Updated from April 24

The stock market's reaction to

Amazon.com's

(AMZN) - Get Report

first-quarter results was one of guarded euphoria. The Wall Street analyst community's reaction was less unanimous.

Amazon's shares were up about 11% to $27.90 on Instinet after the company said it lost $10.1 million, or 3 cents a share, on $1.08 billion in revenue in the quarter. In the year-ago quarter, Amazon lost $23.2 million, or 6 cents a share, on $847.4 million in revenue.

Excluding charges such as an adjustment to its euro-denominated debt and stock-based compensation, the company would have earned $40.3 million, or 10 cents a share. That was an improvement from the company's pro forma loss of $4.8 million, or 1 cent a share, in the year-ago period.

Wall Street analysts were expecting Amazon to earn 4 cents a share in the first quarter, excluding charges, on $1.05 billion in sales, according to Thomson Financial/First Call. The company projected in January that it would earn between 1 cent and 5 cents a share on revenue of $1.025 to $1.075 billion on this basis.

Although Amazon's pro forma numbers exclude the effect that currency fluctuations had on its euro-denominated debt, they include the benefit the company received from their effect on its international revenue and earnings. Taking out this exchange rate benefit, Amazon's pro forma income would have been about $35.3 million, or 9 cents a share.

In Friday morning research notes, J.P. Morgan maintained its underweight rating on the stock, saying the weak economy was likely to make top-line growth difficult. It said the current price is too high given existing risks.

Specifically, J.P. Morgan said, Amazon has limited potential for higher revenue in an increasingly competitive market, and is too leveraged to weak consumer spending.

Elsewhere, CSFB set a price target of $26 for the shares (slightly below their premarket quote) and raised its full-year earnings estimate to 42 cents, although it maintained a neutral rating. Deutsch Bank said the shares could go to $33, citing the potential for further margin expansion. It upped the 2003 EPS estimate to 45 cents, the 2003 estimate to 65 cents, and maintained its buy rating.

Higher Guidance

For the current quarter, the company projects that its sales will come in between $1 billion and $1.05 billion. The company expects to post operating income between $45 million and $60 million.

Amazon projected that it will post full-year operating income of at least $275 million on sales of $4.7 billion or more. The revenue guidance was up from the company's previous estimates. Earlier this year, the company estimated that it would earn 27 cents a share on a pro forma basis on $4.52 billion in sales.

Citing the unpredictability of foreign-exchange rates and its stock price -- which affects the value of some of its stock-based compensation -- the company declined to give bottom-line guidance for the second quarter or the year.

Cash Flow Falls

Despite the improved bottom line, the company posted a big cash flow decline as it paid off some of its vendors. The company consumed $251.8 million in operating cash in the quarter.

The company's free cash flow, which includes its operating cash flow and its purchases of fixed assets, declined $258.2 million. Meanwhile, the company's accounts payable shrank from $618.1 million at the end of last year to $393.7 million at the end of the just-completed quarter.

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Amazon said it would pay off some other outstanding liabilities as well. This May, the company plans to redeem a set of notes it originally sold in 1998. Amazon plans to pay $277 million for the notes, which includes a 5% premium over their $264 million principal amount.

Even after the note retirement, the company will still have some $2 billion in long-term debt. Amazon closed the quarter with about $1.08 billion in cash and marketable securities.

Overseas Strength

In the quarter, the company benefited from strong international sales. Sales through the company's sites serving the United Kingdom, Germany, France and other countries grew by 68% in the quarter to $378.8 million. Overseas sales now represent about 35% of Amazon's revenue.

The company's international results also contributed to Amazon's bottom line. The international sites posted an operating income of $15.8 million in the quarter, compared with a $10.8 million operating loss in the year-ago period.

But much of the growth in international sales was a result of currency fluctuations. Excluding the benefit from exchange rates, Amazon's international sales would have grown 45% over the same quarter last year, or $51 million less than reported. The currency benefit added about $4 million to the international segment's operating income, or about a penny a share.

Meanwhile, Amazon saw considerably slower sales through its North American sites, which serve the United States and Canada. Amazon's North American sales grew 13% in the quarter. Meanwhile, operating income for its North American business grew 45.8% to $51.7 million.

Amazon attributed its sales growth in the quarter to its free shipping program. Earlier this year, the company announced that it would make permanent a promotion that offers free shipping on most orders totaling more than $25.

That promotion has proved costly to Amazon and the company expects to lose money on shipping this year. In the just completed quarter, Amazon's shipping revenues fell $11 million to $78 million. The company's loss on shipping services was $27 million, up from $1 million in the year ago period.

Margin Squeezed

The shipping losses helped sink the company gross margins as a percentage of sales in the quarter. Gross margin measures the difference between what a retailer charges for its goods and services and what it pays for them. In the quarter, Amazon posted a gross profit margin of 25%, which was down 1.4 percentage points from the year-ago period.

Amazon officials have argued that the free shipping promotion and its widespread discounts on products are more effective as marketing than traditional advertising efforts. In line with that thinking, the company narrowed its marketing spending.

In the quarter, Amazon spent $28.2 million, or 2.6% of sales, on marketing. In the first quarter last year, Amazon spent $32.2 million, or 3.8% of sales, on such expenses.

Some of the company's other operating expenses also declined as a portion of sales. Fulfillment expenses declined by 1 percentage point to 9.6% of sales. That performance marked the first time that such costs have come in at less than 10% of sales in a quarter other than the fourth quarter, company officials said.

Meanwhile, the company spent $50.1 million, or 4.6% of sales, on technology and content costs. That was down from $55.5 million, or 6.5% of sales, in the same period a year ago.

The company's euro-denominated debt and stock-based compensation helped to sink its earnings in the quarter. The company reassesses the value of its euro-based debt every quarter depending on changes in the currency rates. A weaker dollar meant that Amazon's euro-debt appreciated by $21.8 million in the quarter, which detracted from its earnings.

Amazon's stock price also rose in the quarter, meaning the value of the stock-based compensation appreciated as well. A charge related to that appreciation cost the company $21 million in the quarter. Meanwhile, the company awarded $6 million worth of restricted stock in the quarter.

Amazon said last year that it would begin expensing stock options awards at their fair market value beginning this year. In making that change, the company said it would look at other options for stock-based compensation, including restricted stock grants.

The e-tail leader changed the way it segments its revenue and earnings the quarter. Although the company continues to provide sales and operating income for its North American and international operations, the company is no longer providing bottom line information for its various stores and services.

So, while the company said that sales in its North American electronics and other non-media stores grew by 32% in the quarter, company officials declined to say whether its electronics business posted a profit in the quarter. Amazon's non-media stores had posted non-stop losses since the company launched them.