« Good News: Central European Media Enterprises Acquires Minority Interests in Slovakia | Main | Financial Times Writes Up Central European Media Enterprises »

July 18, 2007

No SIgns of Upturn at Gannett

Gannett (GCI) reported another poor quarter as expected. There was nothing in the numbers to signal less pressure on revenues was around the corner. In addition, management provided no commentary on fundamentals or use of cash flow and the balance sheet that would reassure investors. As a result, I see no reason to be bullish off these numbers and still predict that GCI sees the $40s before it sees the $50s.

For 2Q07, GCI reported adjusted EPS of $1.24 on revenues of $1.93 billion. EPS were a few pennies ahead of consensus while revenues fell just short of expectations. Management and analysts noted a few non-operating items that impacted EPS which suggest that operating results were actually a little light.

GCI's problems remain centered on the top line....

Newspapers and Broadcasting both saw revenue declines but it is the much larger newspaper segment that is causing most of the trouble. During the quarter, newspaper revenues fell 5.3% with the U.S. papers falling 7.7%. Classified advertising remains very weak with Real Estate down 13.6% in June and Automotive down 14.7%. Real estate has a tough comp against mid-teens growth a year ago but the decline in auto is on top of a similar decline a year ago indicating that this area is in secular decline. Management noted the real estate weakness is much more pronounced in California, Florida, Nevada, and Arizona. More importantly, management noted that weak real estate advertising is spilling over into other categories, especially retail.

The good news is that GCI continues to control expenses very well. In the newspaper segment, pro forma operating expenses fell 3% benefiting from a 7.8% decline in newsprint expenses. The newsprint savings were mostly volume related although pricing was down a small amount. Corporate expenses fell 8.1% but this is a volatile line item on a quarterly basis.

Other good news is in the UK where the cyclical aspects of the decline in real estate are moderating and revenue growth is almost in a positive territory. Profit growth resumed in the UK which management noted was a positive sign indicating that "when" revenue growth returns in the US there will be plenty of operating leverage to drive profits.

The big question for GCI and the rest of the newspaper industry is whether the recovery is a "when" or an "if." If I had to fault GCI management if would be that their planning seems to assume the problems are more cyclical than secular. Of course, there is not that much management can do about secular issues.

McClatchy, New York Times, Tribune, and Dow Jones all report in the next week. GCI didn’t provide much hope.

Posted by Steve Birenberg at July 18, 2007 10:33 AM in Newspapers