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Scripps Networks Interactive (NYSE:SNI)

Q2 2011 Earnings Call

August 09, 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

Michael Morris - Davenport & Company, LLC

Eric Handler - MKM Partners LLC

Meghan Durkin - Deutsche Bank AG

Benjamin Swinburne - Morgan Stanley

Anthony DiClemente - Barclays Capital

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

Michael Nathanson - Nomura Securities Co. Ltd.

Marla Backer - Hudson Square Research, Inc.

Paul Sweeney - Bloomberg Research

Alexia Quadrani - JP Morgan Chase & Co

John Janedis - UBS Investment Bank

Thomas Eagan - Collins Stewart LLC

Barry Lucas - Gabelli & Company, Inc.

Brian Karimzad - Goldman Sachs Group Inc.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the second quarter earnings report. [Operator Instructions] And as a reminder, this conference is being recorded. I'll now turn the conference over to Mark Kroeger, Vice President of Corporate Communications and Investor Relations. Please go ahead, sir.

Mark Kroeger

Thanks, Kathy. 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 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 second quarter earnings presentation materials that we’ll 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.

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.

With that, I'll turn it over to Ken.

Kenneth Lowe

Well, thank you, Mark, and good morning, everyone. As always, we thank you for your interest in Scripps Networks Interactive. The second quarter was another strong one for the company and its shareholders. Some of the highlights include industry-leading double-digit growth in advertising revenue, success in the recent broadcast upfront and initiation of a $1 billion share repurchase program. At Scripps Networks Interactive, we truly have power brands that viewers and advertisers value and desire, and it's this focus on our audience that really drives the success of our business. For us, it's really all about building strong relationships: strong relationships with passionate viewers and strong relationships with advertisers, many of whom rely on the targeted nature of our networks to reach their most valued customers.

We built our business on a very solid foundation of endemic advertisers who consider our networks as really must-buy marketing platforms. They know that media consumers connect with us through our popular programming. But even more importantly, viewers incorporate our lifestyle brands into their everyday lives. They visit our growing and profitable interactive branded websites. They follow their favorite shows and personalities on Facebook and Twitter. And they purchase products from our growing list of licensed merchandise that reflects the brand characteristics that they desire. This level of viewer engagement is really unmatched in the industry and is a significant competitive advantage to Scripps Networks Interactive.

We saw many exciting developments in the second quarter in all of our fully distributed lifestyle networks. For example, at Food Network, we saw sequential improvement in viewership during the second quarter, and we finished strong, with Food Network moving back into the top 10 for primetime at #8 for the month of June. The premieres of Food Network Star and the new season of Restaurant: Impossible contributed greatly to the network's improved viewership results in June, which is a trend that we see continuing into third quarter. The hit series Chopped continues to be a standout performer, with viewership climbing each week in the current season. And we're following up on the positive sequential viewership momentum with our outstanding July premieres like Extreme Chef and Heat Seekers.

But we're not stopping there. In August, we're bringing you more and new exciting programming such as Sugar High with Duff Goldman, a Food Network fan favorite; Crave, which is a show hosted by food-obsessed journalist Troy Johnson. Troy's expedition shed light on how a particular dish or a trend started, how it's made, the science behind it and even the loyal people who are really nuts about the flavor, just like Troy. We hope you tune in and catch some of these new programs. It's always a pleasure to hear investors tell us about their favorite shows on Scripps Networks.

And on the digital side, our Food Network apps are crossing new thresholds. The Food Network Nighttime app has had more than 1.1 million downloads, and we’ve had more than 300,000 downloads of our Food Network In The Kitchen app, which for a time, was the #1 paid culinary app on iTunes. We have almost 2 million Facebook fans, and on Twitter, we have more than 570,000 followers, both great examples of how people have integrated our brands into their daily lives.

We've also been busy extending our brands into areas beyond TV. For example, later this fall, we're expecting to launch 2 Food Network venues at the Fort Lauderdale Airport. The concept is called Food Network Kitchen, and it includes a gourmet market, the grab-and-go food, as well as quick-serve food. We hope you'll give it a try next time you're flying through Fort Lauderdale.

And we're expanding our sports venue offerings as well, setting up Food Network concessions in 6 additional NFL stadiums including New York, Chicago, Charlotte, St. Louis, Cleveland and Buffalo. So this season, we hope you'll enjoy a great meal with us as you watch your favorite NFL team.

And finally, our partnership with Coles continues to exceed all expectations with sales outpacing last year's by 40%. And we're continuing to see great results from Food Network Magazine. In fact, the June issue was the fattest in its history, which is publishing speak for the most ad pages ever, again showing how much advertisers value our brands, our viewers and our readers.

Good things are also happening over at HGTV. We had our best-ever June and second quarter as well, driven by successful new shows like HGTV's House Hunters on Vacation and My Yard Goes Disney. Additionally, all of these programs have a median viewer age 4 years younger than the network average, which makes the programs particularly attractive to advertisers. Also contributing to strong results was the return of perennial favorites like the new season of HGTV Design Star, which launched in June. Fan favorite series like Holmes on Homes and House Hunters and House Hunters International all are pulling in solid viewership. And to keep the momentum going, we're launching some great new shows in the third quarter like Run My Makeover. On every 1/2 hour episode, homeowners allow a room in their house to be completely transformed according to the design preferences of online users who vote on everything from flooring, to fixtures, to cabinets, to cooktops. And when the votes are all tallied, it's up to our host, with a little help from the homeowners, to pull all of the elements together into one amazing room. It's quite a show.

Now we've seen some great traffic results at our branded websites in the Home category during the quarter as well. Overall page views at our websites were up more than 25%, with some sites like hgtv.com seeing increases of more than 35% and frontdoor.com traffic almost doubling.

Of course, the HGTV brand is continuing to grow beyond its on-air and online platforms. On June 1, Sherwin-Williams launched HGTV HOME paint in more than 2,800 stores across the country. And HGTV HOME Flooring by Shaw is now in 500 retail outlets, with more stores getting onboard weekly. So be sure to try the paint and flooring for your next weekend home improvement project. But we're not stopping there. We're exploring additional licensing opportunities to leverage the HGTV brand name for other home products, so stay tuned for more announcements to come.

Now, over at Travel Channel, we've been busy redefining the content genre for television and other media platforms. We're seeing continued audience growth of the network, thanks to strong viewership of returning series like Anthony Bourdain's No Reservations, Adam Richman's revamped food -- Man v. Food Nation, Ghost Adventures and the new season of Bert the Conqueror. And building on the popular Ghost Adventures franchise, we saw great results from the premiere of Zak Bagans' Paranormal Challenge, which happened to match the record for the highest-rated series premiere in Travel Channel's history. Additionally, new shows like Off Limits with Don Wildman and Sand Masters performed very well during the quarter.

And you've heard us say it before, travel is really more than just a destination. It's all about meeting new friends and guides, and we're pleased to launch several new promising series in the third quarter including Truck Stop, Missouri, which is a show about a mega truck stop/mini mall that's a pass-through for some and a destination for others. This places a true revolving door of outrageous characters with personalities and stories to match. Hope you'll catch it.

Travel Channel also launched its first mobile application on June 28, the Man v. Food Challenge game. Now, you can be like Adam and eat your way across America. And if you're feeling hungry, the game is available on iPhones, on iPods and iPads and soon it will be released for Android devices.

Meanwhile, flanker brands in the home and food categories, DIY Network and Cooking Channel, are continuing their steady rise. At DIY Network, our standout shows like Man Caves, Renovation Realities and Desperate Landscapes and our popular Crashers series drove viewership up in the second quarter. And we're keeping the momentum going with the launch of several new shows designed to appeal to the home improvement expert in all of us, like Door Knockers, where unsuspecting homeowners get a knock on the door that they will never forget. Before they know it, a crew of contractors is walking into the house, bringing out power tools and creating amazing room transformations right on the spot.

At Cooking Channel, audiences were up 20% to 30%, depending on the day part year-over-year. And we're premiering new exciting entertaining shows in the third quarter. For example, The Perfect 3, which brings viewers the 3 most perfect recipes of a given dish. Plus, we're challenging viewers to send us footage of their own perfect dishes. The winner gets their own webisode on cookingchanneltv.com. And finally, speaking of cookingchanneltv.com, the website is as hot as the channel, with page views up more than 50%.

So there you have it, a lot of really great things happening at SNI. We finished strong at Food Network, moving back into the top 10 for primetime. We had our best-ever June and second quarter at HGTV, and we continue to see audience growth at Travel, Cooking and DIY. And we're launching and expanding exciting new branded products and services for Food and HGTV. And we're seeing strong double-digit growth in traffic at our network and branded websites. All in all, some very positive momentum for the company as we look ahead. So with that said, let me now turn it over to 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 go over the numbers in any detail. I'm going to focus my remarks on the second quarter and provide some color on what drove our very positive results.

Starting with the consolidated view, revenue was up 12%, and total segment profit was up 24%. As a result, net income from continuing operations attributable to SNI grew 36% to $0.78 per share or 31% on a normalized basis. And as promised, we initiated a $1 billion share buyback program, starting with the repurchase of 6-million-plus shares from the Edward W. Scripps Trust for about $300 million. Going forward on the buyback, we intend to be active in the market with a combination of structured and opportunistic buying programs. This should give us the flexibility we need to meet all of our business objectives. Let me assure you that we're committed to using this entire authorization in a timely fashion to create value for our shareholders.

Turning back to operating results. Our key revenue drivers for the quarter came in about as expected, with advertising sales up 13%, affiliate fee revenues growing 6% and our digital revenues, which are primarily the dot-com properties associated with our networks and shows, up 28%.

Looking at advertising. The third quarter is trending well for us. But keep in mind that year-over-year comparison is a bit challenging when you take into account the unusually strong growth we achieved during the third quarter of 2010. You'll remember we had 19% ad revenue growth in the period last year, which represents a pretty steep hill to climb. For the third quarter of 2011, we might not report the advertising growth rates we have achieved year-to-date, but let me stress that we fully expect to achieve the projections in our full year guidance for total revenue.

That said, we're seeing good year-over-year improvements in ad sales that are in line with our expectations, considering the underlying strength of the scatter marketplace relative to the upfront commitments we've made. Keep in mind that we committed more of our 2011 inventory in both the broadcast and calendar upfronts to take advantage of the strong pricing. That leaves us less exposed to scatter for the balance of the year when compared with 2010. Still, all of our networks are benefiting from the continuing strength of the marketplace. Scatter-versus-scatter pricing in the third quarter is running in the low teens over last year's scatter and up mid-20s over the upfront. That's similar to how scatter played out for us in the second quarter, running in the mid to high teens over last year's scatter and mid-20s over the upfront.

The strength of the scatter marketplace had a direct impact on the broadcast upfront we just completed. In a word, we had an excellent upfront. We finished right at the top of our cable peers, with healthy double-digit gains in both CPM pricing and total dollar volume commitments. We did particularly well monetizing the audience we're building at the Travel Channel, while advertiser demand for HGTV and Food Network inventory remained exceptionally strong.

Collectively for Scripps Networks, volume was up 20%, and pricing finished up in the low double digits. All that bodes well for the fourth quarter this year and points to another good year in 2012. Our success in the upfront, despite some ups and downs we've had with viewership recently, speaks to the desirability of our lifestyle networks as value programming environments with highly engaged viewers who are passionate about food, home and travel. As has been the case historically, advertisers are willing to pay up for networks like ours that can deliver engaged upscale viewers who are willing to spend discretionary income to buy key goods and services.

Turning to affiliate fee revenue. Growth continued at about 6% during the second quarter. As a reminder, 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 the current levels for the balance of this year.

Looking at our digital businesses. Revenues grew 28% to more than $27 million in revenue this quarter. This growth was driven by increased traffic and ad delivery. So an important piece of our business is growing at a very healthy double-digit rate.

Travel Channel, meanwhile, remains our single largest growth opportunity and continues to deliver improved results. Helped by audience growth and focused advertising sales, overall revenue increased about 15% with advertising revenue growth in the upper teens. Affiliate fee revenue grew in the mid-single digits.

Cooking Channel performance during the second quarter continued to exceed our expectations. Driven by growth in audience and improved advertising, total revenues for the network were up 30%, excluding the amortization of rebranding distribution incentives. Net of launch amortization, reported revenues for the brand were up about 17%.

Through focused management of our operating expenses, we continued to successfully leverage our cost structure and realize the benefits of our revenue growth. Lifestyle Media segment profit was up a very hefty 22%, and the margin increased to 55%, up from 50% in the second quarter of 2010. Excluding the onetime expenses related to the Travel Channel acquisition, segment profit increased 18%.

Realizing the benefits from our revenue growth and expanded operating margins, EPS from continuing operations increased to $0.78 per share, which is up 36% from last year. Excluding the onetime items, second quarter 2010 EPS would've been $0.60 from continuing operations.

And turning quickly to the International business. We continue to see strong evidence of the appeal of our content. Based on percentage share improvement, Food Network U.K. is the most improved network over the past year, and the positive trends continue. We had our highest-rated weekends in June since we launched. We had our best audience ever on June 5. Helping to drive this audience growth are new titles like Eat St. and DC Cupcakes. Both of these new programs are gaining a strong following in the U.K. The news should only get better this quarter. The network has significantly expanded its reach after securing additional channel space on U.K.'s largest TV platform. Adding free view distribution extends the network's reach to about 23 million U.K. homes during primetime.

Availability of our content is growing and gaining in popularity. In less than 6 months, Food Network has firmly established itself as the top lifestyle channel in South Africa, beating our primary competitor in June. We're also seeing expanded distribution deals in Southeast Asia, including Taiwan and the Philippines. Elsewhere, discussions are ongoing as we've got additional distribution opportunities around the globe. Finally, international program sales are growing at a very brisk rate, up almost 80% this year. Please bear in mind that this growth is off of a small base, though.

Finally, a few comments about our current cash position. We received the initial payment of $150 million from the sale of Shopzilla. We spent $300 million of our buyback authorization, leaving us $700 million remaining under the authorization. During the second quarter, we generated about $140 million in cash from continuing operating activities, and we ended the quarter with about $713 million in cash.

Just one more note. We're on track for a solid 2011, and we're maintaining the full year guidance we provided earlier this year. So all in, very positive quarter for the company and its shareholders.

That's it for our prepared remarks, and thanks for your attention. Operator, we're ready to take any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from John Janedis with UBS.

John Janedis - UBS Investment Bank

Joe, you touched on this earlier in the prepared remarks, but can you tell us in a bit more detail what drove the 28% growth in the digital business? Meaning, is there any revenue from licensing content to the online video players in there? And what are you seeing in online display?

Joseph NeCastro

Well, we can have John add some color to that, but basically, I think it's fairly straightforward. There's not anything new in there. It's really just increased traffic and ad delivery. And John, if you have any other color you want to add?

John Lansing

Yes, just a little, Joe. John, the website hgtv.com has had some significant growth year-over-year in page views, and the other growth driver for our digital business is the advertising on video. And our video plays on both foodnetwork.com and hgtv.com have been up significantly for the quarter and for the year as well. And we're seeing that trend continue. So the 2 drivers are the growth in page views at HGTV and the overall growth in video.

John Janedis - UBS Investment Bank

And then also, from the programming perspective, the Food category continues to get a bit more crowded, and so can you just talk a bit more about the strategy here going forward? Are you increasing the number of hours of original programming? How many shows are you premiering in the second half of this year versus 2010? And should we expect above-trend increases in programming costs going forward?

John Lansing

All right, I'll start on that, and then, Lori, you might want to comment on programming cost trends. But we are obviously seeing the competition around us in the Food category and responding in kind. We're launching this year the highest number, greatest number of new original series and new premieres of existing series that we have in the history of the network. 12 new original series are being premiered this year. Third quarter and fourth quarter have a number of promising, as Ken noted in the prepared remarks, promising new concepts. And so the answer is yes, we're investing. Obviously, we're also investing in Cooking Channel. We're seeing growth there. And I can tell you as well that the ratings on Food Network are trending very positively both through July and into August, and we expect that to continue.

Lori Hickok

Yes, and I can follow up on the expense. And keep in mind, the amortization lags expense, so if you look at our cash flow statement, you will see we're investing more. So we do expect even more increases in expense next quarter. That's just the timing of the premieres. So still, we believe we'll be in our full year guidance for the year. Obviously, we continue to look at that, but obviously, as there's competitive pressure, we will continue to do the right things on spending and ratings of the deal [ph].

Operator

We'll go next to Anthony DiClemente with Barclays Capital.

Anthony DiClemente - Barclays Capital

I have 2 questions, one for John and one for Joe. John, away from ratings for a second. If we can just isolate advertising demand. I think, earlier in the year, there had been some talk out there that, because food ad buyers have been seeing some supply cost inflation in their own business that they have been looking to defend margin. And as a result, big food companies, be it General Mills, ConAgra, that they were holding the line on ad demand. I wonder if you could comment if that was true. And if it's true now, if you're seeing that, I think people speculate that about 35% of Food Network advertising is endemic. So I just wonder if you could comment on that. And then I have a follow-up for Joe on the buyback.

John Lansing

Yes, sure, Anthony. We're seeing solid demand in the Food category. It remains our #1 category, and it was actually the second fastest-growing category of our top 5 categories. So the demand has been brisk and continues to be, and we certainly rode a healthy amount of Food category business in the upfront.

Anthony DiClemente - Barclays Capital

Okay, great. And then on the buyback, Joe, if we just think about this $700 million, can you comment on the pace of that? So is it safe for us to sort of model straight line pacing of that buyback over the next 4 quarters? Is there an opportunity for an upsizing of that $700 million? Maybe you can give us a little bit more on your buyback plan.

Joseph NeCastro

Yes, look, Anthony, I wish I could. I think you'll see us being as aggressive as warranted by what we see in the marketplace. But I really can't commit to the exact pacing of that. As I said in the prepared remarks, we fully expect to use the authorization. This was not just an announcement. We expect to be in the market as soon as we can. We're in a quiet period until we get past earnings here, but you'll see us in the market. In terms of a potential upsizing, that wouldn't even be considered until we have either fully exhausted or nearly fully exhausted the current authorization.

Operator

Then we'll go next to Alexia Quadrani with JPMorgan.

Alexia Quadrani - JP Morgan Chase & Co

I guess, the first question, could you give us a bit more color on the vertical...

[Technical Difficulty]

Lori Hickok

Oops.

Joseph NeCastro

We lost her.

Operator

I apologize. [Operator Instructions]

Alexia Quadrani - JP Morgan Chase & Co

Just a couple of questions, the first one on the vertical strength you're seeing in the quarter. I guess if you can, John, if you can walk through sort of what you're seeing by different advertising category in terms of the strength and weakness? And then it sounds from your bullish comments, going into the third quarter despite the tough comps, that there really haven't been any signs of any weakening by these verticals. Could you just sort of reaffirm that, that I’ve got that right?

John Lansing

Alexia, you do have that right. In fact, our categories remain strong. Food, number one; consumer goods; retail, automotive; home improvement. The fastest growing of the 5 top categories was automotive. We're still seeing significant strength in the Automotive category, particularly from Ford. And then as I mentioned earlier, the Food category was strong. I think one of the things that helps bolster our performance, particularly in our endemic categories like Food, is our unique selling proposition, the engagement of our audience, in addition to the upscale nature of our audience. For example, our Kellogg's business was up significantly this quarter due to the promotion with Food Network Stars, something that you can only get on Food Network, and it really delivers something more than just impressions. It delivers an engaged audience that, I know for a fact, Kellogg's feels very, very positive about that. So our sales teams bring a unique set of assets and tools to the marketplace. And that helps us, I think, drive those categories.

Alexia Quadrani - JP Morgan Chase & Co

And then just on the Travel Channel, the percentage of ad revenue from direct response, did that continue to strengthen in the quarter?

John Lansing

Yes, it's continuing to trend in the right direction. From 30% a year ago, it's now down to 15%. And as you know, I think, from earlier calls, our average for Food and HGTV tends to be between 6% and 8%. And we expect Travel will be there by the end of the year if not the first quarter of 2012.

Operator

Our next question is from Doug Mitchelson with Deutsche Bank.

Meghan Durkin - Deutsche Bank AG

This is actually Meghan Durkin in for Doug. I just was wondering, how variable is your cost base if the stock market is right and the economy starts to deteriorate even further here?

Joseph NeCastro

Meghan, I'll take that. This is Joe. I think our primary expenses, if you look at our cost base, are programming, marketing and people. And of course, programming, we view as a multiyear commitment. It is variable over the long haul but certainly not in the short run, and we as a company, sort of live and die by programming. We make the right calls on programming based on ratings and viewership and connecting with our audience. With respect to marketing, that is something that is very easy to move around. We think it's dangerous to cut it out for the long haul, but certainly, in any particular period, you can be flexible on that one thing. And the people piece of the business, I think it's not strictly speaking variable. We don't run a very bloated shop, we don't think. We actually have one of the lowest cost bases in the industry, so we try to keep a rein on that. So I think, all in, it's not the most flexible or variable cost base, but there is some flexibility around marketing and, certainly over the longer haul, the other 2 major costs.

Meghan Durkin - Deutsche Bank AG

Okay. And then on the buyback, you mentioned that your pace would be variable depending on what you see in the market. Does that mean that you would be more aggressive if your stock was to go down more? Or would you hunker down and start to save the cash if it starts to get ugly?

Joseph NeCastro

If it starts to get ugly. Look, I think you're -- obviously, that's how we would think about it. We look at our stock as an investment opportunity, and obviously, the better price we could get, the more we would be interested in buying. We do have other strategic uses for the cash over time. So again, we would always like to maintain a little bit of flexibility. With that said, the current authorization, we think, provides us with plenty of flexibility, and we'll be as aggressive as we think we need to be.

Operator

Our next question comes from Brian Karimzad with Goldman Sachs.

Brian Karimzad - Goldman Sachs Group Inc.

On digital rights, you have library content with a very long shelf life, maybe not quite as long as some good Tennessee whiskey, but it is pretty long life in the realm of television. And on the one hand, it has good value there, but on the other, you do use it pretty aggressively to fill the schedule on your networks and help build ones like cooking. So is there a potential loss of value to you if you were to offer it on some third-party digital platforms. And to be frank, it's the kind of content that seems to work well filling gaps rather than something that someone would actively seek out on demand. But how do these factors and others that are unique to you impact your willingness to make your content available to some of the third-party digital distributors that others have been working with?

John Lansing

It's a great question, Brian. First of all, we believe that our best partners are our current partners in terms of distribution, and that's the cable and satellite affiliates. In terms of working with them on TV Everywhere concepts and to the extent that the economics flow in a way that -- in a manner that's fair, then we think the audience is fairly well served through the digital platforms with cable and satellite operators. And then notwithstanding that, there is other content that we have in our library content, over 30,000 hours of digitized content that we own all the rights to that's outside of the window potentially with our affiliates or may have a unique application that's not necessarily a linear application, more video-on-demand or even segmented video-on-demand that could have a value and will have a value proposition for us with other third-party distributors. But let me reiterate that we think it starts with our current distributors, and we believe there's a path to creating a great consumer experience there, and to the extent that we can make that work with them, we will. But at the same time, we'll look at other over-the-top opportunities and measure those economics and monetize our library to the greatest possible extent.

Operator

We have a question from Eric Handler with MKM Partners.

Eric Handler - MKM Partners LLC

It's a little [ph] about your ratings, particularly at Food. I think you said it was starting to improve on a sequential basis but still down year-over-year. With all the content that you're bringing out right now, do you feel like you're spending enough on marketing and trying to keep cost down and maybe you should spend a little bit more to try spread the message a little bit about the new programming?

John Lansing

Yes, that's, again, great question. We are looking to spend more in consumer marketing, outside consumer marketing in the third quarter and into the fourth quarter to drive the momentum. We have seen really good sequential improvement. June into July grew 6%, and even the back half of July were the 2 fastest-growing weeks of the month. Moving into August, we had probably the best month of the first half of the year -- pardon me, the best week in the first half of the year at the end of July moving into August. So the momentum is there, week-to-week improvement. We have great new series and premieres of existing series coming out, and we will be putting some additional marketing. In fact, you will see that we're pulling some of our marketing from the fourth quarter into the third quarter to drive this momentum. And it will create a little bit of a lumpy expense situation quarter-to-quarter, but it should be about on forecast for the back half of the year in total.

Operator

We'll go next to Michael Morris with Davenport.

Michael Morris - Davenport & Company, LLC

Hoping you can help understand a bit better just how we should be thinking about ratings when we're looking at how advertising will perform in the future. And I guess specifically, there's certainly an inventory or a sellout portion that's difficult for us to ascertain, given we can see the year-over-year ratings trends. We have an idea of where your pricing is based on the information. So I guess, what I'm getting at, if you could help, if I look at something like Food Network and I look at the slowdown from the first quarter to the second quarter, assuming that affiliates were flat, it looks like that primarily comes from advertising. Is that ratings-driven almost exclusively? And if I look at how the ratings in any particular period are going year-over-year, am I at a point now where, with -- especially with Food and HG in terms of their maturity where the amount of inventory available is almost purely driven off of those ratings? Or does there continue to be some inventory play in there, and can you help us understand how much?

John Lansing

Sure, I'll take a stab at that. I think, in essence, what you're asking is whether the maturity of the big networks limits the upside of creating more impressions and how do we think about that and how do we sell those impressions. I guess, in terms of are they maturing, I'd say the answer is no. They're growing. And if you look at all of Lifestyle Media, and we're really considered the leader in Lifestyle Media, but look at reality lifestyle programming, whether it be on some of our competitors or on our own channels, and it really is the fastest-growing segment of television viewing in all of television. And we've seen unprecedented highs in terms of ratings on a number of individual shows that tell us that there's a great appetite for an improvement in our ratings going forward, and we're seeing that in terms of year-over-year performance. HGTV just had the highest-rated quarter in the history of the network, highest-rated June in the history of the network, et cetera. Travel Channel is growing similarly, as is Food now. But as we think about that, Michael, we think that we have to obviously have our pricing set. And we had, as Joe mentioned in the prepared remarks, we had really nice load of even mid-teen percentage growth in CPM going into the upfront. So that's a solid base that's laid in. We think about the amount of inventory we put into the upfront versus the scatter, and we did put a few more percentage points into the upfront to take advantage of that pricing. And then we think about just calling the scatter market and understanding it, and right now, the scatter market remains strong. And because of that, we have pricing going in that we believe will -- we can sustain with our ratings delivery. Ideally, we like to put ratings estimates out there that are just a bit of a stretch so that we don't leave any money on the table, and we hold back just a minor amount of inventory to make good on those, and that's a routine use of inventory in order to maximize the opportunity of the marketplace. And then the sort of the third rail for us are the special opportunities, the Dream Home Giveaway, the Next Food Network Star, the Urban Oasis, the Blog Cabin. All of those special programs and special series and special events allow us to drive not only higher pricing but guaranteed revenue that's not ratings-dependent. And so that, along with our other programming and marketing strategies, really does set us apart. You hear us talk about that a lot, but it's true, that our highly engaged audience, upscale female audience -- by the way, just to remind you, Food and HGTV are ranked #1 and # 3 in delivering upscale audiences in all of television, combined with our special opportunities, combined with our pricing and inventory management, really drives our success story.

Michael Morris - Davenport & Company, LLC

If I could just follow up. If I look specifically at Food in the quarter and what you reported, you went from 14.6% growth in the first quarter to 9.2% in the second quarter, and in terms of total dollars, you went from expanding by $22 million to $16 million. How much of that has to do with ratings? Or how much of it just had to do with something else I'm not picking up on in terms of what happened in the second quarter?

John Lansing

No, listen, we had a tough ratings month in May and into June, no question about it, and that did impact our revenue growth in the second quarter for Food. Thankfully, that has been turned around, and it's now progressing, as I said earlier, sequentially July into August. And as we look at the trend for the third quarter, I'm very confident that Food will be back up and meeting our expectations and helping to drive a higher growth rate.

Operator

Our next question is from Michael Nathanson with Nomura.

Michael Nathanson - Nomura Securities Co. Ltd.

I have a couple just more mathematical model questions for Joe, maybe for John. Just based on what I'm hearing about volume trends in the third quarter on pricing, and Joe, very clear about you'll decelerate into 3Q, I'm assuming the deceleration is low singles. Is that the right way to think about it, just given everything you've said so far?

Joseph NeCastro

Michael, I'm not sure what you mean by low singles...

Michael Nathanson - Nomura Securities Co. Ltd.

Basically, you went from 12.5 to, say, 9.5, 10, around that range growth for third quarter is kind of what -- if volumes are holding up and pricing is a little, it doesn't look like that much of a deceleration off of your second quarter growth rate.

Joseph NeCastro

Yes, without getting terribly specific, you’re not that far off.

Michael Nathanson - Nomura Securities Co. Ltd.

Okay. And then following that, based on what you're saying about fourth quarter, as long as scatter doesn't materially disappoint, we’re assuming things do get better a bit on the new upfront in the fourth quarter. That’s still a correct assumption, right?

Joseph NeCastro

That's absolutely a correct assumption.

Michael Nathanson - Nomura Securities Co. Ltd.

Okay. And then on programming, because I don't think the Q is out yet, what is your programming growth for the first half of this year, I guess, apples to apples?

Joseph NeCastro

We're going to have to -- let me look at that, and I'll interject on the next question or at the end of the next question.

Michael Nathanson - Nomura Securities Co. Ltd.

Okay, so then I have 2 more. And then basically you're very clear in all your cost guidance. Between the 6% to 9% growth on programming expense for the year, 6% to 9%, do you think a midrange is possible? In terms of now you're halfway into the year, which way are you going to skew, more higher or lower to that range?

Joseph NeCastro

Well, the range is still good. I think it's a little early to say exactly where we're going to be there, but you heard John's comments about spending some marketing to support some of the new program launches. So again, I think it's too early to be definitive. We'll definitely be in the range, but it's, as I said, it's a little early.

Michael Nathanson - Nomura Securities Co. Ltd.

Okay. And then the last one was just on your tax rate. You've been clear on that. Is coming a little bit lighter the first half of the year a little better for you? Is there any change to how your tax is reflected now that you've deconsolidated Shopzilla?

Joseph NeCastro

No, there shouldn't be a material effect from Shopzilla, a change. If anything, it's a little of what you've seen is the effect of Shopzilla.

Michael Nathanson - Nomura Securities Co. Ltd.

Okay, so 31% to 33% is still the range to think about?

Joseph NeCastro

Right.

Michael Nathanson - Nomura Securities Co. Ltd.

Okay.

Lori Hickok

And in the first half, we actually saw programming costs down in the first half, which is what we expected. Again, if you remember what John alluded to and I did earlier, we're going to see a little more of the spending in the back half, primarily third quarter, kind of with premieres and just the lag factor of our cash spend.

Operator

Our next question is from Paul Sweeney with Bloomberg Industries.

Paul Sweeney - Bloomberg Research

Two questions, the first on the digital business, another strong quarter in terms of revenue. Can you just talk to us about how you planned, I guess, your investment process in that business over the next 2 to 3 years? How should we think about how much you're going to be spending in that business? Seems to be a very opportunistic business for you, and perhaps how big could that piece of the business be for you? And then second, on the international side. You mentioned continued strong performance, and you mentioned, I guess, in the past that you've been a little bit late to the game, but could you give us a sense of how you're thinking about your International business? Are you comfortable with your, I guess, your strategy, pursuing partnerships as opposed to perhaps a more aggressive acquisition kind of plan on the international side?

Joseph NeCastro

Sure, Paul, this is Joe. Let me talk about international, and then maybe John and I will double team on digital. With respect to international, we are reasonably comfortable with the approach of finding partners in many geographies. There are, and I think I've alluded to this in the past, there are opportunities where it may make sense for us to invest alone, but they are relatively limited. I think we are very active, and we certainly look at opportunities, and now people understand that we have programming that is very appealing globally in the lifestyle space. We are one of the brand partners that a lot of companies look to in terms of a sourcing programming there. So we're trying to take that advantage and turn that into investment opportunities for us in various markets, and we'll continue that. And again, we will be opportunistic in terms of using our balance sheet to invest where it's appropriate there, but I do believe that a lot of what you're going to see there are partnerships. I'll start on the digital part of your question. I think, with respect to the question on how much we're willing to invest and how big that business can be, we have a lot of energy internally around new ideas in the digital space, and we are working internally on certain launches. We also look externally for opportunities. You're likely not going to see us spend up for a very large acquisition, and I'm sure everyone's aware, evaluations have gotten a little bit crazy, certainly in the last couple of weeks, anyway. I haven't bothered to look in the last couple of weeks. But you're not likely to see us do a Shopzilla style acquisition where we spend $0.5 billion on one business. I think our sense has been that, if we're going to use the tool of acquisition, it ought to be in a space where something that we can't do ourselves, could be a technology play that we need help with and/or something that's additive to an existing category or adjacent to an existing category. So I think you're going to see us be closer to the vest as you have in the last couple of years. I mean, as far as how big the business can grow to, some of that depends on how much we're willing to invest externally. But certainly, internally we will continue to fund launches. John, you might want to talk about...

John Lansing

Yes, just briefly. Our distinct advantage, again, is that we own such a significant amount of content, and our goal is simply to be on every platform and be ahead of our consumers on those platforms. Our development of our In The Kitchen app for Food Network, a paid app, outperforming our expectations with over 315,000 downloads. HGTV, Travel both introducing apps. The Oyster.com investment with Travel has proven to be very advantageous for us. And just the general energy around a lot of these over-the-top and existing distributor relationships over how we can meet the consumer demand through digital, through our unique assets is one that gives me a great deal of optimism about this business going forward. And the fact that we are agile, that we are able to maneuver quickly with our content, we are not tied up with the rights issues as most media companies are, gives us, I think, a distinct advantage in this space. And we'll take advantage of that going forward.

Operator

We have a question from Marla Backer with Hudson Square.

Marla Backer - Hudson Square Research, Inc.

I'm switching topics here. First of all, Food seems to be a real natural for licensing. But what about some of the other brands? Do you think there's upside there? And to what extent do you have to be careful so that you don't come into a conflict with some of your core advertisers?

John Lansing

Sure. Food has been a standout for us in terms of licensing, and HGTV is now beginning to catch up. We tend to start those conversations with our major advertisers, our key advertisers, and make sure that they are involved in the conversations, and as best we can, we work with them. Sherwin-Williams is a great example. It's one of our largest retail advertisers, and it helped drive Sherwin-Williams' business, I think, the launch of the HGTV paint line, et cetera. So it's one that we're careful with. But we just begin each conversation with our advertiser in mind and then try to build the concept and the idea from there going forward, so it's just a matter of managing it carefully. But the opportunity, really, in licensing in the Food and the Home category is really limited mostly just by the imagination of our team here and finding where consumers really -- where these brands can help other products really resonate for consumers in the home and in the kitchen.

Marla Backer - Hudson Square Research, Inc.

And then one question on International. You've obviously had tremendous success in the U.K. Does that -- how do you speak to that kind of programming in the U.K.? Do you try to leverage more of your international stars there? And on the flip side, some of your U.S. stars, who are -- who do very well here, someone like Guy, let's say, do those stars also -- is there an opportunity for them as you continue to expand internationally?

Joseph NeCastro

Sure. Marla, this is Joe. I think you hit it on the head with respect to how we express the channels. We do try and leverage relationships that we have with U.K.-based chefs, and we do have a number of relationships there. But if you look at the channel there, it will look very much like it does here. There is a wide variety of programming and a lot of the U.S. chefs, and luckily in the U.K., there's a fair amount of interest there. I know Ina Garten is particularly popular over there, for instance. So we do try to leverage our existing stars, and all of our stars are certainly interested, John may talk to this, interested in international opportunities in getting their programming, their content and their name spread more around the globe. We're happy to work with them. That makes sense. So we'll continue to do that, and I think we will go market by market. Certainly, there are markets where more local programming is necessary than others, and I think we will have to customize that where it's appropriate. John, you want to talk about...

John Lansing

Yes. The only interesting thing about that, Joe, is that the program would work both ways too. So if we had our talent involved in the programming in the international market, it would actually work very well in Travel Channel and Food Network, so it comes back and helps us in both ways.

Operator

We will go next to Ben Swinburne with Morgan Stanley.

Benjamin Swinburne - Morgan Stanley

You touched a lot on the call about digital and your thoughts there, and this was the first quarter where we saw sort of sizable revenue from one of your cable network peers in the digital space with Viacom's results. And I'm wondering how you guys think your existing distributors are doing in the digital front on TV Everywhere and on-demand. And I'm partly asking, I was actually watching Hook Line & Dinner last night, on-demand -- I won't tell you what cable operator, although I guess you could probably guess. And I think there was a sponsorship deal there with Hellmann's. I'm just wondering if you're seeing a lot of pickup in usage there. It's not particularly well-branded from an interface perspective as I'm sure you guys would probably agree. But I'm wondering how focused you are on sort of the VOD opportunity with your existing providers and if you're seeing pickup in usage because of increased marketing or spending there and if that could turn into a really decent revenue stream in growth there for you down the road.

John Lansing

Yes, no, it absolutely is, and we're very focused on it. The key issues for us around VOD, whether it be on a TV screen or on an iPad or on anything, is really measurement, to be able to monetize it. And that's something Nielsen is working aggressively on. And I know that some of our partners, distribution partners, including Cablevision in New York, is working closely with Nielsen to get there quickly. And that's a win-win for everybody. It will allow us to monetize that content on a variety of platforms through advertising. And today, that's -- we're just not quite there yet. And that's been probably the biggest hurdle to VOD growth. I guess there's 2 ways to think about it. There's the consumer adoption of it, and then there's the monetization of it. And if the consumer adoption improves as the interface improves and as just the pattern of usage grows for on-demand content, I think that's happening now, and we want to take advantage of that. And then the second piece is getting a Nielsen or whatever measurement in place so that it can be monetized effectively. I think that's right around the corner. And then I think you have an opportunity for programmers and distributors to really create a value proposition for one another here by working together, and we intend to do that.

Operator

We have a question from Ben Mogil with Stifel.

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

Actually, all of my questions have been asked and answered.

Operator

Then we'll move on to Barry Lucas with Gabelli & Company.

Barry Lucas - Gabelli & Company, Inc.

I want to come back to the expense side and maybe think about margins a little bit. And I know you've gotten this question before, John, but are you really spending enough? I mean, look at the margin, where it is, and it's likely to come down a little bit in Q3. And then maybe going out, what do you think the margin opportunity is? Or is there operating leverage in the business going forward?

John Lansing

Sure, I'll touch on that, and then maybe Ken might want to talk about it just from a larger strategic point of view. But we talk about that a lot around here, under Ken's leadership, and we recognize that this is a great margin business driving a lot of cash to the bottom line. But it's -- essentially, our business is built on relationships between audiences and our content, and we know that's the secret here that really drives growth into the future. And what we won't do is allow the programming investment, marketing investment to be such that we don't believe we're competing as aggressively as we need to be to hold on to and grow that, that really that #1 position in Lifestyle Media in all of television. And so we're having those conversations now. You're right. There will be some compression in the third quarter simply because we know it's time right now to invest in our content to drive that growth on Food Network. It will even out at the end of the year. And going forward, the world will only become more competitive. It always has, and we'll respond in kind.

Kenneth Lowe

Yes, Barry, it's a discussion you and I've had many times. And as you know, our answer has always consistently been the same. We're very proud of our margins. We're proud of our operators and the way they go about running our businesses, but we've always tended to try to focus on shareholder value over the long term and not so much margin growth or margin expansion. When it's available, naturally, we take advantage of it. But I think there is leverage in this business, and I'm, like John, very optimistic about the future, not only because of the categories we're in but because of our ability to take this content to other platforms. And some of those platforms at the moment don't have the margins the cable network business has, but that's not to say they won't in the future. So it's always been a business about shareholder value, shareholder growth, and it just happens to be a good spot with margins right now. But I've never, and we've never let that get in the way of building business or investing in new businesses, new platforms, and that's not going to change.

Operator

Our final question will come from Thomas Eagan with Collins Stewart.

Thomas Eagan - Collins Stewart LLC

Can you remind us on the upcoming affiliation renewal dates for Travel and Food Network? We know you mentioned -- not for '11, but any details for '12?

Joseph NeCastro

Yes, Thomas, this is Joe. Well, I think what we said is that we have one renewal at the end of the year for the Food Network, the end of this year. And that's sort of the last of the group. And then with respect to Travel Channel, we had one very small one early this year, but most of that comes up at the end of 2012 and 2013 and somewhat evenly between those 2 periods. Thank you, operator.

Operator

Thank you. And ladies and gentlemen, this conference will be available for replay after 12:30 p.m. today through midnight, Tuesday, August 23. You may access the AT&T Executive playback service at any time by dialing 1 (800) 475-6701 and entering the access code 208998. International callers, dial (320) 365-3844, using the same access code 208998. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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