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THE DAY AHEAD: Profits are Amazon&#039s only defense against critics

Amazon.com dismissed Lehman Brothers' credit report as "hogwash," but the defense is flimsy until the company delivers on its positive cash flow and profit promises.

As we all know by now, the alleged pillar of consumer e-commerce tumbled 19 percent Friday on concerns about slowing sales and the company's debt load.

Worries about slowing sales growth isn't news, but what was interesting was a report from Lehman Brothers convertible bond analyst Ravi Suria. "From a bond perspective, we find the credit extremely weak and deteriorating," he wrote. "The company's inability to make hard cash per unit sold is clearly manifested in the weak balance sheet, poor working capital management and massive negative operating cash flow - the financial characteristics that have driven innumerable retailers to disaster throughout history. "

Amazon's comeback? Amazon.com spokesman Bill Curry told Reuters that Lehman's comments were ''absolute, pure unadulterated hogwash.'' ``We are nowhere near running out of cash,'' Curry said. ''Anyone who understands the cash flow dynamics of this business knows this.''

Curry said the company had more than $1 billion in cash at the end of the quarter.

To determine what the real deal is you have to read between the lines. We'll start with Suria's "From a bond perspective" line. What this means is that Suria looks at Amazon as a retailer, not an e-tailer. The category difference is very important. If you believe Amazon is an e-tailer, you don't pay attention to little things such as logistics, inventory and other back-end issues -- yet. Amazon said in its first quarter conference call it will be more efficient. It isn't now though.

Suria's assessment that Amazon's bonds aren't worth the paper they're printed on also isn't new. Amazon's bonds were rated at the junk level, which means they're very risky.

Suria's "bond perspective" line also sticks out because it shows he doesn't have to play all the games that equity analysts do. He's independent. Isn't it interesting that Merrill Lynch's Henry Blodget and other analysts can flag sales concerns, but still always give Amazon the benefit of the doubt? These equity analysts know Amazon may need more financing and investment banking help at some point.

Lehman analyst Holly Becker has a "buy" rating on Amazon shares. Three cheers for independent analysis at Lehman.

The last equity analyst who was extremely vocal about Amazon's prospects was Jonathan Cohen, Blodget's predecessor at Merrill. When Amazon shares soared, Cohen, who stuck with the fundamentals, was shown the door and replaced with Blodget.

Now let's look at Curry's comments. The first thing Curry tries to do is minimize concerns about a cash crunch. Suria said Amazon won't make it through the first quarter of 2001 without more financing. Curry said the company had more than $1 billion in cash at the end of the first quarter. He doesn't indicate how much cash there is near the end of the second quarter. Suria said the company will need cash in a year, not tomorrow.

Then consider Curry's "cash flow dynamics" defense. Amazon is clinging to its former virtual model in which it didn't have distribution centers. Amazon's cash flows have historically come from equity and debt offerings. It's a tough way to live these days. Suria contends Amazon looks like a retailer these days. And compared with other retailers, Amazon doesn't look too hot.

Amazon didn't address issues raised by Suria, including need for additional financing, inventory progress and other red flags. Stay tuned for Amazon's earnings call.

The bottom line here is that Amazon has to deliver on its stated goals: Become more efficient, turn cash flow positive in the fourth quarter and be profitable in its book and music businesses. Until now, however, Amazon's profit push is unproven. If Amazon can deliver positive cash flow, the critics will shut up. Even Suria.

"We would become a lot more comfortable with the credit if we see the company generating positive operating cash flows during the next shopping season and not have to tap the debt markets again to fund its operations," said Suria.

It's up to Amazon to deliver.TDAIN