HGTV Helps Scripps Networks Interactive Outpace Rivals

Pay TV specialist Scripps Networks Interactive (SNI +0.00%) shares touched a 52-week high heading into its fourth-quarter earnings report as investors grew optimistic that the owner of hit channels such as HGTV, Food Network, and the Travel Channel would ride ratings growth to improved operating results.

The company didn't disappoint when it reported Tuesday morning. While a one-time accounting charge sent profits far lower, solid advertising gains, combined with an improved trend on distribution fees, ensured that Scripps' 2016 fiscal year set records for the TV network.

Here's how the headline results stacked up against the prior-year period:

Data source: Scripps' financial filings.

What happened this quarter?

Scripps closed the books on a solid operating year that saw advertising revenue jump 17% worldwide thanks to strong ratings growth in the U.S. and improving results internationally, especially in Europe.

Key highlights of the quarter include:

• U.S. advertising revenue growth rebounded to a 9% gain following last quarter's 7% boost. Stronger ratings at its lifestyle channels, combined with the premium audience demographic that they attract, allowed Scripps to dramatically outperform peers this quarter. Discovery Communications (DISCK +0.00%) last week announced a 1% advertising gain while Time Warner (TWX +0.00%) posted flat results in early February.
• Distribution fees fell 2% for a slight improvement over the prior quarter's 3% decline. Scripps was far behind both Discovery and Time Warner on this metric, as these competitors made up for weak advertising growth by extracting significantly higher network carriage fees last year.
• HGTV led the way with an 8% revenue expansion for the quarter and the full year, followed by a 6% increase for Food Network. Travel Channel's growth decelerated to a 1% pace but finished at a solid 4% for the year. HGTV ended up ranked third among all cable networks in the total adult demographic.
• Net income was impacted by a $57 million goodwill writedown in the international segment. After adjusting for that non-cash charge, adjusted earnings improved 4% for the quarter on gains in both the U.S. and international divisions.

What management had to say

Speaking about the full-year results, CEO Kenneth Lowe highlighted the company's ratings-driven growth: "We achieved record levels of revenue and significantly improved our earnings," he said in a press release. "This standout performance is a direct result of our relentless focus on operational execution and the deliberate investment we've made in programming, international business and in Scripps Lifestyle Studios."

Management was encouraged by success they've had monetizing Scripps properties across digital platforms through the Lifestyle Studios brand. But the main profit driver was increased ratings at some of the company's biggest channels. "HGTV, DIY Network and Cooking Channel had their highest-rated and most watched year ever," executives explained.

Looking forward

Lowe and his team aim to monetize the HGTV brand around the world, as demonstrated by the network's recent launch in Poland, which marked its biggest international rollout yet. Early results are encouraging in this key media market: HGTV began in second place among lifestyle networks there.

Image source: Scripps.

Digital distribution will be a focus going forward as Scripps aims to improve on last year's 9% growth in the channel. Investors can also expect to see the international segment grow to a more significant portion of earnings over time.

The key to solid sales and profit growth will be the popularity of its core properties: HGTV, Food Network, and Travel Channel. Scripps needs these channels to continue setting ratings and engagement records for it to keep stealing market share even as the broader pay TV subscriber base declines.