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Technology
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Amazon posts a profit
graphic January 22, 2002: 3:39 p.m. ET

Internet retailer posts first-ever profit the old-fashioned way, topping forecasts.
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  • Amazon 4Q report crucial - Jan. 21, 2002
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  • Amazon.com
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    NEW YORK (CNN/Money) - Amazon.com made good on founder Jeff Bezos' promise to post its first-ever quarterly profit Tuesday, handily beating Wall Street forecasts in the process.

    Amazon didn't even have to resort to controversial pro forma accounting methods. It posted a net profit of $5 million, or 1 cent a share, for the quarter, using standard accounting methods. The result compares with a net loss of $545 million, or $1.53 a share, a year earlier. Sales jumped 15 percent to $1.12 billion in the quarter, thanks to a spike in holiday traffic during November and December.

    "We're incredibly happy," Amazon's chairman and CEO told CNNfn. "It really was driven by lower prices for customers in the fourth quarter," Bezos said.

    Amazon slashed operating costs in half in the quarter, enabling the company to cut prices on its core books, music and video business in exchange for higher volume, and helping put Amazon in the black for the first time.

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    The world's biggest Internet retailer still is saddled with $2.2 billion in debt. About 30 percent of its quarterly sales growth came from international markets, where a relatively weak euro has bitten into the profits of many U.S. companies in recent quarters.

    Amazon (AMZN: up $2.43 to $12.59, Research, Estimates) stock soared on Nasdaq Tuesday, where it was the most active issue.

    While the fourth quarter may have proven clean for Amazon, some are concerned that the first quarter will bring fresh concerns about profitability.

    Amazon became saddled with debt in its early years as it grappled with the novelty of doing business on the Web, making several costly mistakes such as building warehouses. Though the debt does not come due until 2008, some are concerned about the company's ability to drive sales growth enough to generate the cash needed to pay its debts.

    One analyst who follows the company said Amazon is now making all the right moves, through its strategic partnerships with other retailers and other cost-cutting measures, but whether it can generate enough sales to begin paying off debt remains questionable.

    "Now they have entered into what you would call the world of grown-ups, which is a company that makes money by its own admission. That means that now they have to play by the rules of grown-ups," the analyst said.

    The company is projecting first-quarter sales between $775 million and $825 million. But the company logged $810 million in liabilities, that is the amount it owes vendors, in the fourth quarter. Much of that will come due in the first quarter, virtually canceling out revenue growth, the analyst said.

    That means no money to pay down debt.

    "This business has been around seven years. It's high time they learned the ropes," the analyst said. "But you have to give them credit. It's like you're giving a student credit for not getting an F."

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    Last January, Bezos forecast an operating profit in the fourth quarter, the first profit in Amazon's seven-year history. He reiterated the promise throughout the year.

    Many Wall Street observers thought the company could fulfill that promise only by using pro forma accounting - accounting methods that allow management to discount certain cost items that are included in regular accounting, called Generally Accepted Accounting Principles. Amazon has argued that its pro forma system is more suitable to its business model.

    Under regular accounting, Amazon's fourth-quarter numbers are good. But with pro forma accounting, they are downright attractive.

    Including $36 million in interest expense, Amazon posted pro forma earnings of $35 million, or 9 cents a share, compared with a loss of $90 million, or 25 cents a share, a year earlier. That far exceeds the consensus of Wall Street analysts, who anticipated a pro forma loss of 7 cents a share, according to earnings tracker First Call. Sales were forecast at $1.01 billion.

    Excluding the interest expense, the company reported a pro forma profit of $59 million, compared with a loss of $60 million a year earlier. Analysts had said a pro forma operating profit of more than $10 million would show a good improvement in margins.

    "It indicates business was pretty solid and far beyond expectations," Deutsche Banc Alex. Brown analyst Jeetil Patel said. "I think it's going to be a volume-driven business going forward. It's a pretty impressive showing looking at numbers across the board."

    Bezos said Amazon's move to cut prices in the quarter drove business. He also said Amazon will continue with the pricing/volume strategy by offering free shipping on orders over $99. (635K WAV or 635K AIFF)

    In an effort to staunch declining volumes on books, movies and videos, Bezos late last year announced a new "bundling" initiative in which customers are encouraged to buy additional products for a discount. For example, a customer who buys "The Exorcist" video might also be encouraged to buy the book and other similarly themed items.

    Check Internet stocks here

    Looking ahead, Amazon said it expects to lose as much $16 million in the first quarter of 2002, with sales between $775 million and $825 million. Analysts currently expect a loss of 11 cents a share on sales of $747 million.

    For all of 2002, the company sees net sales growing 10 percent with pro-forma income from operations of $30 million. graphic

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