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Amazon.com misses estimates but sets profit roadmap

Losses widen, but company says its book division turns a profit

Amazon.com posted a wider-than-expected loss in its fourth quarter Wednesday, losing $185m (£113bn), or 55 cents a share, on sales of $676m. But officials broke with company tradition and mentioned the "P" word -- profits.

First Call consensus expected the online retailer to lose 48 cents a share, but many analysts were projecting a loss of between 53 cents and 58 cents a share due to a series of inventory writedowns.

In the quarter, Amazon.com took a $39m charge for inventory reductions, but officials said the company's operations would become more efficient. On an operating basis, Amazon.com lost $175m in the quarter.

Clearly, Amazon.com's philosophy of foregoing profitability for the foreseeable future and increasing expenses to provide top-notch customer service has rankled some analysts. Officials on a conference call, however, moved to smooth things over. It worked. Amazon.com's shares jumped to 77 in after-hours trading after closing up 2 to 69 7/16 in the regular session.

Chief financial officer Warren Jenson said its fourth quarter operating loss was at the high point and would come down throughout 2000. "We have reached a tipping point in the business," said CEO Jeff Bezos, who said "profits" or "profitability" more than once. Bezos cited six goals: boost customer count, pursue operational excellence, continue to expand, expand internationally, partner with other e-tailers, and "drive toward profitability in each and every business we're in".

Bezos said margins would improve substantially. "Our investment curve should be less steep and our time to profitability should be shorter," he said. "We expect overall losses to decrease."

Amazon received 73 percent of its fourth quarter sales from repeat orders and only spent $19 to acquire a new customer.

Jenson divided Amazon's businesses into groups. In the fourth quarter, operating losses for its retail business (books, music, toys etc.) were 20 percent of sales. A year from now, Jenson said operating losses would be 5 percent of sales, including any new retail stores. "In 2000, we will reap the benefits of scale," said Jenson, who said gross margins would approach 20 percent in the first quarter and could improve throughout the year. Gross margins in the fourth quarter fell to 13 percent from 19.8 percent in the third quarter.

The $676m in sales represents a 167 percent improvement from the year-ago quarter when it lost $22m, or 17 cents a share, on sales of $253m. Earlier this quarter, Amazon.com predicted it would record total sales roughly $650m.

In the quarter, its cumulative customer accounts grew by 3.8m to more than 16.9m.

Company officials credited strong electronics and auction sales for the top-line surprise. Officials said its book business was profitable, but didn't detail exact figures. Predictably, the company's fulfillment expenses were 16 percent of its total sales, up 10 percent from the year-ago quarter.

Jenson said he expected strong growth in 2000, but sales would slip sequentially in the first quarter. However, first quarter sales would be "up strongly year over year".

In December, the site's reached climbed to 25.6 percent and unique visitors jumped to 15.9m, according to Media Metrix.

Company officials said it was able to ship 99 percent of holiday orders, peaking with more than $16m in shipments in a single day. Sales per customer who purchased in 1999 were $116, up from $106 for 1998.

While US sales of books improved 66 percent to $317m from the year-ago period, those sales accounted for less than 50 percent of the company's total sales. Its music sales soared to $78m in the quarter, up 136 percent from the year-ago quarter. DVD and video sales were up more than 500 percent from the same time last year to more than $64m.

Its toy and children's product sales were $95m in the quarter, which looks impressive on its own but not so imposing considering eToys recorded sales of more than $107m in the same period.

Sales from its electronics, home improvement and auction services business checked in at roughly $51m in the quarter.

Amazon has had a busy month. First, the company's pre-announced sales of $650m for the quarter. After investors and some analysts panned the stock for its profit outlook, Amazon detailed a barrage of strategic pacts that led many analysts to change their tune about the stock.

The company first inked a broad pact with Drugstore.com and Greenlight.com. Last week, it said it was laying off 150 employees. On Monday, Amazon said it bought a stake in Audible in a deal where Audible will give the online retailer $30m over three years. One day later, Amazon bought a stake in Living.com in exchange for promotion.

Twenty-one of the 30 analysts tracking the stock maintain either a "buy" or "strong buy" recommendation. First Call consensus expects Amazon.com to lose $1.16 a share in fiscal 2000.

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