You almost have to be a wizard-in-training of Harry Potter's stature -- or at least a very savvy accountant -- to figure out how much money Amazon.com Inc. is raking in these days.
Everyone knows Amazon's (Nasdaq: AMZN) claim to fame is selling huge volumes of books, compact disks, and a growing number of other goods to consumers over the Internet. But some of its biggest sales recently have come from promoting other Internet companies to Amazon's huge customer base, not from Harry Potter novels.
The issue is that these Internet companies often pay in stock for the promotions. Treating the stock payment as revenue, which accounting experts say is legal, raises questions.
To wit: What happens when the value of the securities falls? In Amazon's case, the company doesn't go back and restate its revenue. Instead, it records the losses in other less-scrutinized areas of its financial statements, including lines devoted to investment gains and losses.
Amazon vs. the SEC
The company's accounting treatment has drawn the scrutiny of the Securities and Exchange Commission. In its third-quarter earnings announcement, Seattle-based Amazon revealed that the regulators are scrutinizing both its accounting treatment and its disclosure of stock deals with other dot-coms. Amazon said it believes it is appropriately handling both matters.
With Internet stocks far off their highs, Amazon would appear to be taking a hit. It disclosed in its third-quarter earnings a US$33.8 million "non-cash loss," connected Internet audio company Audible Inc. and credit card issuer NextCard Inc.
Amazon hasn't gone out of its way to call investors' attention to the stock component of the payments from commerce partners. But its most recent federal filing does state that 64 percent of the US$166 million it received in payments from commerce partners during the nine months ended Sept. 30 was in stock. It stashed much of that payment as unearned revenue to be booked on its top line, over the term of the marketing alliances with the companies, usually one to three years.
The company recorded US$94.8 million on its top line from its commerce partnerships during the first nine months of the year. During those nine months, Amazon posted US$1.8 billion in total revenue.
The concern of investors -- and possibly the SEC -- is that money-losing Internet operations like Amazon are generally valued as a multiple of revenue, rather than of earnings. But "the value of those securities has gone down dramatically and the quality of revenues associated with them is very low," said Tom Courtney, an analyst at BancAmerica Securities Inc.
Added John Spytek, a technology analyst at Banc One Investment Advisors Corp., which has a small position in Amazon: "We all start with revenues" in valuing the company. "If they find ways to over-inflate it, it becomes an issue."
