Scripps Networks Interactive (NASDAQ:SNI) this week announced quarterly earnings results that reflected growing stress on its business as pay-TV ratings shrink and consumers shift their content viewing online. Costs related to its upcoming merger with Discovery (NASDAQ:DISCK) also pinched the TV network's profits while management warned of a "rapid transformation" impacting the media industry.

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

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Revenue

$825.5 million

$803.1 million

2.8%

Net income

$124 million

$146 million

(15%)

Earnings per share

$0.95

$1.12

(15%)

Data source: Scripps.

What happened this quarter?

Sales growth was weak as Scripps suffered from lower advertising revenue and a slowdown in distribution fee gains in its core U.S. market.

A man in glasses watches TV while browsing on his laptop.

Image source: Getty Images.

Key highlights of the quarter include:

  • U.S. advertising revenue declined for the third straight quarter. The ad business shrank 1% compared to a 2.5% improvement last quarter. Lower ratings at both HGTV and Food Network were to blame even as Travel Channel, Scripps' third-largest property, logged a slight uptick in ratings.
  • Distribution fee growth fell to a 5% pace from 7% as the pool of cable subscribers declined.
  • Rising programing and marketing costs combined with weaker revenue growth to send profits down 6% in the U.S. segment.
  • The international division posted 4% higher sales and a modest uptick in profits as its Polish network, TVN, grew its ratings.

What management had to say

Because of the pending merger with Discovery, Scripps executives won't be holding a conference call to discuss the third-quarter results. But in a press release, they commented more generally on what they see as the company's strengths. "At a time of rapid transformation in the media industry," CEO Kenneth Lowe said, "we continue to execute on our strategic goals to strengthen the core business, expand our reach and monetize audiences."

"Our brands deliver the compelling content and programming that viewers love and trust, and with each passing quarter, we are building stronger community with consumers across a multitude of devices and platforms around the world," Lowe continued.

Management was especially pleased with the company's digital distribution arm, whose audience jumped 85% over the prior-year period to 460 million. "Scripps Lifestyle Studios delivered another record-breaking quarter, further solidifying our digital businesses as an increasingly important growth driver for the company," they explained.

Looking forward

The network is still on track to conclude a $15 billion merger with Discovery that will create one of the largest forces in pay-TV content in the U.S., responsible for 20% of all ad-supported viewing. The combined company will produce 8,000 hours of original content per year, executives expect, to add to its massive existing library of about 300,000 hours of content.

The transaction had been worth about $90 per share to Scripps investors back when it was announced in late July. That value has dipped slightly since then, though, because a large part of it is calculated based on Discovery's stock price, which has declined over the past few months. Scripps shareholders who chose to receive the mix of stock and cash that Discovery is offering -- rather than the all-cash option -- will own about 20% of the combined company after closing.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Discovery Communications. The Motley Fool recommends Scripps Networks Interactive. The Motley Fool has a disclosure policy.