Gannett Announces Total Q3 Revenue Will Be Some $300 Million Less Than Q3, 2008 So What Happens – Its Shares And Those Of Other Newspaper Companies Surge!

Philip M. Stone October 1, 2009 Follow on Twitter

Gannett, the largest US newspaper publisher, shocked the financial world this week, estimating its expected Q3 earnings would exceed most analyst estimates, even though total revenue would be down $300 million compared to the same quarter a year ago. Its shares and those of other newspaper companies surged because the financial people have became believers that the cost-side is really under control.

But note that Gannett’s better-than-expected Q3 earnings, projected at around 39 – 42 cents a share, has been achieved entirely by savage cost cutting – that means mostly a lot of people no longer having jobs, or taking unwanted holidays and the like – and there have been considerable savings in such areas as newsprint and ink. But revenue is still going in the wrong direction.

As far as investors are concerned, however, newspaper companies have finally reached that level where their cost basis is appropriate to the reduced revenues now coming in and that are expected to stay at current levels for some time to come.

And any time a company surprises the financial people with better than expected earnings – no matter what the reason – then shares will surge. Now, it seems all of those companies that had shares valued at less than $1 and were being bet on to enter bankruptcy just a few months ago are now seen in a far more positive light by Wall Street.

For mighty Gannett whose shares hit a low in early March of $1.85 – can you really believe that? – the announcement that the third quarter savings have built upon second quarter savings has given the company a real Wall Street boost. On the day it announced its Q3 expectations the shares rose 17.6% and on Wednesday they closed up a further 6.5% making for a 25% two-day gain, closing at $12.51. 

McClatchy, one of those companies whose shares were languishing below $1 – they hit a low of 35 cents in March --  got a boost from its Q2 results a couple of months back and the Gannett news pushed McClatchy up by 6%, but it didn’t all stick and it lost 3.4% on Wednesday, closing at $2.56 so the two-day up was just 2.4% -- perhaps indicating there is some doubt there whether McClatchy has all of its act together, or maybe just some profit taking. Whatever, savvy investors back in March still are doing very nicely today!

So, while the cost side seems to be under control what positive can be said about the revenue side? Not much. It is still bad, and it looks like staying bad for the foreseeable future. About the best that can be said is that most publishers don’t think it will get much worse, but standby for the Q3 earnings reports to hit. As it is, Gannett has already said it expects to be down $300 million from Q3 last year and Q3 last year was by no means a great quarter!

Ad sales drops within the industry have stayed pretty steady this year, with Q1 sales down 29% from the same quarter a year ago, and Q2 down 28%, according to the Newspaper Association of America. Most analysts expect around the same percentage drop for Q3. 

In real dollar terms those percentages mean that Q2 combined sales of print and digital by US newspaper companies fell nearly $3 billion from the same quarter a year earlier. Now you begin to understand the why behind the savagery that cost-cutting has taken in the past 12 months in particular.

To get revenues up means looking for ways to charge for things that haven’t been charged for before. Just like airlines charging for checked baggage, the checked baggage in the case of newspapers are, of course, digital platforms.

There now seems to be consensus that newspapers can no longer give away news for free on those platforms based on the advertising model. The money just isn’t there. And that’s why everyone now is talking about charging, and experimentation is going on to see what works and what doesn’t.  Most people are looking at some sort of hybrid system that includes some news for free and some that would be paid for, but studies such as the one by Ramon Casadesus-Masanell of Harvard Business School and Feng Zhu of USC's Marshall School of Business, basically says it’s no good being a little big pregnant. You either are pregnant (charge for everything) or you are not (advertising model.) Combining the two may not be so good.

Another revenue booster way that newspapers have discovered works is to make the public pay more of the true cost of providing their daily read. Many newspapers have increased subscription and newsstand prices and for the most part the end result has been increased circulation revenue by several percentage points.

Jim Maroney, publisher and ceo of the Dallas Morning News, gave out some remarkable information last weekend on NPR’s On The Media show.  He noted, “One of the things we have done is we have gone to our customers and said, look, we need to ask you to pay a greater proportion of the cost of publishing and distributing a newspaper to your home.

“In so doing we’ve reduced our dependency on advertising. The typical model for newspapers has been 80% advertising and 20% revenue from the people who buy the paper. By this time next year, we’ll be something closer to 60/40, maybe even 55/45. To date, we’re about 80% through all of our renewals and 92% of our subscribers have agreed to pay a higher price, and I’m very proud of that.”

The Dallas Morning News has had its fair share of editorial cost-cutting, and it even partners with the rival Ft. Worth Star-Telegram on various beats, particularly the arts and sports, but Maroney says one of the reasons people are willing to pay more is because his newspaper has actually been adding pages, not taking them out. He said he doubted he could have gotten subscribers to agree to pay more “had we continued to cut our newsroom or continued to cut pages out of the paper.”

There seems to be a lot of sense in that from which others can learn.