Gannett Beats, Profit Dips

Gannett Company, Inc. ( GCI - Analyst Report ) , the publisher of the nation's one of the largest-selling daily newspapers, USA Today, recently posted first-quarter 2012 results. The quarterly earnings of 34 cents a share beat the Zacks Consensus Estimate of 31 cents, but dropped 17.1% from last year's 41 cents, reflecting a slump in publishing advertising demand coupled with a marginal fall in circulation revenue.

On a reported basis, including one-time items, earnings came in at 28 cents a share, down 24.3% from 37 cents earned in the year-ago quarter.

Behind the Headline

Gannett's total revenue dropped 2.6% to $1,218.6 million from the prior-year quarter due to fall in revenue across Publishing segment, partially offset by gain at Broadcasting and Digital segments. Total revenue also fell short of the Zacks Consensus Estimate of $1,240 million.

The economy which is still not awaken completely from the state of hibernation, has been taking its toll on publishing companies, and Gannett is no exception. Total Publishing revenue tumbled 6% to $874.1 million. Publishing advertising revenue fell 8.4% to $551.4 million from the year-ago quarter, following a decline of 7.1% in the fourth quarter of 2011. Tepid recovery in the economy along with weakness in advertising demand in the U.S. and U.K. impacted the results.

The downturn in the publishing industry came at the wake of declining print readership as more readers choose to get free online news, thereby making the print-advertising model increasingly irrelevant.

January witnessed the sluggish advertising performance due to industry-wide softness, which was followed by some improvement in February and March but not enough to provide a lift.

Publishing circulation revenue dipped 1.8% to $263.3 million. Classified advertising showed some improvement, after falling 8.4% at domestic publishing operations in the fourth quarter of 2011 it dropped 5.8% during the quarter under review. Although weakness did persist in automotive and real estate categories but they fared better than the previous quarter. Publishing segment operating income slipped 35.4% to $84.8 million.

Gannett said that total Broadcasting revenue jumped 7.5% to $176.2 million buoyed by robust advertising demand. Television revenue rose 7.9% to $170.9 million. However, when excluding cyclical political advertising demand, television revenue climbed 5.6%. Retransmission revenue increased 17% to $22.8 million during the quarter. Broadcasting operating income grew 14.4% to $72.6 million.

Management now expects total television revenue to rise in the high-single digit percentage in the second quarter of 2012 when compared with the prior-year quarter.

Digital segment revenue rose 6.8% to $168.4 million due to robust revenue growth at CareerBuilder. Digital operating income came in at $16.3 million compared with $16.1 million in the year-ago quarter.

Company-wide total digital revenue rose 8.2% to $272.8 million, including a 12.5% growth registered in publishing digital revenue and an increase of 6.4% experienced in television station digital revenue.

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 and 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 offset the 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 hiccups 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 June 2010. The New York Times Company ( NYT - Analyst Report ) launched a pay-and-read model on March 28, 2011.

Gannett hinted of initiating a subscription based model in six markets, commencing Digital Marketing Services, and expanding USA TODAY Sports Media Group to generate new advertising and marketing revenue sources. Under its planned $65 million strategic investment for 2012, the company has invested $20 million, and foresees return as the year proceeds. The company’s long-term objective includes, returning $1.3 billion to investors and annual revenue growth of 2% to 4% by fiscal 2015.

Financial Aspects

Gannett, the publisher of 82 U.S. daily newspapers, lowered its long-term debt by $95 million to $1.7 billion, and generated net cash flow from operating activities of $162.1 million and free cash flow of $147.7 million in the quarter. Cash at the end of the quarter totaled $157.5 million.

The company during the quarter repurchased approximately 2.4 million shares aggregating $35.5 million. During the quarter, management increased its annual dividend by 150% to 80 cents a share and announced new $300 million share buyback program to be completely exhausted in the next two years.

Currently, we maintain our long-term Neutral recommendation on Gannett. Moreover, the company holds Zacks #3 Rank that translates into short-term Hold rating.