Gannett says Q3 revenue fell 8.6% as newspaper company hit by ownership shift of Cars.com
Publisher of USA Today, now a newspaper-only company after spin-off, reports that its ad revenue fell 4.5 percent when missing digital properties are excluded from the total
The newspaper chain Gannett today reported Q3 earnings, reporting that revenue fell 8.6 percent, partially the result of the fact that ownership of Cars.com now belongs to TEGNA, the spun-off broadcast side of the former unified Gannett Co.
Taking out this digital advertising, revenue still fell 4.5 percent, with adjusted EBITDA declining 5.7 percent to $97.0 million, compared to $102.9 million in the third quarter of 2014.
Gannett recently announced that it would be acquiring the newspapers of Journal Media Group, which includes the Milwaukee Journal-Sentinel. Journal Media Group was a recently formed newspaper company that resulted when Journal Communications swapped its broadcast properties for the newspaper properties of E.W. Scripps. When Journal Media Group announced earnings this summer it reported net income of $3.3 million, barely in the black. The company will unveil one more earnings report in November before closing shop.
As expected, the broadcast side of Gannett, now called TEGNA, is doing great. It reported a 28 percent increase in earnings last week, driven very much by the digital business that is no longer tied to the newspaper side of the old company.
Here is Gannett’s Q3 earnings press release:
McLean, VA – October 29, 2015 — Gannett Co., Inc. today reported third quarter 2015 results of operations.
Recent highlights include:
- Announced the merger of Gannett and Journal Media Group, Inc. (JMG), expected to close in Q1 2016, is expected to add approximately $450 million in annual revenues and approximately $60 million in adjusted EBITDA in the first full year. Additional $25 million of synergies targeted for year two.
- Achieved approximately 101 million unique domestic digital visitors. Total digital revenues for the third quarter were $159.9 million. Digital-only subscriptions grew 37%.
- Declared dividend of $0.16 per share.
- Continued integration of acquired properties in Texas, New Mexico, Pennsylvania and the UK, which is progressing ahead of plan.
Robert J. Dickey, president and chief executive officer, said, “After our first 120 days as a public company, Gannett has made significant progress toward several of the key initiatives that we outlined during our analyst day in June. Cost reduction initiatives are progressing as planned, the integration of our recently acquired properties in Texas, New Mexico, Pennsylvania and the UK into our “One Gannett” operating model is ahead of schedule, investments in our digital platform are resulting in continued growth in unique visitors and digital revenues, and the announced merger of Gannett and Journal Media Group will add significant scale and synergy opportunity to drive revenue and earnings growth.”
Beginning with the period post-spin from the company’s former parent and in conjunction with the execution of new agreements with the company’s former parent and certain of its affiliates, the company began reporting wholesale fees associated with sales of certain third party (principally Cars.com and CareerBuilder) digital advertising products and services on a net basis, as a reduction of the associated digital advertising revenues, rather than in operating expenses within our consolidated statements of operations. This change has no impact on reported operating income, operating cash flows, net income or earnings per share.
Operating revenues for the third quarter were $701.2 million compared to $767.3 million in the third quarter of 2014, a decrease of $66.1 million or 8.6%. This decline is partially due to approximately $16.2 million related to the reporting of sales of certain third party (principally Cars.com and CareerBuilder) digital advertising products on a net basis (as described above), $7.6 million of prior year revenues related to exited businesses as well as $8.4 million of unfavorable foreign currency exchange rate changes. Excluding these items, revenues declined $33.9 million, or 4.5%, primarily attributable to ongoing advertiser demand shifts and the impact of the unfavorable affiliate agreement change with CareerBuilder and its impact on classified employment revenues in the quarter. These declines were partially offset by positive revenue trends in Gannett’s digital products as well as revenues from businesses acquired late in the second quarter.
Weighing on the underlying digital growth rate are the unfavorable post-spin changes to the CareerBuilder affiliate agreement and the change in reporting for third party digital revenues. Excluding CareerBuilder revenues from all periods and the effect of the change in reporting for third party digital revenues, digital revenues increased $6.2 million or 3.9% in the third quarter. This increase is across the board, with the most meaningful increases coming from desktop display, video and sponsored links. Overall, reported digital revenues were $159.9 million in the third quarter of 2015 compared to $173.6 million in the third quarter of 2014, a reduction of $13.7 million or 7.9%.
Adjusted EBITDA for the third quarter was $97.0 million compared to $102.9 million, in the third quarter of 2014, a decrease of $5.9 million or 5.7%. The decline in third quarter adjusted EBITDA was due to a $7.6 million reduced EBITDA contribution primarily resulting from changes to the Cars.com affiliate agreement in October 2014 and the CareerBuilder affiliate agreement in August 2015, $2.2 million in unfavorable foreign exchange rate changes and declines in print advertising revenues, partially offset by cost reductions and efficiency gains in operating expenses as well as increases in digital revenues and a full quarter of operating results from businesses acquired during the second quarter of 2015.
Earnings per share for the third quarter, on a fully diluted basis, were $0.33 and includes $17.5 million of pre-tax severance, acquisition-related and other charges. Before the impact of these charges and adjusted for taxes, adjusted earnings per share on a fully diluted basis would be $0.43. Fully diluted earnings per share reflect a diluted share count of 118.2 million shares, approximately 3.2 million higher than the end of the second quarter of 2015 due to the addition of the dilutive effect of stock based compensation, principally converted from the former parent at the time of the spin. Additionally, during the quarter the company purchased no shares under its $150 million share buyback authorization. This was due to restrictions on trading while in possession of material non-public information regarding the potential merger transaction with Journal Media Group.
Acquisitions and Integration
In early October, the company announced that Gannett and Journal Media Group entered into a definitive merger agreement under which Gannett will acquire all of the outstanding common stock of Journal Media Group for approximately $280 million, net of acquired cash.
Under the terms of the transaction, which was unanimously approved by the boards of directors of both companies and is subject to Journal Media Group shareholder approval, Journal Media Group shareholders will receive $12.00 per share in cash. Gannett expects to finance the transaction through a combination of cash on hand and borrowings under Gannett’s $500 million revolving credit facility. “The publications of both Gannett and Journal Media Group have a rich history, a commitment to journalism, and a dedication to informing and being active members in the communities we serve. Our merger will combine the best of each of our organizations to create a journalism-led, investor-focused company which will provide substantial value to the shareholders of both companies,” Dickey said at the time the merger was announced.
In its first full year, the transaction is expected to add approximately $450 million to Gannett’s annual revenues and approximately $60 million in adjusted EBITDA, through a combination of JMG’s solid base business and certain quickly attainable synergies. The company expects approximately $25 million of additional synergy opportunities in the second year.
In June 2015, the company completed the acquisition of the remaining 59.4% interest in the Texas-New Mexico Newspapers Partnership (TNP) that it did not own from Digital First Media, which includes properties in Texas, New Mexico and Pennsylvania. The deal was completed through the assignment of Gannett’s interest in the California Newspapers Partnership and additional cash consideration. The company has been actively integrating the operations of TNP into the operating infrastructure of Gannett. Already the company has completed the consolidation of cash management, credit and collections, procurement and payment systems, payroll, and integration of the management structure. Over the next few weeks the integration of the circulation systems, customer service, design operations, and the consolidation of these properties onto the Gannett digital platform is also expected.
Net cash flow from operating activities was $126.1 million in the quarter. Capital expenditures in the third quarter were $10.3 million, primarily for technology investments and real estate efficiency projects. The resulting cash balance at the end of the third quarter was $142.8 million, an increase of $70.8 million compared to the cash balance at December 28, 2014.
At the end of the third quarter of 2015, the underfunded pension liability was $527.0 million, compared to $770.0 million as of December 28, 2014, a reduction of $243.0 million or 31.6%. The significant reduction in this liability is a result of year to date contributions of $120.1 million, mostly made during the period pre-spin. The remaining changes were primarily associated with actuarial changes, including an increase in the discount rate, resulting from a revaluation of the pension plan as of the date of the spin of Gannett from its former parent.
On October 28, 2015, the company’s Board of Directors declared a regular quarterly cash dividend of $0.16 per common share. The dividend will be payable on January 4, 2016 to shareholders of record at the close of business on December 4, 2015.
“We are experiencing trends similar to what we forecast at the end of the second quarter: specifically, revenue trends in the second half of the year that are improved over the first half of the year, partially as a result of the acquisitions of TNP and Romanes, and adjusted EBITDA margins that are modestly higher in the second half than the first half. We expect this guidance to hold for the remainder of the year, with normal seasonal patterns indicating that the fourth quarter will be the highest revenue and earnings quarter of the year,” Dickey concluded.
Additionally for the fourth quarter of 2015, the company expects the following:
- Capital expenditures of $32-$35 million
- Depreciation and amortization of approximately $28 million
- Effective tax rate for the fourth quarter of 28-30%