January 27, 2021

Gannett has unleashed a flood of good financial news this month along with a positive 2021 forecast. At the nation’s largest chain, with more than 250 regional papers and USA Today:

  • Fourth-quarter 2020 advertising bounced back better than expected, and 2021 is off to a good start. Gannett has the high traffic numbers to support a healthy national digital sales network, and CEO Mike Reed said the results also reflect “pent-up demand” at the local level after ad revenue took a 50% hit in the first months of the pandemic.
  • Debt and interest expenses fell quickly last year as costs were reduced by $150 million more than the $300 million promised.
  • While hardly a growth stock, Gannett shares have rallied from a low of $1.15 last fall and are trading at more than $4 a share now.
  • Digital paid subscriptions grew by 31% in 2020 and now total more than a million. Digital subscription revenue did even better, growing by 46%. That suggests the company is moving readers off bargain introductory rates to fuller prices as its subscription drive matures.
  • In a virtual investment conference conversation on Jan. 14, Reed went so far as to say, “We don’t think it is unrealistic over the next five years to have 10 million digital subscribers.”

That would require adding about 1.8 million a year and multiplying the current base nearly tenfold. Given that USA Today’s site remains free, I asked Reed if that goal wasn’t wildly ambitious. He replied by email:

“Nothing exceptional comes from reasonable expectations. Of course it is ambitious, but why wouldn’t our goal be to be the best?”

In his conference presentation, Reed said that The New York Times has reached the 7 million digital subscription mark with digital traffic of about 100 million uniques per month — and that Gannett sees 150 million uniques per month. I questioned whether that was an apples-to-apples comparison since most of the Times’ growth has come while the majority of its content has been behind a paywall.

Reed defended his reasoning:

“With regard to your correlation to the NY Times — wasn’t the NYTimes site free when they embarked on their paid digital subscription strategy? The answer is yes. They took their site of unique visitors, coming there for free, and started to convert them to paid. When you think about it that way, we are embarking on a similar and proven path. 10 million paid digital subscribers for us represents penetration of only 6.6% of our audience. Very achievable. We also have the added advantage of local news combined with award-winning national news. We will also be exploring additional vertical subscription opportunities.”

In his conference presentation, Reed said that he considers the company “in the middle to late innings” of digital transformation. Digital transformation has been an announced goal at Gannett and other chains for roughly a decade, but progress has been agonizingly slow. Print ways of thinking about news and advertising persisted — and even as both print ad and circulation revenue declined at an accelerating pace, they still accounted for a majority of revenue in most places.

Now only 20% of the company’s revenue comes from print advertising, Reed said. “At USA Today, our best-known brand, we get 117 million uniques a month. … Advertising is more than 90% digital. It’s not really a print product anymore.”

When the GateHouse chain acquired Gannett in late 2019, retaining the Gannett name for the new company, I wrote that USA Today’s print edition would probably be phased out in two years. (I will retract the piece if nothing like that happens by the end of 2021.)

So I asked Reed, with print advertising minimal and much of USA Today’s paid print circulation distributed by hard-hit hotels, why keep up the expensive exercise of printing and distributing nationwide?

“Our media business is not only an advertising business, it is also a growing subscription business,” Reed replied. “USA Today is no different. While 90% of the advertising revenue is digital, which is a GREAT thing, there is also a strong subscription business for USA Today, and that is print. Print is also still very valuable from a branding perspective for our entire company and the USA Today Network. Finally, we still believe there is a future for print products done in the right way, in combination with the digital side of the business.”

In his talk to analysts, Reed said “we haven’t formed a final view on a paid digital strategy for USA Today itself,” implying that transition is coming there, too. The regional papers already have paywalls and are increasing the push for paid digital subscriptions.

An editorial strategy at Gannett has been to localize national stories and pull regional stories up to post on USA Today, while pooling resources for investigations. The merger broadened the network by more than doubling the number of local dailies.

As for finances, Gannett issued a “preliminary” fourth-quarter report that revenues were coming in $10 million higher — at $875 million — than it had originally estimated. Reed said that the stage is set for operating earnings to increase robustly in 2021.

As my colleague Kristen Hare and I have reported, those results are partly driven by stringent cost control — layoffs and furloughs in newsrooms and the rest of the company, plus a lot of printing consolidation, pushing back print deadlines at many titles.

Reed repeated that the vast majority of the $275-300 million in cost-saving synergies he promised has come from eliminating duplication of backroom functions. The pandemic allowed for more reductions in operating costs as work from home made some office space inessential and reduced travel. Real estate sales accelerated.

The favorable trends on both the revenue and expense side have allowed Gannett to pay down about 40% of the $1.8 billion it borrowed for the acquisition. It plans to refinance the rest at a lower rate this year.

“At 11.5%,” Reed told the investors group, “we don’t want to carry that a day longer than we have to.”

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Rick Edmonds is media business analyst for the Poynter Institute where he has done research and writing for the last fifteen years. His commentary on…
Rick Edmonds

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