Journeying Through the Rainforest That Is Amazon

Updated from 4:41 p.m. EDT:

Citing strong growth in its international and electronics businesses, online retailer Amazon.com (AMZN Quote) Tuesday topped Wall Street earnings estimates for the first quarter. But the bookseller continued to burn cash and failed to satisfy analysts in explaining exactly how it is improving profitability.

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The Seattle-based company said it lost 21 cents a share on revenue of $700 million, compared with a loss of 35 cents a share on revenue of $574 million in the same quarter last year. Analysts predicted a 24-cent loss on $674 million in revenue, according to Thomson Financial/First Call.

In its drive to boost profit margins and turn profitable toward the end of the year, Amazon took restructuring charges of $114 million during the quarter and expects to take additional restructuring and other charges exceeding $50 million during the second quarter. Those charges cover costs associated with the 1,300 layoffs Amazon set earlier this year, among other things.

Shares closed Tuesday at $15.68, down 52 cents, and rose 14 cents in after-hours action on Island after the release.

Cost Management

In a conference call Tuesday evening, the company showed it was making progress on the cost front. Amazon's chief financial officer, Warren Jenson, attributed improving margins to better inventory management. In the consumer electronics arena, Jenson said the company would seek to buy direct from more manufacturers, and thus be able buy at the lowest possible price. With its consumer electronics business growing, buying direct from manufacturers is key for the company to lower its margins and become profitable.

One analyst praises the rise in gross margins, but says she will seek out more specific information from the company about exactly how it is reducing costs.

"We certainly got more detail than before," says Holly Gustafson, an analyst at Legg Mason Wood Walker. "But I would like a little more detail on what is going on with the gross margins." (Gustafson has a buy rating on Amazon, and her firm does not have an underwriting relationship with the company.)

Meanwhile, Amazon continues to gobble up cash to run its core operations. Operating cash flow showed a deficit of $407 million in the first quarter, 27% larger than the $320 million shortfall in the year-ago period. By comparison, first-quarter sales were 22% above the year-earlier number. And as a percentage of sales, the cash flow from operations loss also increased -- to 58% from 56%.

The accounts payable number of $257 million in the first quarter was marginally higher than the year-ago's $256 million, which, at first blush, appears to suggest that any move by vendors to curtail trade financing has yet to cause a big squeeze on Amazon's cash flows. However, the $257 million number was well below the $308 million expected by Merrill Lynch's Henry Blodget -- and the higher that figure at quarter-end, the better for Amazon's cash flows. In fact, the first quarter's $230 million decline in accounts payable -- a use of cash -- was much larger than the year ago's $207 million drop.

Big Plans

As expected, the company reiterated its plans to turn a profit on a limited basis by the fourth quarter of 2001, a goal that has been overshadowed in recent months by a sometimes colorful debate on Wall Street over whether the company will have enough money to pay its bills as it strives toward profitability. The company says it will have plenty of cash and marketable securities -- about $640 million worth at the end of the first quarter -- but some analysts say the company could face a creditor squeeze in the second half of the year should its working capital turn negative.

That consensus earnings estimates were lower than the company's recent guidance underscores the lack of credibility Amazon has with many on Wall Street, due to its penchant for spinning the news harder than the Clinton White House.

An extension of this is an ongoing debate about how the company reports its finances. Gary Lutin, a New York investment banker who has organized a series of forums on Amazon hosted by the New York Society of Securities Analysts, will hold two more public meetings, on April 26 and May 10, prior to the company's annual meeting. The aim of these meetings is to devise a set of questions to pose at candidates for Amazon's board of directors.

Amazon is clearly trying to assuage investor concerns over the amount and quality of information it reports. At the opening of the conference call, the company's investor relations chief, Tim Halladay, highlighted a new feature in Amazon's earnings releases: reconciling GAAP results to pro forma results, which exclude some costs of doing business. "We continue to increase the amount of information released," he said. In addition, the company broke out its domestic electronics, kitchen and tools business, a move likely to please analysts. Formerly, this category was lumped with its e-commerce services division under the rubric of emerging businesses.