Gannett Maintained at Neutral
The economy, which has still not completely awakened from the state of hibernation, has been impeding the growth of publishing companies, and Gannett Company, Inc. (GCI) is not immune to it.
Challenging economic conditions along with softness in advertising demand have been weighing upon the company’s performance. The publishing companies have been trying every means to shield themselves from the impact of an unstable market and have been contemplating on new revenue generating avenues.
Advertising - The Risk Factor
Advertising, which remains a significant source of revenue for the company, in turn depends upon the global financial health.
We observe that Gannett’s publishing advertising revenue fell 8.1% year-over-year to $594.3 million during the second quarter of 2012, 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. Advertisers are shying away from making any upfront commitments in a cloudy economy.
The ongoing sluggishness in the advertising market is also weighing upon The New York Times Company (NYT), the publisher of The New York Times, the International Herald Tribune, The Boston Globe and 15 other daily newspapers. Total advertising revenue slid by 6.8% to $244.3 million in the second quarter of 2012, as against a fall of 8.1% registered in the first quarter.
Diversifying Business Model
Gannett is taking initiatives to diversify its business model by adding new revenue streams in an effort to make it less susceptible to economic adversities. The company is also adapting to the changing face of the multiplatform media universe, which currently includes Internet, mobile, tablet, social media networks and outdoor video advertising.
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 efficiency, and in turn the operating performance.
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 launched a pay-and-read model on March 28, 2011.
Gannett is repositioning itself for improvement in print and digital media through a new subscription based model, whereby subscribers will be able to access the paid content through websites, mobile and tablet, and will have the preference of choosing the frequency of home delivery of print editions. On the other hand, the company will limit the number of free articles that a non-subscriber can access.
We believe the success of the pay model depends on the accessibility of new articles across the web. Potential customers will be reluctant to shell out even a penny if content is available free of cost elsewhere.
Gannett also commenced Digital Marketing Services and is expanding USA TODAY Sports Media Group to generate new advertising and marketing revenue sources. Management expects to generate revenue of $75 million to $100 million for the year from Digital Marketing Services. Gannett announced the acquisition of BLiNQ Media LLC, provider of social media marketing solutions for companies.
Other Drivers
Gannett witnessed healthy growth across its Broadcasting and Digital segments during the second quarter of 2012. Broadcasting revenue jumped 11.4% buoyed by robust advertising demand. Television revenue rose 11.2%, whereas retransmission revenue increased 17.1% during the quarter. Digital segment revenue rose 4.5% due to sturdy revenue growth at CareerBuilder.
Gannett has reduced leverage by deploying cash flows to pay down debt, which stood at $1.66 billion at the end of the second quarter of 2012. As a result of lowering debt load, interest expense dropped by 19.2%. The company also generated net cash flow from operating activities of $154.5 million and free cash flow of $140.4 million in the quarter.
Gannett is also actively managing its capital, returning much of its free cash to shareholders via share buybacks and dividends. During the first quarter of 2012, 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.
The company, during the second quarter, repurchased approximately 3.4 million shares aggregating $45.5 million. The company’s long-term objective is to return $1.3 billion to investors and attain annual revenue growth of 2% to 4% by fiscal 2015.
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.
Given the pros and cons, we prefer to remain on the sidelines and maintain our long-term Neutral recommendation on Gannett. 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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