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The Amazon Earnings Speculation Story

By Nora Macaluso
Jan 21, 2002 2:26 PM PT

As e-tailer (Nasdaq: AMZN) prepares to deliver on its promise of posting an operating profit for the fourth quarter ended in December with its earnings report due January 22nd, analysts are looking beyond the numbers, wondering if the company can start growing again.

The Amazon Earnings Speculation Story

"They have essentially promised (a profit), and people take it for granted that they have to do it," US Bancorp Piper Jaffray analyst Safa Ratschy told the E-Commerce Times. "If they can produce anything above $10 million, that would get attention that this is an operation that can generate significant cash."

Though analysts have confidence Amazon will make good on its promise, they expect the company to lose money overall. The consensus forecast is for a loss of 7 cents per share for the quarter.

Amazon has predicted fourth-quarter sales of US$970 million to $1.07 billion, and analysts are expecting the number to come in somewhere in the middle. The Seattle, Washington-based e-tail giant is unlikely to disappoint, because "that's a pretty wide range," Morningstar analyst David Kathman told the E-Commerce Times.

Cutting Room

Cost cuts, price reductions and a focus on used items will enable Amazon to meet its profits before-taxes-and-charges goal, analysts say. Though the expected profit is only on a pro-forma basis and excludes a range of taxes, charges and other items that will contribute to a bottom-line loss, "it would still be a significant thing," because it would show that operations are performing well, Kathman said.

"Their growth has just slowed tremendously, but they've made some more progress toward profitability," Kathman said. "The big challenge is to boost growth and maintain profitability."

The quarter's results are not likely to include any big charges, and Amazon -- unlike some other companies that use their own measures of success -- has always been forthcoming about how it arrives at its pro-forma projections and exactly what items it leaves out, said Kathman. Amazon's quarterly press releases, which detail the accounting methods, are among "the longest I've ever seen," he added.

In the third quarter, cost cuts enabled Amazon to narrow its operating loss by 60 percent, even as revenue remained flat with a year earlier.

Boom to Bust

In its early days, Amazon grew by leaps and bounds, without concern for profitability. When the Internet bubble burst, the company -- having established its position at the forefront of the e-tail sector -- retrenched, focusing on achieving a profit at the expense of revenue.

Amazon "is well positioned long-term to capture the growth of e-commerce, given its established brand name, global opportunity, large customer base and superior technology platform," wrote Goldman Sachs analyst Anthony Noto in a January 7th research note. "Near-term, the company faces the challenge of driving both cost rationalization while striving to reaccelerate growth."

A fourth-quarter pro-forma profit, wrote Noto, is "critical to helping Amazon break out of the box created by the necessity of managing two competing objectives" -- boosting sales and controlling costs.

Trading Places

The company's strategy of offering used merchandise alongside new items, for example, is helping the bottom line because the company incurs little or no warehousing costs for the used goods. However, said Kathman, there is the potential that used-product sales could "cannibalize" sales of new items. "It's kind of a trade-off," he said.

Noto agreed, but approved of the strategy overall. "Used and service revenue provide higher-margin revenue, which should lead to meaningful upside" to operating income, he wrote in the January 7th note.

According to Kathman, 17 percent of all goods sold on in the third quarter were used goods. At the same time, the gross margin on those products, he said, is "much fatter," at 80 percent, versus about 25 percent for the company's traditional e-tail business. "It kind of skews the results a little bit," he said.

A big problem for Amazon is that its core business of books, music and video "has become a mature market on the Internet," said US Bancorp's Ratschy.

Amazon, Ratschy said, is responding correctly by lowering prices and offering more used items. "They just have to go through this process of people wanting to buy used books and cheaper books until they totally lock the market."

Holiday Heights

Post-holiday reports showed Amazon was a strong performer in that crucial selling season. Amazon was one of the 10 fastest-growing e-tailers on NetRatings' holiday list, and did more business than any of the other nine.

However, anlaysts warned, those reports could be deceiving. The company's own "Delight-o-Meter," which tracks the number of items sold, does not tell how much money the company made on each item. "I always want to see the actual numbers," said Morningstar's Kathman.

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