Gannett Q1 Earnings Get Broadcasting Boost - Analyst Blog

Gannett Company Inc. GCI opened fiscal 2014 on a strong note with first-quarter 2014 earnings of 47 cents a share rising 27% year over year buoyed by the splendid performance of its Broadcasting segment that gained from the acquisition of Belo Corp. as well as profitable results at the Digital and Publishing segments. Moreover, the company's earnings came a penny ahead of the Zacks Consensus Estimate of 46 cents.

Including one-time items, earnings came in at 25 cents a share, down 43.2% from the prior-year quarter earnings of 44 cents per share.

The company reported total revenue of $1,404.1 million, down 13.4% from the prior-year quarter, and also fell short of the Zacks Consensus Estimate of $1,416 million. Revenue growth during the quarter primarily stemmed from an improvement in Broadcasting and Digital revenues, offset in part by a decline in Publishing revenues. However, on a proforma basis, the company recorded revenue growth of 2.8%.

Behind the Headline

Gannett stated that the Digital segment revenue rose 2.8% to $179.7 million due to robust revenue growth at CareerBuilder. Digital segment operating income came in at $23.8 million, a marginal 0.9% increase from the year-ago quarter.

Company-wide proforma digital revenue, taking into account the Digital segment and all digital revenues coming from the other business segments, augmented 6% to $375.6 million. The upside was driven by revenue gains at digital advertising and marketing services at all segments.

Broadcasting segment revenue, which primarily gained from the Belo acquisition, surged almost two-fold (or 99.5%) to $382.3 million. Further, the company's revenue during the quarter benefited from significant advertising demand related to the Winter Olympic Games and political spending along with a notable rise in retransmission revenue. Adjusted Broadcasting operating income soared 96.4% to $164.3 million.

On a proforma basis, Broadcasting segment revenue surged 19.6%, driven by a 6% rise in core revenues, 66.4% growth in retransmission revenue and an increase of 22.9% in television station digital revenue. Meanwhile, political advertising demand totaled $10.0 million compared to $1.9 million in the prior-year quarter.

Management now expects second-quarter 2014 television revenue growth in the 90% range considering the current trends and taking into account the full quarter contribution from the Belo stations acquisition. However, on a pro forma basis, television revenue is forecasted to jump in the mid-teens.

Total Publishing segment revenue declined 3.3% to $842.1 million primarily due to the perils of an untoward winter weather that weighed on advertising as well as circulation demand. An additional factor contributing to the decline was the shift of Easter to the second quarter this year offset by a substantial rise in digital advertising.

Publishing Advertising revenue fell 4.8% to $501.3 million, while Publishing Circulation revenue dropped 1.4% to $282.1 million. Total Publishing segment's adjusted operating income slipped 1.9% to $786.1 million.

Publishing segment digital revenue rose 7.6% attributable to increased digital advertising and marketing solutions revenue.

Classified advertising at domestic publishing operations decreased 5.9% during the quarter under review. Within classified, softness persisted in all operating categories with employment (down 8.4%), real estate (down 3.3%), automotive (down 1.5%) and legal (down 7.2%). Retail and national advertising revenue categories at domestic publishing operations declined 7.1% and 1.5%, respectively.

The current economic situation does not seem promising for publishing companies, which are bearing the brunt of waning advertising demand, and Gannett, a Zacks Rank #4 (Sell) stock, is no exception. Other publishing companies such as Journal Communications Inc. JRN and The E.W. Scripps Co. SSP are also encountering similar headwinds.

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 restrict 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 glitches in the economy, it still promises revenue generation.

The New York Times Co. NYT launched a pay-and-read model on Mar 28, 2011. Gannett also 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.

Further, Gannett in Dec 2013 completed the acquisition of television-station operator, Belo Corp. The deal will serve as a game changer for the company as it will solidify its foothold in the rapidly growing broadcast media business. Moreover, this deal is a perfect fit for the company as it will transform Gannett's business model, which was largely focused on low margins newspapers to a high-margin multi-media business.

Other Financial Aspects

Gannett ended the quarter with total cash of $293.0 million and long-term debt of $3.45 billion.

The company generated net cash flow from operating activities of $166.0 million and free cash flow of $148.9 million in the quarter. The company, during the reported quarter, repurchased approximately 1.3 million shares aggregating $37.9 million.

Additionally, Classified Ventures LLC, a joint venture of Gannett and 4 other companies, successfully sold Apartments.com to CoStar Group Inc. for a total of $585 million. Gannett plans to use its portion of the sale proceeds, which sums to $155 million owing to a 26.9% stake in the JV, towards debt reduction as well as to fulfill other capital requirements.