Wednesday, April 23, 2014

GCI: Good Q1 results; on track to meet our FY '14 expectations

Gannett (GCI) reported pretty strong Q1 results, and it appears the Company is on track to meet or beat our full-year top and bottom-line expectations.  We think management also displayed confidence, supported by the good numbers, by buying back approx. 1.3MM shares at an average price of $29.23/sh.

Total revenues of $1.4bil came in slightly below the $1.41bil Street estimate, while non-GAAP EPS of $0.47 beat the consensus by a penny.   

  • Driven by Winter Olympics and political ads, GCI's broadcast segment revenues were up 20% Y/Y on a pro forma basis, which includes Belo revenues in Q1 '13.  Retransmission revenues, which may be at risk a few years down the road depending on the Aereo case decision, grew 66% on a pro forma basis.  Core broadcast revenues grew 6% Y/Y.  
  • Olympic ad revenues of $41MM came in much higher than our $28.8MM estimate.  In addition, with $80MM in political ad revenues only in Q1, we expect political ad spending to increase significantly as we get closer to mid-term elections.  We have modeled in $196.8MM political ad revenues for the year, which we think GCI can meet.
  • Broadcast operating margin of 40.4% was below last year's 43.7% as integration post Belo acquisition continues.  We continue to expect this figure to increase to around 49% for the year, given further integration and significantly higher political ad revenues going forward.  
  • Publishing advertising and circulation revenues declined 4.8% and 1.4%, respectively.  This was not a surprise, although it could have been better as management said the bad weather impacted those revenues by approx. $7MM.  Management also indicated that the sale of for which GCI received $155MM, will have a "small impact" on publishing revenues.  Other publishing revenues remained pretty much flat, down only 0.1%.  Publishing operating margin of 5.1% declined 180bps from last year.  Although not indicated in the earnings press release, we think some of the decline was due to facility consolidation and asset impairment charges.  Those details will be included in the Company's 10-Q filing.
  • Digital revenues (mainly were up 2.8% Y/Y with operating margin of 13.3% compared to last year's 13.5%.  Given the seasonality of this segment, along with publishing and broadcasting (due to ad revenues), we look for digital segment margin to be higher for the full-year.  

Again, in our opinion, GCI is on track to meet or beat our estimates for FY '14.  We continue to value the Company at approx. $40/sh.  

We were pleased that one of the analysts on the call asked about the Aereo case; and we agreed with management's response that the main issue is whether or not Aereo is violating copyright laws.  In our opinion it is.  After reviewing the transcript of the arguments made before the Supreme Court on Tuesday, we still (as we mentioned on Monday) think Supreme Court's decision (likely in Jun. '14) will allow Aereo to continue operating but will also give broadcasters an opportunity to charge Aereo for distributing the content for which they pay.  While the justices appeared to agree with broadcasters regarding copyright infringement, they were also worried that a decision completely against Aereo may put Aereo out of business.  The entire transcript is available on the Supreme Court website:

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