The Trials of Jeff Bezos - Company Financial Information

Industry Standard, The, April 23, 2001 by Miguel Helft

Walt Street has been asking the CEO of Amazon.com to deliver results. But even as Amazon's stock inches up, everyone's asking him for more.

AT THE TIME, IT SEEMED LIKE A BRILLIANT stroke: Amazon.com, the retailer that launched and led the e-commerce revolution, would promote other online retailers on its site in exchange for hefty fees. For CEO Jeff Bezos and his company, the payments would be nearly pure profit and could quickly turn around his money-losing operations. So beginning in late 1999, Amazon signed a string of such deals with the likes of Audible.com, Drugstore.com, Greenlight.com, Living.com and others. Wall Street analysts gushed and predicted that Amazon.com could bring in an extra $500 million over five years.

But those deals don't look so clever anymore. As it turns out, the "fees" Amazon collected often took the form of stock in enterprises that were highly speculative. One by one, Amazon affiliated startups collapsed, leaving some investors claiming they were duped. Even though Amazon disclosed partial details of the agreements in its regulatory filings, it now faces more than a dozen lawsuits from investors.

That's just one of the litany of headaches Bezos faces. Investors once reacted to his every announcement with enthusiasm. But for more than a year now, Wall Street has responded with nothing but skepticism, even scorn, as many of Amazon's efforts to calm investors with soothing spin and new initiatives fell flat. Even relatively positive news is coming up short. Last week's announcement of smaller-than-expected losses, followed by a new alliance with bookseller Borders and an upgrade on its debt by Moody's, may have given Amazon a boost but has not quieted increasingly vocal critics on Wall Street, who are calling on Bezos to do something dramatic to reverse the firm's fortunes.

Amazon consists of nearly 20 stores with about $2.8 billion in annual sales, but only books, music and videos generate operating profits. The others, such as toys, housewares and consumer electronics, as well as international operations, continue to lose money. And proforma operating profits for the entire business, which Amazon hopes to reach in the fourth quarter of this year, still exclude a lot of hefty bills, most notably interest on Amazon's $2 billion in debt.

Back at headquarters in Seattle, Bezos and his team say they are forging ahead on a steady course. But that course has been derailed. Tacitly acknowledging that it can't keep losing vats of money, the company has been scrambling to cut costs. Over the past few months, it has tried everything from improving efficiency to cutting staff to shuttering warehouses. It also has sought to reinvent itself with new alliances.

It all sounds a little desperate -- for good reason. These days, even Amazon's most reliable weapon, Bezos' disarming earnestness and goofy charisma, has lost its magic. After months of relative quiet, the affable, ever-smiling CEO has gone into a full-blown PR offensive. But even after a flurry of interviews with news organizations, Bezos hasn't been able to generate much positive coverage. He has lost his Teflon coating.

That new phenomenon was on full display last week, when it seemed Amazon's fortunes had finally turned. For the first time in months investors had reason to cheer: The company announced that its losses during the first quarter would be smaller than expected. Shares jumped an impressive 75 percent, albeit the rebound was from a 30-month low of $8.37. Amazon credited efficiency improvements for the healthier bottom line.

Yet several analysts and market watchers remain skeptical. Amazon's report, they note, was preliminary and lacked important details. The report did make some points starkly: Sales growth in its biggest and only profitable businesses -- books, music and video -- has stalled. Meanwhile, analysts charge that Amazon's fastest-growing business, consumer electronics, is not making money. Bezos does little to dispel that notion. [See sidebar, page 29.] "We love the economics" of the consumer electronics business, he insists. But when pressed on whether it makes money, Bezos replies: "We don't break it down to the category level."

It's that reluctance to disclose details that has stoked criticism. Despite assurances that it has plenty of cash to pay its bills, Amazon has sought to discredit former Lehman Brothers analyst Ravi Suria, who in February raised the specter of creditors squeezing the company. Several news reports suggest some of the retailer's suppliers are doing just that, a point Bezos vehemently denies.

But Amazon has failed to respond to repeated invitations from the New York Society of Securities Analysts to offer assurances that the company's financial house is in order. Recently, Amazon sought to buy Evite, a party-invitation Web site, and tried to close the deal in time for first-quarter reporting. Why? Partly to get the few million dollars Evite had left on its own balance sheet, according to people familiar with the matter. Ticketmaster eventually bought Evite, and Amazon executives decline to comment on the situation. What's more, many analysts are tired of what they call Amazon's creative math, charging that the company's pro-forma operating profits promised for the fourth quarter hide what will be significant net losses.