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Gannett Beats Zacks' Expectations

Zacks Equity Research

Gannett Company, Inc. (GCI) posted better-than-expected third-quarter 2012 results. The quarterly earnings of 56 cents a share beat the Zacks Consensus Estimate by a couple of cents, and rose 27.3% from last year's 44 cents, reflecting a surge in television advertising attributed to Olympics and political spending, and subscription based model.

Behind the Headline

After witnessing a decline of 2.1% in the second quarter, Gannett's total revenue climbed 3.4% year-over-year to $1,309.3 million during the quarter under review due to increase in revenues across Broadcasting and Digital segments, partially mitigated by fall in Publishing segment. Total revenue also came ahead of the Zacks Consensus Estimate of $1,293 million.

Gannett indicated that total Broadcasting revenue, including Captivate, surged 36% to $237 million buoyed by robust television advertising demand and retransmission revenue. Television revenue soared 38.1% to $233 million primarily driven by increased political and Summer Olympic Games related ad demand.

Retransmission revenue increased 11.5% to $22.3 million during the quarter. Broadcasting operating income grew 73.1% to $118.7 million.

Management now expects television revenue to rise in the very high-twenties percentage in the fourth quarter of 2012 compared with the prior-year quarter.

Digital segment revenue rose 4.7% to $182 million due to robust revenue growth at CareerBuilder. Digital operating income came in at $39.9 million, up 16.2% from the year-ago quarter.

Company-wide total digital revenue augmented 22.8% to $334.6 million, driven by increased digital advertising and marketing solutions as well as sustained rollout of the all-access content subscription model, and includes a 64.6% growth registered in publishing digital revenue and an increase of 6.4% experienced in television station digital revenue.

The economy, which is still not completely awakened from the state of hibernation, has been taking its toll on the publishing companies, and Gannett is no exception. Total Publishing revenue tumbled 3% to $890.2 million during the third quarter but fared better than the decline of 5.8% witnessed in the previous quarter.

Publishing Advertising revenue fell but at a decelerating rate of 6.6% to $552.7 million from the year-ago quarter, following declines of 8.1% and 8.4% in the second and first quarters of 2012, respectively. Publishing segment operating income slipped 26.3% to $85.9 million.

Publishing Circulation revenue portrayed a substantial improvement, increasing 5.6% to $276.7 million on the back of subscription based model, following a marginal decline of 0.6% recorded in the previous quarter.

Tepid recovery in the economy along with weakness in advertising demand in the U.S. and U.K. impacted the results. Advertising revenue dipped 7% in July, 6.8% in August and 5.9% in September. 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.

Classified advertising at domestic publishing operations dropped 3.4% during the quarter under review. Within classified, softness did persist in employment (down 4.4%) and real estate (10.2%) categories but automotive registered growth (up 1.3%). Total retail, national and classified advertising revenue categories declined 7%, 8.1% and 5.1%, 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 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) 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.

Gannett 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.

Other Financial Aspects

Gannett lowered its interest expense by 12.5% year-over-year due to lower average debt balances. Long-term debt at the end of the quarter was $1.63 billion. The company generated net cash flow from operating activities of $182.2 million and free cash flow of $161.8 million in the quarter. Cash at the end of the quarter totaled $237.4 million. Capital expenditures incurred during the quarter were $24.7 million.

The company, during the reported quarter, repurchased approximately 2.4 million shares aggregating $35.5 million. Year-to-date, Gannett has bought back 8.2 million shares of worth $116.5 million. During the first quarter, management increased its annual dividend by 150% to 80 cents a share and announced a new $300 million share buyback program to be completely exhausted in the next two years.

Closing Comment

Gannett remains committed to streamline its cost structure, strengthen its balance sheet and rebalance its portfolio. However, we remain apprehensive about risks that the company faces due to its high dependence on advertising revenues.

Currently, we prefer to remain on the sidelines and maintain our long-term Neutral recommendation on the stock. However, the company holds a Zacks #2 Rank that translates into a short-term Buy rating, and well defines the company’s effort to navigate through challenging times.

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