Key Amazon Unit Pays in Volatile Stock
Amazon.com revealed that a significant portion of revenue from one of its most profitable business units is paid in volatile Internet stocks rather than cash, leading some analysts to further question the quality of the beleaguered Web pioneer’s earnings.
The online retailer said on Wednesday that the $24.3 million it received from its Amazon Commerce Network in the second quarter included only $4.2 million in cash, according to Securities and Exchange Commission filings. The unit accounted for most of the growth in second-quarter gross profit margins, a key indicator of sales profitability.
In a complicated arrangement, Amazon.com receives payment from the Amazon Commerce Network, which represents other online retailers such as Drugstore.com and Pets.com, in exchange for co-branded selling space on Amazon.com’s Web site.
The fact that most of that revenue comes in the form of stock creates problems in a falling tech market. Share prices of Drugstore.com are down almost 85% this year, while Pets.com has dropped 89% from its initial public offering in February.
The disclosure is the latest in a series of negative reports surfacing from Amazon.com, the one-time darling and undisputed leader of online commerce, prompting some analysts to raise more doubts about the Seattle-based company’s financial strength.
“A number of investors were assuming that the revenues they are recording” from Amazon Commerce Network “are cash revenues,” said Gregory Konezny, a U.S. Bancorp Piper Jaffray analyst. “The complexion of that has changed significantly to much less cash and more equity.”
Amazon.com shares have declined more than 58% since the beginning of the year--partly because investors fear the company will run out of cash unless it begins to generate more revenue than it burns to fund its daily operations, analysts say. Amazon shares rose 69 cents to close at $31.50 in Nasdaq trading on Thursday.
Company executives could not be reached for comment late Thursday, but they have said the Web retailer will generate positive cash flow during the second half of this year. Analysts remain skeptical, though, and this new financial disclosure is likely to intensify concerns over the once highflying symbol of the so-called New Economy.
It follows a spate of recent bad news, including the resignation of President and Chief Operating Officer Joseph Galli, who quit in July after 14 months on the job. In June, Lehman Bros. issued a scathing 28-page report that questioned the company’s ability to earn profits over the long haul.
Ravi Suria, the Lehman Bros. analyst, said that even though Amazon has distinguished itself as one of the best-established brands in business-to-consumer electronic commerce, “from a bond perspective, we find the credit extremely weak and deteriorating.”
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Bloomberg News was used in compiling this report.
