Here's a funny thing: When (Nasdaq: AMZN) was rapidly growing sales, as well as losses, analysts wanted to know when it would become profitable. Now that Amazon is focused on profitability but growing more slowly, analysts want to know when it will increase its growth rate.

Ya just can't win.

Amazon's first-quarter conference call focused on the company's drive toward profitability and its lessened focus on growing sales in established businesses. Once the company is profitable by some measures, management will refocus its attention on increasing sales while maintaining profitability.

Seems logical.

The company has improved its pro forma operating loss in each of the last five quarters:

Quarterly Pro Forma Operating Loss
Q1 '00: $99 million
Q2 '00: $89
Q3 '00: $68
Q4 '00: $60
Q1 '01: $49

And even though Amazon's book, music, and video division only grew sales 2% from last year, the division's gross profit rose 32% due partially to lower fulfillment costs, at 14% of sales compared to a goal in the high single digits. Amazon booked $82 million in shipping revenue, and incurred a 6% operating loss on shipping due to tests of free shipping offers, which will continue.

Amazon's three business segments outside of books, music and videos saw sales rise at least 55% year-over-year. These include electronics, kitchen, and tools as one segment, "services" -- which include Amazon's deals with Toys R Us (NYSE: TOY), Microsoft (Nasdaq: MSFT), and others -- and the international division. Two divisions were profitable: The book, video and music division, and services. Services gross margin was greater than 60%, compared to 26% for Amazon as a whole. Excluding services, Amazon's gross margin was 23%, about even with last quarter.

In case you were wondering, Amazon's deal with Toys R Us involves two websites and Toys R Us handles the inventory. Amazon's new deal with Borders (NYSE: BGP) involves one website, and Amazon handles the inventory. Sales from the Borders deal will be included in Amazon's books, music and video sales starting in August.

Total first-quarter sales rose 22% to $700 million, making for Amazon's second-largest quarter in history. The company will add new product categories this year, but it stands by its projection of 20% to 30% sales growth, to about $3.5 billion. The net loss for the first quarter was $234 million, less than last year's $308 million, but still enough to increase Amazon's negative shareholder equity by about 10%.

Understand working capital
Amazon is moving towards negative working capital, which has everyone sweating. Negative working capital is when current liabilities are greater than current assets. It can be a very bad thing. Once on solid footing, though, it can be a good thing, because suppliers and customers would be financing Amazon's business.

Amazon's working capital declined from $386 million to $251 million in the quarter. Management is comfortable where it stands. However, they know they must turn inventory faster, and become profitable, before they can seriously entertain a negative working capital strategy. The first quarter's annualized inventory turns rose to 13 from 10 last year, but are down from 26 in 1998.

Negative working capital won't happen this year -- "unfortunately," management said. When people decry the company's decline towards negative working capital in 2002, however, don't be among the screamers. Negative working capital is an eventual goal. Another long-term goal is triple digit returns on invested capital.

Services, please
CEO Jeff Bezos used much of the conference call to champion the potential of providing Amazon's commerce platform and tools to external customers and commerce partners. The company expects at least $150 million in service revenue this year (much of it probably Toys R Us), while it had $0 in service revenue a year ago. $150 million is slight, but Amazon expects high-margin service revenue to be more meaningful long term.

On the right path...
My takeaway from the results is that Amazon is on the right path to becoming a sustainable and eventually profitable business. That said, although Amazon will likely be profitable on a pro forma operating basis in the fourth quarter, the company is far from earning a net profit.

And even if Amazon turns net profitable, sales volume must be substantially higher before the company will be able to service and pay down its $2 billion in debt with net profits alone. So, Amazon isn't out of the woods yet. It's just meandering on the right path to get there.

Still, I'd wait and see...
At $15.50, the company's enterprise value is around $7 billion. This is expensive for a retailer approaching $3 billion in sales on slowing growth and that will probably continue to lose real money well into 2002 or longer. Overall, given this stock's high risk in contrast to the potential for modest rewards for at least a few years, I believe that potential investors should use a wait-and-see approach.

I've posted notes from the two conference calls that Amazon held yesterday, detailing more numbers and thoughts. You can also read the company's 2001 projections in its well-detailed first quarter report.

A correction for Monday's Breaker
In Monday's column, Brian Lund said that the U.S. book, music, and video operation at eBay (Nasdaq: EBAY) and its subsidiary had $700 million in sales for the quarter. Actually, it should have been about $175 million, or a $700 annualized run rate. That's about 41% of Amazon's annual U.S. books, music, and video sales. Amazon is still the top dog here.

We apologize for the error. The article has been changed to reflect the proper sales figures.

The author owns shares of eBay. See his profile for a complete list of his holdings. Amazon and The Motley Fool have a business relationship. The Motley Fool has a full disclosure policy.