Gannett's poor 1st quarter results bode ill for newspapers in 2012

Gannett is the first newspaper organization to report earnings this year, but the results were not appreciably better than the bleak patterns of 2011.

Print advertising continues to fall -- 8.3 percent compared to the same period a year ago. Digital revenues were up, but not nearly enough to make up those losses, the company reported Monday.

Management talked at length about investing in strategic digital initiatives, including paywalls for community papers, a consolidated USA Today digital Sports Media Group and digital marketing services to businesses in Gannett markets, but any big impact is months or years off.

Operating profits were down 47 percent for the publishing division compared to the 2011 period, 24 percent for the entire company. Broadcast, buoyed by political advertising, had a strong quarter with revenues up 7.5 percent and an operating margin of 42.5 percent.

Broadcast now contributes more to profit than publishing, which is five times as big in revenues.

Wall Street was disappointed in the results, sending Gannett shares, which had gained 12 percent so far this year, down 7.5 percent by the market's close.

Gannett has been pitching investors on its transformation to a multi-media, heavily digital company for several years. In yesterday's earnings report -- and at an investors' day presentation in late February -- Gannett has now started breaking out what it is spending "on investments in strategic initiatives."

That is not a standard part of quarterly financial reports, but Gannett wants to make the case that with operating profits still healthy, it is allocating significant outlays to new ventures rather than dropping all that money to the bottom line.

In the first quarter, CEO Gracia Martore said, the company spent $20 million of the $65 million planned for this year on the initiatives. USA Today sports and the digital marketing service are now adding 2 percentage points to publishing division profits, she said.

But digital subscriptions, being phased in to the 80 community papers over the course of the year, will not contribute to earnings until the fourth quarter of 2012.

Gannett projects that the paywalls will contribute $100 million in 2013, and that the whole package of digital investments will generate $1.3 billion in earnings by 2015.

Meanwhile the trends in legacy publishing remain discouraging.

January was a particularly bad month for advertising, Martore said, and national categories (including entertainment and telecom) are especially weak. "The telecom price wars seem to be over," she said, so the big display ads from five or six competing mobile phone companies are not likely to come back.

This has been a big factor in poor results at USA Today, which Martore said she hopes to improve with the appointment of a new publisher by this fall.

Paid circulation is down 3.5 percent daily and 3.4 percent Sunday, compared to the first quarter of 2011, Martore said, meaning Gannett is not yet stabilizing or growing Sunday as a number of papers are. Single-copy price increases were partly to blame for the declines, she said, and circulation revenues were down only about half as much -- 1.8 percent.

On the expense side, newsprint consumption was down 7 percent year-to-year, suggesting that Gannett is printing that much less advertising and roughly that much less news in its papers.

Gannett, the biggest of the newspaper companies, is typically one of the first to report. Its results -- especially the decline in print advertising and weakness in national -- is likely a bellwether for the other public companies that will follow and for the privately-held part of the industry which does not provide financial details.

Next up this week will be Media General on Wednesday, whose newspaper division is for sale as it sorts out complicated debt restructuring issues. The New York Times will follow, its performance always subject to close attention, especially now that it has built a base of 450,000-plus digital subscriptions.

Digital revenue growth faltered at a number of the companies late last year, so one indicator to watch as the results roll in is whether it is resuming a healthy growth rate so far in 2012.


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