Gannett Co. Inc.’s (NYSE: GCI) shares recently have struggled to remain much above their 52-week low. Some of this has been blamed on its failed attempt to buy rival Tronc Inc. (NASDAQ: TRNC), although that analysis no longer seems relevant. The more pertinent issue is whether Gannett can reach its revenue guidance for 2017, which is between $3.15 billion and $3.22 billion. If it can match or beat those numbers, the stock is likely to rally strongly.
For 2016, Gannett’s revenue was $3.05 billion. Its favored method to measure its bottom line, “adjusted EBITDA” (see definition below), was $349 million. Gannett expects adjusted EBITDA will be $325 million to $335 million in 2017. The 2017 numbers will include revenue from recently acquired properties, particularly the North Jersey Media Group, which owns the Bergen Record. The deal was announced in July. That buyout and several smaller ones will make comparisons to 2016 complicated.
The successful formula for Gannett to reach its target is common to virtually every other large newspaper operation in the United States, with the exception of The New York Times and The Wall Street Journal. Each of these two national papers has large pools of paid digital subscribers. New York Times Co. (NYSE: NYT) reported its paid-only digital subscriptions were 1.853 million at the end of 2016. The Wall Street Journal’s average digital subscribers for the fourth quarter of last year were 1.08 million. Properties beyond the Times and Wall Street Journal have had trouble matching their success. Gannett’s measure, which includes hard numbers, is slightly different from some other companies. What its calls its digital-only plus Sunday grew 62.4%, topping 200,000 for the first time during the fourth quarter.
Put as simply as possible, Gannett has to get the growth of its digital advertising and digital subscription businesses to outpace the attrition of its print revenue Alternatively, it needs to continue to cut costs, which it recently did in New Jersey and Tennessee. Gannett has to run against the primary secular trends that affect the industry. Essentially, it has to break away from the patterns that have afflicted nearly the entire industry to be successful.
The news about Gannett’s digital advertising last year was positive in the fourth quarter, according to the company:
Digital advertising revenues of $110.8 million were up 14.4% compared to the prior year quarter, due primarily to acquisitions, improved local performance in the U.S. and strong growth at the USA TODAY. Excluding acquisitions and the impact of a 38.7% reduction in the employment category, digital advertising revenues increased 11.9%. The increase was driven by a 41.5% increase in combined video and mobile display and a 21.1% increase in other sources of digital advertising revenues such as digital marketing services and affiliates.
Without the adjustments for acquisitions, however, revenue fell:
Operating revenues for the fourth quarter were $867.0 million compared to $739.3 million in the prior year fourth quarter, an increase of $127.7 million or 17.3%. The increase in revenue was primarily attributable to acquisitions and continued momentum in national digital advertising revenues. Revenue increases were partially offset by ongoing declines in print advertising and circulation demand. On a same-store basis, operating revenues declined 7.7%.
Gannett needs to turn that nearly 8% slide into a small improvement for it to hit 2017 numbers.
Most investors would argue that the headwinds Gannett faces to match its 2017 forecast make the odds of success only modest. That is currently priced into the stock, which trades at $8.02, against a 52-week high of $17.72 and 52-week low of $7.30. The mean 12-month share price target among analysts who cover Gannett is $9.50. If the company hits the $3.2 billion revenue forecast, the results almost certainly will get its stock there, all other things in the economy and general equity markets being equal.
As for adjusted EBITDA, Gannett defines it as follows:
[A]djusted EBITDA, which may not be comparable to a similarly titled measure reported by other companies, as net income before (1) income taxes, (2) interest expense, (3) equity income, (4) other non-operating items, (5) severance related charges (including early retirement programs), (6) acquisition related expenses (gains) (7) facility consolidation and asset impairment charges, (8) other items (including certain litigation expenses and multi-employer pension withdrawals) (9) depreciation and (10) amortization.