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Amazon Has Steepest Profit Drop in Decade Amid Warehouse Splurge
Danielle Kucera, ©2012 Bloomberg News
Updated 6:15 a.m., Friday, July 27, 2012

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July 26 (Bloomberg) — Amazon.com Inc., the largest Internet retailer, reported the biggest drop in net income since it reached profitability a decade ago after ramping up spending to capture more business during the holidays.

Net income fell 96 percent to $7 million, or 1 cent a share, the steepest drop since 2002, Amazon said in a statement yesterday. That missed the 3-cent average estimate of analysts compiled by Bloomberg. Sales rose 29 percent to $12.8 billion, shy of the $12.9 billion prediction.

Chief Executive Officer Jeff Bezos has opened six fulfillment centers and plans to add 12 more in 2012 to speed up online-purchase deliveries and bring down shipping costs, as Amazon siphons shoppers from physical stores. The company also stepped up investment in technology, such as its Kindle reader.

“They’ve got to continue to invest, and that forgoes short-term profits for long-term gains,” said Kerry Rice, a San Francisco-based analyst at Needham & Co. “It’s kind of a double-edged sword.”

The shares increased less than 1 percent to $221.88 in extended trading after earlier gaining 1.4 percent at the close yesterday in New York. The stock had advanced 27 percent this year.

Amazon said it expects a third-quarter operating loss of $350 million to $50 million, compared with the average analyst estimate of a gain of $119.6 million. Sales in the current period will be $12.9 billion to $14.3 billion, Amazon said, while analysts on average projected $14.1 billion.

Operating Income

“The guidance for the third-quarter operating income is lower than it’s probably ever been and the stock’s up,” Rice said. “This is not an earnings story. This is a demand, topline-driven story.”

Amazon is pouring resources into Kindle Fire, a tablet that lets it sell digital books, movies and music. It’s also investing in website support and marketing to prepare for the fourth quarter, when there’s a rush of holiday sales, Chief Financial Officer Thomas Szkutak said on a conference call.

“Our operating expenses are growing at a faster rate than revenue,” Szkutak said. “It’s a number of areas, including our fulfillment expense line item, marketing, as well as technology and content. We’re investing across the business.”

Operating expenses climbed 31 percent to $12.7 billion in the second quarter, boosted in part by a 44 percent increase in fulfillment spending to $1.36 billion. Income from operations was $107 million in the second quarter, Amazon said in a statement. Analysts on average had projected $45 million.

Warehouses

Amazon has costs associated with the fulfillment centers it has already opened this year, which take time to stock, staff and reach scale, as well as those in progress, said Mark Harding, an analyst at JMP Securities. Those expenses factored into the third quarter loss projection.

“When you add on additional capacity so quickly, it takes a little bit of time for that additional volume to run through those fulfillment centers and scale up,” Harding said.

Sales from third-party retailers increased to 40 percent of total units sold, compared with 36 percent in the previous quarter. Those purchases boost margins because Amazon collects a commission on any item sold by an outside vendor and books that income as 100 percent profit. The company charges about 12 percent of each third-party sale, estimates Carlos Kirjner, an analyst at Sanford C. Bernstein & Co.

Planned upgrades to the Kindle Fire may have curbed sales of Amazon’s top-selling product. The tablet’s share of the market slipped to 4 percent in the first quarter, from 17 percent in December, according to IDC.

Amazon may have sold about 670,000 units of the device in the second quarter, fewer than in the previous three months, as customers held off on buying in anticipation of a newer version, Harding said. Amazon doesn’t break out device sales.

The company also is spending money on digital content, pushing sales of music, books and movies on the tablet. LOVEFiLM U.K. Ltd., Amazon’s European online video streaming service, struck a deal with Universal Pictures Ltd. for rights to films such as “Bridesmaids” and “Despicable Me” in May.

–Editors: Lisa Rapaport, Reed Stevenson

To contact the reporter on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net

Read more: www.sfgate.com/business/bloomberg/article/Amazon-Has-Steepest-Profit-Drop-in-Decade-Amid-3739448.php#ixzz24EaitVwU

India’s Biggest Corporate Loss Shows Singh’s Deficit Dilemma
By Rakteem Katakey
August 10, 2012 8:31 AM EDT
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Indian Oil Corp. (IOCL) posted a record quarterly loss after the government failed to compensate it for capping fuel prices, showing the challenge facing Prime Minister Manmohan Singh as he attempts to rein in the nation’s finances.
The state-owned supplier of about 40 percent of the fuels consumed in India reported the biggest loss by any company in the country after selling products including diesel and kerosene below cost.
The pending compensation adds to the high inflation and budget deficit that Singh is grappling with, along with sliding industrial production, a failing monsoon, a declining rupee and the European debt crisis that’s sapped demand for Indian goods. The coalition government has refrained from increasing prices of diesel, the most widely used fuel, for more than a year to prevent protests from its allies and opposition parties gearing up for national elections in less than two years.
“There’s a problem with inflation and we can’t increase fuel prices, and the budgeted amount for subsidy is not enough,” Indian Oil Chairman R.S. Butola told reporters in New Delhi yesterday. “The problems are many, but something will have to be done. The loss is huge.”
Indian Oil’s loss widened to 224.5 billion rupees ($4.07 billion) in the three months ended June 30 from 37.2 billion rupees a year earlier, the nation’s largest company by sales said in a stock exchange filing. Rivals Hindustan Petroleum Corp. (HPCL) and Bharat Petroleum Corp. (BPCL) posted losses of a record 92.5 billion rupees and 88.4 billion rupees, respectively, in the quarter.
Indian Oil is yet to be compensated by Singh’s government for a loss of 174.9 billion rupees from selling diesel, kerosene and cooking gas below cost in the quarter, Butola said. The rupee’s slump in the period increased the cost of purchases for the refiner, which imports almost 80 percent of its oil needs, while Brent crude’s 20 percent decline last quarter lowered the value of its stockpiles by 40.6 billion rupees.
“The $4 billion loss is stunning and staggering,” said Jagannadham Thunuguntla, chief strategist at SMC Global Securities Ltd. (GLBS) in New Delhi. “The oil marketing policy is so complicated that these companies have to live at the mercy of cash compensation policy of the government.”
Indian Oil fell 0.5 percent to 250.35 rupees, the lowest level since June 19, at the close in Mumbai. The stock has declined 1.3 percent this year, compared with a 14 percent increase in the benchmark Sensitive Index. (SENSEX)
China, the world’s second-biggest oil consumer, increased retail gasoline and diesel prices for the first time since March starting today after global crude costs climbed. Brent crude oil in London trading gained 7.3 percent in July, the first increase in four months.
Indian Oil received 82 billion rupees as a government grant a year earlier. The refiner had debt of 909 billion rupees as of June 30, compared with 754.5 billion rupees on March 31, Butola said.
“Increasing fuel prices will lead to some pain for the people and this pain is a necessary medicine for reviving growth and sustaining the economy,” said Sonal Varma, economist at Nomura Holdings Inc. in Mumbai. “So far, political compulsions have been dominating economic compulsions and it’s time for this to reverse.”
India plans to cut the budget deficit to 5.1 percent of gross domestic product in the year ending March 31, after missing a target of 4.6 percent last year.
Inflation in Asia’s third-biggest economy has stayed above 7 percent since February. Price pressures from a drop in the rupee and the impact of a weak monsoon on crops forced the central bank to leave interest rates unchanged in July, breaking with a wave of cuts in borrowing costs from China to Brazil and Europe.
The rupee fell 8.6 percent against the U.S. dollar in the quarter ended June 30, the worst performer among major currencies in Asia Pacific. It has slumped about 18 percent against the dollar in the past 12 months to 55.285 per dollar.
Manufacturing fell 3.2 percent in June from a year earlier, according to India’s Central Statistical Office yesterday. Mining gained 0.6 percent and electricity output rose 8.8 percent.
Finance Minister Palaniappan Chidambaram, who was appointed last week, has said he intends to take steps to reverse the slowdown in manufacturing. He also pledged to clarify tax laws and contain the budget deficit as he tries to assuage concern that the nation’s outlook is deteriorating.
India will reassess its fiscal deficit goal for the 12 months that began April 1 after a mid-year review, Chidambaram said yesterday in a written response to questions from lawmakers. Forecasters from Citigroup Inc. to Crisil Ltd., the local unit of Standard & Poor’s, predict the gap will widen from 5.8 percent of GDP in 2011-2012.
India’s GDP rose 5.3 percent in the first quarter from a year earlier, the least since 2003. Standard & Poor’s and Fitch Ratings have warned they may strip the nation of its investment- grade credit rating, citing risks including fiscal and current- account deficits.
To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net
To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net
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Facebook Falls to Half-Price From IPO After Lock-Up Ends

U.S. Navy Ship Collides With Tanker Near Strait of Hormuz
By Wael Mahdi and Isaac Arnsdorf
August 12, 2012 5:47 AM EDT
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The U.S. Navy said one of its guided-missile destroyers collided with an oil tanker near the Strait of Hormuz in the Persian Gulf.
The collision between USS Porter and the Panamanian-flagged bulk oil tanker M/V Otowasan occurred at about 1 a.m. local time, Bahrain-based U.S. 5th Fleet spokesman Lieutenant Greg Raelson said in a phone interview today. The collision was not combat-related and overall damage to the ship is being evaluated, he said.
Strait of Hormuz is a narrow waterway carrying a fifth of the world’s traded oil that Iranian officials have threatened to block in retaliation for sanctions targeting the country’s nuclear program. The U.S. Navy has said it would move to stop any Iranian attempt block the waterway.
The tanker, owned by Tokyo-based Mitsui OSK Lines Ltd. (9104), can hold 2 million barrels of crude oil and is 95 percent full, according to ship-tracking data compiled by Bloomberg. The vessel loaded at Mesaieed in Qatar and was sailing to Fujairah, the region’s largest refueling port in the United Arab Emirates, the data show.
“We have had no reports of any spills or leakage,” 5th Fleet’s Raelson said.
To contact the reporters on this story: Wael Mahdi in Manama at wmahdi@bloomberg.net; Isaac Arnsdorf in London at iarnsdorf@bloomberg.net
To contact the editor responsible for this story: Shaji Mathew at shajimathew@bloomberg.net

Mark Zuckerberg admits Facebook stock tumble is ‘painful’ to watch

Mark Zuckerberg, CEO of Facebook
Picture: Getty
Last Updated: 2:08PM BST 17/08/2012
Mark Zuckerberg has reportedly admitted Facebook’s stock market tumble has been “painful” to watch, at a meeting designed to boost staff morale.

He gathered staff to discuss the issue ahead of the release of an extra 271 million shares on Thursday, which cut Facebook shares to just $19.87, almost half their $38 flotation price, according to The Wall Street Journal.

Until the IPO in May, Mr Zuckerberg publicly professed little interest in the value of his creation and encouraged staff who had been awarded generous share options to adopt the same focus on developing it products. He posted a picture saying “stay focused, keep shipping” on his Facebook profile on the day of the flotation.

Witnesses said that at the meeting the 28-year-old chief executive was asked if staff were allowed to talk about the firm’s troubles on Wall Street. At other Silicon Valley firms where many employees own stock, such as Apple, the company share price is standard small talk in canteens and break rooms.

Mr Zuckerberg reportedly said that people should now feel comfortable talking about the issue, but still try not to focus on it.

He was forced to acknowledge Facebook’s “painful” stock market hammering, however, to employees whose options were issued at a higher price than the shares are currently trading at. Many remain unable to trade their share as a series of lock-in periods remain in force.

Thursday’s new low meant Mr Zuckerberg’s personal fortune has been slashed to about $10bn, down from estimates of almost $20bn in May.

Facebook’s stock has tumbled amid criticism that its shares were overvalued by bankers to begin with. Its maiden results, in July, revealed a revenue growth slowdown and a overall loss of $157m. The firm has also admitted it is threatened by the growth in smartphones and tablets as it has not worked out a strategy to make money from its mobile apps or mobile website.

Apple Inc. (AAPL) is preparing to introduce the next version of the iPhone on Sept. 12 in what will be a design overhaul of its top-selling product, according to two people with knowledge of the company’s plans.

The people asked not to be named because an official announcement hasn’t been made. The new iPhone will have a larger screen and thinner body, and is expected to work with faster long-term evolution wireless networks being introduced by carriers such as Verizon Wireless and AT&T Inc. (T), according to analysts such as Piper Jaffray Cos.’ Gene Munster.

The design change will be Apple’s first for the best- selling smartphone since 2010, when it unveiled the iPhone 4. Last year’s update, the 4S, had the same look as the prior version. Anticipation for the new model has led to a drop in sales for the current devices, causing Apple to miss analysts’ sales and profit targets for three months that ended in June. The iPhone accounted for 46 percent of the company’s revenue in the quarter.

Apple is battling Samsung Electronics Co. (005930) for supremacy in the $219.1 billion smartphone market. While Apple’s strategy has been to release a single smartphone each year, Samsung has become the world’s leading handset maker by putting out several devices a year in a range of sizes and prices.

The planned September debut was reported earlier by iMore, a technology news website. Natalie Harrison, a spokeswoman for Apple, declined to comment.

Higher Prepayments

Signs that Apple is preparing to introduce a new product were evident in its quarterly financial results. The company increased the prepayments it is making for components by $1.15 billion — a jump that may indicate a new product is going to be introduced, according to a report yesterday from Maynard Um, an analyst at Wells Fargo Securities.

Apple co-founder Steve Jobs had worked closely on the redesigned phone before his death in October, one person familiar with the matter said in May.

The stock rose 0.2 percent to the equivalent of $598.87 in German trading as of 9:08 a.m. in Frankfurt. Apple, the world’s largest company by market value, climbed 1.7 percent to $595.03 at yesterday’s close in New York. The shares have risen 47 percent this year.

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Amazon Profit Tumbles as Bezos Splurges on Warehouses

Amazon.com Inc. (AMZN), the largest Internet retailer, reported the biggest drop in net income since it reached profitability a decade ago after ramping up spending to capture more business during the holidays.

Net income fell 96 percent to $7 million, or 1 cent a share, the steepest decline since 2002. That missed the 3-cent average analyst estimate compiled by Bloomberg. Sales rose 29 percent to $12.8 billion, shy of the average estimate of $12.9 billion.

Chief Executive Officer Jeff Bezos has opened six fulfillment centers and plans to add 12 more in 2012 to speed up online-purchase deliveries and bring down shipping costs, as it siphons shoppers from physical stores. The company also stepped up investment in technology, such as its Kindle reader.

“They’ve got to continue to invest, and that forgoes short-term profits for long-term gains,” said Kerry Rice, a San Francisco-based analyst at Needham & Co. “It’s kind of a double-edged sword.”

The shares increased less than 1 percent to $221.88 in extended trading after earlier gaining 1.4 percent at the close in New York. The stock has advanced 27 percent this year.

Amazon said it expects a third-quarter operating loss of $350 million to $50 million, compared with the average analyst estimate of a gain of $119.6 million. Sales in the current period will be $12.9 billion to $14.3 billion, Amazon said, while analysts on average projected $14.1 billion.

Operating Income

“The guidance for the third-quarter operating income is lower than it’s probably ever been and the stock’s up,” Rice said. “This is not an earnings story. This is a demand, topline-driven story.”

Amazon is pouring resources into Kindle Fire, a tablet that lets it sell digital books, movies and music. It’s also investing in website support and marketing to prepare for the fourth quarter, when there’s a rush of holiday sales, Chief Financial Officer Thomas Szkutak said on a conference call.

“Our operating expenses are growing at a faster rate than revenue,” Szkutak said. “It’s a number of areas, including our fulfillment expense line item, marketing, as well as technology and content. We’re investing across the business.”

Operating expenses climbed 31 percent to $12.7 billion in the second quarter, boosted in part by a 44 percent increase in fulfillment spending to $1.36 billion. Income from operations was $107 million in the second quarter, Amazon said in a statement. Analysts on average had projected $45 million.

Warehouses

The company has costs associated with the fulfillment centers it has already opened this year, which take time to stock, staff and reach scale, as well as those in progress, said Mark Harding, an analyst at JMP Securities. Those expenses factored into the projection of a loss in the third quarter.

“When you add on additional capacity so quickly, it takes a little bit of time for that additional volume to run through those fulfillment centers and scale up,” Harding said.

Sales from third-party retailers increased to 40 percent of total units sold, compared with 36 percent in the previous quarter. Those purchases boost margins because Amazon collects a commission on any item sold by an outside vendor and books that income as 100 percent profit. The company charges about 12 percent of each third-party sale, estimates Carlos Kirjner, an analyst at Sanford C. Bernstein & Co.

Planned upgrades to the Kindle Fire may have curbed sales of Amazon’s top-selling product. The tablet’s share of the market slipped to 4 percent in the first quarter, from 17 percent in December, according to IDC.

Amazon may have sold about 670,000 units of the device in the second quarter, fewer than in the previous three months, as customers held off on buying in anticipation of a newer version, Harding said. Amazon doesn’t break out sales of the device.

“When Kindle sales slow, there are less customers available to make digital purchases,” said Dan Kurnos , an analyst at Benchmark Co.

To contact the reporter on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Apple Provides Lessons for RIM’s BlackBerry Comeback Bid

Research In Motion Ltd. (RIM)’s decline has die-hard BlackBerry fans harking back 15 years to the days when another fruit-themed company was losing market share, posting losses and spurring talk of its imminent demise.

In 1997, Apple Computer Inc. (AAPL) lost more than $1 billion, saw sales tumble 28 percent and was as little as 90 days away from bankruptcy. Co-founder Steve Jobs returned to Apple that year and did many of the things RIM is attempting now: He simplified the company, embraced a new operating system and revamped the culture to focus on products that were true breakthroughs.

RIM faces long odds in trying to replicate Apple’s success story — for one, it lacks Steve Jobs. A RIM comeback also hinges on challenging a hit product that Jobs himself introduced: the iPhone. Still, RIM has rabid fans and can rely on Apple’s approach of controlling both hardware and software, letting it make products that tightly integrate the two pieces.

“Apple and RIM are both innovative companies with very loyal customers,” said Ron Adner, an associate professor of strategy and entrepreneurship at the Tuck School of Business at Dartmouth College in New Hampshire. “For RIM to follow that story line, they need a lot of innovation in not a lot of time — not impossible, but not likely.”

RIM Chief Executive Officer Thorsten Heins took the helm in January and made some big changes, including a plan to fire almost a third of the workforce and shut down manufacturing sites. The Waterloo, Ontario-based company also hired JPMorgan Chase & Co. and RBC Capital Markets to study strategic options. Heins says selling the company isn’t the goal of the review. RIM would prefer to find a partner or license its operating system.

‘Own Path’

With the changes under way, Heins, 54, says his company will surprise critics with its transformation.

“The trait that distinguishes innovative companies is the ability to keep conventional wisdom in perspective and focus instead on the unique value they provide customers,” he said in an e-mail interview. “They follow their own path, which is what RIM is doing — and we know we must get it right.”

Even so, Heins’s product changes haven’t been as big as those enacted by Jobs, who died last year. Immediately after taking over Apple in 1997 following a 12-year absence, Jobs cut about 70 percent of the company’s products — including printers and the Newton personal digital assistant. He trimmed research spending and eliminated the corporate-development department.

Board Shakeup

Jobs also replaced most of the board and began reworking the corporate structure and supply chain. The common theme: focus only on what was necessary to maintain the company’s hold on its loyal fans.

From that position of retrenchment, Jobs pursued an ambitious expansion. He personally helped create Apple’s “Think Different” campaign — not just to get customers to buy current products but to inspire Apple’s own employees to build them. Apple released the iPod music player and iTunes in 2001, the iPhone in 2007 and the iPad in 2010. The company dropped the word “computer” from its name in 2007, reflecting that transformation. Four years later, it overtook Exxon Mobil Corp. (XOM) to become the world’s most valuable business.

RIM needs to show that it’s not just trying to play catch- up, said Adner, author of “The Wide Lens: A New Strategy for Innovation.” Take the example of the BlackBerry PlayBook. When the Apple iPad tablet took off, RIM hurried to offer its own device. The result of that rush job was a product that lacked built-in e-mail — one of the BlackBerry’s main selling points.

“It was lunacy,” Adner said.

‘Bold Retreat’

Instead, RIM needs to make a “bold retreat” to get out of markets where it can’t win, such as consumer technology, focusing instead on its corporate customers, he said.

Charlie Wolf, an analyst who has covered Apple since 1985 and watched its comeback unfold, isn’t counting out RIM yet. The real test will be whether its new BlackBerry 10 software can deliver, he said.

“I don’t think we should dismiss BB10 — it would be foolish,” said Wolf, who works for Needham Securities Inc. in New York. “But to begin to attract new users, it’s got to be superior and markedly superior to the iPhone. And it’s an incredibly tall order.”

Like Apple’s bruising at the hands of Microsoft Corp. (MSFT) in 1996, RIM has been battered by competitors. Sales fell 43 percent last quarter from a year earlier, as U.S. and Canadian consumers dumped their BlackBerrys in favor of Apple’s iPhone and devices based on Google Inc. (GOOG)’s Android platform. The company expects a second straight operating loss this quarter.

Market Share

The sales declines may slow as RIM’s customer base is whittled down to the BlackBerry faithful, though that’s no recipe for growth, said Daniel Kunstler, a former technology analyst who was among the first to upgrade Apple to a buy rating in August 1997.

Fifteen years ago, Apple’s market share was plunging. Its portion of the personal-computer market had fallen by almost half over a three-year period, according to Standard & Poor’s. The stock also was getting battered, falling to a split-adjusted $3.19 in July 2007. It now trades at almost $575. RIM shares, meanwhile, are currently trading below $7, down 95 percent from their mid-2008 peak of $147.55.

Kunstler, based in San Francisco, says the comparison between RIM and Apple is flawed because the Canadian company lacks a couple of key ingredients: Jobs’s own imagination and his ability to coax and cajole his teams into executing their ideas and delivering products on time.

Product Fumbling

“Before Jobs returned, Apple had been fumbling very badly for a number of years on the product side,” Kunstler said. The product discipline he instilled in the company is hard to replicate, he said.

In a bid to tighten its product focus, RIM plans to sell fewer BlackBerry models when the new generation arrives — probably no more than four, Heins says. Even so, the products will be late. Last month, Heins delayed the arrival of RIM’s first BB10 phone until early 2013, meaning it will now debut more than a year after it was originally expected.

Heins took over as CEO from Mike Lazaridis and Jim Balsillie, who ran the company as a team. Lazaridis, RIM’s founder, remains a director, is vice chairman and heads up the board’s innovation committee — its own attempt to think different. The company’s next breakthrough may be just as hard for outsiders to predict as its initial success, Lazaridis said in an e-mail.

‘Game-Changing Innovation’

“One thing we’ve seen over the years is that game-changing innovation can come from anywhere, including a company that got its start over a bagel shop in Waterloo, Ontario,” he said.

Jobs had instant credibility with Apple employees because he helped start the business and wasn’t around during most of the lean years. Lazaridis doesn’t have that distinction: RIM gained and then lost most of its value under his stewardship. He’s also been criticized for not anticipating the popularity of camera phones and mobile browsers. By stepping aside this year, Lazaridis put Heins, a former Siemens AG executive who joined RIM almost five years ago, in the role of would-be savior.

RIM declined to say if Heins is taking cues from Jobs’s career. His inspiration comes from 78 million BlackBerry fans, who want to see the company succeed, Heins said.

“The excitement and commitment that all of these people, our customers, fans and employees, show on a daily basis gives me all the inspiration I need to navigate through this period and guide RIM to once again transform the way people communicate and to generate long-term value for our shareholders,” Heins said in an e-mail.

NeXT Software

The linchpin of Apple’s operating-system comeback was NeXT, an OS Jobs had built while in exile from Apple. The company acquired the business and then retooled it to create the basis of the Mac OS X. Similarly, RIM bought QNX Software Systems for $200 million in 2010 and began reconfiguring it as the basis for BB10. RIM’s future depends whether the new operating system can similarly disrupt the market, said Mike Abramsky, principal at Toronto-based consulting firm Red Team Global.

“That’s the $64,000 question,” said Abramsky, a former analyst who tracked both Apple and RIM. “It’s almost like they have to revolutionize the market the way Apple did to change their fortunes around — and that I think is beyond them.”

RIM also needs to appeal to developers, who would have to make the apps required for BB10 to compete with Apple and Android devices, said Jean-Louis Gassee, a venture capitalist who worked at Apple for almost a decade. No matter how good BB10 is, it will lag too far behind Android and Apple, he said.

Needs Ecosystem

“Assuming Thorsten Heins manages to lead his engineers into creating an OS on par with Android and Apple, RIM does not have the ecosystem,” Gassee said. “The killer problem is the ecosystem.”

One outcome for RIM would be to sell off the company — something Apple had discussed doing before Jobs returned. Mike Kwatinetz, a partner at venture firm Azure Capital Partners in San Francisco, would like Microsoft to buy RIM.

Tony Imperati, a spokesman for Redmond, Washington-based Microsoft, declined to comment on that possibility.

“RIM needs to somehow change the war,” said Kwatinetz, a loyal BlackBerry user who covered Apple as an analyst during its turnaround. “They just do e-mail better than anybody.”

Barring a Microsoft deal, RIM should focus solely on corporate customers, who have no interest in “Angry Birds” games or YouTube videos, Kwatinetz said. RIM doesn’t have much of an alternative, he said. “Are they really going to outflank Apple as a consumer company?”

To contact the reporters on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net; Peter Burrows in San Francisco at pburrows@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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Facebook Falls After Report Fails to Quell Concerns Over Growth

Facebook Inc. (FB) fell in late trading yesterday after its first earnings report as a public company showed a slower sales gain and narrower profit margins, failing to allay concerns over growth that have dragged down shares.

Operating margin, excluding certain costs, was 43 percent in the second quarter, a decline from 53 percent a year earlier, amid a fourfold surge in sales and marketing expenses, Menlo Park, California-based Facebook said in a statement yesterday. Revenue rose 32 percent, the slowest pace on record, and payments-related sales were $192 million, below the $199.3 million average prediction from analysts surveyed by Bloomberg.

Facebook executives led by Chief Executive Officer Mark Zuckerberg, addressing analysts for the first time since the company’s May 17 initial public offering, issued no growth forecasts and said little else to reassure investors who fret that the company is overvalued. The largest social network is adding users faster than it can generate ad sales, the company said, reiterating remarks it made in the run-up to the IPO.

“It has become a show-me story,” said Nabil Elsheshai, a senior equity research analyst at Thrivent Financial for Lutherans. “The problem is deceleration, and there wasn’t anything from an outlook perspective that would indicate that is going to stop.”

Facebook shares slumped 12 percent to as low as $23.75 after the results were released. It had dropped 8.5 percent to $26.85 yesterday during regular trading hours, leaving it down 29 percent from its $38 IPO price.

Expenses Surge

Sales increased to $1.18 billion, topping the average estimate of $1.16 billion, according to data compiled by Bloomberg. Monthly active users rose to 955 million, exceeding the 950.1 million prediction by analysts surveyed by Bloomberg.

The revenue increase was dwarfed by a surge in spending on marketing and sales, which ballooned to $392 million. The company reported a net loss of $157 million, or 8 cents a share, and profit excluding certain costs of 12 cents a share.

Yesterday’s report and conference call — the most highly anticipated earnings release since Google Inc.’s inaugural figures in 2004 — gave management its first chance since May to make a case that Facebook deserves a higher price relative to earnings than 98 percent of the Standard & Poor’s 500.

“A little bit of earnings guidance, a little bit of optimism about future performance would have been nice,” said Jordan Rohan, analyst at Stifel Nicolaus & Co. in New York, who has a hold rating on Facebook. “Facebook trades at a premium to many companies, including Google, and is only growing at a slightly faster pace than companies like Google.”

Twitter, Google

Shareholders sought assurances that the company can keep users engaged amid rising competition from Twitter Inc. and Google and that it can overcome challenges making money from advertising on mobile devices.

Facebook said in May that sales growth wasn’t keeping pace with user expansion as more people access the service with mobile phones. The number of ads delivered in the U.S. decreased 2 percent last quarter even as the number of daily users increased 10 percent, Chief Financial Officer David Ebersman said on the conference call.

“Ad impressions continued the recent trend of growing more slowly than users as more of our usage is on mobile devices,” Ebersman said. “This trend is particularly true in markets such as the U.S., where smartphone use is expanding rapidly.”

Facebook has had little time to gain traction in mobile advertising, having just announced its inaugural mobile- advertising platform in February.

Mobile Challenges

Zuckerberg, who gave opening remarks on the call, said mobile is a key area of focus for the company. Mobile users, who make up more than half of the membership, are more active than counterparts who use only the desktop version, he said.

“Mobile is a huge opportunity for Facebook,” Zuckerberg said. “Our goal is to connect everyone in the world. And over the next five years, we expect 4 or 5 billion people to have smartphones. That’s more than twice as many people as have computers today.”

Early results on mobile ads show some promise, according to AdParlor, which provides services for marketers. Click-through rates are 15 times higher on mobile than on desktops, while the pricing is 30 percent less, according to AdParlor.

Owing to the success of new services, Facebook should boost both mobile and desktop advertising revenue in the future, Chief Operating Officer Sheryl Sandberg said on the call. Still, the company must educate companies about how to best advertise on a social service, still a relatively new avenue for marketers, she said.

Like TV

“It took a long time for the TV market and advertising to be truly understood, it took a long time for search, and I think we’re still in that learning curve with a lot of our clients,” Sandberg said. “If our ads work — and we continue to make our ads work and they work for advertisers and our users — we’ll be able to educate the market over time.”

Facebook raised $16 billion in the May 17 IPO, the largest ever for a technology company. Yet its debut was marred by technical glitches, and the stock only managed to close above $38 on the first day of trading. The company had first proposed a price range of $28 to $35 before raising it to $34 to $38 just days before the IPO.

Facebook derives most of its revenue from ads that reach users as they post comments, embed videos or check photos uploaded to the site by friends. The company also makes money when users pay for digital items, including on games made by Zynga Inc. (ZNGA) Facebook shares were weighed down in regular trading yesterday after Zynga announced earnings that missed estimates.

Progress Made

Facebook is making progress in certain areas, including online display advertising, which includes photos and other graphical elements. Facebook will have 16.8 percent of the U.S. market this year, after grabbing the top spot from Yahoo! Inc. last year, according to EMarketer Inc. in New York. Google will have 16.5 percent, up from 13.8 percent last year and Yahoo’s share will be 9.1 percent, down from 10.8 percent.

Users are also spending more time on the service. Average time spent online increased 5.1 percent in June to 400.2 minutes, or more than six-and-a-half hours, after a gain of less than 1 percent the previous month in the U.S., according to researcher ComScore Inc. (SCOR)

To contact the reporter on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Used Lamborghinis Linger on H.K. Lots Amid China Lull

Waiting lists for ultra-luxury cars in Hong Kong are getting shorter and used-car lots are cutting prices on Lamborghinis, Ferraris and Bentleys in the latest sign of China’s slowdown.

At first glance, the numbers are deceiving: Sales of very expensive new autos surged 47 percent in the first six months, according to industry analyst IHS Automotive. Look more deeply, however, and another picture emerges, especially in the city’s used-car lots.

Dealers of such second-hand cars say job cuts and the worsening global economic outlook are creating uncertainty among the finance-industry and expatriate professionals who make up the bulk of their buyers. Morgan Stanley (MS), Citigroup Inc. (C) and Deutsche Bank AG are among firms with Asian headquarters in Hong Kong that are cutting jobs worldwide.

“The more expensive the car, the more dry the business,” said Tommy Siu at the Causeway Bay showroom of Vin’s Motors Co., the used-car dealership he founded two decades ago. Sales of ultra-luxury cars have halved in the past two or three months, he said. “A lot of bankers don’t want to spend too much money for a car now. At this moment, they don’t know if they’ll have a big bonus.”

Unlike Rolex watches, Gucci handbags and other luxury goods, Hong Kong’s car market hasn’t been distorted by the more than 28 million mainland Chinese who flocked to the city last year. Mainland shoppers spend 44 billion euros ($54 billion) on luxury goods while traveling overseas to locations such as Hong Kong and Europe, according to CLSA Asia-Pacific Markets.

‘True Look’

“In the car market, it’s not buying like watches,” said Booz & Co.’s Russo. “Here you are getting a true look at a category of product bought by Hong Kong buyers. It’s a pulse check on how Hong Kong residents view the stability of the financial system.”

The new-car figures look better because of some short-term developments. The release of the latest models from Ferrari and Lamborghini and the opening of the first Hong Kong showroom by McLaren — maker of the 592-horsepower MP4-12C carbon-fiber coupe — have given sales a bump. Meantime, depressed demand in Europe means a bigger allocation of new cars for Hong Kong dealers.

With the highest proportion of billionaires in the world, according to a Boston Consulting Group report released in May, Hong Kong has enough buyers unaffected by market conditions to keep new sales going, said Bill Russo, a Beijing-based senior adviser at Booz & Co.

‘Saying Something’

There were 273 new Bentleys, Lamborghinis, Rolls Royces, Ferraris, Aston Martins and McLarens sold in the six months to June 30, up from 186 in the first half of last year, according to Englewood, Colorado-based IHS. This outpaced the 23 percent gain in the U.S., the world’s richest nation, and the 40 percent jump in mainland China, the world’s biggest car market, IHS data show.

For these buyers, price isn’t an issue and settling for second-hand is not an option, Russo said.

“It’s the brand image and it says something about you,” said Russo, who was formerly Chrysler Group LLC’s China head. “Used-car buyers are more price sensitive and economic cycles will affect these shoppers more. They are paying for the cars with their income as opposed to their savings.”

The European debt crisis is slowing expansion in emerging markets including China, the International Monetary Fund said this month, when cutting its global economic growth forecast for next year to 3.9 percent from 4.1 percent.

Aspirational Buyers

Hong Kong’s economy eked out 0.4 percent growth in the first quarter, the slowest since escaping the recession caused by the 2008 global credit crisis. Average daily turnover on the city’s stock exchange, the world’s fourth biggest, was 22 percent lower in the first half than the corresponding period of 2011. Asia-Pacific takeovers have dropped 22 percent to $306 billion, according to data compiled by Bloomberg.

People shopping in the second-hand market are typically aspirational buyers who are more likely to sit it out rather than trade down when they can’t afford the brand they want.

“An uncertain economic outlook encourages consumers, particularly those without a buffer provided by sizeable financial assets, to pause on big-ticket purchases,” said Tom Rafferty, a London-based Economist Intelligence Unit analyst.

Vin’s Siu said the drop in high-end customers who typically account for 30 percent of turnover at his 300-lot business was the most important factor behind a 20 percent drop in total sales. Expatriates made up about 70 percent of customers, he said. “A lot of expats are leaving Hong Kong,” he said. “For every 10 who are leaving, two are coming.”

Mercedes Discount

To spur demand, dealers in pre-owned cars are slashing their prices — together with how much they’re willing to pay sellers.

A yellow, 2011 Lamborghini Gallardo 550 recently listed for HK$2.88 million ($371,000) on second-hand car website 28car.com is about $830,000 cheaper than a new model — chump change that would buy a new Mercedes E-Class Coupe to run the kids to school. A silver-gray 2011 Ferrari California with 980 kilometers (613 miles) on the clock is available for HK$2.68 million. That’s a 19 percent discount to a brand new 2012 vehicle, and HK$400,000 cheaper than a 2011 version sold by Ferrari’s official in-house used-car dealer.

“We started cutting prices at the beginning of the year to stimulate sales because the market was slow,” said Tony Chan, a director at GP Motors a short walk up the hill from Vin’s, adding that second-hand Ferraris and Bentleys are leaving the 30-lot dealership at half the speed of last year.

Someone looking to sell a 2009 Bentley Continental will have to accept HK$1.7 million, a third less than they would have received at the start of the year, Chan said.

In the basement automall beside Hong Kong’s Grand Hyatt hotel, trader Samuel Chui said he has stopped buying more cars.

“People want cash now, they don’t want the commodity,” said Chui, who reduced the number of car lots he rents from 15 to nine at the end of last year as business began to slow. “We’ve got plenty of stock and it’s not moving.”

To contact Bloomberg News staff for this story: Liza Lin in Shanghai at llin15@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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