Amazon Disappoints

Baldwin Louie — Mon, 23 Jul 2001 18:00:00 -0400

UPDATE Online commerce giant Amazon.com posted a narrower-than-expected second-quarter loss Monday but disappointed investors by reporting revenues well below Wall Street analysts' forecasts.

The Seattle-based retailer posted a pro forma operating loss of 16 cents a share, compared with a per-share loss of 33 cents a year ago. The consensus analyst estimate called for a loss of 22 cents, according to Thomson Financial/First Call.

Amazon.com's revenue for the quarter totaled $668 million, better than the $578 million in sales recorded a year earlier but less than the $700 million that the company reported in the first quarter. The performance also was well below the lowest forecast from analysts, which called for $675 million in revenue.

Amazon has loudly stated that it would break even by the end of this year, and sales growth was widely viewed as its best chance of meeting that goal. The company also is burdened with $2 billion in long-term debt that has the Street worried.

The disappointing earnings report overshadowed an announcement earlier in the day that AOL Time Warner would take a $100 million equity stake in Amazon and expand a 4-year-old joint marketing agreement. The joint marketing pact calls for Amazon to promote AOL as its exclusive ISP and to set up a boutique selling the media conglomerate's services and products.

"We are providing our platform of functionality to a leading service provider," Amazon CEO Jeff Bezos said during a conference call after the earnings release. "The deal brings Amazon's industry-leading tools to the AOL brand."

Investors were clearly worried that Amazon's earnings would disappoint. During the regular session, Amazon shares fell 95 cents, or 5.6 percent, to $16.03. After the company released its earnings report, shares fell an additional 97 cents, or 6.05 percent, to $15.06 in the late session.

Analysts participating in the company's conference call after the earnings report expressed concern over the falloff in top-line revenue growth. CFO Warren Jensen stressed that the impact of slowing sales is being offset by cost-cutting and improved efficiency. He said that gross margins came in at a record 29.6 percent for the quarter and that the company has reduced its pro forma operating loss for six quarters in a row.

"We will continue to trade top-line growth for bottom-line improvements," Jensen said.

Still, analysts were apprehensive about the strategy. "How low can revenue go and still enable you to meet profitability?" said Jamie Kiggen, an analyst at Credit Suisse First Boston.

Analysts are also worried about a widely anticipated decline in consumer spending in the second half of the year, and the effect that stingier consumers could have on Amazon's revenues. Merrill Lynch analyst Henry Blodget asked whether the company is counting on an increase, decline or no change in consumer spending toward the end of the year.

"We are not going to go into the specifics for how consumer spending effects guidance," said Jensen. "But we are not counting on any level of economic recovery to meet guidance."

Amazon said that it expects an increase in revenue to between $625 million and $675 million in the third quarter and that it will hold pro forma losses at current levels. The company maintains that it is on track to break even on a pro forma basis in the fourth quarter. Pro forma calculations are based on assumptions about the company's business and exclude one-time charges.

The skepticism over earnings eclipsed the deal with AOL Time Warner. The media giant's purchase constitutes just more than 6.5 million shares at a price no higher than $15.28, according to documents filed with the Securities and Exchange Commission. AOL would become the fourth-largest shareholder in Amazon when the deal is completed.

John Doerr, an Amazon board member and a partner at the venture-capital firm Kleiner Perkins Caufield & Byers, said the deal is "a further validation of Amazon as a commerce platform."

Doerr added that while the money wasn't the driving force behind arrangement the deal, Amazon certainly didn't mind putting more cash in its coffers. "It never hurts to have an extra $100 million."

AOL TW has agreed to hold the shares for two years unless the companies terminate their agreement, according to the SEC filing. AOL TW also has agreed that it will not try to acquire more than 5 percent of Amazon's stock, nor would it "seek to commence a merger, asset sale, or other change of control transaction affecting [Amazon]," according to the filing.

The deal represents a new direction for the relationship between the two companies. AOL will be integrating Amazon's customer-friendly shopping tools, such as its reviews of products, its personal wish lists and its product ratings. "Amazon.com provides one of the best user experiences for shopping in the online world," said Barry Schuler, chairman and CEO of the AOL services unit.

Miguel Helft and Susan Orenstein contributed to this story.

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Amazon Disappoints