The economy, which is still finding its way out of the woods,
has been thwarting the growth of publishing companies, and
Gannett Company, Inc.
) is no exception. Tough macroeconomic conditions along with
softness in advertising demand have been taking the toll. Companies
have been shielding themselves from the impact of a wobbly market,
as well as contemplating on finding new revenue generating
Advertising - an Inherent Risk
Advertising, which remains a significant source of revenue for
the company, in turn depends upon global financial health.
We observe that Gannett's publishing advertising revenue fell
8.4% during the first quarter of 2012, following a decline of 7.1%
in the fourth quarter of 2011. 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.
Another diversified media conglomerate,
The New York Times Company
), professed of a challenging economic environment, which we
believe will continue to dampen advertising revenue.
The ongoing slouch in the advertising market continues to weigh
upon 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 8.1%
in the first quarter of 2012, as against a fall of 7.1% registered
in the fourth quarter of 2011.
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 conditions. 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 efficiencies, and in turn the operating
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.
Gannett witnessed healthy growth across its Broadcasting and
Digital segments during the first quarter of 2012. Broadcasting
revenue jumped 7.5% buoyed by robust advertising demand. Television
revenue rose 7.9%, whereas retransmission revenue increased 17%
during the quarter. Digital segment revenue rose 6.8% due to robust
revenue growth at CareerBuilder.
The company is deploying its operating cash to pay down debt and
lower its leverage. The company generated net cash flow from
operating activities of $162.1 million and free cash flow of $147.7
million in the first quarter of 2012, and lowered its long-term
debt by $95 million. Debt to EBITDA ratio at the end of the quarter
was approximately 1.7x, providing financial flexibility.
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. During the quarter, the company repurchased
approximately 2.4 million shares aggregating $35.5 million.
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 have a long-term Neutral recommendation on
Gannett. However, the company holds a Zacks #4 Rank, which
translates into a short-term Sell rating.
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