Those Dynamite Gannett Earnings Still Spell Bad News For Newspapers

Philip M. Stone July 21, 2010 Follow on Twitter

Gannett, the largest US newspaper publisher, reported Q2 earnings up a third over the same period and Wall Street greeted that with a thud – the shares fell 11% on the day. A disconnect? No. While Gannett is into broadcasting and digital services – both of which did very well -- it’s still newspapers that drives the company and overall revenue fell 1.6% in the quarter as newspaper advertising revenues continue to decline.

The silver lining is that the newspaper ad revenue decline rate is at lower percentages each quarter, but the bottom line is that it is still in decline in an environment where advertising revenue forecasters are predicting 2010 will be a pretty good year overall with advertising picking up, but newspapers may not get their accustomed share.

Gannett said that its television revenues grew 20.3% which is well in line with the almost euphoric enthusiasm in the broadcast world that business is picking up again. And on the digital front Gannett said those revenues grew 8.3% -- perhaps a bit disappointing especially since most of the increase came from such sites as CareerBuilder and ShopLocal rather than from local advertising on its local newspaper Web sites.

Gannett’s problem is that the television and digital revenues good news combines to produce only about 25% of the company’s overall revenues – its 81 daily newspapers and its Newsquest Group in the UK are still the driving force and their combined ad revenue and circulation revenue continued down. And that’s why when Wall Street dug under the headline figures for the company as a whole and saw that some 75% of the business is still in revenue decline that was good enough to dump the shares.

And since Wall Street figures what happens at one newspaper company, especially one that is as tightly managed as Gannett, probably will be true at others, too, their shares also got slaughtered.

Gannett’s newspapers simply are not operating at the levels the company once enjoyed. It was not unusual for a Gannett newspaper in the good old days to have at least a 30% profit margin. Today, even with all the cuts, it is probably in single percentage figures at most of its newspapers with a few exceptions. Overall earnings may be up because TV and digital revenues are getting better but is still a downwards slippery revenue slope for the newspapers where only rigid cost controls are making its numbers somewhat acceptable. Even then the spin is still that, yes, revenues are still declining, but the rate of quarterly decline is easing up. Fact is, down is down, even worse in a way when you figure how bad the 2009 numbers were and now they are even worse in 2010.

Cost savings that helped in the past may now be harder to come by. Gannett freely admits, for instance, that low newsprint prices have been a great boon, but that is coming to an end. Although the price for standard 30-lb paper has remained stagnant for the past month and this week remained at $593.06 per metric tonne, it is still around $140 higher than it was a year ago, an increase of some 25%. The good news there is that the increases thus far are much lower than the producers have been seeking. 

Gannett also showed a disturbing circulation revenue figure. Many newspapers have actively been increasing their newsstand and subscription prices over the past year or so and while it has resulted in less circulation as some readers leave, overall the financials have been positive. But in Gannett’s case the circulation revenue fell 5.9%. How come?

It may well be that many Gannett newspapers are in economically depressed areas and any additional price increase could be seen by hard-pressed readers there as a reason to cut that expense completely. Perhaps also given all of the editorial cuts readers just don’t believe they were getting the value for money they once got.

Whatever the reason, downward circulation revenue is bad news because newspapers realize they have been selling their product far too cheap in the past relying so much on advertising, and as advertising continues to dry up publishers more and more are going cup in hand to their readers – some newspapers have doubled their newsstand price within 12 months. But after all of the well publicized editorial cuts that cannot be hidden in the finished product it could be that readers are not as stupid as publishers may think they are.

If that trend continues elsewhere it will be really bad news for the industry. Lee Enterprises, for instance, that publishes 53 daily newspapers reported Tuesday that its circulation revenue basically stood still – down 0.5% in Q2. The New York Times has had great success jumping its circulation revenue via higher pricing and its earnings statement Thursday will let us know if limits have been reached.

Gannett is actively getting its debt down – it fell in the quarter by $170 million – so while that campaign is going on with “cash flow” the only real buzz words in its corporate corridors there is going to be little investment for some time to come to improve the editorial product.

So, take all of that together and you see why Wall Street greeted a doubling of Gannett profits over the same quarter a year ago with a bloodbath. And a couple of more figures  to consider as you decide how newspapers are doing these days – compare Gannett’s $195.5 million Q2 profit with Google’s $2.37 billion Q2 profit. Enough said?