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The latest company to feel an ‘Amazon effect’ is not a bricks-and-mortar retailer, struggling to compete with the e-commerce giant.
Atlas Air Worldwide Holdings, a provider of outsourced aircraft and aviation operating services, said Wednesday that costs incurred in the quarter because of a new venture with Amazon.com were part of the reason its profit and revenue fell way short of estimates.
In May, Atlas announced it would provide air cargo services for Amazon, helping it to build out its delivery network. The agreement included the operation of 20 Boeing 767 freighters by Atlas unit Atlas Air, providing crew, maintenance and insurance, over a seven-year period.
As part of their agreement and to “align interests and strengthen the long-term relationship,” Atlas granted Amazon warrants to acquire up to 20 per cent of the company at a strike price of $37.50 a share over a period of five years. Vesting was tied to the start of the freighter program and other conditions.
The company also granted Amazon warrants to buy up to an additional 10 per cent of Atlas’s stock at the same strike price over a seven-year period, with vesting tied to payments made by Amazon.
Atlas said it expects to place its first aircraft into service for Amazon this quarter. “We have secured all of the conversion slots and the vast majority of the feedstock aircraft required to support 20 B767-300s for Amazon by the end of 2018,” Chief Executive William Flynn said, according to the Atlas earnings release.
However, as well as absorbing early startup costs, Atlas said it had a liability related to the Amazon warrants and said it would re-measure them at fair value for every period until they are exercised or expire in May 2021. Atlas’s stock was last trading at $37.85, down about 8 per cent on the day.
Atlas said it now expects full-year adjusted earnings per share from continuing operations to be lower than adjusted EPS in 2015 by a high-single-digit percentage. The current FactSet consensus implies a 5% decline.
“We provide guidance on an adjusted basis because we are unable to predict, with reasonable certainty, the effects of the warrants issued to Amazon or certain other significant items that could be material to our reported results,” said the release.
Cowen analysts said the Amazon startup costs will weigh on Atlas revenue for the next few quarters, but it’s not all bad news. “This will negatively impact overall profitability,” they wrote in a note; however, “we believe the Amazon relationship will ultimately prove to be very profitable but the startup will be slightly disruptive in the near term.”