Scripps Networks (SNI +0.00%) has a simple enough business model: Produce quality programming to attract a viewer demographic TV advertisers crave. The media giant does that through popular channels like HGTV and the DIY Network, which bring more affluent audiences than you can find on most broadcast channels.
But that model still leaves Scripps exposed to the volatile advertising industry and to shifting TV-watching attitudes. The company's fourth-quarter results, released on Thursday morning, were affected by both of those trends.
Declining advertising growth
Advertising revenue improved by less than 1%, for Scripps' slowest quarterly growth rate of the year. It also marked the third straight quarter of declining growth; advertising rose by 10%, 8%, and 5%, respectively, in the first three quarters of 2014.
Food Network booked lower sales this quarter. Source: Scripps Networks.
Sure, some of the fourth-quarter dip is just about seasonality. Management said in a conference call in November that they expected advertising growth to be soft this quarter. But Wall Street was holding out for a smaller slowdown. Analysts expected Scripps to post 5% sales growth rather than the 2% improvement it actually booked.
Scripps' portfolio of channels turned in a mixed performance, with its flagship HGTV growing sales by 4%, as Food Network and the Travel Channel shrunk slightly. The DIY Network was the standout, with a 7% gain in the fourth quarter and 10% for the full year.
Meanwhile, affiliate fees, Scripps' other source of income, rose 6%. The increase wasn't quite enough to offset the rising cost of programming, so profits were just below expectations. Scripps earned $0.96 per share, slightly below Wall Street's $0.97 per share target.
Those somewhat weak results didn't detract much from Scripps' overall strong year, though. Net income grew by 6% to $727 million on a 5% boost in annual sales. "The strength of our lifestyle media brands and the connections they make with consumers and advertisers enabled the company to maintain its record of growth and creating shareholder value for the quarter and the full year," CEO Kenneth W. Lowe said in a press release announcing the results.
Expectations for the year
Lowe and his executive team expect 2015 to play out in roughly the same way as 2014 did. The company forecast revenue growth of 4% for the year. Costs are expected to climb by as much as 10% as programming expenses keep rising. But management is aiming to offset at least some of that increase by cutting costs in other areas of the business.
That sales forecast equates to revenue of $2.81 billion, just below Wall Street's 2015 target of $2.84 billion. Analysts might need to pull back their annual growth estimates for Scripps on account of the soft advertising environment. But the company is still expected to ride its popular lifestyle channels to higher profits and sales this year.
