Scent of Charred Greenbacks Wafts Over Amazon.com

Updated from 6:32 p.m. EDT

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Amazon.com (AMZN Quote) shares tanked 20% this morning after the company's financial forecasts suggested it is burning cash faster than planned.

After the closing bell Monday, Amazon matched Wall Street's second-quarter financial targets and set a $100 million stock sale to AOL Time Warner (AOL Quote). But the online bookseller also slashed second-half growth targets. In morning trading, Amazon was off $3.21 to $12.78.

For its second quarter ended June 30, Amazon lost $58 million, or 16 cents a share, on a pro forma basis, excluding various expenses. That was narrower than the 22 cents expected by analysts surveyed by Thomson Financial/First Call and better than the year-ago loss of $116 million, or 33 cents a share.

Revenue rose 16% to $668 million, from $578 million a year ago. The latest-quarter number was about $10 million short of the analyst estimate.

Bottom Lining Amazon's focus shifts to profits

Source: Amazon.

Amazon agreed to sell $100 million of its stock to AOL at up to $15.28 a share, which represents a 10% discount to Amazon's Friday close. The companies said AOL will buy the shares at the lower of that price or Amazon stock's average price on the trading days Tuesday through next Monday.

"It would appear that AOL secured a fairly valuable strategic position at a very good price," says Gary Lutin, a New York investment banker who hosted a series of forums on Amazon's finances for the New York Society of Security Analysts over the last year.

Amazon also cut third-quarter and second-half revenue expectations to a 10%-20% rise over a year ago, from the previous 20%-30% growth guidance. The company said third-quarter revenue would amount to $625 million-$675 million, far short of the $732 million Wall Street estimate.

Despite the lowered guidance, Amazon reiterated its goal of breaking even for the first time, on a limited basis, by the fourth quarter of 2001.

"We, like everyone else, are in a period of economic softness," said Warren Jenson, Amazon's chief financial officer, in a conference call. "The good news is that we are in a position to deliver on the bottom line."

That said, the company appears to be burning cash faster than expected, possibly reviving the debate on Wall Street over the health of its balance sheet. Amazon said it expects to have $600 million in cash on hand by the end of the third quarter and $900 million by the end of the year. Notably, these were the same amounts the company targeted before the $100 million cash infusion from AOL.

The quarter was clearly a mixed one for the company, and reflects Amazon's focus on becoming profitable rather than boosting sales. For example, the performance of the U.S. books, music and video division -- the company's largest and most profitable business segment -- is likely to disappoint analysts and investors. In the quarter, revenue increased just 1% from a year ago, even worse than the paltry 2% jump in the first quarter. Yet the division is clearly becoming more efficient: Gross profits improved by 28% from a year ago.

Amazon emphasized its relatively new business of selling used goods, which puts the company in direct competition with online auctioneer eBay's (EBAY Quote) fixed-price site Half.com. In the quarter, 10% of total U.S. orders were for used products.

The company declined to say how much it expects the segment to grow, but said new and used goods provide similar profit margins.

"We are largely indifferent to the sale of a new item vs. a used one," said Jenson.