January 22, 2002 1:15 PM PST

Amazon posts its first net profit

In a fourth quarter marked by strong international sales and cost cutting, Amazon.com on Tuesday reported its first-ever net profit, on record sales, delivering on its promises to Wall Street.

Amazon reported net income of $5 million, or a penny a share, under generally accepted accounting principles, well ahead of analysts' expectations. Most analysts had predicted that the company would report a profit on a pro forma basis, which excludes a host of expenses and charges. Fourth-quarter sales were $1.12 billion, compared with $972 million a year ago.

"I think everyone was surprised," said Jeff Fieler, an analyst at Bear Stearns. "It was the 81 percent in international sales growth that drove (the revenue) surprise. The rest comes from a lot of different places, predominantly from the cost side. There's lower marketing costs, a big improvement on fulfillment--in absolute dollars, it dropped by $21 million year over year."

Amazon shares closed up 24 percent, gaining $2.44 to $12.60.

"We just ran things much more smoothly," Amazon CFO Warren Jenson said in a conference call with analysts.

Improvements in the company's operations will enable Amazon to cut prices and offer free shipping for orders above $99 while delivering results on the bottom line, said CEO Jeff Bezos.

"Broadly speaking there are two types of retailers: those who work hard to raise prices and those who work hard to lower prices," said Bezos. "Either model can be successful, but we've decided to pursue the second model."

For the Seattle-based company to post what some analysts would call a real profit under GAAP is quite a turnabout. Amazon had been blasted by accounting critics for being the poster child for pro forma accounting before it began reconciling its results to GAAP and providing investors a higher level of supplemental data.

Nevertheless, many analysts and investors had pooh-poohed Amazon's profits pledge because it excluded a host of items such as stock-based compensation, goodwill, restructuring charges and one-time gains.

Excluding those expenses, the e-tailer's pro forma profits topped estimates handily, reaching $35 million, or 9 cents a share. According to First Call, Amazon was expected to lose 7 cents a share, excluding goodwill, on sales of $1.01 billion.


Gartner analyst Charles Abrams says earnings of a penny a share aren't normally cause for celebration. But Amazon's first profit shows that not all e-tailers will share the same fate as Webvan and Peapod.

see commentary

In the fourth quarter a year ago, the company reported a net loss $545 million, or $1.53 a share, on sales of $972 million. For 2001, Amazon reported a net loss of $567 million, or $1.56 a share, on sales of $3.12 billion. The company ended 2001 with $996 million in cash and marketable securities on hand, compared with $1.1 billion in 2000.

Although analysts had expected Amazon to post a profit excluding certain items and expenses, most were waiting for the company's outlook to see if it could maintain profitability in subsequent periods.

For the current quarter, Amazon said that it expects to reach the break-even point at best or, at worst, to post a pro forma loss of $16 million. Sales are expected to be between $775 million and $825 million, or up 11 percent to 18 percent from a year ago.

Those projections are better than current First Call expectations. The company is seen to post a loss of 11 cents a share on sales of $747 million.

For the full year, Amazon said it is targeting sales growth of 10 percent or more with positive operating cash flow. Pro forma income for operations is expected to be $30 million or more.

International gains
Amazon's fourth-quarter results were propelled by gains in its international units. For the three months that ended Dec. 31, Amazon reported international sales of $262.4 million, up 81 percent from a year ago. Jensen added that Amazon's Germany and United Kingdom units were break even on cash flow.

Among other units, books, music and video remain Amazon's biggest sellers, ringing up revenue of $538 million in the fourth quarter, but sales growth was a mere 5 percent.

Electronics tools and kitchen sales were $216.6 million, down 2 percent from a year ago. Services sales were $98 million, up 3 percent.

Despite the company's upbeat quarter, growth for certain of Amazon's units may raise a few eyebrows among analysts who have been complaining that the e-tailer has sacrificed growth for profits.

"Forecasting 10 percent or more growth for 2002 is still a pretty low overall growth number," said Fieler.

The company credited improvements in productivity for its bottom-line gains. By many measures, Amazon has become more efficient. Annualized inventory turns improved to 25 in the fourth quarter, up from 18, while pro forma losses in the company's electronics, tools and kitchen unit fell 72 percent to $20 million. Amazon's international businesses also pared their losses while boosting sales.

The company's fulfillment, marketing, and technology and content expenses were lower in the fourth quarter compared with the year-earlier period. Amazon has shifted many of its systems to the Linux operating system and hasn't had to market as heavily since many rivals such as eToys have disappeared.

That cost cutting is enabling Amazon to pass along some savings to customers. Amazon said it will provide a new class of shipping dubbed "Super Saver Shipping," which will offer free delivery for orders over $99. With the new policy, the company is making a standard practice of its usual holiday-season promotion.

The shipping deal excludes several items: toys, video games, baby products, and items purchased through Amazon's Target and Circuit City partnerships. The savings may also come at a cost to speed: Amazon says that choosing the Super Saver Shipping may add three to five days to delivery times.

"We will continue to push productivity and pass it on to customers," said Bezos.

Bezos acknowledged that Amazon's new shipping policy will be expensive in the short run, but could bring in new customers.

"There could be a whole new pool of customers for Amazon if we can offer a new class of shipping," said Bezos. "Given our cost improvements, we believe this is a bet worth taking."

News.com's Margaret Kane contributed to this report.

 

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