Programming Costs Up at Scripps Networks

UPDATED: Special charges push net income lower
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UPDATED: 3:50 p.m. ET

Scripps Networks Interactive reported lower net income in the third quarter because of higher expenses and special charges.

Net income fell 3% to $98.6 million, or 61 cents per share, from $101.7 million, or 61 cents a share, a year ago. The company had a $25.3 million loss on foreign currency contracts.

Expenses rose 14% to $285 million. The company said the increase was driven by a 25% increase in programming costs resulting from the premiere of new shows and series. Marketing expenses rose 33% to support the launch of the new programming. Scripps Networks executives said they expect programming and marketing costs to return to more normal levels going forward.

Revenues rose 7.9% to $504 million. Affiliate fee revenues were up 6.1% to $148 million and advertising revenue was up 8.6% to $344 million.

"The company's positive third-quarter results reflect the resiliency and popularity of our lifestyle television networks," Kenneth W. Lowe, chairman, president and CEO, said in a statement. "Food Network and HGTV each have a loyal and growing fan base that our advertising and distribution partners value. At Travel Channel, we're focused on defining the content category in new and creative ways, while our premium-tier networks -- Cooking Channel and DIY Network -- are benefitting from strong competitive positions as favored destinations for a highly desirable and defined group of media consumers. Our strategy to stay focused on these attractive content categories has resulted in consistent growth for the company and the creation of significant value for our shareholders."

The company reiterated its full-year guidance that revenue would be up 10% to 12%, that programming expenses would be up 6% to 9%. To get there, the company would have to have sharply higher ad revenue -- low double digit growth -- in the fourth quarter.

Scripps executives were optimistic because ratings appear to be improving at Food Network and HGTV, thanks in part to the added spending on programming and promotion.

Travel Channel's ratings were down in the third quarter by 15% and revenues were up only 0.4 to $62.6 million,

"It was really one series on Travel that really had the greatest impact and that series unfortunately had a more rapid decline than we anticipated," said John Lansing, president of Scripps Networks, during the company's earnings conference call with analysts. "If you normalize the third quarter ratings for Travel and took the Man v. Food series out of both quarters, it's actually a flat quarter."

Lansing said that "with the new programming coming on Travel and the addition of a new vehicle for Anthony Bourdain as well with some marketing support, we also anticipate growth there as well."

New programming for the channel the series Hotel Impossible and Vacation Crashers, drawn from similar concepts Scripps' other networks.  "We know it will work," Lowe said.

Scripps is also upbeat about the ad market.

"Based on current trends, I'd have to say we're still quite optimistic and upbeat about advertising in 2012," said Joseph NeCastro, chief administrative officer and CFO at Scripps Networks.

"The healthy marketplace is continued into the fourth quarter with scatter versus scatter pricing running up in the high single-digits, and scatter to 2011 broadcast running up in the high-teens," NeCastro said. "Looking ahead to 2012, it's still a little too early to tell. What I can tell you, though, is that at this point in the process, it's looking like upfront cancellations are going to be at a minimum."

Scripps also reported that according to Nielsen, all of its networks were in fewer homes, with declines ranging from 0.7% to 1.6%.

Analysts were concerned about the figure because fewer homes means less subscription revenue and lower advertising delivery.

But Scripps said the declines were cause by Nielsen changing its TV universe.

"It's just an empirical statistical variance that we didn't anticipate, so we thought it was worth noting that the T.V penetration estimates reflected a slight decline in the number of U.S. households that received T.V signals," Lansing said. "Nielsen adjusted their penetration numbers down from about 99% of T.V households to about 97%. But the impact for us is more like about 1% and fairly de minimis."

In its earnings announcement, Scripps also broke out revenue for each of its networks:

Revenue at Food Network rose 12% to $180 million.

Revenue at HGTV rose 4.1% to $181 million.

Revenue at Travel channel rose 0.4% to $62.6 million.

Revenue at DIY Networks was up 3.7% to $23.7 million.

Revenue at Cooking Channel was up 36% to $16.6 million.

Revenue at Great American Country dropped 21% to $6.1 million.

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