Glenn, did you see this? Your not the only person who has questions about Amzn's accounting.
>12/18/00 11:03 AM ET
Forget profitability for the time being. All analysts want for Christmas from Amazon.com (AMZN:Nasdaq - news) are more financial details and less PR spin.
While it's undeniably a huge hit with Web-surfing consumers, the company is one of the most controversial on the Street. Analyst ratings run the gamut from strong buy to sell, and you can scrounge up investors who think the thing is going to be bigger than Wal-Mart (WMT:NYSE - news) or a flameout on the scale of Boston Chicken. On the heels of eToys' (DCLK:Nasdaq - news) latest setback, Amazon dropped 14% Monday morning to $19.69, leaving it some 80% off its 52-week high of $106.63.
The controversy continues: On Thursday, Tim Albright of Salomon Smith Barney raised his fourth-quarter revenue estimates and narrowed his per-share loss estimates, calling the company the "light in the troubled consumer commerce sector." (He rates Amazon a buy.) A day earlier, Sanford Bernstein's Faye Landes, who gives the stock her lowest rating of underperform, said focus groups showed that while Amazon is perceived as an expert in books, music and video, it "lacks authority" in other categories. (Neither firm has done underwriting for Amazon.)
In part, the controversy comes because people feel Amazon doesn't provide enough details about its finances -- particularly when those details don't confirm its own cozy investing bedtime story. It issued a press release when its Holiday Delight-O-Meter, which tracks the number of items sold this holiday season, hit 25 million. But by the company's own admission, this number is meaningless when it comes to actually tracking sales figures. There's similar criticism about other pro forma figures that aren't calculated through generally acceptable accounting principals -- such as talking about "revenue per active user" without defining exactly what an active user is. Meantime, Amazon didn't issue a press release when it parted ways with ad agency FCB San Francisco.
The Greatest Degree of Certainty
"Providing more advertising is not the same as providing information," says Gary Lutin, an investment banker at advisory firm Lutin & Co. and a co-sponsor of an ongoing New York Society of Security Analysts' Committee for Corporate Governance workshop on Amazon. "Partial information is neither adequate nor appropriate."
Tim Halladay, Amazon's director of investor relations, says the company's disclosure policies are more than adequate, and that they go well beyond what other companies report.
There is certainly a demand for information on cash flow and sales detail, however, as evidenced by the NYSSA's workshop. "We picked them because there's clear controversy about the information, which makes it a better demonstration case," says Lutin. "And they have a reputation for running a good business."
Amazon wouldn't make available a representative to answer the group's questions in person, though it participated in earlier meetings.
What'd Be the Harm?
So the workshop collected information requests and submitted them to the company in writing. Based on those, and conversations with other analysts and investors, here's an abbreviated holiday wish list of information:
More detail on sales. The NYSSA workshop asked Amazon to break out revenue from any other sources other than direct sales to consumers -- stuff like advertising revenue and commissions from its auction operations. Analysts want to know exactly how much of Amazon's sales come from actually selling stuff like books and CD players -- their core businesses -- and not sidelines.
More information on Amazon's investments in other companies, such as its partners in the Amazon Commerce Network. Though the details may vary, a typical partnership agreement involves sales through a co-branded spot on Amazon's site in exchange for payment -- in the form of cash or equity. Examples include drugstore.com (DSCM:Nasdaq - news) and Kozmo.com. The NYSSA asked Amazon to break out details of revenue from those partnerships that comes in the form of stock instead of cash. That's important if, as in the case of Drugstore.com and other e-tailers, the stock drops precipitously.
They also want specific details about any agreements linking sales to equity investments, or any other arrangements that "might be considered 'related party transactions.'" (In its last quarterly earnings report, Amazon disclosed that the Securities and Exchange Commission was conducting an inquiry into how it treated and accounted for investments in some of its Amazon Commerce Network partners.)
Again, this is important, on the revenue side, to see how much of sales comes from core areas and how much comes from payments from partner companies, which may be at risk if they disappear or falter (as some have).
Better guidance on operating cash flow. While Amazon projected its cash position for the end of the fourth and first quarters, it would not comment on what its position would be later in the year, or how it would get there. This has led to speculation that the company will try to raise money in the first quarter. Cash position figures may sound reassuring -- Amazon has said it will have about $1 billion in cash and marketable securities at the end of the year and $700 million on March 31, 2001, the end of the first quarter -- but because those are only snapshots in time, they don't really say much about the company's cash needs during the year.
On the Oct. 24 third-quarter conference call with investors and analysts, Amazon would not discuss its cash position later in the year, saying only that it expects "strong free cash flow" in the final three quarters of the year.
The lowdown on marketable securities. The NYSSA asked Amazon for the original costs and book values of its investments in marketable securities. This information changes rapidly if the marketable securities portion declines, though -- as it has with many investments, like Webvan (WBVN:Nasdaq - news), in which Amazon holds a 6.3% stake. On Sept. 30, the end of the third quarter, Webvan shares were at $2.31; they now trade at 50 cents.
Amazon responded to most of the group's questions by referring to quarterly and annual documents it previously filed with the SEC. Lutin says there was nothing new learned from the company's responses.
Interested?
Amazon's Halladay says the company provides more than adequate information to investors. "Most public companies do not include their cash flow as part of a normal earnings release," he says. "We do. And we make sure our 10-Q is filed well before the deadline, which is very rare." Lutin says Amazon isn't skimping on all information -- just the stuff that puts the company in a bad light. He says Amazon could easily justify releasing only the data required by accounting authorities, but the company goes beyond that by offering only statistics that favor its story.
Of course, there's nothing illegal about that, and no one is accusing Amazon of not adhering to generally accepted accounting principles. And other companies use many of the same practices -- Yahoo! (YHOO:Nasdaq - news), for example, does not break out revenue from commerce and revenue from advertising. Criticism of Amazon boils down to excessive spin control. "They're trying to convince people of the vision as they see it," says Lutin.
They surely believe in that vision, and so do many investors. But without a clear road map to profitability, and with analysts and investors uneasy about the data they're getting, Amazon will find itself facing more questions |
