The Day Ahead: Mulling Amazon's sales, VerticalNet questions

Amazon.com: When good news is really bad news
Written by Larry Dignan, Contributor

Commentary: When is a positive preannouncement really a sales miss? That's what a lot of folks will be asking as they dissect Amazon.com's sales forecast today.

After the bell Monday, Amazon.com said its fourth quarter sales would be in line with estimates and top $960m with losses on target. Good news, right? Not so fast.

Amazon left itself with a nice hedge -- sales are "expected to exceed $960m", the company said. But Wall Street had estimated sales of $1.05bn, according to earnings tracking firm First Call. Technically, the range was between $950m and $1.05bn with an optimistic figure of $1.1bn.

No matter how you slice it, Amazon is coming in at the low end of sales expectations. It would be perfectly reasonable to cut the e-tailer some slack because the economy is slowing, but investors may not go for it. To some folks Amazon's preannouncement will be the equivalent of a sales warning.

Many analysts said Tuesday that Amazon fell short. Goldman Sachs analyst Anthony Noto cut the e-tailer from "market performer" to "trading buy". He cited growth concerns for 2001 and lowered sales estimates to $3.9bn from $4.11bn. Amazon was expected to put up fourth quarter sales of $1.5bn or so in 2001, according to First Call.

The bottom line is all that free shipping didn't juice Amazon's sales enough.

If Amazon had sales of more than $1bn, it's likely that it would have said so. The other figures tossed around by Amazon are also relatively meaningless without the full earnings report. Inventory was at $175m for the quarter, and losses will be roughly in line with expectations. First Call is projecting a loss of 26 cents a share.

Shares of Amazon initially surged in afterhours trading, but quickly lost the early gains. That's a reasonable reaction given the good news/bad news nature of Amazon's preannouncement.

Don't leave your healthy scepticism at home -- ever. VerticalNet investors are learning that lesson after Joseph Galli left as chief executive of the B2B company only five months on the job. Just a few weeks ago, Galli was talking up VerticalNet's transition to be a software company.

As Galli was touting VerticalNet's future and its "elegant streamlined business model", he was interviewing for the chief executive job at Newell Rubbermaid.

It showed. I recently wrote a column about how VerticalNet was among the many companies redoing their business models to bolster their flagging share prices. Many folks emailed me and said I was missing the bigger picture -- the one that Galli was shoveling out to press and friendly Wall Street analysts.

After interviewing Galli last month, I couldn't help but be skeptical -- Galli's spin seemed half-hearted. The company sold off NECX, an electronics component exchange and VerticalNet's biggest revenue driver, and suffered from a big case of Ariba and Commerce One envy. VerticalNet was reaching in its quest to be a software provider and Galli knew it.

That's why Galli, who landed a hefty hiring bonus from VerticalNet, ran to Newell Rubbermaid. "What excites me most about working for Newell Rubbermaid is the opportunity to return to my roots in the durable goods industry," he said in a statement. Galli said VerticalNet continued to have great potential. Then why leave?

Galli's departure isn't the end of VerticalNet, but it does raise a bunch of questions. Here is a company that faced a big transition to become a software company, had a major development job at Converge, which bought NECX, and had to renew a bunch of storefronts in April amid a slowing advertising market. Meanwhile, a pending acquisition with SierraCities is on the ropes because of VerticalNet's weak stock price.

Galli obviously didn't think he had the patience for the job -- or even that a turnaround was doable. So what did Galli accomplish in his five months? Not much. Galli's mandate was to cut costs and make VerticalNet profitable, but the Newell Rubbermaid job offer and a never-ending parade of crises distracted him.

Although Galli's departure rattled VerticalNet shares, the company may be better off without him.

Michael Hagan, chief operating officer and cofounder at VerticalNet, will take over as chief executive. This move isn't bad news. Hagan knows the company, knows the customers and knows the operations. We really couldn't say that about Galli.

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