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Gannett Company, Inc. (GCI - Analyst Report) posted second-quarter 2013 earnings of 58 cents a share that missed the Zacks Consensus Estimate by a penny, but jumped 4% from 56 cents earned in the year-ago quarter. The year-over-year growth was primarily driven by its all access content subscription model coupled with sturdy performance of its Broadcasting and Digital segments. However, soft advertising demand remains a drag in the quarter.

Including one-time items, earnings came in at 48 cents a share compared with 51 cents in the prior-year quarter.

The company reported total revenue of $1,302.7 million, down 0.3% from the prior-year quarter, and also fell short of the Zacks Consensus Estimate of $1,332 million.

Behind the Headline

Gannett stated that total Broadcasting revenue, including Captivate, increased 3.2% to $212 million, buoyed by robust growth of 62.3% in retransmission revenue and a jump of 1.5% in core advertising revenue, partially offset by fall in political revenue.

Television revenue increased 3.6% to $204.8 million. Broadcasting operating income grew 3.7% to $98.1 million.

Management now expects third-quarter television revenue to decline in the mid-teens on account of strong political and Summer Olympic revenue attained in the year-ago quarter.

Digital revenue rose 2.9% to $186.5 million due to robust revenue growth at CareerBuilder. Digital segment operating income came in at $35.3 million, down 3.4% year-over-year.

Company-wide total digital revenue augmented 20.1% to $374.3 million, driven by revenue gains at digital advertising and marketing services well as sustained rollout of the all-access content subscription model.

Total Publishing revenue declined 1.7% to $904.2 million. Publishing Advertising revenue fell 5.3% to $562.5 million. Publishing Circulation revenue portrayed a substantial improvement, increasing 6% to $279.7 million on the back of a subscription based model. Local domestic circulation revenue jumped 11.4%. Total Publishing segment's adjusted operating income slipped 6.4% to $111.4 million.

Classified advertising at domestic publishing operations decreased 5.2% during the quarter under review. Within classified, softness persisted in every category with employment (down 8.6%), real estate (down 3.2%), automotive (down 0.8%) and legal (down 7.9%). Total retail and national advertising revenue categories declined 5.8% and 1%, respectively.

Advertising, which remains a significant source of revenue for the company, depends upon the global financial health. Gannett is taking initiatives to diversify its business model, shielding itself against any economic onslaught by adding new revenue streams. The company is also adapting to the changing face of the multi-platform media universe, which currently includes Internet, mobile, social media networks and outdoor video advertising in its portfolio.

In an effort to restrict declining revenue and shrinking market share, publishers are scrambling to slash costs. Gannett has been realigning its cost structure and streamlining its operations to increase efficiencies.

To curb shrinking advertising revenue and seek new revenue avenues, the publishing companies contemplated charging readers for online content. Despite glitches in the economy, it still promises revenue generation.

News International, the subsidiary of News Corporation (NWSA - Analyst Report) started charging readers for the online content of The Times of London and Sunday Times of London from Jun 2010.The New York Times Company (NYT - Analyst Report), the diversified media conglomerate, launched a pay-and-read model on Mar 28, 2011.

Gannett also initiated a subscription based model, commenced Digital Marketing Services in top markets, and refurbished its iconic brand, USA Today, to generate new advertising and marketing revenue sources.

Gannett recently announced the acquisition of television-station operator, Belo Corp. The company will purchase all outstanding shares of Belo for $13.75 per share, bringing the estimated value to $1.5 billion in cash. Taking into account Belo’s existing $715 million debt, the total transaction value amounts to $2.2 billion. The company expects to close the transaction by the end of 2013.

The deal will serve as a game changer for Gannett as it will solidify its foothold in the rapidly growing broadcast media business by almost doubling its existing broadcast portfolio from 23 to 43 stations. Alongside, this major acquisition makes it the fourth-largest owner of major network affiliates in the U.S.

Moreover, this deal is a perfect fit for the company as it will transform Gannett’s business model, which was largely focused on low margins newspapers to a high-margin multi-media business and position it as the top affiliate for CBS Corporation (CBS - Analyst Report).

Other Financial Aspects

Gannett ended the quarter with total cash of $161.5 million and long-term debt of $1.36 billion.

The company generated net cash flow from operating activities of $187.7 million and free cash flow of $172.8 million in the quarter. The company, during the reported quarter, repurchased approximately 0.4 million shares aggregating $8.6 million. Year-to-date, the company had bought back 2.1 million shares for $41.4 million. The company also replaced its existing remaining buyback program with a new $300 million share repurchase authorization to be exhausted over the next 2 years.

Currently, Gannett hold a Zacks Rank #2 (Buy).

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