Amazon Says Profits Will Come This Year

Amazon.com (Nasdaq: AMZN) is still on track to deliver pro forma profitability in the fourth quarter of this year and expects to be profitable on the same basis for all of 2002, the company said Tuesday.

“While there can never be guarantees, you will hear from us that we are highly confident about our ability to deliver pro forma operating profits in the fourth quarter,” Amazon chief financial officer Warren Jenson said at the company’s annual analysts conference.

“We believe we are well-positioned for pro forma, operating profitability for the year 2002,” Jenson added.

Although a step in the right direction for the e-tail giant, pro forma profitability excludes a variety of expenses, including charges associated with acquisitions and interest on Amazon’s more than US$2 billion in debt.

In a bid to reach profitability, Amazon has been working hard to improve its metrics. Jenson said that pro forma operating expenses as a percentage of sales fell from 40 percent in the first quarter of 2000 to 33 percent in the first quarter of 2001. Gross margins and inventory margins are also improving, the CFO said.

Tapping Markets

The key to Amazon’s success in the future is a strategy of globalization and diversification, according to Jenson.

“We continue to feel that not only in the United States do we have significant opportunity, but that we’re only beginning to tap global markets,” Jenson said.

Jenson added that after only two years, international business now accounts for 19 percent of Amazon’s sales.

Computer Shop

Amazon also said Tuesday that it plans to begin selling PCs via the Internet during the second half of 2001, despite the many challenges posed by selling computers online.

Amazon is attempting to diversify its product mix and sell more than books, movies and videos (BMV). Jenson said BMV sales dropped from 91 percent of total sales in the first quarter of 2000 to 58 percent of sales in the first quarter of 2001.

Improving ‘Service’

The services business has also grown from virtually nothing in the first quarter of 1999 to 16 percent of Amazon’s gross profits in the first quarter of 2001, according to Jenson.

Jenson said revenues from services, including the company’s deals with brick-and-mortar retailers Toys ‘R’ Us and Borders, were on track to reach $175 million to $200 million this year.

Harrison Miller, Amazon’s vice president and general manager of e-commerce service, said that the company will continue to evaluate different partnerships over the next 18 months. Additionally, Amazon plans to open a third Toys ‘R’ Us store, Imaginarium, “well before the holiday season.”

DVD Bundles

Amazon also plans to beef up its retail offerings. David Risher, Amazon’s senior vice president of marketing and merchandising, told the analysts that the company planned to begin testing a program called “Amazon Extra” Tuesday night. Amazon Extra will offer consumers discounts for purchasing selected bundles of related products.

For instance, consumers interested in purchasing the movie “Gladiator” as a DVD will be given the option of purchasing “Spartacus” as well and saving an additional $5 over the single purchase price of both DVDs. Risher said that Amazon will be able to bundle products on a “massive, massive scale.”

According to Risher, Amazon hopes the new program will increase average order size. He added that vendors have contacted Amazon and asked to partner with the Internet giant on its bundling initiative.

Purchase Orders

Amazon also said it will roll out an institutional sales program during the second half of 2001 that will allow consumers to make purchases on credit. Institutions and businesses will be able to set up accounts with multiple buyers and will be able to access order histories by purchaser.

Risher said that Amazon anticipates its institutional sales program will bring in $150 million over the next two years.

To this point, professional customers, including libraries and businesses, account for roughly 42 percent of the U.S. book market, according to Risher. However, Amazon has been missing out on these sales because the company does not allow consumers to use purchase orders.

Amazon stock was down 47 cents at $16.44 as of the close of trading Tuesday.