Amazon moving on up

Amazon.com has had an exceptional week - the exception being that it has been a rare good week for the sometime ailing dot-com.

First quarter results, announced on Tuesday, met analyst expectations. Revenue was up, gross profit was up, international growth was up and losses were down. All the figures seem to show it on track to meet its December profitability target.

But while the results have met with applause a quick look beneath the surface shows recent problems are far from over.

Included in this quarter's results is a $114m restructuring charge, a large proportion of which went on paying severance cheques to the 1,300 staff let go in January.

In the US, the Securities and Exchange Commission is still investigating Jeff Bezos' alleged insider dealing.

Although fears of bankruptcy have not been born out, a February report from Lehman Brothers claimed Amazon is in danger of running out of cash this year and did the company no favours coming as it did so soon after mass layoffs and cutbacks

The home straight may be in sight but nobody knows better than Amazon itself that it is not out of the woods yet.

The analyst reports don't bother the company according to Amazon.co.uk MD Steve Frazier. There are enough analysts out there who back the company's drive to profitability.

But there are other challenges that bother him. Profitability may yet be achieved at the cost of more job cuts. There are no immediate plans, but as Frazier points out, there are also no crystal balls in this game.

"We aren't there yet and we have a lot of hard work in front of us. It still remains a real challenge to stay focused on all the things we need to do next year," he told silicon.com.

A quick look at Amazon's cashflow shows it is not as flush as first impressions would suggest. It ended the quarter with $643m in cash and almost $856m in assets. But liabilities amounted to almost $605m, leaving just $250m in working capital. In the same quarter a year ago Amazon had about $386m in working capital.

Cash constraints obviously limit expansion opportunities. Jeff Bezos commented, after Tuesday's results, that there are "some attractive categories out there that we're not participating in at all".

Backing his boss, Frazier also listed this as one of his challenges. "There aren't enough hours in the day to take advantage of all the opportunities still out there," he said.

Expansion into new areas is important, as Amazon's results have proven. Overall growth increased by 22 per cent, but just two per cent of that growth came from the core area of books, music and video, with consumer electronics reporting the biggest boost in sales.

Gross profit margins from alliances such as Toys R Us and Drugstore.com are on average 67 per cent compared with 23 per cent across the rest of the business.

The alliance with Borders won't do any harm, although as Frazier points out Amazon won't feel any benefits until the deal is finalised this summer.

But Amazon is already very diversified, says Tony Hart, ecommerce analyst with Datamonitor. It now needs to be very careful about its future choice of bedfellows.

He said: "The company will have to work hard at finding the right partners in the future. It is already fairly diverse. There aren't a lot of business that would complement its current product range that well."

But many of the areas it has already expanded into have the potential to be very lucrative. Nick Jones, e-tail analyst with Jupiter Research, believes that Amazon is on to a winner if it can hold its ground in the consumer electronics sector.

It's B2C's new hot sector, he says, with a lot of potential for repeat business. The laws of business would suggest that if you can sell a customer a DVD player then you can also sell them the DVDs to play on it.

Repeat business is important for Amazon. According to first quarter figures 78 per cent of total orders came from repeat customers.

Those customers are funding the route to profitability. But profitability is not the end of the road for Amazon. Once there it needs to be sustained through strong partnerships.

The recent breakdown of the WalMart talks prove this is no easy task. And when the profits do pour in, Amazon.com will no doubt - like any responsible parent - re-invest in the loss-making international subsidiary sites.

By Frazier's own admission Japan and France are burning cash faster and making bigger losses than the German and UK sites.

France in particular should be standing on its own two feet by now, says Meta analyst Jeff Mann. If the internal and economic downturn continues, Amazon could be faced with some tough choices about its international sites, he warns.

"It would not surprise me if Amazon pulled out of some international markets. They're using up cash, and if you look at Japan there are huge cultural differences to account for. If they don't make the Q4 figures they will need to demonstrate that they are taking action."

Amazon may be on the right route, but even a profit announcement in December will just mean an operational profit.

It could be a long time before expectant shareholders can fill their boots.