The economy, which is still not awaken completely from a state
of hibernation, has been taking its toll on publishing companies,
Gannett Company, Inc.
) is no exception. However, the companies are contemplating on
finding new revenue generating avenues.
Advertising - an Inherent Risk
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
7.1% during the fourth quarter of 2011, following a decline of 8.5%
in the third quarter. Tough macroeconomic conditions along with
softness in advertising demand impacted the results. Advertisers
are shying away from making any upfront commitments in a cloudy
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 7.1%
to $358.5 million in the fourth quarter, as against a fall of 8.8%
registered in the third 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 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 on charging readers
for online content. Despite hiccups in the economy, it still
promises revenue generation.
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 hinted that Internet users will be allowed to access 5
to 15 articles per month without shelling out a penny. The company
said that once implemented the model will fetch $100 million.
In March 2011, The New York Times Company launched a pricing
system similar to that of the Financial Times' metered system,
whereby after browsing a certain number of free articles, readers
will be asked to subscribe to enjoy full access to its articles on
phones, tablet computers and the Internet.
Gannett witnessed healthy growth across its core television
advertising and digital revenue during the fourth quarter of 2011.
The company stated that excluding cyclical political advertising
demand, television revenue climbed 11.3%, attributable to an
increase in auto advertising. Retransmission revenue jumped 30.3%
during the quarter. Digital segment revenue rose 9.4% to $181.5
million due to robust revenue growth at CareerBuilder.
The company is deploying its operating cash to pay down debt and
lower its leverage. The company lowered its long-term debt by $158
million and generated an operating cash flow of $274 million and
free cash flow of $203.3 million in the fourth quarter. Debt to
EBITDA ratio at the end of the quarter was marginally below 1.7x,
suggesting financial flexibility.
Gannett is also actively managing its capital, returning much of
its free cash to shareholders via share buybacks and dividends. The
company in July 2011 doubled its quarterly dividend and announced
the resumption of a $1 billion share repurchase program approved on
July 25, 2006. During the fourth quarter, the company bought back
2.3 million shares for $25 million, and still has approximately
$756 million remaining at its disposal.
Given the pros and cons, we prefer to maintain our long-term
"Neutral" recommendation on the stock. Moreover, Gannett holds
Zacks #3 Rank that translates into short-term "Hold" rating.
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