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Amazon reiterates year-end goals

CEO Jeff Bezos repeats his pledge to reach profitability on a pro forma basis by year's end, while executives outline both cost-cutting measures and expansion plans to reach that goal. CEO Jeff Bezos reiterated his pledge to reach profitability on a pro forma basis by year's end, while executives outlined both cost-cutting measures and expansion plans to reach that goal.

"There (are) never any guarantees, but we are very confident in our fourth-quarter operating profit goal," Bezos told analysts gathered at a conference here Tuesday. "We still have a lot of work to do, but we feel very good about it."

The pro forma profit would exclude a range of costs, such as interest on Amazon's more than $2 billion in debt and charges associated with acquisitions. Amazon, which has never turned a profit, has been under intense pressure during the past year from investors and analysts. The stock closed Tuesday down 47 cents at $16.44, off more than 70 percent from its 52-week high of $56.25.

Although some analysts have praised the company's goal of reaching a pro forma profit, others have questioned using pro forma numbers and have urged Amazon to give more information on its real bottom line. Asked when Amazon would post a real profit, Bezos said, "we haven't given any guidance on that yet."

Jeetil Patel of Deutsche Bank Alex Brown said the presentation showed Amazon is on the right path but has a ways to go.

"Their show was detailed about what they have to do in the next 12 to 16 months to hit breakeven," said Jeetil Patel of Deutsche Bank Alex Brown. "They are doing well with their bottom line, but the top line is where the opportunity is to improve their growth rate."

Amazon announced that during the second half of the year it will begin selling personal computers and will open a book store dedicated to business and institutional customers. Amazon plans to tie the PC store in with its existing electronics store.

Amazon on Wednesday will also begin to bundle products to encourage customers to buy more items. The program--which will typically pair a hot-selling product such as the movie "Gladiator" with an older title, such as "Spartacus"--offers consumers a discount if they buy the products together. Amazon will begin the initiative in its DVD department, but plans to expand it to other stores in the near future.

"This takes our average order size up," said David Risher, Amazon's senior vice president in charge of marketing and merchandising.

International markets
Amazon said it also expects continued growth overseas, although it does not necessarily plan to continue its program of launching standalone Web sites on a country-by-country basis. Instead, Amazon plans to focus its global expansion on expanding the type of products it offers through each of its four overseas stores based in the United Kingdom, Germany, France and Japan.

For instance, the company recently began selling consumer electronics through its United Kingdom site and video games and software through its French store.

The company said it expects its international operations to close the year with anything from a pro forma operating loss of 2 percent of net sales to a profit of 2 percent of net sales for the fourth quarter.

With its four international stores, Amazon now reaches a market that comprised 92 percent of consumer e-commerce revenue in 2000. Consequently, the company will be careful with any future expansions overseas and would likely grow through an extension of its current sites, said Diego Piancentini, senior vice president and general manager of Amazon's international operations.

"The international land rush is over," Piancentini said. "We can take more time to enter future international markets."

Playing host
Another area of growth is the service business, in which Amazon hosts everything from auctions by mom-and-pop sellers to Toys "R" Us' online store.

"We see a lot of opportunities here," said Harrison Miller, vice president and general manager of Amazon's e-commerce services. "We're talking with a number of potential partners. We're looking for deals that will be a clear win for the customer and a clear win for both partners."

Last fall, Amazon launched a new program that allowed third-party sellers to offer used goods on its product pages. Such used goods now account for 8.5 percent of Amazon's book sales, company representatives said.

Executives said Amazon plans to continue to pursue bigger deals with merchants such as Toys "R" Us and Borders, which Amazon announced earlier this year.

Cutting costs, outsourcing
Along with its effort to increase growth, Amazon is also cutting costs across the board, representatives said. In its information technology department, for instance, Amazon has begun to revamp its computer systems, using "commodity" PCs and the Linux operating system, said Rick Dalzell, the company's chief information officer.

Amazon estimates that spending on technology as a portion of net sales will decrease by 20 percent this year. "The cost to serve a Web page is going down faster than the demand is rising," Dalzell said.

Amazon officials said they are also starting to outsource some fulfillment and customer service systems.

Amazon recently signed a deal with Ingram Book Group to handle distribution of some of its books and the company plans to look into similar deals in the future, said Jeff Wilke, senior vice president of operations for Amazon. The company believes that its expertise lies in shipping multiple-product orders to customers and it plans to focus more on those orders in the future, Wilke said. In contrast, the company will attempt to farm out fulfillment on some single-item orders and on orders of large products such as televisions that are costly to ship and store.

"We want to be the best at multi-item orders," Wilke said. "Those processes are hard to do with a broad (product) selection.

"To the extent that we can get large items carried by a drop shipper we will do it."

Despite Amazon's positive spin on its outlook, some analysts were left unimpressed. John Sinclair, an analyst with Montgomery Asset Management said the presentation was mostly a bunch of "unquantifiable gobbledygook."

"There wasn't a lot of useful information," said Sinclair, whose company at one time shorted Amazon's stock but doesn't hold a position now. "They threw out a lot of logistical and supply-chain statistics that wasn't worth much."