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Gannett Company, Inc. (GCI - Analyst Report) posted third-quarter 2013 earnings of 43 cents a share that beat the Zacks Consensus Estimate by a couple of cents buoyed by sturdy performance of its Digital segment. However, earnings dropped 23.2% from 56 cents earned in the year-ago quarter as soft advertising demand remains a drag in the quarter.

Including one-time items, earnings came in at 34 cents a share down 39.3% from the prior-year quarter.

The company reported total revenue of $1,252.9 million, down 4.3% from the prior-year quarter, and also fell short of the Zacks Consensus Estimate of $1,275 million.

Behind the Headline

Gannett stated that Digital revenue rose 5.2% to $191.4 million due to robust revenue growth at CareerBuilder. Digital segment operating income came in at $42.1 million, up 5.4% year-over-year.

Company-wide total digital revenue augmented 12.4% to $376.1 million, driven by revenue gains at digital advertising and marketing services well as sustained rollout of the all-access content subscription model.

Broadcasting revenue, which did not benefit from political advertising and the Olympics as in the 2012 quarter, fell 14.2% to $203.4 million, partly offset by robust growth of 62.8% in retransmission revenue and an increase of 20.7% in digital revenue.

Television revenue came in at $198.5 million down from $233 million in the prior-year quarter. However, excluding political advertising and the Olympics, Television revenue would have surged 13.6%. Adjusted Broadcasting operating income plunged 28.7% to $84.6 million.

Management now expects fourth-quarter television revenue to decline in the high-teens on account of strong political advertising revenue attained in the year-ago quarter. However, excluding the impact of political advertising, television revenue is projected to increase 10% to 12%.

Total Publishing revenue declined 3.6% to $858.1 million. Publishing Advertising revenue fell 5.9% to $520.2 million. Publishing Circulation revenue portrayed a marginal decline of 0.6% to $275 million. Local domestic circulation revenue jumped over 1%. Total Publishing segment's adjusted operating income slipped 10.3% to $77.1 million.

Classified advertising at domestic publishing operations decreased 5.1% during the quarter under review. Within classified, softness persisted in every category with employment (down 8.6%), real estate (down 3.2%), automotive (down 0.3%) and legal (down 10.9%). Retail and national advertising revenue categories at domestic publishing operations declined 4.7% and 9.7%, respectively.

Advertising, which remains a significant source of revenue for the company, depends upon the global financial health. Gannett, which competes with The McClatchy Company (MNI), 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 Corp. (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 Co. (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.

Further, Gannett announced the signing of a partnership with private equity firm, Generation Partners to promote growth of Captivate Network. Captivate Network as a separate company is jointly owned by Gannett (currently has a stake of 18%) and Generation Partners. The association with Generation Partners is likely to bring enough capital and would facilitate in the strategic expansion of Captivate Network’s operations.

Gannett in June 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.

Other Financial Aspects

Gannett ended the quarter with total cash of $811.4 million and long-term debt of $1.98 billion.

The company generated net cash flow from operating activities of $125 million and free cash flow of $105.7 million in the quarter. The company, during the reported quarter, repurchased approximately 1.5 million shares aggregating $37.4 million. Year-to-date, the company had bought back 3.5 million shares for $78.8 million.

Currently, Gannett hold a Zacks Rank #3 (Hold).

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