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Scripps Networks Interactive (NYSE:SNI)

Q1 2011 Earnings Call

May 05, 2011 10:00 am ET

Executives

Mark Kroeger - Senior Vice President of Corporate Communications and Investor Relations

John Lansing - President of Scripps Networks LLC

Lori Hickok - Executive Vice President of Finance

Joseph NeCastro - Chief Administrative Officer, Chief Financial Officer and Principal Accounting Officer

Kenneth Lowe - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Analysts

Meghan Durkin

Eric Handler - MKM Partners LLC

Michael Morris - Davenport & Company, LLC

Kyle Okita

Benjamin Swinburne - Morgan Stanley

Michael Nathanson - Sanford Bernstein

Anthony DiClemente - Barclays Capital

Benjamin Mogil - Stifel, Nicolaus & Co., Inc.

Jason Bazinet - Citigroup Inc

Alexia Quadrani - JP Morgan Chase & Co

John Janedis - UBS Investment Bank

Marla Backer - Soleil

Matthew Harrigan - Wunderlich Securities Inc.

Tuna Amobi - S&P Equity Research

David Bank - RBC Capital Markets, LLC

Brian Karimzad - Goldman Sachs Group Inc.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the first quarter earnings report. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, SVP of Investor Relations, Mark Kroeger. Please go ahead, sir.

Mark Kroeger

Thank you, Julie. 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 John NeCastro, Chief Financial and Administrative Officer. Our prepared remarks should take about 20 minutes, and then we'll open it up for questions. Also on the call is 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, on the page under the microphone icon, you'll find our first 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 2 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. And as always, we thank you for your interest in Scripps Networks Interactive. The first quarter was exceptionally good for the company and its shareholders. A few headlines worth noting: Healthy double-digit growth in advertising revenue -- pardon me. Solid growth in affiliate fee revenue and solid viewership at all our lifestyle networks. Scripps Networks Interactive truly has power brands. Every month, 150 million media consumers connect with our content across TV, interactive platforms and print. And fans engage with our on-air talent daily via blogs, tweets, Facebook and through our branded websites. According to Nielsen, we're also the most upscale network group with the highest concentration of affluent viewers. In fact, according to the latest beta research, Food Network is the highest-rated cable television network for customer service and sales knowledge. These factors really helped contribute to the positive operating results that we reported this morning. The popularity of our networks is evident in our strong first quarter financial results, and the positive trends we're seeing tell us that we're on track for an excellent 2011.

At Food Network, we saw a sequential improvement in viewership during the first quarter, and finished strong, tying last year's audience levels. And beginning in the first quarter, we started an ambitious rollout of new series and premieres of successful hit shows. Chopped All-Stars, Diners, Drive-Ins & Dives, Worst Cooks and Restaurant: Impossible are just some of the popular titles that contributed to the solid viewership numbers we achieved. In fact, the finale of Worst Cooks ranked as one of our highest-rated season finales. And Restaurant: Impossible was so well-received that we renewed it for another 18 episodes, which will begin airing in mid-July. Also of note in the Food category, Food Network Magazine remains the #1 selling culinary title on newsstands, outpacing the combined sales of Cooking Light, Food & Wine, Bon Appétit and SAVEUR. And oh by the way, Food Network Magazine just nabbed the coveted top spot in Adweek’s 31st annual Hot List, beating out other successful magazines, such as Marie Claire, Wired and GQ. Now, we have 3 Food Network books on New York Times Best-Seller List, Alton Brown's Good Eats 2, Bobby Flay's Throwdown! and Food Network's Magazine's new cookbook, Great Easy Meals, which reached #6 on the list in April. And we're leveraging the power of the Food Network brand in new areas as well. In February, we announced a new partnership with Wente Vineyards to create a Food Network wine portfolio, featuring 4 different wines that will be available to consumers this summer. And on the digital side, our Food Network apps are crossing new thresholds. The Food Network Nighttime app has had more than 1 million downloads. And we've had more than 255,000 downloads for our Food Network In The Kitchen app, which for a time was the #1 culinary app on iTunes.

Over Travel Channel, we're redefining the travel content genre for television and other media platforms. We're launching a slate of more than 20 new series this year, with great titles like Mancations, Sand Masters and Off Limits. And we revamped some returning favorites like Man v. Food, which is now Man v. Food Nation, where fans of the show can interact with host, Adam Richman, and even participate in the excitement. We're really excited about the new faces of Travel Channel and the new places that we're heading. We're also continuing to build on our other sturdy cornerstones, Anthony Bourdain, Andrew Zimmern and our popular Ghost Adventures franchise. And you'll see in our successful returning series, travel is more than just a destination. It's about sharing experiences with our trusted guides, connecting with old friends and meeting new ones as well.

More good news about travel. Audience trends are moving to the right direction. In March, we set a primetime viewership record. And compared with March 2010, all day parts were up, driven by sizable double-digit increases in women viewers aged 25 to 54. At HGTV, we're forging ahead. The network continues to be a favorite among women viewers, ranking second among its peer group for reaching upscale women. HGTV's successful viewership is driven by shows such as the HGTV Dream Home sweepstakes, which by the way, had more than 76 million entries, the largest contest on TV. Other shows driving some of the ratings improvement were Holmes on Homes, the most popular show in the first quarter, and perennial favorites, House Hunters and House Hunters International. And just in time for summer vacation, we're expanding the House Hunters franchise with House Hunters on Vacation, premiering in June. We're giving lucky families the chance to stay in a vacation home for a week. Additionally, we're going to be running specials like House Hunters Beachfront so viewers can fantasize about their dream beach home. And coinciding with Earth Day, we'll be airing one of TV's other most popular contest, and that is the HGTV Green Home Giveaway. We'll be giving a special tour of this year's Green Home during the show. And oh by the way, we've already received more than 7 million entries from viewers hoping for a chance to win. Also at HGTV, we're partnering with Disney on a new makeover series called My Yard Goes Disney, premiering next month. This is where people enter to win a chance to have their backyards completely made over Disney style. It performs some pretty magical transformation, so be sure to watch. Viewers also love to show us their home improvement successes and challenges. And that's why this year, we're adding more than a dozen new titles, including design and repair competitions, as well as updating some fan favorites. You'll see a new All American Handyman competition and a new season of HGTV Design Star, with 2 high-profile additions to the Design Star cast. We're adding brand new daytime shows with titles like My Favorite Place, Inferior Decorator and Neat Freak, all designed for busy moms. As promised, you'll be seeing new faces, new personalities and new experts, all with the passion for making our homes and home life the best they can be. And if that's not enough, we, along with our partners at Hearst publishing, have announced the test of a new HGTV magazine scheduled for the fall of 2011. We're intending to follow in the success of Food Network Magazine. The Home category publication looks forward to themes covered in HGTV's popular programming, as well as lifestyle content beyond what's featured on the network. This is going to be a fantastic year for HGTV, and we're off to a great start.

Meanwhile, flanker brands in the Home and Food categories, DIY Network and Cooking Channel, continue to gain momentum. In DIY, the young-adult viewership soared during the first quarter, fueled primarily by a free preview for viewers on DISH Network. At DIY, we like to say, we're the dirtiest network on TV, with standout outdoor-focused shows like Desperate Landscapes and Backyard Blowout. And over at Cooking Channel, we're up 19% in primetime viewership year-over-year. During the final week of March, we had the second largest audience since we rebranded that network. In the first quarter, we premiered several new Cooking Channel series, including Extra Virgin, starring actress Debi Mazar, and The Minimalist, featuring beloved food journalist and celebrated New York Times food columnist, Mark Bittman. We're keeping Cooking Channel global, diverse, fresh and truly cutting-edge in 2011. So all in all, given the strength of our first quarter results, I'd say we're off to a very good start for the year. We're making good on our promise to shareholders that build on the value we've created at Scripps Networks Interactive, and that is double-digit ad revenue growth, industry-leading margins and some of the best-known, most-watched brands on television and digital platforms. SNI continues to make its mark as one of America's leading lifestyle media companies. With that, let me turn it over to Joe.

Joseph NeCastro

Thanks, Ken -- excuse me, and good morning, everyone. I'm sure you've seen our press release by now. So as is our custom, I won't go over the numbers in any detail. I'm going to focus my remarks on the first quarter, provide some color on what drove our very positive results. Starting with a consolidated view, here are the headlines: Revenue was up 14%. Total segment profit was up 35%. And as a result, net income attributable to SNI grew 39% to $0.59 per share or $0.62 on a normalized basis. EPS for the quarter included a $0.03 per share adjustment related to the Tribune's capital contribution to restore their ownership stake back to 31%. You'll recall that the Tribune stake was diluted down until they made a cash contribution, following our contribution of the Cooking Channel to the partnership. As a result, their share of income in the fourth quarter of 2010 was reduced. The Tribune's contribution of cash during the first quarter, that benefit was reversed, allowing them to recover the $4.7 million of net income that had temporarily accrued to us. Now, looking back at our operating results, the key revenue drivers for the first quarter were strong advertising sales, up 12%, a 6% growth in affiliate fee revenues and 47% growth in referral fees and other revenues from our online comparison shopping businesses, which as we've announced, we'll be divesting.

At our Lifestyle Media business, the scatter advertising market continued to be very strong. That led to the development of a healthy calendar upfront for us as 2010 due to a close and advertisers sought shelter from the robust scatter market pricing. If you'll recall, the calendar upfront failed to materialize in both 2009 and 2010 due to the recession and its impact on advertising. And combined with our decision to book more business in last year's broadcast upfront, we have less inventory to sell in the first quarter scatter market, which held back our ad revenue growth rate to some degree. More of our inventory will be exposed to the scatter in the second and third quarters, but not at last year's levels given the upfront business we booked in both upfront marketplaces. Scatter pricing continues to be very healthy across our networks. Pricing was, on average, up in the mid to high teens during the first quarter over the prior year period and up mid to high 20s above broadcast upfront pricing. In terms of categories, we're seeing strength across the board, with food and consumer packaged goods as our top categories. Interestingly, automotive was the biggest positive mover in the quarter, up significantly over the prior year and our third biggest category in the period. In fact, 2 of our top 5 largest advertisers were auto companies. Retail and financial advertisers rounded out the top 5.

Now looking ahead, the early outlook for this year's broadcast upfront is very positive. Current scatter prices should drive demand and another year of good CPM growth for us. So far in the second quarter, scatter pricing continues to be strong, up mid to high teens over 2010, and up mid 20s over the current broadcast upfront.

Turning to affiliate fee revenue, growth moderated during the first quarter, which is consistent with the full year guidance we've provided. As a reminder, please -- so we don't have any sizable renewals until the very end of this year, so don't expect any acceleration in affiliate fee growth from current levels in 2011. Looking at our flagship networks, 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, primarily Cooking Channel and DIY Network, likewise, are capitalizing on growing distribution and increasing viewership. In total, Lifestyle Media revenue was $474 million, up 11% in the quarter compared to last year. Lifestyle Media segment profit was up a very hefty 31% and the margin increased to 52%, up from 43% in the first quarter of 2010. Now in 2010, we had $25 million of onetime charges related to the Travel Channel integration and our carriage agreement renewals. Excluding these items, segment profit increased 16% and margins were up 300 basis points, a very good performance by our networks.

At Travel Channel, we're positive about the direction we're heading. Overall revenue increased about 9%, with advertising revenue up in the healthy double digits and affiliate fee revenue increasing in the low to mid single digits. If you remember, the affiliate fees are still driven by legacy agreements that don't run out until the end of 2012 and 2013. And Cooking Channel, its performance during the first quarter continues to affirm our decision to re-brand Fine Living. Total revenues for the network were up 33%, excluding the amortization of distribution incentives. Net of launch amortization, recorded revenues for the brand were up 11%. As a reminder, the launch incentives for Cooking totaled about $40 million and will continue to be amortized over the next few years.

At Shopzilla, I'm sure you all saw last week that we entered into an agreement to sell the business to Symphony Technology Group for $165 million, which includes $150 million in cash immediately upon closing and another $15 million in deferred payments. As we said in the press release on April 28, we believe Shopzilla's future is very bright, but we believe the business will fare better with a partner that's more closely in line with its strategic priorities. Symphony Technology Group fits that bill. The decision to divest the business is consistent with our oft-stated strategy to focus our energy and our resources on our lifestyle content businesses. Because of the timing of the transaction, our consolidated results for the first quarter still include Shopzilla's revenue of $55.1 million and segment profit of $9.9 million. The business will be reflected as a discontinued operation for all periods presented starting in the second quarter. Also related to the transaction, we expect to record a pretax loss of $45 million to $50 million in the second quarter. And we expect the transaction to close around the end of this month.

Turning to international development, we continue to make good progress attracting new Food Network fans in the U.K. Food Network's U.K. viewership has grown tremendously, up more than 50% compared with March 2010. It's the most improved lifestyle channel on BSkyB's lineup in absolute volume growth and the fifth most successful channel on the Sky platform, up more than 500 channels. And the news just keeps getting better, Food Network U.K. in April outperformed its primary competitor on total day average ratings.

And turning to the balance sheet, we've obviously built a strong cash position, giving us the flexibility we need to consider growth opportunities in addition to the ability to return capital to shareholders. And as for the return of capital, we're taking a serious look at where we are at the moment. We'll likely make some movement in that area in the very near term. Our board meets in a couple of weeks and it will definitely be one of the top topics of conversation. Finally, we're reaffirming our previously issued guidance except for the following adjustments that reflect Tribune's return to 31% ownership of the Food Network partnership and the pending sale of Shopzilla. We're now expecting capital expenditures of $60 million to $70 million, and effective tax rate of 31% to 33%, depreciation and amortization of $90 million to $100 million and noncontrolling interest share of net income of $160 million to $170 million. And that's it for our prepared remarks, so thank you for your attention. Operator, we're ready for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Brian Karimzad of Goldman Sachs.

Brian Karimzad - Goldman Sachs Group Inc.

Just to drill down a bit on what you're working on in HGTV there, because it looks like that one's still not quite up to what its potential could be in what Food Network has been doing on the ad growth side. And it looks like the cadence of the new programming there is pretty heavily back-half weighted after June. If you can give us a sense of when we should be keeping an eye for an improvement there and kind of what litmus test is during the year. And then on the programming expense side, Joe, I know it's about high single digits for this year, call about 8% growth. If this programming is successful this year and the increase in live hours works out as you planned, is it reasonable to expect that we'll see a deceleration in that year-over-year growth rate next year?

John Lansing

I'll start, Brian. Good morning, this is John. Yes, we're seeing some excellent growth on HGTV in terms of ratings. Actually, coming out of March into April, continued strength with Holmes on Homes and other series that the brand has introduced. The programming that's coming in later in the year will definitely serve to support an accelerated growth sequentially from the first quarter to the second to the third. We're already seeing sequential growth month-to-month in the first quarter going into the second quarter. So I'm optimistic there, and in fact, the programming slate for HGTV, as you said, is more back-loaded than front-loaded. And so the summer slate of new premieres is very promising. And so I expect to see that growth continue.

Joseph NeCastro

Brian, this is Joe. On the second part of your question, on programming expense side, you do point out that we have relatively moderate growth this year. I think as John mentioned, as this programming comes in the second part of the year, you will see us start to amortize that, but it'll still be in line with our full year expectations there. And as we go forward, you can see on the cash flow statement that we have ramped up some investment, a lot of that is in Travel. And you'll see that come through with the P&L over the next probably 8 to 10 quarters, so I wouldn't expect a deceleration in the programming expense of any significance.

Operator

And next, we'll go to the line of John Janedis of UBS.

John Janedis - UBS Investment Bank

Ken, over the past couple of years, you've become, I guess I'd say, cable-network-true-player after shutting uSwitch and now, Shopzilla. And so as you look ahead, what does the future look like for the company? Is it a cable network company with larger non-U.S. presence? Or are there other businesses that you find appealing?

Kenneth Lowe

Okay, John. Yes, I think the focus will continue to be, as you say, on obviously these power brands that we've created. But we'll continue to underscore the I in SNI because interactivity, especially on the branded websites that we're continuing to expand and the opportunities that we see that John will probably touch on with mobile devices and others, because those gives us some opportunities that we think move us beyond distant. We've always said this, as you know, John, just being cable networks. So I would see still some small acquisitions that fit very well into our categories in the Home category, Food category, Travel Channel, as you just saw with our investment in Oyster. We'll continue to focus internationally as well because we see some opportunities. You just heard Joe talking about how well Food U.K. is doing, but we're going to be prudent about our partners and where we're investing internationally because as you know, we're a little late to the game when you look at some of our peer groups. But it's going to continue to be a company that focuses very heavily on these 3 categories of Home, Food and Travel. But we won't limit ourselves to just the cable networks. We'll stay true to our core, but at the same time, invest in areas we see that we're able to expand the footprint.

John Janedis - UBS Investment Bank

Okay, thanks. Maybe from the advertising side for John. So what are you seeing on third quarter options, particularly from the CPG, Food and other categories? And then, I think you guys said on the fourth quarter call that you had some audience liability that impacted revenue. Did you book any of that revenue in the first quarter?

John Lansing

Yes, John, we were able to eat into some of that liability coming into the new year, thankfully, due to the increased ratings on Food Network in the first quarter. Food Network's ratings improved in primetime, 10%, sequentially from the fourth quarter into the first, and that helped us monetize some of that liability. In terms of options, a very tiny movement there, nothing notable. The scatter marketplace for the third continues to look strong. In fact, perhaps stronger even in the second. And all of that is driving advertiser demand to what we believe will be a very healthy upfront.

Operator

Next, we'll go to the line of Alexia Quadrani of JP Morgan.

Alexia Quadrani - JP Morgan Chase & Co

At first, a couple of questions on the upfront. When you said you should expect good CPM growth, should we assume that means you guys hope to once again sort of outpace the industry average? And then, how should we be thinking about inventory levels in this year's upfront? Do you think you'll sell more or less, the same?

John Lansing

Sure, Alexia. Yes, I do believe we will be at or near the top of the industry, the cable industry, in terms of CPM growth. And we believe, as we see it today without putting any predictions in terms of CPM growth out there at this point because it's too early, but there's no reason to think that this year's upfront would be any worse. In fact, perhaps even better than the strong upfront from last year. In terms of inventory, we did put a few more points of inventory in last year and depending on where the pricing models are and how we look ahead to the scatter pricing in the fourth quarter and into 2012, it's possible that we'll hold at slightly higher levels, but we haven't made that decision yet.

Alexia Quadrani - JP Morgan Chase & Co

And then just following up on the color you guys have given us for how Q2 is trending, you've got a bit more exposure to scatter, which is trending. It looks like similar rates, similar growth to Q1. You had slightly better ratings. Any reason we shouldn't assume that the ad revenue growth should accelerate in Q2?

John Lansing

No, I anticipate that we'll continue to see acceleration from Q1 into Q2 based on those factors. And also, the fact that we had a particularly strong calendar upfront market this year, that's the marketplace that buys for the full year, January through December, versus the broadcast upfront that buys fourth quarter through third quarter. And it was significantly higher than what we expected. In fact, it supplanted some of the scatter inventory for us in the first quarter. But the growth in that calendar -- those calendar commitments will actually be more notable in the second and third quarter going forward. And so that will also help drive both rate -- pardon me, for us, as well as take advantage of some improving ratings, particularly on HGTV.

Operator

Next, we'll go to the line of Anthony DiClemente of Barclays Capital.

Anthony DiClemente - Barclays Capital

A question for Joe. I think the plan is to close on the Shopzilla sale at the end of May. You have a contribution coming in that came in this past quarter from Tribune, and the company generates a ballpark of $600 million of free cash flow a year. So it seems like you have a pretty strong argument to your board on return of capital and potential for a share buyback. I'm just wondering if you could just elaborate a little bit on your view of use of cash and use of the balance sheet? And then I just have a quick follow-up for John and Ken.

Joseph NeCastro

Yes, thanks, Anthony. I know you and I talked about this before. It's honestly, top of mind for us. But our view is there are myriad opportunities for the company to grow, but we don't see large acquisitions in our future aside from the potential, at some point, of Tribune. So it has become more and more apparent of course to the management and to the board, frankly, that we should initiate something or at least, I should say, actively consider. I don't want to speak for the board at this point. We have a meeting in a couple of weeks. But I'd say it is clearly our view that in some meaningful way, we need to get back to the game of returning cash to shareholders. I think that's fair to say. And all options are on the table, and obviously, not for this audience to preview what our recommendations will be, but suffice to say that it will be an active discussion and I think, hopefully, successful.

Anthony DiClemente - Barclays Capital

Great to hear, thanks. And then just generally, it would be great to hear an update on your international growth strategy and kind of any evolution or update on thoughts of how to expand your brands into Europe and outside the U.S.?

Joseph NeCastro

Sure, Anthony. I'll take that one, too. Again, we've been deliberate and we've looked at a number of opportunities. We are in the process now, actually we're very active, probably as active as we've been in discussions with potential partners on either country-specific or even regional opportunities. And the one thing that we do continue to hear is the demand for lifestyle programming and for our brands, specifically, has remained strong from many, many corners of the world, and also for many of the potential partners. So like I do expect that in the next couple of quarters, we will be able to make some decisions and hopefully, some announcements as to the next moves there. But again, I think it's all positive on that front. As Ken mentioned, we are very deliberate about it and very careful. These are our brands and the only ones we've got, and we have assets that are very attractive to many, many potential partners. So we're going to keep going on that, and hopefully, as I said, have something to announce in the near future.

Operator

Next, we'll go to the line of Doug Mitchelson of Deutsche Bank.

Meghan Durkin

This is actually Meghan Durkin in for Doug. Curious about the flat programming costs in the quarter relative to the ambitious programming rollout you discussed at Food. So what happened there? Was that new programming just less expensive?

John Lansing

No, Meghan, and this is John. There's a -- it really is artificially low for a couple of reasons. One, we are rolling out some series, second, third and fourth quarter, a little more heavily in those quarters than in the first quarter. Secondly, the cash spend, as you can see in the cash flow statement, is significant. It really is the amortization itself tied with the actual premiere of the new content. And then we are also pacing against some write-downs from a year ago that makes last year's number a little artificially high.

Meghan Durkin

Okay. And then, can you give us just the breakdown on what you spent, what the growth was at Travel on programming versus the legacy channels?

Joseph NeCastro

Why don't you let us take that out and we'll come back on the call with it.

Meghan Durkin

Okay. Because you talked about double-digit programming growth at Travel. I just wondered if that's still what you're expecting.

Joseph NeCastro

Oh, yes. I'm sorry, I can address that. We are still expecting that. Again, as you know, due to the pole here and -- our strategy there is to invest in ratings, and the way we do that is primarily programming. So we're going to be very active there. You've probably already seen some new series on the network, you'll continue to see rollouts throughout the year. And again, we're going to -- we think that's one of the best investments we can make, so we will do what we can there.

Lori Hickok

And just to let you know, their amortization, even with the cash spending moved to the back, is up 30%. Just on their amortization fees, alone.

Operator

Next, we'll go to the line of Michael Nathanson of Nomura.

Michael Nathanson - Sanford Bernstein

I have 2, probably one for Joe and then, we'll move on to the second one. The first question is, if you backed out travel affiliate fee growth from the 6% you did, is the previous core channels growing faster than the 6%? The sort of question is, is travel bringing down your average growth rates for affiliate fees?

Joseph NeCastro

I would have -- I'd say it has a very modest effect to dampen it. The others are much larger pots and so the growth rate is largely unaffected by travel at this point.

Michael Nathanson - Sanford Bernstein

Okay. And then, we look at your operating revenues by brand here at GAC, here at the $6.4 million in the quarter. Because it seems it's real estate that's wasting and you have other competitors like Discovery, who are pretty aggressive in looking at rebranding their networks or taking networks like ID to wherever they're taking it to. So at what point do you guys just say, okay GAC is an opportunity, we need to be more aggressive and maybe reposition it. Because it's, you have shelf space. It's just not delivering the potential that it could.

John Lansing

No, the shelf space is undeniably great shelf space. Unfortunately, it's not all paid subscriber shelf space, which is really the key to investing great deals in programming. But the good news is that we are -- our affiliate sales group is doing a very good job even as we speak in developing some renewal scenarios for GAC that will not only potentially add subscribers, but add some more paid subscribers. And doing that, we have a very interesting plan in place right now to develop some broadening the content definition for GAC somewhat and creating some original programming to your very point, to help drive that business forward into the future. But the key to doing that is moving that distribution needle, not just the number of subs but the number of paid subs, and I'm happy to report that, that situation is improving with some renewals that we're working on currently.

Operator

Next, we'll go to the line of Michael Morris of Davenport.

Michael Morris - Davenport & Company, LLC

A question on the digital portion of the business. And the revenue growth rate in digital remained below the overall segment revenue growth rate. It certainly seems like an area that should be accelerating and at some point be a leader in growth, so can you talk a little bit about maybe why that's lagging right now? And what the pathway is to having that become a meaningful driver for the business?

John Lansing

Sure, and I assume you're talking about the digital associated with the networks?

Michael Morris - Davenport & Company, LLC

Exactly. Basically, the digital extension of the brands.

John Lansing

Yes, so actually, it's really good news. We had a terrific quarter in terms of audience development with page views up 28% on 1.9 billion page views, a record number for us, and the 26 million monthly unique visitors on average during the quarter. And what we're seeing is the marketplace, which has been somewhat depressed by the housing economy, which is much more sensitive to our home-related websites, is now, we're seeing a little bit more demand coming back into that sector, which will help drive our growth. And the other part of it, and maybe the most significant driver for our Digital business is the video advertising online, which is showing significant uptick for us as we're developing more video strategies for our websites and syndicating that video. And I can tell you that the pacing for the second quarter is up measurably from the first quarter, and we'll hope to see that strength continue into the upfront and into the third and fourth quarter.

Michael Morris - Davenport & Company, LLC

And when you go out and sell that, I mean are you selling it in conjunction with the network? Are you selling it separately? How kind of mechanically, how can that continue to grow or accelerate the growth from here?

John Lansing

Sure. Well, about 40% of the Digital revenue is tied to packaging with the networks themselves. And then the 60% remaining is tied to unique packages that the online group puts together with advertisers that solve particular advertising messages and goals for campaigns. And as I said earlier, the video portion of that is really beginning to kick in, in terms of heightened demand. And we're even beginning to see for the first time some major advertisers moving significant parts of TV budgets over to the digital side. And of course, our digital properties, foodnetwork.com being the leader, along with hgtv.com represents the 2 biggest opportunities for online in those 2 gigantic categories. And then our ability to promote and cross-promote those puts us in a good position. So again, we've come out of a period where the sensitivity of the housing economy has affected half of the house, if you will, and we're seeing that business start to come back along with the increased video demand. And I'm really feeling pretty good about where that growth is going in the second quarter and beyond.

Michael Morris - Davenport & Company, LLC

Great. And if you don't mind, just one thing back on the question on GAC. Would you consider divesting that asset since it's not in the lifestyle kind of brand genre? Or is that pretty much off the table and it's an operating story?

Kenneth Lowe

Michael, this is Ken. We see total upside with GAC. We see it as an opportunity. As John alluded to, we will be really migrating a little bit more to branded lifestyle content on that network. It's always been one of our goals. We just got, I think, some other priorities along the way. But it's great real estate. We've got a great team there and we see a scenario to invest. And as John said, affiliate sales is doing a much better job now with putting some -- pardon me, affiliate fee revenue on that network, which when we bought it had pretty much zero, and some cases, negative. So opportunity, a place to invest and we think it fits very well into our long-term lifestyle branding strategy.

Operator

Next, we'll go to the line of Jason Bazinet of Citi.

Jason Bazinet - Citigroup Inc

Just one question on leverage. As you guys sort of think about investing for growth and returning capital to shareholders, can you just remind us your sort of target leverage level? And do you define that sort of on a gross or a net basis?

Joseph NeCastro

Yes, Jason, this is Joe. I think it's fair to say we don't have a target leverage. We, the company, will, even as we put some leverage on the balance sheet, we'll put the balance sheet to work. We'll stay modestly levered, I think, at best. And we think even with that, despite that, there's plenty of room to return a significant amount of capital to shareholders. So you're never going to see us in just sort of driving as hard as we can to lever up the balance sheet and use it. We think there's plenty of room without doing that, but expect it to be modest.

Jason Bazinet - Citigroup Inc

And modest would be sub 3, is that fair?

Joseph NeCastro

Oh yes, that's fair.

Operator

Next, we'll go to the line of Eric Handler of MKM Partners.

Eric Handler - MKM Partners LLC

When you look at the Cooking Channel, you've had some good ratings growth there. As your affiliate fee contracts come up, do you have an expectation that you could get more meaningful sub increases there?

Joseph NeCastro

Absolutely. We go into every affiliate negotiation with that expectation. And you're right, the success of that rebranding of Fine Living is not only getting the attention of the audience and the advertisers, but I think the distributors are seeing it not only as good for their customers, but good for their own local ad sales. Our networks tend to be the best local ad sales vehicles for most distributors, including HGTV and Food. And by transitioning Fine Living to Cooking, we opened up a whole new network for that high demand food inventory. So because of that, I'm very optimistic that we can push that case forward when those renewals come up.

Eric Handler - MKM Partners LLC

And just sort of as a follow-up, when do some of those renewals come up? And 2, would there be an opportunity to, given the ratings, maybe see some additions before those contracts occur?

Joseph NeCastro

Unlikely, there'd be additions before the renewal negotiations come up. And we have some this year, including the end of this year, but it would represent less than 30% of the available universe.

Operator

Next, we'll go to the line of David Bank of RBC Capital Markets.

David Bank - RBC Capital Markets, LLC

Guys, you've been amongst the most vocal about content migration over to the iPad apps from some of the MSOs. And I was wondering if we could just get a sense of what you think your priority is of getting the content to other platforms to make it even more sticky for consumers. How important do you think it is to have this content ported over to things like the iPad? And what do you think you should get -- what do you want in exchange for that? How do you think about what the incremental value is for the distributor and what you should get paid?

Joseph NeCastro

Sure, David. Well, we want to be where our consumers are going. So we believe that our content should be available on iPad and on smartphones and on any device that consumers desire to interact with our content as they do online today. And the question simply is one of negotiating those carriage rights. We don't have any negative feeling towards getting the content on the platform at all. We simply want to have a fair agreement through our carriage rights. Currently, the agreement that we have for carriage is limited only to television sets wired to the cable boxes or satellite box and doesn't include the other devices. The fact that we are vocal about that doesn't suggest that we're not interested in having our content on those devices. It simply means that there needs to be a fair negotiation. Now, your question as to what's the value we're looking for, and that value can flow through affiliate agreements. It can be through the affiliate fees, it can be through inventory questions. Whatever the value -- however the value is derived is really not the concern that we have. It's just making sure that the upside that the distributors would be experiencing with this content distribution, including for their broadband systems, is an upside that we have our fair share of. And frankly, that's -- in my conversations with the majority of the people leading distribution companies, there's not a disagreement that there should be a meeting of the minds on the value proposition or a value exchange. It's really a question of a negotiation and arriving at something that both sides feel is fair and currently, the tone of those discussions is very constructive, very positive as we have them with various distributors and we continue to believe that they are our best partners for building a business that's sustainable into the future. We're a big believer in the cable satellite business model. We believe this is the way to help preserve that value into the future. But the bottom line is the value has to be shared.

Eric Handler - MKM Partners LLC

I'm sorry, if you can hear me with just one quick follow-up, it would be that to modify -- program agreements come up every x number of years, right? And the consumer would appear to be desiring to consume this content on these new platforms, and some of the MSOs want to bring them to the platform. So what do you do? Does this mean that every affiliate fee agreement kind of has to be renegotiated on the fly in order to get this done?

Joseph NeCastro

Well, not on the fly per se, but the conversations about additional grants of rights do not have to wait necessarily for a renewal to come up a month, 3 years down the road. There's every reason from both sides to have those conversations as soon as possible to satisfy the consumer interests.

Operator

Next, we'll go to the line of Tuna Amobi of Standard and Poor’s.

Tuna Amobi - S&P Equity Research

I guess one of the comments recently that struck me was when you said the last time that the -- some correlation between NFL viewership and the Food Network. So I wanted to ask if you have kind of seen anything else? Any additional data points that can help us to surmise trends there, one way or the other, given the uncertainties around the NFL season would be helpful.

Joseph NeCastro

Yes, I wish I had some data that I could just give you to help model that out. I don't have any specific data other than what we saw anecdotally during the football season. I think just generally, our greater interest in sports viewing among women, 25 to 54. And it's something that pops up even in other sports venues from time to time, like the NCAA tournament, basketball tournament, et cetera. So I think it's just a pattern of viewing that's somewhat different than maybe the stereotypical sense that only 18- to 49-year-old young men watch sports. I think it's something that's becoming a bona fide competitor for the female 25-54 audience.

Tuna Amobi - S&P Equity Research

That's very interesting. If I can switch gears here, any progress update regarding the transition of your advertising base on travel from DR to premium? And how do you expect that play out as you look ahead for the rest of the year?

Joseph NeCastro

No, it has been improving quarter-to-quarter, month-to-month. Of course, first quarter, typically, of any year is a higher DR quarter than the other quarters of the year. This particular year was even more so because there was so much of our inventory that was taken up by calendar market and then the scatter, as a result, was less. And because the calendar bookings didn't happen until later in the year, that opened up more inventory in our first quarter for DRs. So it skewed the number a little bit. But I spoke with the head of ad sales for Travel just about this very question yesterday, and he told me that the amount of DR was down 4% quarter-to-quarter as a percentage of total inventory. And he expects that to continue as we add in higher quality advertisers, CPG, et cetera, to the network. And really, the thing to note here is that our ad sales team, led by Steve Gigliotti and his group, put together a very dynamic ad sales team that's specifically assigned to Travel Channel. In the past, Travel Channel did not have a solely dedicated sales team. This is the first time that it has, and that team has really taken off like a shot with a great brand. And as that brand is now improving, ratings are growing and they really have a great story to tell. They're coming off the upfront presentations from the spring with a lot of advertiser interest in getting involved with us on Travel Channel. So there's no question in our mind that, that DR as a percentage of total revenue will continue to fall, and ultimately, will be in the same range that it is on HGTV and Food.

Tuna Amobi - S&P Equity Research

That's very helpful. And lastly on Shopzilla, as I look at the consideration, the sale price, it just seems to me based on some of the comparable properties out there, some of the smaller deals we've seen, that, that asset should have probably fetched a little bit more, if not significantly more than you did. So I'm just kind of wondering, given the, it seems the market has been robust of late. Can you perhaps help us here with some of the elements that kind of feature into your thought process in terms of valuation? And it seems you said you've taken some major loss there. So help us out here, because it seems like your timing was very good in terms of overall market. And to kind of why didn't you push for a higher valuation?

Joseph NeCastro

Well, where were you when we were looking for a buyer? So, look, probably the best answer to that is to say it was a very full, very robust process and the market spoke. The market delivered that price. It's no mystery that, that business has been reinvented over time and is still subject to variability from headwinds in the larger ecosystem. It is not fair to compare the valuation there to other quote, "smaller transactions" because this is a relatively unique space on the web. It's a mature space and there are comparables in their space. So, we feel reasonably good about where we ended up. Obviously, we would love to avoid taking a write-down on the asset as a consequence of the sale. But it was a fully marketed deal and we did not actively say we'll take less for it. Trust me.

Operator

Next, we'll go to the line of Ben Mogil of Stifel, Nicolaus.

Benjamin Mogil - Stifel, Nicolaus & Co., Inc.

Just following up on David Bank's question about sort of what rights you’ve got on digital, what the MSOs have. When you look out to some of the international markets, and that's probably the U.K. is the most relevant one, are the deals that you have similar? And I'm wondering if you can share any kind of international kind of commentary on, do you see active downloads of your apps out there? Do you see active page views? I'm kind of curious if you're seeing international market being similar to the domestic one.

Joseph NeCastro

Ben, this is Joe. On the digital front there, I'd say it's fair to characterize our efforts there on the digital side as nascent. I'd say, you're right, the most relevant marketplace is the U.K. where they have a very, very robust market in digital viewing of content and digital access to all kinds of content there. And so we're very engaged in trying to figure out the best way to take advantage of that. But right now, it's hard for us to say, to talk about the market dynamics in many markets, frankly. We're just still early days on that.

Benjamin Mogil - Stifel, Nicolaus & Co., Inc.

Sure. I meant specifically, is the U.K., your deals there are similar to the way in the U.S. where the -- where more of satellite provider has only the sort of the set-top box rights and everything else still resides with you?

Joseph NeCastro

Yes, that is similar.

Operator

Next, we'll go to the line of Michael Corty of Morningstar.

Michael Corty

You highlighted earlier in the call the growth in automotive advertising. Obviously, auto is strong across all of television, but could you comment on any kind of what's driving the auto category for you in terms of specific channels or programs? Is this more a long-term phenomenon or just a short term? Any comments on that would be helpful.

Joseph NeCastro

Yes, sure Michael. The automotive has been strong for us, particularly General Motors, for one. And they've been a long-time partner of ours with Dream Home as an example. And we are now developing more, we call those tent pole events, Dream Home, Green Home, Next Food Network Star, for example, our HGTV Design Star. And what we typically do is have a major automotive advertiser tied with our major tent poles, and it's a great partnership that we can use, work with them and work with their specific campaigns during that season. And I think it works very well for those advertisers. And it helps solidify their involvement with our networks. Those are dollars that can't be -- there are no options on those commitments for those major campaigns. And it helps us build a strong base with automotive in particular.

Operator

Next, we'll go to the line of Matthew Harrigan of Wunderlich Securities.

Matthew Harrigan - Wunderlich Securities Inc.

2 questions. Looking at digital from a slightly different path, I thought the timing of the deal on iPads was really interesting. With Hearst, you've got an HGTV Magazine now as well. So Food Magazine, can you talk a little bit about the interlacing possibilities there? Because it looks like you can get a bit of a virtuous circle going with some of the better-branded magazine franchises and really take off in that regard, and certain people like Jeff Bucus [ph] are crossing their fingers that they will. And then secondly, particularly given that you're fractured overseas and you're talking about finding one large partner, how do you feel about the dynamics of kind of the a traditional distribution versus the MSOs internationally where you might be able to get things done a little bit faster, and the money coming out, it might be a little bit more comparable?

John Lansing

Okay, I'll start, Matthew, and I'll let Joe talk about international. But listen, we are just really thrilled frankly with our relationship with Hearst in the publication of the Food Network Magazine and the upcoming -- we're looking at the upcoming magazine for HGTV. And in fact, we've had conversations with Hearst very recently without getting into a lot of detail, but both sides recognized what you have pointed out, and that is what may be the potential for these brands and these magazines in a digital environment. And there is interest from both sides to explore that further.

Joseph NeCastro

Yes, Matt, on the international front, too, I think obviously, it's very important set of questions. We obviously are long on content and short on distribution, so all avenues make sense for us to explore. We mentioned tie-ins with larger internationally developed companies that have a lot of distribution that may need content. But we also look at markets individually and look at the opportunities to go in there. So in many cases, there's no one answer to approach a particular market. And then there'll roughly finite number of markets we would even think about entering on our own. So anyway, more to come on that. I'd say it's probably early for us to say. There's one preferred method for achieving distribution. One thing we know that is certain, is that we can't do it sort of the old-fashioned way, if you will, where you go one market at a time and try and negotiate for distribution of the content.

Operator

Next, we'll go to the line of Ben Swinburne of Morgan Stanley.

Benjamin Swinburne - Morgan Stanley

I wanted to ask about the digital platforms that are being built out across your networks. And it seems like between social networking and what is happening with streaming on the iPad, the ability to sort of engage your consumer is really taking a step function forward.

John Lansing

Oh no, there's no question in that, with our websites being essentially leaders in the category Food and Home. And then that also translates to your point in social media. Just by example, HGTV has surpassed 1.4 million Facebook fans just for HGTV, and has 50,000 followers on Twitter. And so, the grand total of audiences, of the audience that interacts with HGTV through social media tops 700,000 in any given month, which is amazing when you think about it. And then, the ability for us to cross-promote on these platforms back and forth and develop new interactive businesses, including the front door business through our Home category, food.com, cookingchannel.com in the Food category, it gives us, I think, an advantage not only in promoting the TV networks, but really in reaching audiences that may or may not be fans of the TV network or will soon be, but rather reaching audiences in a whole new way and satisfying those audiences with unique content and applications on those digital platforms that are unique to those platforms. And so, you can rest assure that we'll be looking to invest more in reaching consumers in our categories by way of digital platforms and creating advertising opportunities and perhaps, even exploring other business models with them. And social media gives us a step up in doing that.

Operator

Next, we'll go to the line of Lance Vitanza of CRT Capital.

Kyle Okita

Actually, this is Kyle Okita for Lance, and my questions have already been addressed, so thank you.

Operator

Next, we'll go to the line of Marla Backer of Hudson Square.

Marla Backer - Soleil

You mentioned before when you were talking about the auto category, you mentioned advertising and advertising partnership. And I think some of the advertising partnerships that you've had like with My Yard Goes Disney and the Kellogg partnership, are very interesting and it seems that your brands will position you uniquely for those kind of partnerships. So can you talk a little bit about where do you see that opportunity? Will there be opportunities for similar kind of partnerships on the Travel Channel? Does that give you a little bit of a longer-term visibility on the ad dollar spend by the advertising partner? And the potential to grow that part of the business.

Joseph NeCastro

Yes, you hit the nail on the head. Frankly, I spoke earlier about the way we use our major tent pole events for solidifying automotive advertising and certainly, Travel Channel is developing that kind of programming. But in addition, our other networks have a secret weapon of sorts where they develop this interstitial programming that goes between the half-hour segments or within, short form programming that also ties in major advertisers such as automotive. And those short form interstitial programs are also being developed for the Travel Channel. So those 2 components are yet to be introduced on the Travel Channel, and when they are later in the year, that will bring that ability, as you suggest, to bring in the kind of partnership with major advertisers, including automotive. And not only helps drive revenue for the network but more importantly, drives the business of the advertisers and then solidifies the long-term relationship between the advertiser and the network.

Operator

And at this time, there are no further questions. I'll hand it back over to our host for any closing remarks.

Mark Kroeger

Thank you, Julie. And this is Mark, everyone. Mike and I will be available for you for the rest of the afternoon if you have any follow-up questions. And, Julie, you can read back the replay information.

Operator

Ladies and gentlemen, this conference will be made available for replay after 12:30 p.m. today until May 19 at midnight. You may access the AT&T Executive Playback Service at any time by dialing 1 (800) 475-6701 and entering the access code of 198481. International participants may dial 1 (320) 865-0844. This does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconferencing Services. You may now disconnect.

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