Publishers Continue to Get Crushed

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Digital revenue couldn't save newspaper chain Gannett's (NYS: GCI) second-quarter margins, as the advertising slump continued to hit publishers in a very big way. Gannett reported a 15% drop in its second-quarter earnings because of a fall in publishing revenues and circulation.

Although the company tried to turn investor sentiments in its favor by announcing the doubling of their dividend and a share repurchase program, its shares closed the day off 3.5%. Let's dig deeper and see what Gannett's numbers have to offer.

The numbers
The USA TODAY publisher's revenues for the quarter fell 2.2% to $1.33 billion. A rise of 12.6% in the digital segment buoyed mainly by its CareerBuilder website helped offset a 5% decline in publishing segment revenue. Digital revenue of $276 million accounted for around 21% of the total.

Curtailed spending by retail and other sectors weighed on advertisement (classifieds) demand, sending advertising revenue down 6.5% to $646.9 million. The slump in advertising has pinched everyone in the game.

Like Gannett, publisher McClatchy's (NYS: MNI) advertising revenue declined 11% in the first quarter. Print advertising at Washington Post (NYS: WPO) also declined 8% in the first quarter.

Gannett's operating margin contracted from 20% to 18.6% in the just-concluded quarter. Correspondingly, its bottom line fell to $151.5 million, or $0.62 per share, from $195.5 million in the year-ago quarter. Excluding special items, earnings came in at $0.58 per share as compared to $0.61 last year.

Going digital
Most publishers are now eyeing the web to boost revenues. The New York Times (NYS: NYT) , whose advertising revenues fell 4% in the first quarter, has recently launched paid a subscription for its website while also focusing on more digital products.

Following this, Gannett may also consider charging for its online access and apps, though the management has kept mum on that front.

Print advertisements are slowly giving way for digital ones. Gannett's USA TODAY saw 23% higher digital revenue while print demand fell. The iPad application also helped Gannett, and its job site had 10% more visitors this quarter despite a wishy-washy job market. Gannett could clearly benefit from a deeper foray into digital products.

Signals of concern
The economic slowdown has hit Gannett hard, which is cause for grave concern. Advertising is plummeting, and is unlikely to reverse anytime soon, with a weak auto sector, flat employment scene, and a lagging real estate market looming over us. Oh, and the fact that people don't read newspapers anymore -- that certainly doesn't help!

The layoff 700 newspaper employees recently also indicates the cost pressures Gannett has been facing.

Moreover, newsprint demand is down by 7% year-to-date in North America. Low political spending may also lead to mid-single-digit percentage decline in television revenue in the upcoming quarter. Furthermore, next quarter will also see more expenses relating to their site ramp-up.

Gannett could have utilized cash for more productive purposes such as digital investments. Its total cash stands at $165 million this quarter. Doubling the dividend may cost around $40 million annually, while the buyback will further add to cash outflow.

The Foolish bottom line
The shaky print market gives us a reason to remain on the sidelines, and waiting for some visibility on recovery and higher digital growth would be a smart move before betting on the stock.

At the time this article was published Fool contributor Neha Chamaria does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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