The economy, which has still not completely awakened from the
state of hibernation, has been impeding the growth of publishing
Gannett Company, Inc.
) 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
The ongoing sluggishness in the advertising market is also
The New York Times Company
), the publisher of
The New York Times
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
News International, the subsidiary of
) started charging readers for the online content of
The Times of London
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
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
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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