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Investors zeroing in on Amazon's bottom line

With the e-tailing giant set to report second-quarter results, investors will learn whether the company will make good on its promise to Wall Street that it will do better this year.

As Amazon gears up to report its second-quarter results today, investors will learn whether the online giant has made progress on its promise to improve its bottom line.

"The single most important piece of information for the stock is management's outlook for Q3 and the rest of the year," Henry Blodget, a closely followed Merrill Lynch analyst, said in a recent research note. "We think investors should pay particular attention to (profit margins) and management's outlook of achieving a single-digit operating income loss as a percent of revenue by Q4."

Amazon's stock could use some good news. Last month, the company's share price fell to a 52-week low after a number of analysts issued negative reports that questioned the company's revenue growth rate and dwindling cash reserves.

Today, Lehman Brothers' Holly Becker downgraded the online retailer to "neutral" from "buy."

Amazon is looking to improve its bottom line at a time when e-commerce stocks have taken a beating across the board. And although Amazon has told Wall Street it will do better this year, the company last quarter posted a widening pro forma loss of $122 million, or 35 cents a share.

Wall Street, meanwhile, expects the company to post a loss of 35 cents a share in the second quarter--not much of an improvement from the first quarter, according to First Call/Thomson Financial.

But analysts expect better results when it comes to operating losses and gross margins, and they added that investors should not be surprised if Amazon outperforms their expectations.

"At the end of '99, management stressed its focus on driving the business toward profitability during 2000, and as a result, we expect operating losses as a percentage of revenue to decrease each quarter for the rest of the year," Blodget wrote.

Blodget expects Amazon to post an operating loss of $85 million in the second quarter, representing 14.6 percent of revenues. Salomon Smith Barney analyst Tim Albright expects that figure to be 14.3 percent.

"They should be able to show some upside due to their lower spending," Albright said.

Last quarter, Amazon posted an operating loss of $99 million, or 17.3 percent of revenues. Analysts such as Blodget expect that figure to drop to 5 percent to 10 percent by the end of the year.

Gross margins are also expected to slightly increase in the second quarter because of improved pricing and inventory management for its new product categories. These margins may also get a boost from Amazon's multiyear marketing deals with such companies as Nextcard, Drugstore.com and Living.com. Amazon's gross margins are expected to reach 22.5 percent in the quarter, slightly better than the 22.3 percent in the previous quarter, Blodget noted.

On the revenue side, analysts expect the online giant to generate anywhere from $585 million to $610 million.

"If they do $600 million, it will be viewed as a positive," Albright said. "They have a track record of surprising on the upside."

Albright said he expects the company to generate $610 million in revenues. But Blodget, who expects Amazon to report revenues of $585 million, does not anticipate any surprises that would exceed his expectations.

In the previous quarter, Amazon generated $574 million in revenues, marking the company's first sequential decline.

Customer account growth is another key area to review, analysts note.

"This is a seasonally slow period for the Internet in general, because it's summer and people are out in the sunshine," said Heath Terry, an analyst with Credit Suisse First Boston. "I expect we'll see a customer count of 22 million, but I don't think we'll see any upside with that number."

That performance would bring a 105 percent year-over-year increase to Amazon's customer base and a 10 percent sequential increase.

And when it comes to revenues generated by customers, Terry said he doubts Amazon will be able to improve on its first-quarter performance of $28 per customer.

"Amazon tends to surprise more on its customer count than its revenues per customer," he noted.