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Wall Street Journal |
Internet-retail pioneer Amazon.com Inc. is feeling the pinch of stiffer online
competition. Higher marketing and technology expenses damped Amazon's
fourth-quarter profit, sending shares plunging.
Shares
of Amazon were down $6.13, or 15%, to $35.75 at
Amazon said net income rose nearly fivefold, to $346.7 million, or 82 cents a share, from $73.2 million, or 17 cents a share, a year earlier. The latest results included a $244 million gain from tax benefits, stemming from Amazon's heavy losses earlier in the decade.
Excluding the tax gain, stock-based compensation, and other expenses, the company said it would have posted profit of $149 million, or 35 cents a share, for the latest quarter. That is below the 40-cents-a-share average estimate of Wall Street analysts, accordibng to Thomson First Call.
Revenue rose 31% to $2.54 billion from $1.95 billion. That surpassed the $2.42 billion estimate of analysts and hit the high end of the company's own revenue forecast. Seattle-based Amazon said the falling value of the dollar boosted revenue by about $85 million. Without the currency impact, revenue would have increased 26%.
Analysts attributed the disappointing earnings to higher-than-expected operating costs, largely for marketing in an increasingly competitive online environment. Among other threats, traditional retailers have enhanced their Web sites to match Amazon features such as electronic gift certificates and free shipping for certain purchases. Other Internet pioneers are feeling similar pressures. Shares of online auctioneer eBay Inc. fell 19% last month after the company missed profit forecasts and offered a lukewarm financial forecast.
"Operating expenses have ramped up higher than the Street thought, than the company thought," said analyst Mark Mahaney of American Technology Research. "The question is whether Amazon is forced to spend more than they had thought because of competitive pressures."
Operating expenses, which include order fulfillment, technology and content
costs, rose 32% to $382 million. Marketing expenses grew to 2.3% of sales,
compared with 2.1% a year earlier, while technology and content costs rose to
2.9% of revenue, up from 2.7%. That sent 
Amazon's operating profits, as a percent of revenue, down to 7%
from 7.9%, Mr. Mahaney said.
The company had forecast that profit margins would rise in the fourth quarter while Wall Street analysts had expected margins to remain about the same, Mr. Mahaney said. "Margins are going in the wrong direction," he said. "That's the eye-opener."
Amazon said technology spending is increasing as it hires more software engineers and computer scientists for initiatives such as its A9.com Internet search engine, and improvements on its Web site. The company said it would boost investment to expand its international capacity this year.
Still, Amazon executives said they were pleased by the results. Chief Financial Officer Tom Szkutak said on a conference call that the company demonstrated "strong growth" and matched its own profit forecast.
Executives said they would continue offering marketing incentives. They introduced a new membership program called Amazon Prime, offering two-day shipping on an unlimited number of orders for a $79 annual fee. "We expect Amazon Prime to be expensive for Amazon.com in the short term," wrote Chief Executive Jeff Bezos in a letter to customers on the company's Web site yesterday.
Amazon expects to make about $175 million in capital expenditures this year, compared with $89 million in 2004. The company's 2005 capital expenditures will exceed the total for the last three years combined, said analyst Safa Rashtchy of Piper Jaffray. He expects capital expenditures to be 2.3% of sales this year, up from 1.3% last year.
"We see this as an important time to be investing. We think there are a lot of opportunities," Mr. Bezos said on the conference call.
Amazon said it expects first-quarter revenue of $1.8 billion to $1.95 billion, and revenue for this year of $8.05 billion to $8.65 billion. The annual estimate is higher than a previous forecast.
For 2004, Amazon posted net income of $588.5 million, or $1.39 a share, up more than 16-fold from $35.3 million, or eight cents a share, in 2003. Revenue increased 31% to $6.9 billion from $5.3 billion.
Write to Mylene Mangalindan at mylene.mangalindan@wsj.com12
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QUESTIONS:
1.) "Amazon said net income rose nearly fivefold, to $346.7 million, or 82 cents a share, from $73.2 million, or 17 cents a share a year earlier." Why then did their stock price drop 14% after this announcement?
2.) Refer to the related article. How were some analysts' projections borne out by the earnings Amazon announced?
3.) One analyst discussed in the related article, Ken Smith, disagrees with the majority of analysts' views as discussed under #2 above. Do you think that his viewpoint is supported by these results? Explain.
4.) Summarize the assessments made in answers to questions 2 and 3 with the way in which Amazon's operating profits as a percentage of sales turned out this quarter.
5.) Amazon's results "included a $244 million gain from tax benefits, stemming from Amazon's heavy losses earlier in the decade." What does that statement say about the accounting treatment of the deferred tax benefit for operating loss carryforwards when those losses were experienced? Be specific in describing exactly how these tax benefits were accounted for.
6.) Why does Amazon adjust out certain items, including the tax gain described above, in assessing their earnings? In your answer, specifically state which items are adjusted out of earnings and why that adjustment might be made. What is a general term for announcing earnings in this fashion?