SAN FRANCISCO — Gannett Co., the largest U.S. newspaper publisher, used sharp cost cuts to deliver a higher-than-expected second-quarter profit Wednesday and offered a wisp of hope that the industry's advertising drought may be subsiding.
Although the report showed Gannett's revenue continuing to slide in the last quarter, its executives indicated advertisers are gradually spending a little more money on newspapers. Gannett's long-sagging shares spiked 29 percent.
"Things are getting less bad," said Benchmark Co. analyst Edward Atorino.
The report provided the first glimpse at how much weaker the newspaper industry got during the three months ending in June. Two other troubled publishers, McClatchy Co. and The New York Times Co., are scheduled to release their second-quarter numbers next week.
The stock market's enthusiastic reaction to Gannett almost seemed incongruous, given that the publisher's main source of income – newspaper ads – plunged by 32 percent in the second quarter.
Such a precipitous drop would be viewed as a disaster in most other industries, but actually represented modest progress for Gannett, the owner of USA Today and more than 80 other daily newspapers. In the first quarter, Gannett's newspaper ad revenue plummeted 34 percent.
Gannett's total revenue, which includes newspaper sales and revenue from its television stations, dropped 18 percent to $1.41 billion – about $50 million below the average estimate among analysts polled by Thomson Reuters.
With less money coming in, McLean, Va.-based Gannett has been cutting costs relentlessly during the past year.
The company has eliminated thousands of jobs and forced most U.S. employees to take two unpaid weeks of leave during the first six months of this year. Management tightened the belt even more to start the third quarter, as another 1,400 workers lost their jobs.
Gannett's frugality paid off with a second-quarter profit of $70.5 million, or 30 cents per share. That contrasted with a loss of $2.3 billion, or $10.03 per share, in the same period last year, when Gannett absorbed a large write-down to account for its diminished market value.
If not for a variety of charges, Gannett said it would have earned 46 cents per share – a dime above the average analyst estimate.
Gannett shares gained $1.01 to close at $4.50. The stock has fallen by more than 90 percent since the newspaper industry's ad revenue began to crumble at the end of 2005.
Investors probably wouldn't have been so excited about the modest progress that Gannett reported Wednesday if its management hadn't stressed that the advertising downturn started to ease in June and that the trend has continued this month.
"It appears to us that some of the advertisers that have been sitting on the sidelines are starting to dip their toes back into the waters," Garcia Martore, Gannett's chief financial officer, told analysts in a conference call.
Martore has been running Gannett for the past month while the company's chief executive, Craig Dubow, recovers from back surgery. Gannett hasn't said when Dubow will return.
Like all newspaper management, Gannett's executives are grappling with the fallout from the worst U.S. recession since World War II on top of a shifting media landscape tilting toward the Internet.
Advertisers are embracing less-expensive online alternatives while more and more readers get their news from free Web sites instead of newspapers' print editions.
To make matters worse, newspapers recently have been suffering revenue losses online, too. For instance, Gannett said revenue from its digital operations would have dropped 18 percent in the second quarter if not for an internal restructuring that added more businesses to the division.
Gannett continued to lose subscribers in the second quarter, with weekday circulation falling by about 13 to 14 percent, Martore said. She didn't specify how much of the decline came at USA Today, which boasts the nation's largest print circulation.
The adverse conditions have stoked fears that Gannett might not have enough cash to honor its commitments to lenders.
Martore sought to ease those concerns Wednesday, saying Gannett won't have any large debts due for nearly two years, when it's supposed to repay a $280 million bank loan. As of June 30, Gannett's debt totaled about $3.5 billion, down from about $3.7 billion in March.
But Gannett could still get into trouble with lenders if the ad slump shrivels its cash flow. The company has promised lenders its debt won't rise above 3.5 times a key financial metric known as EBITDA, or earnings before income taxes, depreciation and amortization. Gannett's debt currently is about three times EBITDA.
Martore said Gannett expects to remain safely under the limit, "assuming no ... extraordinary further event in the economy."
AP Business Writer Andrew Vanacore in New York contributed to this report.