On Topic <G>: Barrons says Amazon's forecast of profitability this year for book division may not include SG&A expense
Guarded Kudos, of Sorts, for Amazon.com
By Mark Veverka (Barrons 2/7/00)
"Kudos to Amazon.com for finally putting more meat on the bone. We,
among others, have been badgering the Seattle e-commerce concern to break
out more detailed financial data on a consistent basis in which to better
monitor the progress of its incomparable business model.
Last week, Amazon.com took a number of steps in that direction during
release of its fourth-quarter results, including more revealing accounts of its
vaunted customer base.
Amazon quietly told investors that customers now total nearly 17 million, but
they also said that only 14.1 million did business with them over the past 12
months.
The good news for shareholders is that finally there will be more accurate
means to track customer-related metrics. After all, as Chief Executive Jeff
Bezos is wont to say, Amazon is not an e-tailer but a customer company.
Thus, new-age fundamentals such as revenue-per-customer are critical to the
premise of Amazon's build-out-before-profits growth model.
"Reporting data that will let analysts track the true performance of the
customer base [is] a major step forward," attests Eric Von der Porten of
Leeward Investments, a hedge fund in San Carlos, California. The
troublesome news is that Amazon is losing about 21% of its customers on an
annual basis. Considering that the company consistently touts total customer
growth, including inactive customers, isn't that a tad misleading?
Amazon may have finally opted to reveal active customer figures to show that
its customers will eventually spend more on the site instead of less. To justify
its massive spending campaign to build out global operations, Amazon
contends its customers will cross categories, say from books to toys, to buy
more stuff.
We have been arguing that Amazon's business model wasn't working because
its average revenue-per-customer was actually declining. For the business
model to work, that trend must be reversed. Analysts, including Merrill
Lynch's Henry Blodget, are on record saying the same thing.
Well, Amazon reports that revenues-per-customer are trending upward,
which is positive for the company. Trouble is, it had to change the way the
metric was calculated to arrive at the favorable conclusion. Amazon reported
that revenues-per-active customer for the 12 months ended December 31
were $116, up about 9.4% from 1998's $106.
If this number continues to grow, it means at the bare minimum that the
business model is going in the right direction. We applaud the company for
making these data available to investors so, going forward, this important
measurement can be followed more accurately.
Still, numerous dark clouds are on the horizon. Management's declarations
that Amazon's book business climbed into the black grabbed all of the
headlines, but the company had been broadcasting that news for months.
What's more, skeptics with sharp pencils are challenging that assertion,
claiming that Amazon isn't accounting for SG&A costs when calculating the
profitability of the book-selling operations.
In addition, management forecast that it should be able to increase profit
margins to as much as 20% by yearend. That's after reporting bleak margins
of 13% for the fourth quarter, down from 21% during the same holiday
quarter in 1998. (For more on Amazon's fourth-quarter report, see article.)
It's no secret how Amazon expects to achieve this. The company has
announced a spate of partnership deals with other Websites, such as
Drugstore.com, Audible.com and Living.com, which have agreed to pay
Amazon more than $100 million over the next few years. Where will these
nascent dot.coms get the dough? From none other than Amazon. In what
appear to be quid pro quo deals, Amazon buys equity in these companies
only to have them pay fees in return that drop to Amazon's bottom line.
What happens if these businesses fail to meet their obligations or their stock
becomes worthless? Some skeptical hedge-fund managers consider such
"monetization of traffic" practices -- as Amazon is calling them -- somewhat
reminiscent of another go-go retailer, the now bankrupt Boston Chicken.
To their credit, Bezos and Chief Financial Officer Warren Jenson conducted a
much tighter and more informative conference call last week than they did
during the previous quarter, when they whipsawed analysts with news about
ever-expanding losses.
This time around, the analysts were so effusive in their praise that it was easy
to catch the scent of future banking business in the air. There have been
rumblings that Amazon needs to go back to the public markets to raise more
cash, which has dwindled to around $700 million. So despite the warning
signs, the sell-siders were pumping out fawning research notes faster than you
could click a mouse."
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[bold added for emphasis--SC] |
