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Gannett Co., Inc. Reports Second Quarter Results

Monday 16. July 2012 - Reported Earnings per Diluted Share of $0.51, Non-GAAP Earnings per Diluted Share of $0.56

Operating Cash Flow Totaled $285 million Excluding Special Items
Free Cash Flow Totaled $140 million
Company-Wide Digital Revenues Increased 13 percent Year-Over-Year
Gannett Co., Inc. (NYSE: GCI), a leading international media and marketing solutions company, today reported second quarter financial results. Earnings per diluted share, on a GAAP (generally accepted accounting principles) basis were $0.51 for the second quarter of 2012 compared to $0.62 for the second quarter of 2011. Excluding special items in 2012 and 2011, second quarter earnings per diluted share were $0.56 compared to $0.58 for the same quarter last year.
Gracia Martore, president and chief executive officer, said, “Gannett is making measurable progress in implementing our growth strategy. We are pleased with the early results of these efforts and look forward to strong progress in the second half of the year. Our all access content subscription model has been successfully rolled out in half of our U.S. Community Publishing properties through the end of the quarter, and is generating the revenue growth we had anticipated. We expect to realize year-over-year circulation revenue growth in the range of 25 percent at these properties as we cycle our longer term subscriptions. Demand for our digital marketing services is strong and is already attracting significant new client relationships.
“All of Gannett’s business segments remained solidly profitable in the second quarter, with Broadcasting and Digital operations delivering strong revenue growth. Broadcasting results were positively impacted by significantly higher core and politically related ad demand and retransmission revenue. Company-wide digital revenues were up 13 percent reflecting higher demand for digital solutions and the early success of our new subscription model. Publishing revenues reflected uneven advertising demand. We anticipate that Olympic and political spending and increasing revenue from new initiatives will bolster company-wide results in the second half. Expenses were impacted by $30 million of previously announced initiative investments primarily related to our all access content subscription model, digital marketing services and our digital relaunch which are all gaining traction,” Martore said.
In addition to the $30 million of investments in strategic initiatives, results for the second quarter of 2012 include $20.3 million of special charges affecting operating income. Facility consolidation non-cash charges totaled $5.1 million ($3.1 million after tax or $0.01 per share) reflecting primarily accelerated depreciation costs associated with the transfer of production activities. Workforce restructuring charges in our Publishing segment of $9.7 million ($5.8 million after tax or $0.02 per share) reflect principally the impact of employee acceptances during the second quarter of an early retirement plan announced earlier this year. Results for the second quarter of 2012 also included pension settlement charges totaling $5.4 million ($3.2 million after tax or $0.01 per share).
Results for the second quarter of 2011 included $15.2 million of special charges ($9.3 million after-tax or $0.04 per share) affecting operating income and a $20.1 million ($0.08 per share) net tax benefit.
Amounts reported in accordance with GAAP are contained in Tables 1 through 4. Certain amounts and comparisons included in the following discussion of GAAP results are supplemented by discussions which exclude the effect of special items. Details of these special items and their effect on GAAP results are included on the Non-GAAP Financial Information Tables 5 through 10 attached to this release. The company’s basis for providing discussions of non-GAAP results is detailed below.
CONTINUING OPERATIONS
Net income attributable to Gannett in the second quarter of 2012 totaled $119.9 million while net income attributable to Gannett on a non-GAAP basis was $132.0 million. Reported operating income was $216.5 million and non-GAAP operating income totaled $236.8 million. Operating cash flow in the quarter (a non-GAAP term defined as operating income plus special items, depreciation and amortization) was $285.0 million.
Total operating revenues for the company in the second quarter were $1.31 billion, a decline of just 2.1 percent from the second quarter of 2011. Broadcasting revenues were up 11.4 percent reflecting higher core and politically related advertising demand and significant growth in retransmission revenue. Digital segment revenues were 4.5 percent higher due primarily to revenue growth at CareerBuilder. Publishing segment revenues were 5.8 percent lower reflecting significant volatility in the quarter, particularly softer advertising demand in April and late June offset by firming results in May. On a constant currency basis, Publishing segment revenues were down 5.5 percent.
Operating expenses including the special charges noted above were $1.09 billion in the quarter. They were down slightly from last year’s second quarter. Strategic initiative investments that totaled approximately $30 million and a $4 million increase in pension expense were more than offset by the impact of company-wide efforts to create efficiencies and lower costs particularly through Gannett Publishing Services and sourcing initiatives. Operating expenses on a non-GAAP basis, which exclude special items but include the impact of the investment in strategic initiatives and pension expense declined almost 1 percent from the second quarter last year to $1.07 billion. Lower non-GAAP operating expenses in the Publishing segment were partially offset by strategic initiative investments. The increase in Broadcasting segment and Digital segment expenses was driven primarily by higher costs associated with revenue growth.
In the first quarter, the company announced a new capital allocation plan that included a 150 percent increase in the annual dividend to $0.80 per share and a $300 million share repurchase program targeted to be completed over the next two years. During the second quarter the company purchased approximately 3.4 million shares for $45.5 million.
PUBLISHING
Publishing segment operating revenues in the quarter were $920.3 million compared to $977.1 million in the second quarter last year as volatile advertising demand and the sluggish economic recovery impacted results. Digital revenues in the Publishing segment were up 29.3 percent in the quarter reflecting higher revenue from digital advertising and marketing solutions and the rollout of the all access content subscription model. Close to 25 percent of U.S. Community Publishing properties delivered higher revenues in the second quarter.
Advertising revenues totaled $594.3 million compared to $646.9 million in the second quarter last year. Year-over-year advertising revenue comparisons were choppy in the quarter. Advertising revenues on a constant currency basis were 11.6 percent lower in April, down just 1.9 percent in May and declined 8.8 percent in June. In the U.S., advertising revenues were 8.3 percent lower in the quarter while at Newsquest, the company’s operations in the UK, they were down 5.2 percent, in pounds.

Second Quarter 2012 Year-over-Year Comparisons
———————————————-
Total
Total Publishing
Publishing Segment
U.S. Publishing Newsquest Segment
(including USA TODAY) (in pounds) (constant currency)
——————– ———- ——————
Retail (7.0%) (4.1%) (6.7%) (7.0%)
National (18.2%) 2.6% (16.7%) (16.9%)
Classified (3.7%) (7.1%) (4.6%) (5.3%)
—– —– —– —–
(8.3%) (5.2%) (7.8%) (8.1%)
Across the Publishing segment, all categories of advertising revenue were better than first quarter year-over-year comparisons except national.
Retail advertising was 7.0 percent lower in the quarter, reflecting volatility as positive year-over-year comparisons in May did not offset softer ad demand in April and June.
National advertising declined 16.9 percent, driven by declines at USA TODAY and U.S. Community Publishing. National advertising was positive at Newsquest, in pounds, and improved sequentially in the quarter.
Classified advertising revenues in the U.S. were 3.7 percent lower. All domestic classified category comparisons were better than first quarter comparisons. Automotive advertising was almost 1 percent higher compared to the second quarter last year, while employment was just 0.7 percent lower. Real estate advertising was down 13.8 percent, reflecting the slow recovery in the housing market. Classified advertising comparisons, in pounds, at Newsquest were uneven in the quarter with lagging results in April and June offsetting slightly positive results in May.
The percentage changes in the classified categories were as follows:
Second Quarter 2012 Year-over-Year Comparisons
———————————————-

Total
Publishing Total
U.S. Newsquest Segment Publishing
Publishing (in pounds) (constant currency) Segment
———- ———- —————— ——-
Automotive 0.8% (14.1%) (1.3%) (1.8%)
Employment (0.7%) (4.3%) (1.8%) (2.6%)
Real Estate (13.8%) (8.1%) (11.7%) (12.6%)
Legal (3.1%) — (3.1%) (3.1%)
Other (7.0%) (5.5%) (6.6%) (7.4%)
—– —– —– —–
(3.7%) (7.1%) (4.6%) (5.3%)
The positive impact of the all access content subscription model offset the anticipated decline in circulation volumes. Circulation revenue for U.S. Community Publishing was 1.3 percent higher while circulation revenue company-wide was down slightly.
Reflecting the company’s strategic efforts to provide digital advertising and marketing solutions as well as the impact of the new content subscription model, digital revenues were 29.3 percent higher in the Publishing segment. Digital revenues at U.S. Community Publishing were up 33.1 percent due primarily to the content subscription model. At USA TODAY and its associated businesses, digital revenue increased 37.4 percent while Newsquest’s digital revenues were 10.1 percent higher, in pounds.
Despite approximately $28.2 million in strategic initiative investments, reported Publishing segment operating expenses were $816.1 million in the quarter, a 2.7 percent decline from $838.5 million in the second quarter last year. On a non-GAAP basis, Publishing segment operating expenses were also 2.7 percent lower and totaled $801.3 million as strategic investments offset, in part, successful efforts to create efficiencies as well as facility consolidations in prior quarters. Newsprint expense was down 7.4 percent in the quarter due to lower consumption. For the third quarter of 2012, the company expects its newsprint expense will again be below year ago levels.
Reported Publishing segment operating income, which includes the impact of strategic investments, was $104.2 million. Publishing segment operating income on a non-GAAP basis totaled $119.0 million in the quarter and operating cash flow was $147.7 million. In U.S. Community Publishing, more than half of our properties had higher profitability compared to the second quarter last year. Newsquest’s profitability, in pounds, was higher as well due to revenue initiatives and continued cost containment.
BROADCASTING
Broadcasting revenues (which include Captivate) totaled $205.4 million in the quarter, an 11.4 percent increase compared to $184.4 million in the second quarter last year. This reflects primarily stronger television advertising demand and revenue growth of 15.3 percent at Captivate.
Television revenues increased 11.2 percent to $197.7 million, compared to $177.7 million in the second quarter last year. A $9.0 million increase in politically related ad demand, as well as significantly higher core advertising led by auto, drove the revenue growth. Retransmission revenues totaled $22.7 million, a 17.1 percent increase from the second quarter a year ago and television station digital revenues were 11.5 percent higher. Total adjusted television revenues, defined to exclude the incremental impact of even year political ad demand, were up 6.2 percent. Based on current trends, we expect the percentage increase in television advertising revenues to be in the low-thirties for the third quarter of 2012 compared to the same quarter last year, benefiting from the Summer Olympic Games and political advertising. However, it is too early in the quarter to gauge results, particularly for political spending which will be placed primarily late in the quarter.
Broadcasting segment operating expenses were up 6.6 percent and totaled $110.8 million in the quarter. The increase reflects higher sales and marketing costs and $1.7 million in strategic initiative investments. Reported operating income was up 17.6 percent to $94.6 million, while operating cash flow was 15.8 percent higher and totaled $101.7 million.
DIGITAL
Digital segment operating revenues totaled $181.3 million in the quarter, an increase of 4.5 percent due primarily to strong revenue growth at CareerBuilder. Digital segment operating expenses were up 5.5 percent to $144.8 million due to higher costs at CareerBuilder and strategic spending on digital initiatives. Digital segment operating income totaled $36.5 million and operating cash flow was $44.9 million.
Digital revenues company-wide, including the Digital segment and all digital revenues generated by the other business segments, totaled $311.7 million, an increase of 12.9 percent. The increase reflected higher digital advertising and marketing solutions and the continued rollout of the new all access content subscription model.
At the end of the quarter, Gannett had about 120 domestic web sites affiliated with its local publishing and television markets, USA TODAY, Gannett Government Media and Gannett Healthcare Group. USATODAY.com is one of the most popular newspaper sites and the USA TODAY app is now a top news app with almost 15 million downloads across iPad, iPhone, Android, Windows and Kindle Fire. USA TODAY’s mobile traffic was up in June this year as page views increased 154 percent and total monthly visitors were 49 percent higher compared to June a year ago. In June, Gannett’s consolidated domestic Internet audience share increased 5.8 percent from June of 2011 to 52.3 million unique visitors reaching 24 percent of the Internet audience, according to Comscore Media Metrix. Newsquest is also an Internet leader in the UK where its network of web sites attracted 87.0 million monthly page impressions from approximately 10.1 million unique users in June 2012. CareerBuilder’s unique visitors in the second quarter averaged 21.4 million.
NON-OPERATING ITEMS
The company’s equity earnings include its share of operating results from unconsolidated investees including the California Newspapers Partnership, Texas-New Mexico Newspapers Partnership, Tucson newspaper partnership and other online/digital businesses including Classified Ventures.
Equity income in unconsolidated investees totaled $8.7 million in the quarter compared to $8.0 million in the second quarter last year. Solid results at Classified Ventures primarily drove the increase.
Interest expense declined 19.2 percent from last year’s second quarter and totaled $36.1 million. The decline was primarily due to lower average debt balances.
Other non-operating items declined $6.1 million due primarily to a gain in the second quarter last year associated with the prepayment of a secured promissory note the company received in connection with the disposition of certain publishing operations in 2010.
The company reported pre-tax income attributable to Gannett of $171.1 million for the second quarter, which includes the effects of the special operating charges discussed above. Tax provided on this income totaled $51.2 million which represents an effective tax rate of 29.9 percent. This tax provision reflects the benefit of favorable tax settlements during the quarter. Excluding the effects of the special charges discussed above, the effective tax rate on pre-tax income attributable to Gannett was 31.0 percent compared to 33.0 percent for the second quarter of 2011.
Net cash flow from operating activities was $154.5 million, while free cash flow (a non-GAAP measure) totaled $140.4 million in the quarter. Both numbers reflect the impact of a $22 million contribution to the company’s principal retirement plan during the second quarter. The balance of long term debt at quarter end was $1.66 billion. Total cash at the end of the quarter was $202.1 million.