year, Affiliates fee revenue was $138 million, up 61% year over year, and Other revenue was $10.2 million, up 44.4% year over year. Excluding the contribution from the Travel Channel, Lifestyle Media segment generated $432.9 million, up 17% year over year.

Quarterly total expense was $253 million, up 19% year over year. Of the total, Programming expense constituted $108 million, up 8.1% year over year and Non-Programming expense was $145 million, up 29% year over year. Total segment profit was $247.9 million, up 47.6% year over year.

Brand wise, HGTV revenue was $176.3 million, up 12.8% year over year. Total subscriber base is now 99.4 million, up 0.7% year over year. Food Network revenue was $178 million, up 23.3% year over year. Total subscriber base is now 100.1 million, up 0.9% year over year. Travel Channel revenue was $68.1 million. Total subscriber base was 95.6 million, up 0.4% year over year.

DIY Network revenue was $22.8 million, up 23.2% year over year. Total subscriber base is now 53.5 million, up 0.6% year over year. Cooking Channel revenue was $15.7 million, up 28% year over year. Total subscriber base is now 57.1 million, up 1.2% year over year. Great American Country revenue was $7.7 million, up 1.9% year over year. Total subscriber base is now 59.3 million, up 1.4% year over year. SN Digital revenue was $29.2 million, up 5.1% year over year. Other revenue was $3.8 million, up 89.5% year over year.

Interactive Services Segment

Quarterly total revenue of $67.8 million was up 38.2% year over year. Operating expenses were $34.7 million, up 6.4% year over year. However, segment profit was $20.8 million, up a substantial 106.3% year over year.

Future Financial Guidance

Management has provided guidance for fiscal year 2011. At the Lifestyle Media segment, total revenue is anticipated to increase by 10% -12%. Programming expenses will likely see 6%-9% inflation. Non-Programming expenses will be flat to down by 2%. Interactive Services segment profit is expected to be $50 million – $55 million. International operating losses are expected to be $5 million – $10 million.

Capital expenditure will come in a $75 million – $85 million range. The effective tax rate is pegged at 32%-34%. The company sees depreciation & amortization expenses of $125 million to $135 million. Interest expense will come in a narrow band of $33 million – $35 million. Non-controlling share of net income is expected at $125 million to $135 million.

Recommendation

We maintain our long-term Neutral recommendation on Scripps Networks. Currently it is a short-term Zacks #4 Rank (Sell) stock.The company’s weak television rating that resulted in a sequential loss of viewers is the main reason behind the bearish short-term Sell rating. Scripps Network competes with Discovery Communications Inc. (DISCA) among others.

 
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