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THE DAY AHEAD: Be wary of new dot-com profit paradigm shifts

Now that profitability -- or at least an alleged path to profits -- is an investor obsession, some Internet companies are trying to push a profit paradigm shift. These companies mention the "p" word, cook up newfangled calculations and hope investors overlook the real bottom line.

First it was EBITDA (earnings before all the bad stuff) and then it was cash EPS (earnings without some of the bad stuff). Now companies are trying to pass off gross profits (selling goods for more than we paid for them), profit vapor, and just thinking about profits as the real thing.



Are all profits created equal?



The real bottom line is getting farther and farther away.

Here's a guide to the latest dot-com profit stunts:

The gross profit chatter

We can't recall ever seeing gross profits played up until this week. Hmmm. Maybe dot-coms reckon that any profit will do. Don't get too enthusiastic about gross profits.

Drugstore.com (Nasdaq: DSCM) and Buy.com (Nasdaq: BUYX) went the gross profit route with their earnings reports. Drugstore.com tried the gross profit trick 38 words into its earnings release.

"Drugstore.com also achieved a positive gross profit (defined as net sales minus cost of sales) of $1.1 million, or 5 percent of total sales," the company said.

The company basically said that it sold goods for more than it paid for them. Many money-losing companies can make that claim.

Buy.com used the same stunt, and even gave a mock per-share figure. "Gross profit was $8.9 million, or $0.08 per share," the company said. The official bottom line was a loss of 28 cents a share. Both companies topped estimates and had good progress, so why try to fool us?

We could report a profit if we wanted to!

Sure you could. Juno Online (Nasdaq: JWEB) went with the "we're not profitable because we choose not to be" route with its first quarter earnings.

"Juno's net loss in the first quarter was only $2.9 million before subscriber acquisition expenses (which expenses are largely discretionary, and can be adjusted in response to such factors as seasonal variations in the cost-effectiveness of direct mail advertising, the availability of funding, and overall market conditions)," the company said.

Juno went on to say it's front-loading marketing expenses.

Later in the earnings release (much later), Juno forks over the real net loss -- $1.28 a share. Most of that was marketing spending, which at last check still counts as an expense.

This "we could be profitable" theme is prevalent in the dot-com world. In fact, it's not hard to find a few analysts that will say Amazon.com (Nasdaq: AMZN) could flip a switch and be profitable -- if it wanted to.

Profits are coming ... really they are

This strategy is the equivalent of profit vaporware. Profits are mentioned, but there's no map of how a company will get from point A to point B.

Examples of this approach are numerous. Amazon is on a path to profits, but hasn't set any dates.

In CyberCash's (Nasdaq: CYCH) earnings release on Thursday, the company dropped this statement: "Our goal is to achieve operating profitability for CyberCash, and we are on target."

On target? What target? According to earnings tracking firm First Call Corp., the company is expected to report losses for at least fiscal 2001. No analyst even ventured a guess for 2002. On target in CyberCash's case could mean 2010 for all we know.

Set a date

If you really want to impress us, set a profit date. Not setting a profit deadline is like getting engaged and never setting the wedding date.

Many dot-coms are getting the hint -- even if Wall Street doesn't immediately respond.

Business-to-business player VerticalNet (Nasdaq: VERT) expects to be profitable in the third quarter of 2001. About.com (Nasdaq: BOUT) on Thursday said it'll be profitable in the second quarter of 2001, two quarters ahead of schedule.

EToys (Nasdaq: ETYS) reported a hefty loss in its fourth quarter, but did back up its profitability talk with a few dates.

On a conference call with analysts, CEO Toby Lenk said the company "will be in striking distance of break-even by the holiday quarter of 2001 (third quarter)."

Lenk said eToys will be profitable in 2002. "We see a clear path to profitability," said Lenk. "The largest of the quarterly loss is behind us. We're putting the stake firmly in the ground."

Lenk projected that eToys would be profitable on $750 million to $900 million in sales. Whether you believe the profit projections of eToys, About.com or VerticalNet is up to you, but at least there's some accountability.


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