Executives
Joseph NeCastro - Chief Administrative Officer and Chief Financial Officer
John Lansing - President of Scripps Networks LLc
Lori Hickok - Executive Vice President of Finance
Kenneth Lowe - Chairman, Chief Executive Officer, President and Chairman of Executive Committee
Mark Kroeger - Senior Vice President of Corporate Communications and Investor Relati ons
Analysts
Meghan Durkin
Eric Handler - MKM Partners LLC
John Janedis -
Benjamin Swinburne - Morgan Stanley
Anthony DiClemente - Barclays Capital
Michael Nathanson - Sanford Bernstein
Benjamin Mogil - Stifel, Nicolaus & Co., Inc.
Alexia Quadrani - JP Morgan Chase & Co
Chris Marlowe
David Bank - RBC Capital Markets Corporation
Marla Backer - Soleil
Matthew Harrigan - Wunderlich Securities Inc.
Barry Lucas - Gabelli & Company, Inc.
Brian Karimzad - Goldman Sachs Group Inc.
Scripps Networks Interactive (SNI) Q3 2010 Earnings Call November 4, 2010 10:00 AM ET
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Scripps Networks Interactive Third Quarter Earnings Report. [Operator Instructions] I'd now like to turn the conference over to the Senior Vice President of Investor Relations, Mark Kroeger. Please go ahead, sir.
Mark Kroeger
Thank you, Lea, and good morning, all, and thanks for joining us. We'll start the conference call today with comments from Ken Lowe, our Chairman, President and CEO; and Joe NeCastro, Chief Financial Officer. Our prepared remarks should take about 20 minutes, then we'll open it up for questions. Also on the call are John Lansing, President of the Scripps Networks Operating Division; and Lori Hickok, Executive Vice President of Finance.
Let me remind you, if you prefer to listen in via the Internet, go to our website, click on Investor Relations and find the microphone icon on the landing page. Additionally, under the Presentation tab, you'll find our third quarter earnings presentation materials that we will be referring to during the prepared remarks portion of our call. An audio archive will be available on the site later today, and we'll leave it there for weeks, so you can access it at your convenience.
Let me remind you that our discussion this morning will contain certain forward-looking statements. Actual results may differ from those predicted. And some of the factors that may cause results to differ are set forth in our publicly filed documents, including our Form 10-K.
And with that, I'll turn it over to Ken.
Kenneth Lowe
All right. Thank you, Mark, and good morning, everyone. Thank you for joining us. As always, we appreciate your interest in Scripps Networks Interactive.
The third quarter was outstanding, outstanding for the company and shareholders by just about every measure. Suffice it to say, the company was truly hitting on all cylinders during the three-month period. Let me give you some of the headlines. Industry-leading ad revenue growth; strong double-digit growth in affiliate fees tied, of course, to the new contracts we negotiated last year; leading competitive edge performance by our flagship networks, HGTV and Food Network; outstanding results at our two newest networks, Travel and Cooking, which are rapidly building larger audiences and expanding their base of advertisers; and importantly, a solid contribution from our online comparison shopping businesses, which reached an inflection point during the quarter and are once again beating prior-year numbers. So all in all, an excellent quarter for the company and the shareholders, and I'm happy to report that strong performance has continued right into the current quarter.
On the fundamental level, the basis of our strong growth is our focus in ownership of the Home, Food and Travel Lifestyle categories, and our expertise in engaging audiences that our advertisers absolutely desire. These are truly powerful, powerful brands. In fact, Nielsen recently ranked HGTV, Food Network, Travel Channel, Cooking Channel and DIY Network among the top 10 for aggregating upscale viewers. Now in my mind, that goes a long way in explaining our success. At Travel Channel, the audience continues to grow by leaps and bounds and our ad sales team has truly hit the ground running, significantly expanding our growing list of national advertisers at Travel.
Inventory sold as direct response advertising, which started out at about 30% of total sales when we acquired the network, is now down in the mid to high teens. Now there was a lot of low-hanging fruit to be had, and we picked it. We think Travel Channel is right on track. We're leveraging the popularity of our key talent, including Adam Richman, Anthony Bourdain and Andrew Zimmern or the three As we've come to call them, to new heights. And I can tell you that the outstanding management team at Travel is working on some very promising concepts that are currently on the pipeline we've got a lot of hope for. You'll start to see their handy work in the months to come, so stay tuned to the Travel Channel.
Turning over to the Cooking Channel, our decision to re-brand Fine Living was clearly the right thing to do. Viewership among adults 25 to 54 at Cooking has surged forward, up as much as 100% at some day parts compared with Fine Living a year ago. As we said last quarter, advertisers responded positively to the new network as well, a fact that's evident in Cooking's third quarter performance. Cooking gives us added exposure to the tremendously popular food genre in television, which as you know, we defined really by transforming the Food Network. Now we've taken great care to differentiate Cooking from Food, using the platform as an opportunity to really take a deeper dive into the genre and super serve those avid foodies out there. Cooking also gives us more flexibility in serving advertisers who want to capitalize on the popularity of food programming on TV. So far, I'd to have say that Cooking Channel has been a big win for us and our shareholders, and I hope you've had a chance to check it out.
Meanwhile, the Food Network continues to charge ahead. Despite daunting year-over-year comparisons, total household viewership held firm in the prime time during third quarter. In September, prime time viewership among all adults 25 to 54 was up 4%. Prime time viewership among women in the same age group was up 3%. The solid viewership at Food Network is attributable in no small part to the enduring popularity of shows like Diners, Drive-Ins & Dives and great theatrical[ph] events like The Next Food Network Star. Speaking of which, this year's winner, Aarti Sequeira, and her new show, Aarti Party, by the way, had been instant daytime hit, proving once again our ability to identify and nurture great talent at the Food Network. The power of Food Network is also evident to the growing list of ancillary businesses that we're creating around this powerful brand. The Food Network Magazine, already profitable two years ahead of schedule, was designated as the best-selling newsstand culinary title during the quarter, and while incidentally, Bobby Flay and Alton Brown both have books on the New York Times Best-Seller List as we speak. We've had the sports concessions at high-profile locations like the premium Gridiron and Touchdown Clubs at the Meadowlands.
Plus we've introduced Food Network-branded menus that are being used in the suites of the new Meadowlands Stadium as well as other NFL venues, including Cleveland, Buffalo and Chicago. And if that isn't enough, our partnership with Coles continues to reap rewards with sales of Food Network-branded kitchenware outpacing our expectations for the year. It's no wonder women in cable chose this year to make Food Network President Brooke Johnson Woman of the Year. Congratulations, Brooke. It's a well-deserved honor and all of us is so very, very proud of you.
Food Network is truly on fire, and we're finding creative and profitable opportunities to expand the brand. Of course, our success story all began with HGTV, Home and Garden Television. The original Scripps Network, HGTV, dominates the home category on television and is regularly ranked as the number one network among high-income women viewers. Total day viewership at HGTV grew 5% during the third quarter, and on weekends, our audience was up a healthy 6%.
In prime time, HGTV maintained the lofty status as a 1.0-rated network, aggregating an average of nearly 1 million television households a night during the period. September, by the way, was the network's best month ever for total day viewership. Let there be no doubt, HGTV is a power brand on television, and along with the DIY Network, we own this lucrative home category. We're building on that competitive edge with great new specials like the HGTV Urban Oasis Giveaway and Secrets From a Stylist, featuring Emily Henderson, winner of this year's HGTV Design Star.
Now are our first-ever Urban Oasis winner is going to be announced during the special on November 20, and that lucky person will walk away with $1.5 million in prizes, including a brand-new Acura and a luxury high-rise apartment in downtown Manhattan, which is designed by our very own Vern Yip, by the way. A lot of good things in the pipeline for HGTV, and like I said, this is our category. We defined it, we own it and we intend to keep it growing.
And finally, a word about Shopzilla, and this is really a great story. We've been working on building a sustainable business model at Shopzilla for sometime now, and I'm happy to report that we've reached that important point where quarterly results have begun to improve over the prior year periods. Now this is no small feat, and a lot of credit is due to our creative and very hard-working team out in Santa Monica. We successfully repositioned the business, and we set the table for future growth through both differentiation and diversification.
The U.S. business is on course to return to double-digit revenue growth in Q4 as a result of increased consumer visitation and increased revenue yield as the company continues to strengthen its relationship with both consumers and advertisers. And in Europe, Shopzilla's presence continues to grow at a very, very healthy pace. In fact, we are now the number one comparison shopping network in both the U.K. and in France, and that's according to comScore. Our brands, BizRate, Shopzilla, Beso and the new, just last month, Tada, collectively are among the world's leading online comparison shopping destinations, competing effectively with the likes of Google and Yahoo! Again, no small feat.
So there you have it. Scripps Networks Interactive, one of America's leading media companies, and we're hitting our stride, delivering on our commitment to create value for our shareholders. Quite a quarter.
With that, let me turn it over to Joe to drill down into the numbers. Joe?
Joseph NeCastro
Thanks, Ken, good morning, everyone. I'm sure you've seen our press release by now, so as is our custom, I won't got over the numbers in detail. I'm going to focus my remarks on third quarter highlights and provide some color on what drove these very positive results.
Starting with the consolidated view, here are the headlines: Revenues was up 40% and up 22% excluding Travel. Total segment profit was up 55%, and as a result, net income attributable to the company and the shareholders grew 56% to $0.61 per share or $0.59 on a normalized basis. EPS for the quarter includes a favorable tax adjustment that added $0.03 per share, and it includes a $0.01 reduction for Travel Channel transition costs that fell into that period. The transition costs year-to-date stand at about $28 million. For the full year, we still expect this to be at the low end of the $30 million to $40 million range we forecasted.
Key revenue drivers for the quarter were strong advertising sales, up 34% as reported and up 19% excluding the Travel Channel, a robust 72% growth in affiliate fee revenues, which was up 40% ex-Travel, and 7% growth in referral fees and other revenues from our online comparison shopping businesses. Advertising sales during the period benefited from the healthy scatter advertising market combined with the success we've had monetizing the audience growth at all of our networks. Scatter pricing during the quarter was up mid to high teens over the prior-year period and up 25% to 30% above 2009, upfront pricing.
Looking ahead into the fourth quarter, scatter pricing continues to be strong, up mid teens over the prior year and up low to mid-20s over the most recent upfront. We're seeing strength in nearly every advertising category with food, consumer packaged goods and retail leading the charge. The recovery in automotive and financials is also contributing to our improved ad sales.
The growth in affiliate revenues reflects the success we had late last year in negotiating new carriage agreements for HGTV and Food. Expanded distribution at all of our networks also contributed, with Food Network topping 100 million U.S. households for the first time and HGTV very close to the same. Distribution of our premium tier channels also grew during the period, with the new Cooking Channel leading the way, up 4.3% from Fine Living's footprint of a year ago. Cooking now passes a very respectable 58 million households. GAC, by the way, is quickly approaching the 60 million household mark.
Now drilling a little deeper in the Lifestyle Media results. Food Network and HGTV benefited during the quarter from their dominant competitive positions in their respective content categories and from their sizable audiences. Our premium tier networks, likewise, are capitalizing on growing distribution, increasing viewership and a strong scatter advertising market place. Advertising growth return to our Lifestyle Media websites with revenue up 23% in the quarter. Lifestyle Media segment profit was up a very hefty 55%, and the margin expanded from 46% to 50%, a very solid performance by our networks, indeed.
And Travel Channel is proving to be a definite win for the company and for shareholders, just about every indicator is moving in the right direction. We've quickly broaden the base of national advertisers. The amount of inventory committed to lower-priced direct-response advertising is declining significantly. We had a very successful upfront, which you'll see reflected on our fourth quarter results. And viewership is growing at a steady, healthy pace. Travel Channel is on track to be decidedly accretive to both segment profit and EPS in 2010. Acquiring this great asset last year was clearly the right decision for the company.
Similarly, Cooking Channel's performance during the third quarter affirmed our decision to re-brand Fine Living. Total revenues for the network were up 36%, excluding the amortization of incentives that we negotiated with our distribution partners. Net of this launch fee amortization, reported revenues for the brand were up 9%. The launch incentives for Cooking totaled around $40 million and will continue to be amortized over the next few years. Also during the quarter, we contributed Cooking Channel for the Food Network partnership as expected.
At Shopzilla, as Ken mentioned, we've turned an important corner. Our suite of comparison shopping websites contributed to a consolidated revenue and profit growth during the third quarter. The improvements we've made to make our sites more valuable to both consumers and online retailers have taken root and are having the desired positive effect on operating results. Shopzilla's websites had become a real force in Europe, where the business is up 50% year-to-date over 2009. And in the U.S., we're seeing a return to growth as we improve our yields after undergoing a massive increase in product offers last year. We've also optimized our position with an upstream search, which has led to more inbound sessions. And lastly, we've launched new products, Beso and Tada, that have expanded diversified our proposition with consumers and also provided incremental opportunities for advertising partners to find qualified leads.
We talked about Beso before since it officially launched a year ago, but it's worth noting that in September, it already eclipsed 2 million monthly unique visitors.
Tada.com, which launched less than a month ago, capitalizes on the power of group-buying to help consumers get big discounts on retail products and gift cards from well-known retailers. We presently run one deal per week every Tuesday, but initial response has been very strong from both retailers and consumers, and we have plans to ramp up to daily deals in 2011. I think everyone on this call should sign up and check it out right now.
Turning to international development. Food Network U.K. continued to gain viewership momentum during the third quarter. Less than a year after its launch, the network was Sky's most-watched lifestyle channel in a competitive 8 p.m. time slot during one week in September, and it was the third most-watched lifestyle channel for the week, beating our primary competitor in the Food category. During the quarter, we contributed about $8 million to our EMEA partnership to continue funding the operations as we get the business up and running. The cash contribution increases our equity stake from 80% to 89%.
Also since the end of the third quarter, we launched Food Network on DTH platforms in Malaysia and the Philippines and are continuing to explore a possible joint venture in India. As for the balance sheet, we're maintaining our strong cash position preferring, at present, to maintain the flexibility to consider growth opportunities. As we've said on numerous occasions, our capital structure is on a continuous review, especially as cash is starting to accumulate.
Finally, as 2010 draws to a close, we fine-tune a limited guidance we provided for the full year. You could see the complete updated guidance in the press release and the presentation deck that we provided. But let me quickly touch on the changes we've made. First, affiliate fee revenue will end up around $550 million for the year, with the rate of growth decelerating a bit because of more difficult comps. Remember, we completed one affiliate deal in September last year, and there were two weeks of Travel Channel included in the Q4 2009 results.
As for non-programming expenses, we narrowed the range toward the higher end of the previous guidance. We decided to take advantage of the strong scattered advertising market, and we initiated some additional marketing around Cooking and Travel to increase brand awareness and to build on the momentum we're creating. We're now expecting non-programming expenses to be between $550 million and $560 million. And lastly, we now expect the startup losses from our international development efforts to be in the range of $10 million to $12 million.
Looking at other items, capital spending will end up being about $80 million to $85 million this year, and the effective tax rate will be unusually low at 30%, reflecting the favorable tax adjustments we've called out during the last couple of quarters. And finally, we're expecting noncontrolling interest share of net income to be in the $135 million to $140 million range, reflecting the strong advertising market and the outstanding performance of the Food Network this year.
That's it for our prepared remarks. Thank you for your attention. Operator, we're ready to take any questions.
Question-and-Answer Session
Operator
Our first question is from the line of John Janedis from UBS.
John Janedis -
Some of the episodes have been talking about launching a low-tier video product. Obviously, it's very early. But can you talk about how you think about this could impact either mature or emerging networks? And maybe is it really more of an attempt to get some leverage in future negotiations?
Kenneth Lowe
John, I don't think that that talk is all that serious at this point. We understand what the reality is going to be. So honestly, we haven't thought a lot about it. I mean, the brands we have are very powerful. If anything, we've seen all of our networks expanding their distribution over the past several years. So I think that's probably just talk at this point.
John Janedis -
And then you obviously called out Food with another strong quarter. On the ratings side, it obviously slowed a little bit here after a few years of double-digit growth. Is there any evidence at all of viewership shifting from Food to Cooking? And do you have any sense maybe of the percentage of viewers of Cooking that also are viewers of Food?
John Lansing
John, this is John. I'll take that. We have looked at the question of whether there is some cannibalization with Cooking and Food. And frankly, we're seeing very little of that and that both -- Food was, in third quarter, equal to its highest quarter ever in prime time, while Cooking surged in terms of ratings delivery compared to last year's Fine Living, up 70% in total day and up 34% in prime. So there has been a win for both Food and Cooking, I think, in the ability for Food to cross-promote in audience to Cooking, but that audience is not necessarily leading to, but rather, we believe, watching more Food programming overall.
John Janedis -
I think your confidence in Shopzilla appears to be improving here. And I think you've been pretty clear that the top priority is non-U.S. expansion. But from a digital perspective, are you also considering expanding the footprint?
Joseph NeCastro
We are. We continue to look at that. We're happy with the footprint we've got so far. But there are always a couple of countries that we'd like to think about expanding into. I think for the moment, you won't see us do that, but that's always on our radar.
Operator
And next, we go to a question from the line of Brian Karimzad from Goldman Sachs.
Brian Karimzad - Goldman Sachs Group Inc.
Just to get a little bit more color on Travel there. I know it's been growing by leaps and bounds in terms of the audience, but the upfront kind of happened back in May. It was going at that point, but perhaps the momentum wasn't as clear. Any sense, one, how much more you're able to up that audience guarantee for Travel? And then two, you had said overall, your networks up for pricing were at high the end of what peers are. Is it safe to say that Travel itself was well above that? Some are well into double digits because of some of the resets you're doing?
Kenneth Lowe
Yes, Brian. In fact, the ad sales team at Scripps Networks has done a tremendous job of improving the selling proposition for Travel Channel. A year ago, when it wasn't under our sales guidance, it was using upwards of 30% to 35% of its inventory for DR advertising, and we've been steadily improving in that area in adding high-quality spot advertisers, particularly in the CPG category to Travel and improving the pricing proposition for Travel as well. And all of that is happening at a time while Laureen Ong and her team have been successful in the short time, I should say, that they've had control in managing the product and improving the ratings as well. So there's really three positive dynamics happening with travel with the improved audience growth. It's the upfront, reason upfront where we were able to put low double-digit improvement in pricing into next year. And then it's the reduction of the exposure of direct-response advertising in favor of more spot advertising.
Brian Karimzad - Goldman Sachs Group Inc.
And then just quickly on HG, you've kind of right-sized that versus some issues in 2Q. I know you've put a lot more emphasis on getting new viewers into that House Hunters franchise, which is a big part of it. Any sense on how successful that marketing was on that, and whether you are getting new folks in? Or is it just more -- you did some scheduling adjustments that worked out okay?
Kenneth Lowe
Well, there was a boost in audience in September when we were able to put that marketing investment behind House Hunters. And that proved to be a very wide strategy by the Home category and the HGTV people in particular because it allowed the audience to find that show, arguably the most popular show on the network, and for them to also put some of the newer content on the other end of House Hunters to expose that growing audience to the new programming. And so the results were positive. We still have some work to do in terms of getting HGTV into more aggressive growth mode in terms of ratings and audience. But I'm satisfied with the recent improvement in the ratings in the third quarter going into the fourth quarter with what I've seen on the programming slate for 2011. And with the addition of Kathleen Finch, who successfully has been managing our DIY Network over the last four years as the new General Manager of HGTV, she brings a high level of programming expertise into that management team, along with President Jim Samples to really get that network up on its feet going forward.
Operator
And Our next question is from the line of Doug Mitchelson from Deutsche Bank.
Meghan Durkin
This is actually Meghan Durkin in for Doug. As follow-up to that first question, on the lower end video service option, did the distributors actually have the right move your networks off of the basic tier? And then another question is just an update on the upfront cancellation within the 2011 budget we're hearing from the advertisers?
Kenneth Lowe
Meghan, this is Ken. No, really, I would have to renegotiate new contracts. And again, I think we've heard this talk. It's heated up recently a little bit just because of a lot of the noise in the marketplace. But I think it's just talk at this point. And there's really no real validity, I think, to it.
John Lansing
Our contracts, I think are fairly solid and we have no concerns about that. We're used to competition particularly in the Food category and in the Home category. So a low-level low-entry product on the video side is not something that would be unusual for us. And so we'll take it as it comes, however it comes. In terms of the cancellations, I'm happy to report that having now past November 1 normal period, when we would find out about cancellations that were back to what would be considered a very normal level, i.e. a very low level of cancellations of upfront business.
Operator
And our next question is from the line of Alexia Quadrani with JPMorgan.
Alexia Quadrani - JP Morgan Chase & Co
Could you please elaborate a little bit on what you're seeing with the verticals in the quarter? I think Joe mentioned a couple of strong categories. But what is your strongest category? Any categories that are weak, are still weak in the market, and where does Auto fall in that?
John Lansing
Interesting, Auto jumped two places for us to number four in terms of our top 10 across all of the Scripps Networks properties, while the Financial category dropped two places. Perhaps the biggest story for us was Technology, which was ranked 13th last year, now jumped into number eight. And that includes high-quality advertisers such as Samsung, et cetera. So the two categories that show losses out of the top 10 were Medical and Restaurants.
Alexia Quadrani - JP Morgan Chase & Co
Would you say that the verticals that are very strong, was it pretty broad-based? Or was there one vertical group that was really the outlier behind all the strength?
John Lansing
Well, I think just the aggressive growth and improvement in Automotive is probably the headline of the quarter, Alexia. But the top three or four remain the same. Food, as always, was our number one category, followed by Retail and CPG.
Alexia Quadrani - JP Morgan Chase & Co
And then when you look at your advertising base on the Cooking Channel, is that mostly the same advertisers that are on Food or are you seeing some new or different advertisers on Cooking?
John Lansing
It's a mixture of both. As you would expect, there are some advertisers that are appearing on both, particularly the large Food, and they're mixed. But our ad sales team, if they do anything well, it's to develop new business. And the Cooking Channel offers that opportunity to develop new business due to its new entry into the market and its ratings relative to Food being a little bit lower, allowing a pricing opportunity for some people in the Food category to get involved with the networks that perhaps weren't able to do on the Food Channel.
Alexia Quadrani - JP Morgan Chase & Co
And last question, and I may have missed this in your opening remarks, but on the percentage of advertisers, direct response advertisers in Travel, do you still expect -- I know that's improved in the quarter, do you still expect that to be in line with the rest of your other networks sort of by year-end?
Kenneth Lowe
Are your referring to DR, Alexia?
Alexia Quadrani - JP Morgan Chase & Co
Yes, direct response.
Kenneth Lowe
I think that will take us a few quarters to watch that out. Keep in mind, we didn't pick up selling the network until April of this year. And so we'll still be pacing against prior performance moving into the first quarter.
Alexia Quadrani - JP Morgan Chase & Co
But it's obviously trending in a very good direction?
Kenneth Lowe
Directionally, absolutely. It will just take us some time to get there. But all of that, we consider to be upside going forward over the next few quarters.
Operator
Next we have a question from the line of Eric Handler with MKM Partners.
Eric Handler - MKM Partners LLC
Given the success that you have right now at Travel Channel's ratings and advertisers, have you thought about possibly increasing the programming budgets there to sort of accelerate the transition of the older programs you have and bringing on some just fresher new programs to drive greater ratings?
Kenneth Lowe
Yes, Eric, absolutely. In fact, Laureen and the team at Travel have put together a very interesting, and I'm very optimistic about, a new programming slate for next year that includes a significant increase in our programming investment, that one that we had -- as we look at the business prior to acquiring it, we felt like it was part of the map that made the acquisition make sense. And with the great surge of ratings that we've had this year with the existing programming, the team is also looking at how to enhance and grow those already successful franchises, such as Man v. Food or No Reservations with Anthony Bourdain, and use that strength to build upon the introduction of new series, new talent. And all in all, next year will be a very exciting year for Travel Channel as it leverages past success and programming and creates new successes going forward.
Eric Handler - MKM Partners LLC
With regard to Cooking, any idea where your affiliate base might eventually grow to? Is this something that we could see $90 million subs or is this something that's just going to grow modestly from here?
Kenneth Lowe
As Fine Living was and as DIY is, it was launched as a premium-tier network. And it is fully distributed as a premium-tier network. In fact, it is a fully distributed network on DIRECTV, on the basic DIRECTV tier. But we believe that Cooking, based on the buzz Cooking is getting right now, the ratings and the attention from the advertisers, and by the way, that attention from the advertisers also translates to our affiliates who use it for local advertising, we believe we have an excellent story going forward to help increase the penetration of its distribution on all platforms.
Operator
And next, we go to the line of Michael Nathanson from Nomura.
Michael Nathanson - Sanford Bernstein
On the step up in DIY, Cooking and GAC on subscriber accounts, is that a function of the new deals you guys did last year or was this just the organic growth in digital subscribers within the U.S.?
Kenneth Lowe
It is the organic growth. The Cooking Channel essentially stepped into the shoes of the Fine Living distribution footprint. And the growth of GAC and DIY continues based on just the growth and penetration of the tier that they exist upon.
Michael Nathanson - Sanford Bernstein
So they're already established, there's no true-up based on the deals you did last year?
Kenneth Lowe
Correct.
Michael Nathanson - Sanford Bernstein
As you mentioned, you said it quickly and the first I heard was there's some launch fees in your advertising around Cooking. Can you repeat how big those launch fees are? And is that a counter-revenue expense or is that below revenue?
Lori Hickok
It's $40 million and it is a counter-revenue so that will reduce revenue over the period.
Michael Nathanson - Sanford Bernstein
So it's $40 million for the quarter?
Lori Hickok
No, $40 million in total cash, because what we did with the incentive payment, we will amortize that quarterly over the remaining contract period.
Michael Nathanson - Sanford Bernstein
How long of a period is that amortization?
Lori Hickok
I mean, it ranges. It might be a little front-loaded, but anywhere from two to six years.
Kenneth Lowe
Yes, we're tied to the remaining term of the agreements that we stepped into for Fine Living.
Michael Nathanson - Sanford Bernstein
So when we see the 9% growth, there's obviously more to it than that because the revenues are actually lowered by the amortization?
Lori Hickok
That excluded, it's closer to 36%.
Michael Nathanson - Sanford Bernstein
You talked a bit about segments or differentiating between Cooking and Food. How big is the CPM gap currently between average CPM at Cooking versus the average CPM at Food on a full-day basis?
Kenneth Lowe
Yes, so Cooking Channel and the ad sales team has been marketing Cooking Channel aggressively, and it's coming in upwards of 85% of the CPM of Food Network, and that's an improvement of about 20 points to where Fine Living was.
Michael Nathanson - Sanford Bernstein
And it's all sold by the ad sales force at Food?
Kenneth Lowe
It's is. It's sold by the ad sales team itself. It's a separate selling team, but they're part of a group that sells the Food category.
Operator
And our next question is from the line of David Bank from RBC Capital.
David Bank - RBC Capital Markets Corporation
Just a follow-up on the Travel Channel DR movement. Could you actually clarify what kind of CPM pickups you're seeing? I know it goes from non-premium to premium, but what does actually translate into the CPM lift when you move the inventory?
Kenneth Lowe
Well, DR, depending on the quarter, depending on the day part, it's hard to put a specific CPM against the DR. But generally speaking, the lift would be something on the order of 10% to 15% based on the day part overall.
Operator
And next, we have a question from the line of Ben Mogil from Stifel, Nicolaus.
On the Liberty front, on the Chellos front, was the decision for you to go from the 80% to 89%, was that a function of Liberty just not anteing up sooner if that's sort of your own decision?
Kenneth Lowe
It was more of the former.
Benjamin Mogil - Stifel, Nicolaus & Co., Inc.
And then secondly, on guidance itself, I know the Q hasn't been filed. And am I right sort of by looking at it, basically you expect the affiliate revenue in the fourth quarter to basically be flat with the third quarter?
Lori Hickok
If you back end, you should get to that looking flat if you look at the guidance, if you should back into it. But keep in mind, we had a two weeks of Travel, and we also did one of the affiliate deals last year. So the comps are going to be able to [indiscernible], and then you have the counter-revenue from the Cooking Channel we just talked about.
Operator
Next, we have a question from the line of Anthony DiClemente from Barclays Capital.
Chris Marlowe
This is actually Chris Marlowe in for Anthony. First, I was wondering if you could elaborate some on the cost synergies that you're seeing for the acquisition of Travel? And maybe give some color on what those are specifically both on the revenue and expense side?
Joseph NeCastro
Sure. Chris, this is Joe. I think we articulated some of those when we were entering into the deal, and I certainly have and almost exactly as we expected. So first and foremost, it was the termination of the discovery arrangements which generated probably the biggest slug of those. I think we estimated that originally around $20 million in annual savings from those have certainly had come to fruition. But beyond that, there were some items that we could absorb into our infrastructure in Knoxville, and that had certainly contributed. I think lastly, the digital operations, we are still working on somewhat but are finding that we're going to be able to hit our objectives there as well.
Anthony DiClemente - Barclays Capital
Given the macro environment, a case can be made that the company is under-levered, with the strength of your balance sheet, would you mind just updating us on any conversations you've had with the board about possible return of capital?
Kenneth Lowe
Without doing any specific on this call because there hasn't been any specific decision we made, we certainly address that issue at this time of year as we look at our budgets for next year and our cash expectations. So there are some things we're always looking at in terms of development opportunities that are sort of arguing in the other direction. But I think, absent pulling the trigger on anything in the near term, I think that will be a very serious discussion on the upcoming board meeting.
Operator
[Operator Instructions] We move to the line of Barry Lucas from Gabelli & Company.
Barry Lucas - Gabelli & Company, Inc.
John, I think from time to time we've talked about margin expansion, what's the right margin for the network business, and you had a terrific margin expansion in this quarter. So what's the right margin? How much more should we be thinking -- how should we be thinking about programming costs going forward?
John Lansing
Well, we are continuing to believe that we have upside in the growth of our networks in terms of audience expansion. And that upside will be realized by the investment in programming and marketing. As you know, in '09, we cut our marketing back practically to zero. And so this year, we'd be establishing those marketing budgets, and we expect to keep that run rate fairly steady going forward. In terms of the programming, while the investment will continue, I don't think we'll be seeing a double-digit percentage increase in investment overall. While in particular instances, say, in the case of Travel going into next year, we will be moving in that direction. But in the case of Food and HGTV, given the prior investment and the momentum, we believe forward momentum, that the shift to marketing to helping the audience find the improved programming will be more of a steady state.
Barry Lucas - Gabelli & Company, Inc.
You've done a really good job about building value, but distributing value seems to have been a little bit less. So by my count, Joe, it looks like there's going to be something very close to $500 million in cash, and it certainly empowers the board to do something about returning a big portion of that to our holders?
John Lansing
We will pass that along.
Operator
Next, we go to the line of Matthew Harrigan with Wunderlich Securities.
Matthew Harrigan - Wunderlich Securities Inc.
You're going into the international here more aggressively just at a time when it feels like there's a bit of an inflection point in terms of the programmers getting more aggressive and demanding in fees in some markets like Continental Europe. Do you feel like you're capped out somewhat in the interim basis by virtue of the arrangements that you've made? And do you think that over a period of time, and you're certainly not going to get to U.S. type split, but do you think that there's going to be a big disproportion there relative to the U.S.? And then secondly, a bit of a fuzzy question, I guess, on the broadband linear TV integration, the interactive advertising and all that, it feels like Travel Channel probably has some tremendous opportunities even relative to Food or HGTV. Can you talk a little bit about that? I mean, it feels like that could be a pretty large ticket, directly the quantifiable component when you go out, say, three to five years.
Joseph NeCastro
Sure. Matt, this is Joe. I'll talk a little bit about international and turn over to John to talk about digital at Travel. On the international front, I guess to answer the specific question there, I don't feel like we're closed out of anything as a result of the deal we have in place. We did reserve several markets that we excluded from the deal. And we are analyzing entry opportunities in several of those at the same time. We do think that ultimately, the structure of those markets are all individual. That's one of the great challenges of the international marketplace is that, with a few notable exceptions, the market's going to be much smaller than the one we're used to addressing. And every market is unique in terms of its structure and its players and its regulation, frankly. So it does take time. But we're happy with our development so far, sort of narrowed the range of losses for this year as we sort of sharpen our pencils and try to figure out what to do next year without spending as much as we anticipated. So we're still optimistic about opportunities in Europe and in Latin America and even in Asia. But it will take us some time to figure out the right steps.
John Lansing
And I'll pickup on the travel question. You are absolutely correct. We do believe that there is a big opportunity on the digital side in terms of interactive advertising, or in any active platform for that matter in the Travel category. And the team at Travel Channel has developed a strategy around that and is looking at the opportunities both competitively and what they can build organically to tap into that.
Operator
Our next question is from the line of Ben Swinburne from Morgan Stanley.
Benjamin Swinburne - Morgan Stanley
I'll try another angle on the international question. Were you guys looking most closely as you look at '11 sort of investments? I know parts of Asia have been interesting. It sounds like U.K. has been a success early on. Just trying to get a sense for whether you think this trend of any better-than-expected results from your international investments continues into 2011. And then, Ken, another sort of soft question around sort of product innovation and broadband conversions. Your networks is particularly well-positioned as interactivity comes to sort of the television business. And some of the data suggest a lot of the iPad usage, tablet usage, is happening while people watch TV. In the area of Food and also on HG and Travel, there's some really exciting things you could do there, bringing all that together to engage with your customer. How are you guys thinking about that opportunity? Am I getting ahead of my skis on whether this could be impactful to the business or is this something you think could really move the needle?
Kenneth Lowe
I'll take that question, and I'll throw it back to Joe, and I'd actually like John to lean in as well. These networks have been built from the get-go for interactivity. I mean, that was one of the premises when we started HGTV, when we acquired Food, the networks that we created and launched, then we saw the opportunity with Travel. We've been working very closely with our distribution partners, our affiliate partners on this because it's big from a standpoint of what could be in the future. Timing wise, hard to tell. But yes, I think one of the bright spots on the horizon for our business is interactivity and what that all could lead to. And into your question, yes, we're doing a lot of iPad apps, a lot of iPhone apps. We're talking daily with some of the potential partners in all these areas. And quite frankly, it's very exciting. It's almost like there's another phase of this business coming, add to the fact that we don't practically own practically all our content, I think, puts us in a good position. What the timeline is, Ben, who knows. But whatever the time line is, we're ready, we're prepared. And I think this will be a huge part of our business in a few years down the line. John, is there anything you add? Joe?
Joseph NeCastro
Ben, on international priorities going forward, I think in 2011, our priorities certainly really remain to continue to pursue the opportunity in the U.K. We think that's very attractive, and as you've mentioned, we have some decent traction going there. India, as you know, we started down the path there and had pull up. We continue to look at that market and are working to identify the right partner there. And we're active in negotiations there in a couple of fronts. So hopefully, there'll be some news on that early next year. And then if I look more broadly at sort of where is next, European markets are difficult and challenging and tend to be small. I think we will spend some time in Latin America and Asia next. But I think priorities in the near term are to keep working hard in the U.K. and figure out what the right steps are in India.
Operator
And our last question will come from the line of Marla Backer from Hudson Square.
Marla Backer - Soleil
Following up on something you just talked about with international and for us focusing on Latin America, Asia, which are obviously fast kind of hold potentials for rapid growth. How can you overcome some of the cultural and certainly language differences that it would also entail to enter those markets?
Joseph NeCastro
Sure. There are several strategies to do that. The most attractive strategy, frankly, is commission your programming because on some level, lifestyle programming has to be market specific, has to resonate locally. So there is a combination of sort of wider interest in U.S. lifestyle that you could obviously either dub or subtitle. But in commissions in new programming, along the same lines of what we do, but also make it relevant to the markets there. And Asian markets, there is a way, certainly with that broader footprint, true in Latin America as well, that you can economize on production and make programming relevant for a pretty wide swathe of territory. The challenge is, of course, a lot of these markets are individually small, so you do have to be careful in your programming strategy. So there are ways and we have people who have specific responsibility for those territories and are working on that precise question.
Marla Backer - Soleil
So are you saying that you could produce programming that would pretty much travel across Latin America but be tweaked on a market-by-market basis at a relatively cost-effective level? Or are you talking about programming each market a little bit differently?
Joseph NeCastro
No, I think more of the former to the extent we can -- I think it makes sense to find some efficiencies. Now you can't paint every market with the same brush, and that's obviously the challenge. But we do think there are economies across the regions.
Marla Backer - Soleil
On print, you've done an amazing job with the magazine at a time when a lot of print existing and new ventures are struggling. Are you looking at print as a potential relatively inexpensive brand extension? And if that’s the case -- are there any other of the brands that could also lend themselves to a print venture?
John Lansing
Marla, this is John. We like being in the print business when we don't own the press. But what we do have is a great partner in Hearst, the 50 partner shift there and they bring that expertise, and we, of course, bring the expertise in the Food category. So to the extent that we can operate with a partner that creates a win-win for both parties and we can bring what we do well, which is expertise and really satisfying consumers in the Food, Home and Travel categories, then print is just another platform. We're agnostic as to how we reach our consumers, whether it's an iPad app, cable network, online video, walking down the aisle of a Kohl’s department store and picking up a magazine. It's all about the consumer and reaching that consumer wherever it makes sense.
Mark Kroeger
Thank you, Lea. This is Mark, and thanks for joining us today. I'll be available the rest of the afternoon for follow-ups.
Operator
Thank you. Ladies and gentlemen, this conference is available for digitized replay after 12:30 p.m. Eastern Time today through November 18 at midnight. You may access the digitized replay service at anytime by dialing 1 (800) 475-6701 and enter the access code of 173668. International participants may dial (320) 365-3844. That does conclude your conference for today. Thank you for using AT&T Executive TeleConference Service, and you may now disconnect.
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