Gannett Beats on Bottom Line

Gannett Company Inc. ( GCI - Analyst Report ) , the publisher of one of the largest-selling daily newspapers, USA Today, recently posted second-quarter 2012 earnings of 56 cents a share, beating the Zacks Consensus Estimate of 53 cents. However, the quarter’s earnings fell 3.4% from last year's 58 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 51 cents a share, down 17.7% from 62 cents earned in the year-ago quarter.

Behind the Headline

Gannett's total revenue inched down 2.1% to $1,307.0 million from the prior-year quarter, due to a fall in revenue across the Publishing segment, partially offset by gain at Broadcasting and Digital segments. Total revenue also fell short of the Zacks Consensus Estimate of $1,321 million.

The economy, which is still not completely recovered from the state of hibernation, has been taking its toll on publishing companies, and Gannett is no exception. Total Publishing revenue tumbled 5.8% to $920.3 million. Publishing advertising revenue fell 8.1% to $594.3 million from the year-ago quarter, following a decline of 8.4% in the first quarter of 2012. 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.

Publishing circulation revenue inched down 0.6% to $263.9 million. Classified advertising dropped 5.3% during the quarter under review. Publishing segment operating income slipped 22.6% to $119.0 million.

Total Broadcasting revenue jumped 11.4% to $205.4 million, buoyed by robust advertising demand and 15.3% revenue surge at Captivate. Television revenue rose 11.2% to $197.7 million, primarily driven by increased political and auto related ad demand.

However, excluding cyclical political advertising demand, television revenue climbed 6.2%. Retransmission revenue increased 17.1% to $22.7 million during the quarter. Broadcasting operating income grew 17.6% to $94.6 million.

Management now expects total television revenue to rise in the low-30s percent in the third quarter of 2012 compared with the prior-year quarter, primarily driven by summer Olympic Games along with political advertisement.

Digital segment revenue rose 4.5% to $181.3 million due to robust revenue growth at CareerBuilder. Digital operating income came in at $36.5 million compared with $36.2 million in the year-ago quarter.

Company-wide total digital revenue rose 12.9% to $311.7 million, driven by higher digital advertising and marketing solutions.

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 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.

Financial Aspects

Gannett, the publisher of 82 U.S. daily newspapers, lowered its interest expenses by 19.2% due to lower average debt balances, and generated net cash flow from operating activities of $154.5 million and free cash flow of $140.4 million in the quarter. Cash at the end of the quarter totaled $202.1 million.

The company during the quarter repurchased approximately 3.4 million shares, aggregating $45.5 million. The company has currently $219 million remaining under its ongoing $300 million share repurchase program authorized during the first-quarter of fiscal 2012.

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