Bezos Says Amazon.com Will Turn 'Pro Forma Operating' Profit by Fourth Quarter, 2001
04/01 12:27 PM (PR)
Story 0038 (AMZN)
CEO Says He Isn't Seeking Merger or Buyer for Company
NEW YORK, April 1 /PRNewswire/ -- Amazon.com CEO Jeff Bezos tells Newsweek the company will turn what he calls "pro forma operating" profit by the fourth quarter of this year and he wants to assure his 30 million customers that he's not running out of money. "The stock is not the business," he tells Newsweek in the April 9 issue. "The business is in better shape than it has ever been," he adds, claiming that profit will come simply by better execution.
(Photo: newscom.com )
Even though Amazon.com takes in almost $3 billion a year and is ranked among the 50 top brands in the world, after six years the company is deep in debt and still burning dollars, and with the stock market tanking, the share price has taken a beating. Bezos now says profitability "is the right thing to do" and he tells Technology Correspondents Steven Levy and Brad Stone that, while the company is actively seeking partnerships, even if no other partners emerge, "we'll be fine." He also says he isn't looking for a merger or a buy-out by an Old Economy company.
But, Wall Street Editor Allan Sloan crunches Amazon's numbers and writes in the current issue (on newsstands Monday, April 2) that the company's road to profitability may not be so easy. "By my math, which Amazon doesn't seriously dispute, it ran through $350 million to $400 million of cash last year. If you assume Amazon continues to bleed cash at a $400 million annual rate, I give Amazon about 18 months before its cash on hand dwindles to levels low enough to make its suppliers restive. Amazon says my $400 million burn rate is way high," he writes.
Sloan says Amazon shouldn't have become a public company before it had a profitable business and it shouldn't have expanded into a "hodgepodge" of new businesses simply because "the buzz phrase in 1999 was 'top-line growth.' That means increasing sales -- but not necessarily making profits." Sloan predicts that Amazon will survive, but not in its current form.
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Allan Sloan
An Amazonian Survival Strategy The E-tailer is Long
on Web Savvy, Short on Profits. The World is Full of
Companies with the Opposite Problem. Will the Two Tango?
Amazon.com is not only a new economy company, but it's also a New English and New Math company. A place where words and numbers have, shall we say, unconventional meanings. Before we get into that, we have to understand the two hard truths that are at the heart of Amazon's problems. First, like most Internet outfits, Amazon shouldn't have become a public company before it had a profitable business. Second, though the company denies it vigorously, I think it over-expanded into a hodgepodge of new businesses ranging from lawn furniture to faucets because the buzz phrase in 1999 was "top-line growth." That means increasing sales -- but not necessarily making profits. Amazon wanted to grow, the money was there, Amazon took it. Things got out of control, leading to last year's $1.4 billion loss. Now that the Internet bubble has burst and "profitability" is the buzzword, Amazon is giving the customers what they want. Which brings us back to Amazon's New Math and New English.
Amazon, sporting a reassuring Jeff Bezos grin, says that it expects "pro forma operating profitability" in the fourth quarter of this year. A normal person would think this means the company will show a fourth-quarter profit. Wrongo. Ask Bezos for a definition, and you discover that pro forma operating profitability means Amazon will show a profit if you don't count certain expenses, including the interest on its $2 billion debt. "It's a first, very, very first step toward net profitability," Bezos says. (I assume he's talking in the accounting sense, but I forgot to ask.) In other words, Amazon won't be taking in more money than it spends. And it's not clear when, if ever, it will do that. This is not unlike the pitch Bezos used to make in 1997, when Amazon was selling stock to the public for the first time. He said the company would be showing profits if it weren't for expenses it rang up by expanding. True. But if Amazon hadn't been expanding, no one would have wanted to buy stock in it.
The real key to Amazon's survival and possible prosperity is staying power. To wit: can it stay afloat long enough to find a business that will make it solidly profitable? Remember that America Online (now AOL Time Warner) used to scramble around like mad, hemorrhaging cash while it searched for profitability, and finally stumbled onto the business of selling advertisers access to its customers. By my math, which Amazon doesn't seriously dispute, it ran through $350 million to $400 million of cash last year. (Much of its $1.4 billion loss consisted of noncash items, such as writing off investments and an accounting item known as good will.) If you assume Amazon continues to bleed cash at a $400 million annual rate, I give Amazon about 18 months before its cash on hand dwindles to levels low enough to makes its suppliers restive. Amazon says my $400 million burn rate is way high. The company had $1.1 billion of cash at year-end, but some of that went to pay Christmas merchandise bills. The now famous Ravi Suria, a bond analyst whose gloomy reports pummeled Amazon's stock, says Amazon could be out of business by year-end. Who knows? "We're in a put-up-or-shut-up market," says Warren Jenson, Amazon's chief financial officer. "If we can deliver, we'll come out of this stronger than ever."
The fact that we have to guess at Amazon's cash flow is a symptom of its New Math problem. With most companies you can tell. With Amazon, despite the tons of statistics it disgorges, you have to guess. "The best and brightest analysts on Wall Street couldn't figure out what (Amazon's) cash flow was," says Gary Lutin, who runs a series of special New York Society of Securities Analysts panels that have attempted to decode Amazon's numbers. (Jenson, who says Amazon's numbers are perfectly clear, says that the company may add information making its cash flow easier to track.)
Regardless of who's counting what, Amazon has a $2.1 billion problem. That's how much it borrowed during its heyday. Selling stock to raise that money would have hurt Amazon's share price -- but it would sure look good now, eliminating the $125 million annual interest tab. That $125 million nut makes it hard for Amazon to pare back to its core businesses of books, videos and music, its easiest shot at (conventional) profitability. It could swap new shares for its bonds, but that would dilute the stock.
My prediction: Amazon will survive, but not in its current form. Either it will pull a Netscape, which sold out to AOL, or else its main business will become running Web operations for other firms. Amazon is great at Web presence and savvy, crummy at making money. The world is full of companies that are great at profits, crummy at Web presence. The logic is irresistible. I'm sorry to be so boring and logical. But even on the Internet, business logic will ultimately prevail.
Sloan is Newsweek's Wall Street editor. His e-mail address is sloan@panix.com.
/CONTACT: Rosanna Maietta of Newsweek, 212 -445 -4859/ 12:27 EDT |
