• by Erik Sass  @eriksass1, October 12, 2006

The nation's largest newspaper publisher, Gannett Co., reported a 12 percent drop in earnings in the third quarter of 2006, compared to the same period a year ago--blaming a weaker fall ad market. Total earnings for third-quarter 2006 were $261.4 million, versus $297 million in 2005. Earnings-per-share fell from $1.22 to $1.11, although much of the earlier figure was attributed to the sale of properties. Discounting the sales and income from discontinued operations, earnings-per-share were actually just $1.13 in third-quarter 2005.

The only bright spot: broadcast revenues for the third quarter were up 11.1 percent, and television revenues were up 11.4 percent.

Although the company has recently acquired two TV stations, its main source of revenue is still its huge newspaper business, including USA Today. Overall, Gannett's newspaper ad revenue rose 1.2 percent, driven largely by new acquisitions--but the company said that without the purchases, national ad revenue fell 3.4 percent and classified revenue fell 2.3 percent. The newspaper business also experienced a 4.2 percent rise in operating costs.

The dip in Gannett's classified ad revenue is another piece of bad news for newspapers overall, which derive a large part of their revenue from it. Although real-estate revenue continued to climb with an 8.2 percent jump, employment classifieds fell 6.2 percent and automotive tumbled 9.5 percent. The latter development is in keeping with auto advertisers' long-term flight from print.

Analysts say newspapers also face a threat in real-estate classifieds. A short-term slowdown in the housing market is actually good news for classified ads. But as houses stay on the market longer, a long-term slump could send newspapers' last strong classified category into a tailspin.

In a report last month, Paul Ginocchio, an analyst with Deutsche Bank, wrote: "The biggest drivers of the change in ad growth over the next two to three quarters will be real-estate and help-wanted classified, both of which are showing weakening trends." On this point, Ken Doctor, a newspaper industry analyst with Outsell, Inc., warned: "The greatest concern going forward is that the economy appears to be slowing, and publishers should be thinking about what will happen cyclically to those two areas." Indeed, Merrill Lynch analyst Lauren Rich Fine has predicted an 11.5 drop in earnings-per-share for the newspaper industry as a whole.

Weak returns from industry leaders like The New York Times confirm that classifieds are in trouble. According to its most recent monthly report, classified ad revenue decreased in August, led by declining automotive and help-wanted categories. In mid-September, The Wall Street Journal lowered its third-quarter guidance because of a weakening ad market. Dow Jones plans to announce third-quarter results on Thursday, October 19.