The Day Ahead: Amazon.com's march to profits still hazy

Amazon.com cleared every hurdle it had to: First quarter loss, revenue, gross margins and customer accounts all topped Wall Street estimates.

But if you were trying to guess when Amazon.com will be profitable keep on guessing. Amazon's first quarter results made it clear that the company won't be pinned down. Amazon execs, however, did dangle enough vague statements to keep you hanging on.

Exhibit one:

"We believe that over the next three quarters combined, Amazon.com will be operating cash flow positive -- enough, we expect, to more than cover our planned capital expenditures," said CFO Warren Jenson.

What does that cash flow positive part mean exactly? Technically, it means Amazon will be able to fund itself without running back to the market. The rest is purposely vague. Will Amazon be cash flow positive in the second, third and fourth quarters? Just the fourth quarter to compensate for the previous two? The third and fourth? No one knows. "You read it right," said Jeetil Patel, an analyst with DT Alex Brown. "It's pretty unclear."

Exhibit two:

"We expect our US Books, Music and DVD/Video segment to be profitable on a pro forma operating basis for the full year 2000," said Jenson.

What about the first quarter? How much of a profit is there? A full year is one thing, the second quarter is another.

In the fourth quarter, Amazon made a point of saying its book business was profitable. In the first quarter, there wasn't any such proclamation. When pinned down on an analyst conference call, Jenson did add that Amazon's book business was profitable in the first quarter. His reluctance raises another question -- just how profitable was the book business?

Exhibit three:

Amazon made a subtle shift last night and started describing itself as a commerce platform. It even introduced a new phrase -- the Amazon Commerce Network (an expanding set of product and service offerings powered by partners). This shift has analysts excited -- you can actually make money.

These commerce network deals encompass Amazon's recent partnerships with Drugstore.com and HomeGrocer.com among others. Amazon uses these partnerships to boost margins because companies will pay top dollar for access to the e-tailer's 20 million customers.

The commerce network boosted profit margins to 22.3 percent, well above estimates of 19 percent. Many analysts have speculated that these portal-type deals will provide most of Amazon's future profits. Operating chief Joe Galli disputed that theory.

Galli said each general manager is responsible for driving profits for Amazon's various retail businesses. He also noted that high margin marketing deals won't be used as a profit crutch. "Retail is still our backbone," he said.

We'll see. Retail margins are weak and possibly weaker depending on how you count fulfillment costs. Meanwhile, fulfillment costs as a percentage of sales increased to 17 percent from 16 percent in the fourth quarter. And, don't forget that average spending per customer was below expectations at $28 (£17.80). That marketing crutch may not be such a bad thing.

Exhibit four:

Amazon seems to make progress on expenses, but always has something else to blow big bucks on. This time it's international expansion. Overseas growth is where it's at, said CEO Jeff Bezos.

Amazon won't be spending on distribution centers this year and should be able to meet Christmas demand with less headcount and more efficient processes. But Amazon will still spend heavily to grow overseas.

The bottom line -- the real one, not the one Wall Street tracks -- is a loss of $308m, including all the bad stuff. That's a huge loss on sales of $574m. Amazon a few quarters ago hinted at profits in late 2001. We haven't heard anything since.

One analyst projects a profit in 2002, but that's merely a guess. Other optimists predict a profit in 2001 as long as Amazon keeps growing sales.

"They have taken a step in the right direction," said Patel. "But profits are still a ways away." Patel rates Amazon a "market perform" and isn't sure what it would take to boost the company to a "buy." He was awaiting more "guidance" from the company.

Frankly, so are we.

VerticalNet’s strong quarter,

What does VerticalNet have to do to get a little respect? Try boosting revenue by 1,320 percent.

VerticalNet, a business-to-business e-commerce company, posted a much smaller than expected loss in its fiscal first quarter as sales ballooned to $27.5m, compared to $10.1m in the fourth quarter and $1.9m a year ago.

Sure, VerticalNet’s growth is attributed to an acquisition, but the sales growth is just the beginning. You may recall a not-so-little deal with Microsoft recently closed. The first quarter didn't include any revenue from that partnership. VerticalNet's storefronts will grow exponentially courtesy of the Microsoft deal.

If B2B stocks boom again, VerticalNet may be in front of the pack. The company also has $208m in cash. In a recent interview with ZDII, CEO Mark Walsh said the company will be profitable in the third quarter of 2001.

Given the first quarter growth, maybe that profit timetable will be pushed up a bit.

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