How fast is Amazon.com's revenue growing, and is it profitable?

Revenue grew 313% to $610.0 million in 1998, but the company is not profitable. It reported a net loss of $124.5 million, or $0.84 per share, and management expects continued operating losses for the foreseeable future, with percentage growth expected to slow.

Why did the net loss increase so much in 1998?

The loss increased mainly because of higher operating expenses: marketing and sales rose to $133.0 million, product development to $46.8 million, and merger and acquisition related costs (mostly goodwill amortization from the Junglee, PlanetAll, and European acquisitions) reached $50.2 million. Interest expense of $26.6 million, largely from the Senior Discount Notes, also added to the loss.

How much debt does Amazon.com carry, and what are the repayment risks?

The company carries the $530 million principal amount of 10% Senior Discount Notes due 2008, which accrete without cash interest until November 2003, plus $1.25 billion of 4 3/4% Convertible Subordinated Notes due 2009 issued in February 1999. Management warns that if cash flow is insufficient, it could default, allowing creditors to accelerate the debt. The Senior Discount Notes also require a 101% repurchase offer upon a change of control.

What are the biggest risks to the business?

Major risks include the rising cost of sustaining growth against thin gross margins, reliance on Ingram (about 40% of 1998 inventory purchases) which Barnes & Noble is acquiring, intense competition from larger rivals with greater resources, a single leased data center in Seattle with no formal disaster recovery plan, the pending Wal-Mart trade secrets lawsuit, and Year 2000 compliance risk. The company also notes its stock price is highly volatile.

Does Amazon.com pay dividends, and how is it funded?

No. The company has never paid cash dividends and intends to retain earnings for growth. The Senior Discount Notes also restrict dividend payments. Funding has come from its May 1997 IPO, the 1998 Senior Discount Notes, and the February 1999 Convertible Notes, with the company noting that future equity or convertible issuances could cause dilution.

AMZN 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 5, 1999. Cited figures are marked; the original filing is the authoritative source.

Amazon.com's 1998 Form 10-K shows a company with explosive top-line growth but deep unprofitability and rising leverage.

Net sales reached $610.0 million^a in 1998, up 313% from $147.8 million in 1997, and gross margin improved to 21.9% from 19.5%. However, the company posted a net loss of $124.5 million ($0.84 per share), up from $31.0 million in 1997, driven by heavy marketing and sales spending (21.8% of sales), product development, and $50.2 million in merger and acquisition related costs including goodwill amortization. Management explicitly warns that losses will continue for the foreseeable future and that the company's percentage growth rate will decline.

The balance sheet strengthened on paper, with cash and marketable securities of $373.4 million^b at year-end 1998, but this was financed largely by debt and equity. The $530 million principal-amount 10% Senior Discount Notes issued in May 1998 (no cash interest until 2003) and a $1.25 billion 4 3/4% Convertible Subordinated Notes offering completed in February 1999 raise significant leverage concerns. The accumulated deficit reached $162.1 million, and the company has a full valuation allowance against its deferred tax assets, meaning no tax benefit is recognized on losses.

For investors, the key tension is between rapid market share gains (about 4.7 million titles, 6.2 million cumulative customers, and over 60% of orders from repeat customers) and the cost of sustaining that growth. The filing also highlights material risks: heavy dependence on Ingram (about 40% of 1998 inventory purchases, now being acquired by Barnes & Noble), a pending Wal-Mart trade secrets lawsuit with Amazon counterclaiming, intense competition from Barnes & Noble and Bertelsmann, extreme stock price volatility (the 52-week range was $9.50 to $184.63^c, split-adjusted), and Year 2000 readiness work still in progress.

02—Key points

Key Highlights

Net sales grew 313% to $610.0 million in 1998 from $147.8 million in 1997, with international sales about 20% of the total.
Net loss widened to $124.5 million ($0.84 per share) from $31.0 million in 1997, including $50.2 million in merger and acquisition related costs.
Gross margin improved to 21.9% from 19.5%, though management warns music and video carry lower margins than books and new categories may dilute margins further.
Marketing and sales expense was $133.0 million (21.8% of sales), and management expects marketing, product development, and G&A spending to rise significantly in absolute dollars.
Total debt increased sharply: $530 million principal amount of 10% Senior Discount Notes (May 1998) plus $1.25 billion of 4 3/4% Convertible Subordinated Notes (February 1999), creating substantial interest and refinancing risk.
Cash and marketable securities totaled $373.4 million at December 31, 1998, and management believes this plus the convertible proceeds covers cash needs for at least 12 months.
Key risks include dependence on Ingram (about 40% of 1998 inventory purchases) now being acquired by Barnes & Noble, the Wal-Mart trade secrets litigation, and a stock price that ranged from $9.50 to $184.63 over the 52 weeks ended February 28, 1999.

03—Questions

Frequently Asked Questions

How fast is Amazon.com's revenue growing, and is it profitable?
Revenue grew 313% to $610.0 million in 1998, but the company is not profitable. It reported a net loss of $124.5 million, or $0.84 per share, and management expects continued operating losses for the foreseeable future, with percentage growth expected to slow.
Why did the net loss increase so much in 1998?
The loss increased mainly because of higher operating expenses: marketing and sales rose to $133.0 million, product development to $46.8 million, and merger and acquisition related costs (mostly goodwill amortization from the Junglee, PlanetAll, and European acquisitions) reached $50.2 million. Interest expense of $26.6 million, largely from the Senior Discount Notes, also added to the loss.
How much debt does Amazon.com carry, and what are the repayment risks?
The company carries the $530 million principal amount of 10% Senior Discount Notes due 2008, which accrete without cash interest until November 2003, plus $1.25 billion of 4 3/4% Convertible Subordinated Notes due 2009 issued in February 1999. Management warns that if cash flow is insufficient, it could default, allowing creditors to accelerate the debt. The Senior Discount Notes also require a 101% repurchase offer upon a change of control.
What are the biggest risks to the business?
Major risks include the rising cost of sustaining growth against thin gross margins, reliance on Ingram (about 40% of 1998 inventory purchases) which Barnes & Noble is acquiring, intense competition from larger rivals with greater resources, a single leased data center in Seattle with no formal disaster recovery plan, the pending Wal-Mart trade secrets lawsuit, and Year 2000 compliance risk. The company also notes its stock price is highly volatile.
Does Amazon.com pay dividends, and how is it funded?
No. The company has never paid cash dividends and intends to retain earnings for growth. The Senior Discount Notes also restrict dividend payments. Funding has come from its May 1997 IPO, the 1998 Senior Discount Notes, and the February 1999 Convertible Notes, with the company noting that future equity or convertible issuances could cause dilution.

04—Continue

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