LivingSocial Weighs Down Amazon Earnings, but That Doesn’t Tell the Whole Story (Memo)

Amazon reported a wider net loss than it expected, largely because of a massive write-down it made in conjunction with its investment in LivingSocial.

The losses not only make the retail giant look bad, but it also makes the Groupon competitor appear as though it is in a real slump. But in a memo, obtained by AllThingsD, which was distributed to LivingSocial employees this afternoon, CEO Tim O’Shaughnessy claims the results are not as bad as they look. “You’re likely to see news articles saying that we hurt Amazon’s earnings and lost a ton of money,” he wrote in the memo, adding, “That doesn’t tell the full story.”

Amazon’s third-quarter net loss was $274 million, or 60 cents a share, including an impairment charge totaling $169 million, or 37 cents a share, related to the Washington, D.C.-based daily deals company.

Other LivingSocial results from Q3 to be revealed in Amazon’s filings:

  • Revenue of $124 million.
  • Operating expenses of $193 million.
  • Operating losses of $565 million.
  • Net loss of $566 million.

Most of the losses in the quarter, however, involve non-cash items related to acquisitions made last year that are no longer worth as much, O’Shaughnessy explained. There’s more good news: for the first time since 2009, LivingSocial had positive operating cash flow. In other words, most of these losses are just on paper.

Hopefully, Amazon investors will buy that story. After the company initially reported results, its stock was down more than 6 percent in after-hours trading, but has since rebounded some. It is now trading down only 2 percent.

Here’s the memo:

Hey all –

This afternoon, our investor and partner Amazon.com announced its quarterly earnings. Because our financials for the quarter had a material impact on its results, Amazon included some information about our numbers in its announcement, and current estimates on some of our financials will be included in a filing that comes out tomorrow as well. This is similar to past quarters.

From those announcements, you’re likely to see news articles saying that we hurt Amazon’s earnings and lost a ton of money. That doesn’t tell the full story, so I wanted to share some more info on our third-quarter results with you, so you — and the customers you serve — can better understand what they mean.

First, here’s what you can glean from Amazon’s filings: We had roughly $124 million in revenue last quarter, our operating expense was approximately $193 million, and we had an operating loss of around $565 million and an overall net loss of about $566 million for the quarter.

Sounds like a lot of losses, right? Or maybe you wonder how our losses could be higher than our operating expenses? Well, what the numbers don’t fully explain is that more than 95% of our estimated losses in the quarter involved non-cash items, in particular an estimated charge of around $496 million related to the write down of “goodwill” in acquisitions we made last year and another $45 million or so related to stock compensation and other items.

In layman’s terms, we took a charge of around $496 million because we had to revalue some of the companies we acquired last year. As you know, the market has also dropped over that same time for similar public tech companies. Those changes in valuation showed up as an “impairment” in our financial statements, but they do not affect the day-in, day-out operations of the business.

When you look at our financial position, the story is very different. For the third quarter of 2012, our global revenue nearly doubled on a year-over-year basis. More important, for the first time since 2009, we had positive operating cash flow for our company on a global basis in the month of September. In other words, we ended the last month of the quarter with more money in the bank than we had at the beginning of the month, marking an important milestone on our path to profitability and long-term success.

The September numbers from Yipit also show strong competitive trends. From August to September, we gained a whopping six points of North American market share against Groupon, as our share jumped from 21% to 24% while theirs fell from 56% in August to 53% in September. While those numbers included our world-record-setting Starbucks deal, they also showed strong growth without it.

In the big picture, all of these trends mean that LivingSocial is gaining control over our own destiny, an enviable position for any start-up and one that allows us to aggressively execute against our vision to build the leading platform for local commerce worldwide.

I know each of you is working hard and making strong moves every day to help us reach our goals. Thanks for all your efforts.

- Tim


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Another gadget you don’t really need. Will not work once you get it home. New model out in 4 weeks. Battery life is too short to be of any use.

— From the fact sheet for a fake product entitled Useless Plasticbox 1.2 (an actual empty plastic box) placed in L.A.-area Best Buy stores by an artist called Plastic Jesus