Gannett Company, Inc. (GCI), the publisher of the nation's one of the largest-selling daily newspaper USA Today, recently posted third-quarter 2011 results. The quarterly earnings of 44 cents a share missed the Zacks Consensus Estimate by a penny, and dropped 15.4% from last year's 52 cents reflecting a slump in publishing and political advertising demand as well as a marginal fall in circulation revenue.
However, effective cost management provided some cushion to the bottom-line. Operating expenses, excluding one-time items, dropped 2% from the prior-year quarter.
On a reported basis, including one-time items, earnings came in at 41 cents a share, down 2.4% from 42 cents delivered in the year-ago quarter.
Behind the Headline
Gannett's total revenue dropped 3.5% to $1,266 million from the prior-year quarter due to fall in revenue across Publishing and Broadcasting segments, partially offset by gain at Digital segment. Total revenue also fell short of the Zacks Consensus Estimate of $1,271 million.
The current economic turmoil is taking its toll on publishing companies, and Gannett is no exception. After dropping 6.5% in the second quarter of 2011, publishing advertising revenue plunged 8.5% to $591.7 million from the year-ago quarter. Tough economic environment along with softness in advertising demand impacted the results.
Publishing circulation revenue dipped 1% to $262.1 million. Classified advertising dropped 9.4% at domestic publishing operations, reflecting weakness in automotive and real estate categories. Employment classified was flat. Publishing segment operating income slipped 16.9% to $116.6 million.
Gannett said that total broadcasting revenue declined 5.9% to $174.3 million. Television revenue dipped 6% to $168.8 million. However, when excluding cyclical political advertising demand, television revenue climbed 4.7%. Retransmission revenue climbed 26.7% to $20 million during the quarter. Broadcasting operating income fell 9% to $68.6 million.
Management now expects television revenue to fall in the low-teens percentage in the fourth quarter of 2011 when compared with the prior-year quarter, which includes a significant portion of political advertising amounting to $52.4 million. However, excluding the political spending that benefited the prior-year, management expects television revenue to rise in the high-single digit.
Digital segment revenue rose 10.3% to $173.9 million due to robust revenue growth at CarreerBuilder. Digital operating income came in at $34.4 million, up 19.8% from the year-ago quarter.
Company-wide total digital revenue jumped 9.8% to $272.6 million, including an 8% growth registered in publishing digital revenue and an increase of 27.5% in online revenue at television stations.
The significant potential risk is the company's high dependence on advertising revenue, which is driven by the health of the economy. To mitigate this, Gannett is adding diverse revenue streams to hedge against economic cycles. The company is also adapting to the changing face of the multiplatform media universe, which currently includes Internet, mobile, social media networks and outdoor video advertising in its fold.
To curb shrinking advertising revenue and seek new revenue avenues, the publishing companies contemplated charging readers for online content. News International, the subsidiary of News Corporation (NWSA) 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), another diversified media conglomerate, launched a pay-and-read model on March 28, 2011.
Financial Aspects
Gannett, the publisher of 82 U.S. daily newspapers, lowered its long-term debt by $103.2 million to $1.92 billion, and generated an operating cash flow of $247.1 million (down 10.3%) and free cash flow of $175.5 million in the quarter. Cash at the end of the quarter totaled $196 million.
Gannett’s Board of Directors on July 18, 2011, authorized the recommencement of $1 billion share repurchase program approved on July 25, 2006. Under the program, the company bought back 2.7 million shares for $28 million, and still has approximately $781 million remaining at its disposal.
Currently, we maintain our long-term Neutral rating on Gannett. However, counting the current pulse of the economy and waning advertising revenue, we prefer to have a short-term Sell recommendation on the stock, which is well defined by our Zacks #4 Rank.
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