LOSSES JUMP AT AMAZON, AS INVESTMENTS PILE UP

Original Story: nytimes.com

The chickens are not coming home to roost at Amazon just yet, but they are checking the flight schedule to Seattle.

Three months ago, Amazon was expected to lose 7 cents a share in the third quarter. After the retailer warned that it was investing so heavily in so many things, analysts pushed their loss projections up aggressively to 74 cents a share.

Even that was not enough. After the market closed Thursday, Amazon reported that it lost 95 cents a share. There was other disappointing news, too: Revenue came in $260 million less than analysts’ projections, and the company said it might lose money again in the fourth quarter, which in the old days was when retailers made all their profit for the year.

Even revenue growth, Amazon’s powerhouse, is fading a bit. The company said revenue would rise between 7 percent and 18 percent in the fourth quarter. In the fourth quarter of 2013, revenue rose 20 percent from 2012.

Amazon’s story for several years has been that it is growing furiously, investing heavily and postponing profits until the halcyon days just around the corner when it will sell all things to all people all the time. That took the company stock on a wild ride, pushing it up to $400 a share early this year.

But Wall Street has been questioning those assumptions in recent months, and those questions forcefully surfaced again after the earnings report. The stock fell 10.7 percent to $279.75, shaving about $15 billion off the company’s valuation.

The results also indicated that the company’s take-no-prisoners attitude toward its suppliers might be catching up with it.

During the third quarter, Amazon was engaged in a highly public scrap with Hachette, the fourth-largest book publisher, over pricing of electronic books. Amazon is discouraging sales of Hachette books as a way to gain leverage in the confrontation. That in turn has provoked protests from authors and negative publicity for Amazon.

That unfavorable publicity could be having an effect. One particularly weak segment for Amazon in the third quarter was North America media sales, which means books, movies and music. It increased a mere 4.8 percent from 2013.

That was the slowest growth for the category in more than five years and a sharp slowdown from the 13.4 percent increase in the second quarter, said Colin Gillis, an analyst with BGC Partners.

Amazon’s chief financial officer, Thomas J. Szkutak, said in a conference call with analysts after the earnings were released that a shift to renting textbooks rather than buying them and a strong 2013 quarter were responsible for the drop. But Mr. Gillis was unconvinced.

“This was a violent deceleration in growth,” he said. “The controversy with the publisher likely also contributed to the slowdown.”

During the call, the analysts were a bit more restive than usual, questioning when the long-promised payoff for Amazon’s heavy spending would come true. “When things don’t go as anticipated,” one asked, “what’s the process for determining whether to plow ahead or turn back?”

Mr. Szkutak answered that there were “things that go great, and things that don’t go as well as others.”

Here are some of the things that went well. Amazon’s tablet line was refreshed during the quarter to enthusiastic reviews. The dark comedy series “Transparent,” an original production for the Prime membership club, got good notices. Fire TV, introduced in the spring, has turned into a popular streaming box. The grocery delivery service expanded to Brooklyn. Amazon bought Twitch, a popular streaming site, to bolster its gaming opportunities.

On the other hand, the third quarter was marred by the disastrous reception of the Fire phone, Amazon’s long-awaited and much promoted entry into the smartphone market. A marketing survey of 500 Amazon customers could not find any who reported owning a Fire. A great many of the reviews on Amazon’s own site give the Fire the lowest possible rating.

A $200 price cut last month briefly pushed the phone up on Amazon’s list of top-selling electronic products, but it quickly fell off again. Thousands of employees spent years developing the phone. It is a rare case of Amazon completely misjudging the appeal of a new product.

Mr. Szkutak said Amazon had $83 million worth of inventory of the phone at the end of the quarter. That should last until the sun goes dim.

Michael Pachter of Wedbush Securities was a mild dissenter on Amazon before the earnings came out, citing “a variety of customer experience enhancements” that will soak up potential profits. These enhancements include a streaming music service recently introduced by Amazon. It is free for Amazon Prime members.

Spending on video and music content will total $2 billion this year and $2.5 billion next year, Mr. Pachter wrote.

Mr. Szkutak said the free content was doing its job, with customers who used the streaming video feature renewing at higher rates and buying more physical goods.

But if the executive sounded one theme during the call, it was that even Amazon realizes there are limits.

“We’ve certainly been in several years now what I would call an investment mode,” Mr. Szkutak said. “There is still lots of opportunity in front of us, but we know we have to be very selective about the opportunities we pursue.”

For nearly every retailer, including Amazon, the fourth quarter is the biggest. As usual, Amazon gave a wide range for its guidance, saying it might lose as much as $570 million and make as much as $430 million. In 2013, it made $510 million in the fourth quarter.

“I think that the potential for a loss in the fourth quarter is what is freaking people out,” Mr. Pachter said. “It is inconceivable that Amazon would lose money during the holidays, at least to someone who bought the stock above $300.”

Sales for Robot Auto-Mowers Surge

Europe’s backyards have become the latest front in the robot wars.

With a quarter of lawn owners saying they dislike mowing the grass, sales of machines that will do the job for them are taking off, especially in Europe where landscaping services are more expensive than in the U.S.

That has spurred a legion of manufacturers to challenge market leader Husqvarna AB. (HUSQB) Robert Bosch GmbH, Deere & Co. (DE) and Global Garden Products Italy SpA this year started offering robotic mowers, which Husqvarna sells for as much as 5,000 euros ($6,487). Honda Motor Co. (7267) plans to enter the fray in 2013.

 Thomas Olsson, head of Swedish operations at privately owned Global Garden Products said they had to get on board.

The market for hands-free mowers, which expanded by more than 30 percent last year, offers a rare bright spot in Europe’s consumer climate. The European market may grow as much as 20 percent annually over the next five years, Olsson said. Most of the customers are in Sweden, Germany, France and Switzerland -- countries that have so far proven resilient to the debt crisis.

Demand for the garden robots has exploded the last couple of years, said Mats Gustafsson, owner of Moheda Jarnhandels AB, a hardware store in the southern Swedish town of Moheda. Gustafsson said he’s sold almost 60 robomowers this year, compared with fewer than 10 five years ago.

European Boom

Henric Andersson, head of product management and development at Husqvarna said robotic auto-mowers are still a niche market in Europe but growing incredibly fast in other markets, and that with time may be as big or bigger than regular mowers in some countries.

Six percent of all mowers sold in Germany are now robotic, and the country’s automatic mower market is growing in “double digits,” according to research company GfK Retail and Technology GmbH.

Husqvarna, the former Electrolux AB unit that produced the first robotic mower in 1995, has six models that can care for lawns ranging from 400 square meters (4,306 square feet) to 6,000 square meters. Outside of Europe, it mainly sells the mowers in Australia and New Zealand.

New Entrants

The Swedish company brought the product to North America in 2001, only to retreat a year later after concluding the market wasn’t ready. In addition to the greater use of landscaping services by U.S. homeowners, North American grass, especially in the southern U.S., is generally tougher than European varieties, making it difficult for the machine’s fine blades to work effectively, according to Husqvarna.

Bosch, the world’s largest supplier of car parts, entered the robotic mower market last month when it started selling its Indego machine in Scandinavia. Deere, based in Moline, Illinois, joined the rivalry earlier in the year with the John Deere Tango E5, which it sells in Austria, Belgium, Luxembourg, Norway and Switzerland.

Global Garden Products, based in Castelfranco Veneto, Italy, bought its way into the $170 million market in January when it acquired LiCo srl’s Lizard mower marque, and rebranded those machines under its Stiga brand.

Andersson declined to discuss Husqvarna’s market share.

Sensor Technology

The mowers use sensor technology to stay within a defined area of the yard, and are typically able to avoid obstacles such as trees and lawn furniture. Some of the mowers, including those made by Husqvarna, move around in random patterns, while others such as Bosch machines follow distinct lines. Unlike traditional mowers, they don’t collect the cut grass, as the clippings are so small they break down fast and act as fertilizer; instead the rechargable mowers are used frequently, often daily.

The price of robotic mowers may be barrier to their success. Husqvarna’s models start at 1,700 euros. Most electric walk-behind mowers sell for 300 euros to 900 euros.

Prices will come down, and when they’re inexpensive enough the market will become mainstream, according to Husqvarna’s Andersson. About 1,000 euros may be “a magical line for the customer,” he said.

Robots aren’t only gardening, they’re also cleaning the house. Sensor-loaded machines have grabbed a 6.1 percent share of the European vacuum-cleaner market, according to GfK. The market has grown about seven times over the last three years and is now worth about 205 million euros in the region, the researcher reports.

Robotic Vacuums

Their success also offers a cautionary tale for pricing. Electrolux AB, (ELUXB) the world’s second-biggest appliance maker, was first to introduce the robot vacuum cleaner in 2001 and after reaping little success stopped making the product in 2009.

Electrolux spokesman Erik Zsiga said the development costs kept the retail prices too high.

Companies that still make robot vacuums include Siemens AG, (SIE) Samsung Electronics Co. Ltd. and iRobot Corp., which raised its earnings forecast in July after sales beat estimates. An Electrolux Trilobite vacuum cleaner retailed for more than $1,500 before it got pulled from the market, while an iRobot Roomba can be bought on Amazon today for as little as $300.

Electrolux’s limited success with robotic appliances isn’t discouraging Honda from betting on auto mowers. The Tokyo-based company said in August it will start selling a machine called the Miimo in Europe next year.

Johan Dahl, an analyst at Erik Penser Bankaktiebolag in Stockholm, who has a hold recommendation on Husqvarna’s shares said even though the competition is getting stiff, there is room for more players to compete profitably.

Penn Evaded Harvard Losses With `Defensive' Fund, Marks Says

Bloomberg

The University of Pennsylvania, the Ivy League school founded by Benjamin Franklin, outperformed its wealthiest peers by avoiding many hard-to-sell assets such as real estate, according to Howard Marks, former chairman of the the investment committee.

Penn held less in private equity and property, more in stocks and owned a “defensive” mix of hedge funds, as well as “substantial” cash and short-term U.S. Treasuries, Marks wrote in an Oct. 20 memo to trustees, obtained by Bloomberg News. The Philadelphia school’s investments fell 16 percent in the year ended June 2009, versus the 27 percent and 25 percent declines of Harvard and Yale, the two richest U.S. universities.

“Most things in investing are two-edged swords: if you do more of them, you’ll make more if they work but lose more if they don’t,” wrote Marks, chairman of Oaktree Capital Management LP in Los Angeles, who left his endowment post on June 30. “Two prominent examples are (1) using borrowed money, or ‘leverage,’ to magnify results and (2) investing in illiquid assets that can’t always be sold on demand other than at a substantial discount from their fair value.”

The $5.7 billion fund outperformed Harvard in Cambridge, Massachusetts, and Yale in New Haven, Connecticut, again in the past year, while still trailing them over the last decade. Yale’s David Swensen pioneered the strategy of using private equity, real estate and commodities to beat stocks and bonds. These infrequently traded stakes ballooned as a percentage of big endowments when markets tumbled after the September 2008 bankruptcy of Lehman Brothers Holdings Inc.

5.6% a Year

Penn averaged annual increases of 5.6 percent in the past decade, compared with the 7 percent and 8.9 percent returns at Harvard and Yale, and its own target of 8.25 percent. In the year ended June 30, Penn gained 13 percent on investments, tied for third-best in the Ivy League, while Harvard’s $27.6 billion endowment climbed 11 percent and Yale’s $16.7 billion fund advanced 8.9 percent.

Columbia University’s $6.5 billion fund in New York led with a 17 percent gain, followed by Princeton University’s $14.4 billion endowment in New Jersey, which increased 15 percent. Cornell University’s $4.4 billion endowment in Ithaca, New York, matched Penn last year.

Yale was the worst performer among the eight Ivy League schools, while Harvard ranked fifth.

Marks, 64, started Oaktree after leaving TCW Group Inc. in 1995. The firm managed $75.1 billion, as of June 30, in investments including distressed debt, high-yield and convertible bonds, private equity and real estate. Marks, who graduated from the Wharton school in 1967, served on Penn’s investment committee for 13 years and established the Marks Family Writing Center in 2003 on campus.

Not ‘Superhuman’

“As I wrote last year, ‘everyone had regrettable investments in his or her portfolio -- given the climate, you’d have to be superhuman not to,’” Marks said in his final letter to trustees after 10 years as the head of Penn’s investment board. “What matters is how many, how big and how bad Endowments in general had more of these than other investors in 2007-08, and thus they experienced bigger problems.”

Robert Levy, chairman and chief investment officer at money manager Harris Associates LP in Chicago, has taken over the chairman role at Penn, Marks said yesterday in a telephone interview.

“Investors have a choice between trying to maximize and trying to build in security,” Marks said in the interview. “There isn’t a right over wrong. Everybody has to make that choice for themselves. I think the events of these recent years demonstrate that choice and action.”

Stressing Stability

Penn’s investment committee emphasized stability over maximizing returns and achieved “a respectable return and minimized disappointment and difficulty in bad times,” Marks said.

In the past decade, the endowment added holdings of non- U.S. equities and hedge funds, lessened its preference for value stocks over growth companies, diversified its mix of investment managers and added venture capital and buyout firms, albeit to a smaller extent than its peers, Marks wrote. In 2004, the school appointed Kristin Gilbertson as CIO, growing its internal endowment management capabilities, he wrote.

The Ivy League schools are private institutions in the northeastern U.S. None has recouped the record losses incurred in the year ended in June 2009. As investments tumbled, universities cut jobs, froze salaries and postponed building projects.

Penn dodged the hundreds of layoffs, construction delays, discounted sales of illiquid investments and debt issuance of several of its peer institutions because the university was less dependent on its fund, getting 10 percent of its budget from endowment earnings, Marks said. In comparison, Harvard and Yale get more than one-third of their budgets from endowment income.

“Never forget the 6-foot-tall man who drowned crossing the stream that was 5 feet deep on average,” Marks said. “Prudent financial management doesn’t get you through ‘on average’ -- rather, it enables you to survive the low points."

Public Colleges Are an Investment

As posted by: Wall Street Journal

Regarding your editorial " 'Shovel-Ready' on Campus" (Dec. 18): Universities around the country have ready to go infrastructure and major repair projects that will create immediate employment and have long-term benefits. No group is entitled to anything in the stimulus package. But Congress and the new administration should consider what campus investments can do for the country as they put together their legislation. Higher-education institutions are a critical part of our physical and human infrastructure. Many students need Alternative Student Loans or Federal Student Loans to attend public colleges.

Many states are deeply cutting appropriations for public universities. Note that for 20 years public universities have received in tuition and state appropriations about the same amount of money, inflation adjusted, on a per student basis. This may seem counterintuitive because of tuition increases, but on the average those tuition increases have been used to cover the falling per student state appropriations.

Peter McPherson
President
National Association of State Universities and Land-Grant Colleges
Washington

Mr. McPherson is a former chairman of Dow Jones & Co.

Perhaps they should dub this bailout: Higher Education Investment Shovel Technology, better known as HEIST.

Monty Loud
Aspen, Colo.