EX-99.1 2 dex991.htm PRESS RELEASE OCTOBER 21, 2004 Press Release October 21, 2004

Exhibit 99.1

 

LOGO

 

AMAZON.COM ANNOUNCES 76% FREE CASH FLOW GROWTH AND 29% SALES GROWTH - EXPECTS

RECORD HOLIDAY SEASON WITH EXPANDED SELECTION, LOWER PRICES, AND FREE SHIPPING

 

SEATTLE—(BUSINESS WIRE)—October 21, 2004—Amazon.com, Inc. (NASDAQ: AMZN) today announced financial results for its third quarter ended September 30, 2004.

 

Operating cash flow was $490 million for the trailing twelve months, compared with $284 million for the trailing twelve months ended September 30, 2003. Free cash flow grew 76% to $420 million for the trailing twelve months, compared with $239 million for the 2003 period.

 

Common shares outstanding plus shares underlying stock-based awards outstanding totaled 434 million at September 30, 2004, compared with 433 million a year ago.

 

Net sales were $1.46 billion in the third quarter, compared with $1.13 billion in third quarter 2003, an increase of 29%. Net sales, excluding the $57 million benefit from changes in foreign exchange rates, grew 24% compared with 2003.

 

Operating income was $81 million in the third quarter, compared with $52 million in third quarter 2003. Consolidated segment operating income grew 29% to $95 million in the third quarter, compared with $74 million in the third quarter 2003. Excluding the $4 million benefit from changes in foreign exchange rates, consolidated segment operating income grew 23% compared with third quarter 2003.

 

Net income was $54 million in the third quarter, or $0.13 per diluted share, compared with net income of $16 million, or $0.04 per diluted share, in third quarter 2003. Pro forma net income in the third quarter grew 52% to $73 million, or $0.17 per diluted share, compared with $48 million, or $0.11 per diluted share, in third quarter 2003.

 

“Our decision to put dollars into lower prices and free shipping instead of TV advertising continues to be embraced by customers,” said Jeff Bezos, founder and CEO of Amazon.com. “Customer adoption of free shipping hit another record high this quarter.”

 

Amazon.com continues to lower shipping and product prices for its worldwide customers. Customers shopping at www.amazon.co.uk now qualify for free shipping on orders of £19 or more, down from the prior threshold of £25.

 

See “Financial Measures” for additional information.

 

Highlights

 

  North America segment sales, representing the Company’s U.S. and Canadian sites, were $816 million, up 15% compared with third quarter 2003. Segment operating income declined $5 million to $57 million, compared with third quarter 2003. Increased adoption of free shipping contributed to an increase of $7 million in net shipping loss compared with the third quarter of 2003.

 

  International segment sales, representing the Company’s U.K., German, French, Japanese, and Chinese sites, were $646 million, up 52% compared with third quarter 2003, and accounted for 44% of worldwide net sales. Excluding the benefit from exchange rates, net sales growth was 39%. Segment operating income grew $26 million to $38 million, compared with third quarter 2003.

 

  Electronics & Other General Merchandise sales grew 55% to $1.47 billion for the trailing twelve months, representing 23% of worldwide net sales. For the first time, North America Electronics & Other General Merchandise sales were over $1 billion on a trailing-twelve-month basis.

 

  A9.com, a subsidiary of Amazon.com, launched a search engine at www.a9.com, to make Internet search more effective. The “search engine with a memory” helps users manage and organize their search results, and discover additional information sources such as the Internet Movie Database and Amazon.com’s Search Inside the Book results.

 

  Star Wars Trilogy was the top-selling DVD worldwide, and the U.K. site received a record 85,000 pre-orders.

 

  The Company introduced Toy stores at both its German and Japanese websites. Customers now have their choice of over 20,000 toys, games, and hobby products, and enjoy discounts up to 30%.

 

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  Amazon Web Services released Amazon E-Commerce Service 4.0 (ECS 4.0), offering software developers and website owners unprecedented access to Amazon’s technology platform and product data. Additionally, the Alexa Web Information Service (AWIS) gives first-ever access to the vast database of website information and usage data compiled by Alexa Internet (www.alexa.com). Access to both ECS 4.0 and AWIS is available at www.amazon.com/webservices, where over 65,000 individuals have registered and downloaded the free Amazon Web Services Software Developers Kit.

 

  Amazon.com’s second U.K. fulfillment center in Scotland is fully operational and prepared to help meet holiday demand from European customers.

 

  The Company acquired Joyo.com Limited, a British Virgin Islands Company, which operates the Joyo.com website in cooperation with Chinese subsidiaries and affiliates. The Joyo.com website is the largest online retailer of books, music, and videos in China, and is Amazon.com’s seventh global website.

 

Financial Guidance

 

The following forward-looking statements reflect Amazon.com’s expectations as of October 21, 2004. Results may be materially affected by many factors, such as fluctuations in foreign exchange rates, changes in global economic conditions and consumer spending, world events, the rate of growth of the Internet and online commerce, and the various factors detailed below.

 

Fourth Quarter 2004 Guidance

 

  Net sales are expected to be between $2.295 billion and $2.545 billion, or grow between 18% and 31%, compared with fourth quarter 2003.

 

  Consolidated segment operating income is expected to be between $162 million and $222 million, or grow between 6% and 45%, compared with fourth quarter 2003.

 

  Operating income is expected to be between $137 million and $197 million, assuming, among other things, that the Company does not record any further revisions to its restructuring-related estimates and that the closing price of Amazon.com common stock on December 31, 2004, is identical to the closing price of $40.86 on September 30, 2004.

 

Full Year 2004 Guidance

 

  Net sales are expected to be between $6.675 billion and $6.925 billion, or grow between 27% and 32%, compared with 2003.

 

  Consolidated segment operating income is expected to be between $475 million and $535 million, or grow between 31% and 48%, compared with 2003.

 

  Operating income is expected to be between $415 million and $475 million, assuming, among other things, that the Company does not record any further revisions to its restructuring-related estimates and that the closing price of Amazon.com common stock on December 31, 2004, is identical to the closing price of $40.86 on September 30, 2004.

 

Full Year 2005 Expectations

 

  Net sales are expected to be between $7.40 billion and $8.15 billion.

 

  Consolidated segment operating income is expected to be between $500 million and $625 million.

 

  Operating income is expected to be between $400 million and $525 million, excluding any impact from SFAS No. 123R, and assuming, among other things, that the Company does not record any further revisions to its restructuring-related estimates and that the closing price of Amazon.com common stock on December 31, 2005, is identical to the closing price of $40.86 on September 30, 2004.

 

A conference call will be webcast live today at 2 p.m. PT/5 p.m. ET, and will be available at least through December 31, 2004, at www.amazon.com/ir. This call will contain forward-looking statements and other material information regarding the Company’s financial and operating results.

 

These forward-looking statements are inherently difficult to predict. Actual results could differ materially for a variety of reasons, including, in addition to the factors discussed above, the amount that Amazon.com invests in new business opportunities and the timing of those investments; the mix of products sold to customers; the mix of net sales derived from products as compared with services; competition; management of growth; potential fluctuations in operating results; fulfillment center optimization; risks of inventory management; seasonality; the degree to which the Company enters into, maintains and develops commercial agreements, acquisitions and strategic transactions; international growth and expansion; and risks of fulfillment throughput and productivity. Other risks and uncertainties include, among others, risk of future losses, significant amount of indebtedness, system interruptions, consumer trends, limited operating history, government regulation and taxation, fraud, and new business areas. More information about factors that potentially could affect Amazon.com’s financial results is included in Amazon.com’s filings

 

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with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2003, and all subsequent filings.

 

Financial Measures

 

The following measures are defined by the Securities and Exchange Commission as non-GAAP financial measures.

 

Free Cash Flow

 

Operating cash flow is net cash provided by (used in) operating activities, including cash outflows for interest and excluding proceeds from the exercise of stock-based employee awards. Free cash flow is operating cash flow less cash outflows for purchases of fixed assets, including internal-use software and website development. A tabular reconciliation of differences from the comparable GAAP measure—operating cash flow—is included in the attached “Supplemental Financial Information and Business Metrics.”

 

Consolidated Segment Operating Income

 

Consolidated segment operating income is the sum of segment operating income of our individual segments and excludes the following line items on the Company’s statements of operations:

 

  Stock-based compensation and

 

  Other operating expense (income).

 

A tabular reconciliation of differences from the comparable GAAP measure—operating income—is included in the attached “Pro Forma Statements of Operations.”

 

Pro Forma Net Income

 

Pro forma net income excludes the following line items on the Company’s statements of operations:

 

  Stock-based compensation,

 

  Other operating expense (income), and

 

  Remeasurements and other.

 

A tabular reconciliation of differences from the comparable GAAP measure—net income (loss)—is included in the attached “Pro Forma Statements of Operations.”

 

For additional information regarding these non-GAAP financial measures, see Exhibit 99.2 to our Form 8-K filed contemporaneously with the issuance of this release.

 

About Amazon.com

 

Amazon.com (NASDAQ: AMZN), a Fortune 500 company based in Seattle, opened its virtual doors on the World Wide Web in July 1995 and today offers Earth’s Biggest Selection. Amazon.com seeks to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer customers the lowest possible prices. Amazon.com and third-party sellers offer millions of unique new, refurbished, and used items in categories such as health and personal care, jewelry and watches, gourmet food, sports and outdoors, apparel and accessories, books, music, DVDs, electronics and office, toys and baby, and home and garden.

 

Amazon.com and its affiliates operate seven websites: www.amazon.com, www.amazon.co.uk, www.amazon.de, www.amazon.co.jp, www.amazon.fr, www.amazon.ca, and www.joyo.com.

 

As used herein, “Amazon.com,” “we,” “our” and similar terms include Amazon.com, Inc. and its subsidiaries, unless the context indicates otherwise.

 

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AMAZON.COM, INC.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

     Three Months Ended
September 30,


    Nine Months Ended
September 30,


    Twelve Months Ended
September 30,


 
     2003

    2004

    2003

    2004

    2003

    2004

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

   $ 641,728     $ 701,150     $ 738,254     $ 1,102,273     $ 327,564     $ 666,418  

OPERATING ACTIVITIES:

                                                

Net income (loss)

     15,563       54,147       (37,872 )     241,763       (35,221 )     314,917  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

                                                

Depreciation of fixed assets, including internal-use software and website development, and other amortization

     18,338       19,083       57,091       54,893       76,955       73,360  

Stock-based compensation

     20,936       9,274       72,712       38,073       108,392       53,112  

Other operating expense (income)

     786       4,505       2,611       (3,187 )     4,624       (3,046 )

Losses (gains) on sales of marketable securities, net

     (141 )     220       (9,393 )     (790 )     (11,260 )     (995 )

Remeasurements and other

     11,142       5,441       93,592       (31,221 )     134,888       5,284  

Non-cash interest expense and other

     1,343       1,140       12,752       3,402       19,902       3,568  

Changes in operating assets and liabilities:

                                                

Inventories

     (62,147 )     (69,626 )     (34,001 )     (61,172 )     (82,369 )     (103,957 )

Accounts receivable, net and other current assets

     (14,844 )     (22,868 )     18,303       (15,842 )     16,775       (33,840 )

Accounts payable

     49,535       95,529       (131,584 )     (137,853 )     131,254       161,463  

Accrued expenses and other current liabilities

     (5,109 )     8,668       (99,312 )     (58,240 )     (57,366 )     15,332  

Additions to unearned revenue

     29,932       33,707       78,652       84,469       98,415       107,458  

Amortization of previously unearned revenue

     (27,816 )     (27,029 )     (85,719 )     (76,154 )     (123,444 )     (102,175 )

Interest payable

     (701 )     4,454       (26,773 )     (29,148 )     2,093       (525 )
    


 


 


 


 


 


Net cash provided by (used in) operating activities

     36,817       116,645       (88,941 )     8,993       283,638       489,956  

INVESTING ACTIVITIES:

                                                

Sales and maturities of marketable securities and other investments

     21,988       395,087       581,011       1,007,411       733,768       1,239,584  

Purchases of marketable securities

     (71,880 )     (380,651 )     (414,194 )     (1,136,032 )     (587,714 )     (1,257,480 )

Purchases of fixed assets, including internal-use software and website development

     (15,192 )     (28,722 )     (28,727 )     (52,378 )     (44,243 )     (69,614 )

Proceeds from sale of subsidiary and other

     5,072       —         5,072       —         5,072       —    

Acquisition, net of cash acquired

     —         (71,195 )     —         (71,195 )     —         (71,195 )
    


 


 


 


 


 


Net cash provided by (used in) investing activities

     (60,012 )     (85,481 )     143,162       (252,194 )     106,883       (158,705 )

FINANCING ACTIVITIES:

                                                

Proceeds from exercises of stock options and other

     41,235       7,727       132,832       42,618       198,208       73,108  

Repayments of long-term debt, capital lease obligations, and other

     (3,437 )     (550 )     (287,576 )     (156,842 )     (290,250 )     (364,574 )
    


 


 


 


 


 


Net cash provided by (used in) financing activities

     37,798       7,177       (154,744 )     (114,224 )     (92,042 )     (291,466 )

Foreign-currency effect on cash and cash equivalents

     10,087       6,117       28,687       760       40,375       39,405  
    


 


 


 


 


 


Net increase (decrease) in cash and cash equivalents

     24,690       44,458       (71,836 )     (356,665 )     338,854       79,190  
    


 


 


 


 


 


CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 666,418     $ 745,608     $ 666,418     $ 745,608     $ 666,418     $ 745,608  
    


 


 


 


 


 


SUPPLEMENTAL CASH FLOW INFORMATION:

                                                

Fixed assets acquired under capital leases and other financing arrangements

   $ 1,572     $ 135     $ 2,648     $ 658     $ 3,374     $ 687  

Cash paid for interest

     30,019       21,497       116,835       107,565       117,477       110,677  

Cash paid for income taxes

     1,019       1,651       1,628       2,659       1,613       2,856  

 

Note: The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.

 

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AMAZON.COM, INC.

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

     Three Months Ended
September 30,


    Nine Months Ended
September 30,


 
     2003

    2004

    2003

    2004

 

Net sales

   $ 1,134,456     $ 1,462,475     $ 3,317,927     $ 4,380,165  

Cost of sales

     848,635       1,106,824       2,487,596       3,322,634  
    


 


 


 


Gross profit

     285,821       355,651       830,331       1,057,531  

Operating expenses:

                                

Fulfillment

     107,057       135,521       318,217       385,943  

Marketing

     28,943       34,347       82,496       99,822  

Technology and content

     53,775       64,823       155,998       178,374  

General and administrative

     22,393       25,907       65,318       80,523  

Stock-based compensation (1)

     20,936       9,274       72,712       38,073  

Other operating expense (income)

     786       4,505       2,611       (3,187 )
    


 


 


 


Total operating expenses

     233,890       274,377       697,352       779,548  
    


 


 


 


Income from operations

     51,931       81,274       132,979       277,983  

Interest income

     4,324       7,553       16,625       18,419  

Interest expense

     (29,802 )     (26,307 )     (100,680 )     (80,093 )

Other income (expense), net

     252       (2,932 )     6,796       (5,767 )

Remeasurements and other

     (11,142 )     (5,441 )     (93,592 )     31,221  
    


 


 


 


Total non-operating expense, net

     (36,368 )     (27,127 )     (170,851 )     (36,220 )
    


 


 


 


Net income (loss)

   $ 15,563     $ 54,147     $ (37,872 )   $ 241,763  
    


 


 


 


Basic earnings (loss) per share

   $ 0.04     $ 0.13     $ (0.10 )   $ 0.60  
    


 


 


 


Diluted earnings (loss) per share

   $ 0.04     $ 0.13     $ (0.10 )   $ 0.57  
    


 


 


 


Weighted average shares used in computation of earnings (loss) per share:

                                

Basic

     397,912       406,647       393,477       405,153  
    


 


 


 


Diluted

     422,802       424,777       393,477       423,924  
    


 


 


 


(1)      Components of stock-based compensation:

                                

Fulfillment

   $ 4,374     $ 2,001     $ 16,221     $ 6,294  

Marketing

     1,582       67       4,167       2,770  

Technology and content

     12,013       4,408       39,807       20,541  

General and administrative

     2,967       2,798       12,517       8,468  
    


 


 


 


     $ 20,936     $ 9,274     $ 72,712     $ 38,073  
    


 


 


 


 

Note: The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.

 

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AMAZON.COM, INC.

Pro Forma Statements of Operations

(in thousands, except per share data)

(unaudited)

 

     Three Months Ended
September 30, 2003


    Three Months Ended
September 30, 2004


 
     As Reported (1)

    Adjustments

    Pro Forma

    As Reported (1)

    Adjustments

    Pro Forma

 

Net sales

   $ 1,134,456     $ —       $ 1,134,456     $ 1,462,475     $ —       $ 1,462,475  

Cost of sales

     848,635       —         848,635       1,106,824       —         1,106,824  
    


 


 


 


 


 


Gross profit

     285,821       —         285,821       355,651       —         355,651  

Operating expenses:

                                                

Fulfillment

     107,057       —         107,057       135,521       —         135,521  

Marketing

     28,943       —         28,943       34,347       —         34,347  

Technology and content

     53,775       —         53,775       64,823       —         64,823  

General and administrative

     22,393       —         22,393       25,907       —         25,907  

Stock-based compensation

     20,936       (20,936 )     —         9,274       (9,274 )     —    

Other operating expense

     786       (786 )     —         4,505       (4,505 )     —    
    


 


 


 


 


 


Total operating expenses

     233,890       (21,722 )     212,168       274,377       (13,779 )     260,598  
    


 


 


 


 


 


Income from operations

     51,931       21,722       73,653 (2)     81,274       13,779       95,053 (2)

Interest income

     4,324       —         4,324       7,553       —         7,553  

Interest expense

     (29,802 )     —         (29,802 )     (26,307 )     —         (26,307 )

Other income (expense), net

     252       —         252       (2,932 )     —         (2,932 )

Remeasurements and other

     (11,142 )     11,142       —         (5,441 )     5,441       —    
    


 


 


 


 


 


Total non-operating expense, net

     (36,368 )     11,142       (25,226 )     (27,127 )     5,441       (21,686 )
    


 


 


 


 


 


Net income

   $ 15,563     $ 32,864     $ 48,427     $ 54,147     $ 19,220     $ 73,367  
    


 


 


 


 


 


Basic earnings per share

   $ 0.04     $ 0.08     $ 0.12     $ 0.13     $ 0.05     $ 0.18  
    


 


 


 


 


 


Diluted earnings per share

   $ 0.04     $ 0.07     $ 0.11     $ 0.13     $ 0.04     $ 0.17  
    


 


 


 


 


 


Weighted average shares used in computation of earnings per share:

                                                

Basic

     397,912               397,912       406,647               406,647  
    


         


 


         


Diluted

     422,802               422,802       424,777               424,777  
    


         


 


         


Net cash provided by operating activities

                   $ 36,817                     $ 116,645  

Purchases of fixed assets, including internal-use software and website development

                     (15,192 )                     (28,722 )
                    


                 


Free cash flow

                   $ 21,625                     $ 87,923  
                    


                 


Net cash used in investing activities

                   $ (60,012 )                   $ (85,481 )
                    


                 


Net cash provided by financing activities

                   $ 37,798                     $ 7,177  
                    


                 


 

(1) In accordance with accounting principles generally accepted in the United States.

 

(2) Consolidated segment operating income.

 

Note: The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.

 

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AMAZON.COM, INC.

Pro Forma Statements of Operations

(in thousands, except per share data)

(unaudited)

 

    

Nine Months Ended

September 30, 2003


   

Nine Months Ended

September 30, 2004


 
     As Reported (1)

    Adjustments

    Pro Forma

    As Reported (1)

    Adjustments

    Pro Forma

 

Net sales

   $ 3,317,927     $ —       $ 3,317,927     $ 4,380,165     $ —       $ 4,380,165  

Cost of sales

     2,487,596       —         2,487,596       3,322,634       —         3,322,634  
    


 


 


 


 


 


Gross profit

     830,331       —         830,331       1,057,531       —         1,057,531  

Operating expenses:

                                                

Fulfillment

     318,217       —         318,217       385,943       —         385,943  

Marketing

     82,496       —         82,496       99,822       —         99,822  

Technology and content

     155,998       —         155,998       178,374       —         178,374  

General and administrative

     65,318       —         65,318       80,523       —         80,523  

Stock-based compensation

     72,712       (72,712 )     —         38,073       (38,073 )     —    

Other operating expense (income)

     2,611       (2,611 )     —         (3,187 )     3,187       —    
    


 


 


 


 


 


Total operating expenses

     697,352       (75,323 )     622,029       779,548       (34,886 )     744,662  
    


 


 


 


 


 


Income from operations

     132,979       75,323       208,302 (2)     277,983       34,886       312,869 (2)

Interest income

     16,625       —         16,625       18,419       —         18,419  

Interest expense

     (100,680 )     —         (100,680 )     (80,093 )     —         (80,093 )

Other income (expense), net

     6,796       —         6,796       (5,767 )     —         (5,767 )

Remeasurements and other

     (93,592 )     93,592       —         31,221       (31,221 )     —    
    


 


 


 


 


 


Total non-operating expense, net

     (170,851 )     93,592       (77,259 )     (36,220 )     (31,221 )     (67,441 )
    


 


 


 


 


 


Net income (loss)

   $ (37,872 )   $ 168,915     $ 131,043     $ 241,763     $ 3,665     $ 245,428  
    


 


 


 


 


 


Basic earnings (loss) per share

   $ (0.10 )   $ 0.43     $ 0.33     $ 0.60     $ 0.01     $ 0.61  
    


 


 


 


 


 


Diluted earnings (loss) per share

   $ (0.10 )   $ 0.41     $ 0.31     $ 0.57     $ 0.01     $ 0.58  
    


 


 


 


 


 


Weighted average shares used in computation of earnings (loss) per share:

                                                

Basic

     393,477               393,477       405,153               405,153  
    


         


 


         


Diluted

     393,477               418,359       423,924               423,924  
    


         


 


         


Net cash provided by (used in) operating activities

                   $ (88,941 )                   $ 8,993  

Purchases of fixed assets, including internal-use software and website development

                     (28,727 )                     (52,378 )
                    


                 


Free cash flow

                   $ (117,668 )                   $ (43,385 )
                    


                 


Net cash provided by (used in) investing activities

                   $ 143,162                     $ (252,194 )
                    


                 


Net cash used in financing activities

                   $ (154,744 )                   $ (114,224 )
                    


                 


 

(1) In accordance with accounting principles generally accepted in the United States.

 

(2) Consolidated segment operating income.

 

Note: The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.

 

7 of 18


AMAZON.COM, INC.

Segment Information

(in thousands)

(unaudited)

 

    

Three Months Ended

September 30,


   

Nine Months Ended

September 30,


 
     2003

    2004

    2003

    2004

 

North America

                                

Net sales

   $ 709,271     $ 816,088     $ 2,116,506     $ 2,455,061  

Cost of sales

     508,150       592,747       1,538,496       1,786,133  
    


 


 


 


Gross profit

     201,121       223,341       578,010       668,928  

Direct segment operating expenses

     138,606       165,901       409,236       470,058  
    


 


 


 


Segment operating income

     62,515       57,440       168,774       198,870  

International

                                

Net sales

     425,185       646,387       1,201,421       1,925,104  

Cost of sales

     340,485       514,077       949,100       1,536,501  
    


 


 


 


Gross profit

     84,700       132,310       252,321       388,603  

Direct segment operating expenses

     73,562       94,697       212,793       274,604  
    


 


 


 


Segment operating income

     11,138       37,613       39,528       113,999  

Consolidated

                                

Net sales

     1,134,456       1,462,475       3,317,927       4,380,165  

Cost of sales

     848,635       1,106,824       2,487,596       3,322,634  
    


 


 


 


Gross profit

     285,821       355,651       830,331       1,057,531  

Direct segment operating expenses

     212,168       260,598       622,029       744,662  
    


 


 


 


Segment operating income

     73,653       95,053       208,302       312,869  

Stock-based compensation

     20,936       9,274       72,712       38,073  

Other operating expense (income)

     786       4,505       2,611       (3,187 )
    


 


 


 


Income from operations

     51,931       81,274       132,979       277,983  

Total non-operating expense, net

     (36,368 )     (27,127 )     (170,851 )     (36,220 )
    


 


 


 


Net income (loss)

   $ 15,563     $ 54,147     $ (37,872 )   $ 241,763  
    


 


 


 


Segment Highlights:

                                

Y/Y net sales growth:

                                

North America

     21 %     15 %     18 %     16 %

International

     61       52       69       60  

Consolidated

     33       29       32       32  

Y/Y gross profit growth:

                                

North America

     30 %     11 %     16 %     16 %

International

     38       56       59       54  

Consolidated

     32       24       26       27  

Y/Y segment operating income growth:

                                

North America

     137 %     (8 %)     73 %     18 %

International

     872       238       N/A       188  

Consolidated

     168       29       167       50  

Net sales mix:

                                

North America

     63 %     56 %     64 %     56 %

International

     37       44       36       44  

 

Note: The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.

 

8 of 18


AMAZON.COM, INC.

Supplemental Net Sales Information

(in thousands)

(unaudited)

 

     Three Months Ended
September 30,


    Nine Months Ended
September 30,


 
     2003

    2004

    2003

    2004

 

North America

                                

Media

   $ 502,271     $ 563,595     $ 1,518,581     $ 1,704,084  

Electronics and other general merchandise

     180,418       228,626       526,002       678,864  

Other

     26,582       23,867       71,923       72,113  
    


 


 


 


       709,271       816,088       2,116,506       2,455,061  

International

                                

Media

     374,989       530,314       1,096,735       1,601,900  

Electronics and other general merchandise

     49,804       115,615       103,756       321,563  

Other

     392       458       930       1,641  
    


 


 


 


       425,185       646,387       1,201,421       1,925,104  

Consolidated

                                

Media

     877,260       1,093,909       2,615,316       3,305,984  

Electronics and other general merchandise

     230,222       344,241       629,758       1,000,427  

Other

     26,974       24,325       72,853       73,754  
    


 


 


 


     $ 1,134,456     $ 1,462,475     $ 3,317,927     $ 4,380,165  
    


 


 


 


Y/Y Net Sales Growth:

                                

North America:

                                

Media

     15 %     12 %     13 %     12 %

Electronics and other general merchandise

     35       27       34       29  

Other

     49       (10 )     26       0  

International:

                                

Media

     50 %     41 %     63 %     46 %

Electronics and other general merchandise

     259       132       197       210  

Other

     (31 )     17       (41 )     76  

Consolidated:

                                

Media

     28 %     25 %     30 %     26 %

Electronics and other general merchandise

     56       50       48       59  

Other

     46       (10 )     24       1  

Consolidated Net Sales Mix:

                                

Media

     77 %     75 %     79 %     75 %

Electronics and other general merchandise

     20       24       19       23  

Other

     2       2       2       2  

 

Note: The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.

 

9 of 18


AMAZON.COM, INC.

Consolidated Balance Sheets

(in thousands, except per share data)

(unaudited)

 

    

September 30,

2003


   

December 31,

2003


   

September 30,

2004


 

ASSETS

                        

Current assets:

                        

Cash and cash equivalents

   $ 666,418     $ 1,102,273     $ 745,608  

Marketable securities

     398,242       292,550       439,092  
    


 


 


Cash, cash equivalents, and marketable securities

     1,064,660       1,394,823       1,184,700  

Inventories

     241,667       293,917       357,320  

Accounts receivable, net and other current assets

     103,873       132,069       150,764  
    


 


 


Total current assets

     1,410,200       1,820,809       1,692,784  

Fixed assets, net

     221,459       224,285       226,762  

Goodwill

     69,121       69,121       137,584  

Other assets

     48,905       47,818       51,538  
    


 


 


Total assets

   $ 1,749,685     $ 2,162,033     $ 2,108,668  
    


 


 


LIABILITIES AND STOCKHOLDERS’ DEFICIT

                        

Current liabilities:

                        

Accounts payable

   $ 499,189     $ 819,811     $ 688,297  

Accrued expenses and other current liabilities

     236,184       317,730       269,178  

Unearned revenue

     40,843       37,844       46,144  

Interest payable

     44,476       73,100       43,952  

Current portion of long-term debt and other

     6,058       4,216       3,452  
    


 


 


Total current liabilities

     826,750       1,252,701       1,051,023  

Long-term debt and other

     2,080,969       1,945,439       1,778,722  

Commitments and contingencies

                        

Stockholders’ deficit:

                        

Preferred stock, $0.01 par value:

                        

Authorized shares — 500,000

                        

Issued and outstanding shares — none

     —         —         —    

Common stock, $0.01 par value:

                        

Authorized shares — 5,000,000

                        

Issued and outstanding shares — 400,422, 403,354, and 407,464

     4,004       4,034       4,075  

Additional paid-in capital

     1,852,308       1,899,398       1,981,659  

Deferred stock-based compensation

     (3,525 )     (2,850 )     (2,529 )

Accumulated other comprehensive income

     36,761       37,739       28,383  

Accumulated deficit

     (3,047,582 )     (2,974,428 )     (2,732,665 )
    


 


 


Total stockholders’ deficit

     (1,158,034 )     (1,036,107 )     (721,077 )
    


 


 


Total liabilities and stockholders’ deficit

   $ 1,749,685     $ 2,162,033     $ 2,108,668  
    


 


 


 

Note: The attached “Financial and Operational Highlights” are an integral part of the press release financial statements.

 

10 of 18


AMAZON.COM, INC.

Supplemental Financial Information and Business Metrics

(in millions, except per share data)

(unaudited)

 

     Q3 2003

    Q4 2003

    Q1 2004

    Q2 2004

    Q3 2004

    Y/Y %
Change


 

Cash Flows and Shares

                                              

Operating cash flow — trailing twelve months (TTM)

   $ 284     $ 392     $ 393     $ 410     $ 490     73 %

Purchases of fixed assets (including internal-use software and website development) — TTM

   $ 44     $ 46     $ 49     $ 56     $ 70     57 %

Free cash flow (operating cash flow less purchases of fixed assets) — TTM

   $ 239     $ 346     $ 344     $ 354     $ 420     76 %

Common shares and stock-based awards outstanding

     433       433       432       434       434     <1 %

Common shares outstanding

     400       403       405       407       407     2 %

Stock-based awards outstanding

     33       29       27       27       27     (18 %)

Stock-based awards outstanding — % of common shares outstanding

     8.1 %     7.3 %     6.8 %     6.7 %     6.6 %   N/A  

Results of Operations

                                              

Worldwide (WW) net sales

   $ 1,134     $ 1,946     $ 1,530     $ 1,387     $ 1,462     29 %

WW net sales — Y/Y growth, excluding the effect of foreign exchange rates

     29.8 %     29.4 %     33.2 %     21.9 %     23.9 %   N/A  

WW net sales — TTM

   $ 4,747     $ 5,264     $ 5,710     $ 5,998     $ 6,326     33 %

WW net sales shipped outside the U.S. — TTM % of net sales

     40.5 %     43.4 %     45.7 %     47.0 %     48.2 %   N/A  

Gross profit

   $ 286     $ 427     $ 361     $ 341     $ 356     24 %

Gross margin — % of WW net sales

     25.2 %     21.9 %     23.6 %     24.6 %     24.3 %   N/A  

Gross profit — TTM

   $ 1,165     $ 1,257     $ 1,347     $ 1,415     $ 1,484     27 %

Gross margin — TTM % of WW net sales

     24.6 %     23.9 %     23.6 %     23.6 %     23.5 %   N/A  

Fulfillment costs — % of WW net sales

     9.4 %     8.2 %     8.3 %     8.8 %     9.3 %   N/A  

Fulfillment costs — TTM % of WW net sales

     9.4 %     9.1 %     8.8 %     8.6 %     8.6 %   N/A  

Consolidated direct segment operating expenses

   $ 212     $ 274     $ 244     $ 240     $ 261     23 %

Consolidated direct segment operating expenses — TTM

   $ 855     $ 896     $ 937     $ 970     $ 1,019     19 %

Consolidated segment operating income

   $ 74     $ 153     $ 117     $ 101     $ 95     29 %

Consolidated segment operating margin — % of WW net sales

     6.5 %     7.9 %     7.6 %     7.3 %     6.5 %   N/A  

Consolidated segment operating income — TTM

   $ 310     $ 361     $ 411     $ 444     $ 466     50 %

Consolidated segment operating margin — TTM % of WW net sales

     6.5 %     6.9 %     7.2 %     7.4 %     7.4 %   N/A  

GAAP operating income

   $ 52     $ 138     $ 110     $ 86     $ 81     57 %

GAAP operating margin — % of WW net sales

     4.6 %     7.1 %     7.2 %     6.2 %     5.6 %   N/A  

GAAP operating income — TTM

   $ 204     $ 271     $ 342     $ 386     $ 416     104 %

GAAP operating margin — TTM% of WW net sales

     4.3 %     5.1 %     6.0 %     6.4 %     6.6 %   N/A  

Pro forma net income

   $ 48     $ 125     $ 97     $ 75     $ 73     52 %

Pro forma net income per diluted share

   $ 0.11     $ 0.29     $ 0.23     $ 0.18     $ 0.17     55 %

Pro forma net income — TTM

   $ 206     $ 256     $ 313     $ 345     $ 370     79 %

GAAP net income

   $ 16     $ 73     $ 111     $ 76     $ 54     248 %

GAAP net income per diluted share

   $ 0.04     $ 0.17     $ 0.26     $ 0.18     $ 0.13     225 %

GAAP net income (loss) — TTM

   $ (35 )   $ 35     $ 157     $ 276     $ 315     N/A  

North America segment:

                                              

Net sales

   $ 709     $ 1,142     $ 847     $ 792     $ 816     15 %

Net sales — TTM

   $ 3,083     $ 3,258     $ 3,401     $ 3,490     $ 3,597     17 %

Gross profit

   $ 201     $ 289     $ 226     $ 220     $ 223     11 %

Gross margin — % of North American net sales

     28.4 %     25.3 %     26.7 %     27.7 %     27.4 %   N/A  

Gross profit — TTM

   $ 821     $ 867     $ 906     $ 935     $ 958     17 %

Gross margin — TTM % of North America net sales

     26.6 %     26.6 %     26.6 %     26.8 %     26.6 %   N/A  

Operating income

   $ 63     $ 114     $ 76     $ 66     $ 57     (8 %)

Operating margin — % of North America net sales

     8.8 %     10.0 %     8.9 %     8.3 %     7.0 %   N/A  

Operating income — TTM

   $ 251     $ 283     $ 307     $ 318     $ 313     25 %

Operating margin — TTM % of North America net sales

     8.1 %     8.7 %     9.0 %     9.1 %     8.7 %   N/A  

 

Note: The attached “Financial and Operational Highlights” are an integral part of this Supplemental Financial Information and Business Metrics

 

11 of 18


AMAZON.COM, INC.

Supplemental Financial Information and Business Metrics

(in millions, except inventory turnover, accounts payable days, and employee data)

(unaudited)

 

     Q3 2003

    Q4 2003

    Q1 2004

    Q2 2004

    Q3 2004

    Y/Y %
Change


 

International segment:

                                              

Net sales

   $ 425     $ 804     $ 684     $ 595     $ 646     52 %

Net sales — Y/Y growth, excluding the effect of foreign exchange rates

     50.4 %     53.6 %     57.9 %     38.1 %     38.9 %   N/A  

Net sales — TTM

   $ 1,663     $ 2,005     $ 2,310     $ 2,508     $ 2,729     64 %

Gross profit

   $ 85     $ 138     $ 135     $ 121     $ 132     56 %

Gross margin — % of International net sales

     19.9 %     17.2 %     19.8 %     20.4 %     20.5 %   N/A  

Gross profit — TTM

   $ 345     $ 391     $ 442     $ 479     $ 527     53 %

Gross margin — TTM % of International net sales

     20.7 %     19.5 %     19.1 %     19.1 %     19.3 %   N/A  

Operating income

   $ 11     $ 39     $ 41     $ 35     $ 38     238 %

Operating margin — % of International net sales

     2.6 %     4.8 %     6.1 %     5.9 %     5.8 %   N/A  

Operating income — TTM

   $ 59     $ 78     $ 104     $ 126     $ 153     158 %

Operating margin — TTM % of International net sales

     3.6 %     3.9 %     4.5 %     5.0 %     5.6 %   N/A  

Supplemental Worldwide Net Sales:

                                              

Media

   $ 877     $ 1,434     $ 1,175     $ 1,037     $ 1,094     25 %

Media — TTM

   $ 3,695     $ 4,049     $ 4,351     $ 4,523     $ 4,740     28 %

Electronics and other general merchandise

   $ 230     $ 473     $ 331     $ 325     $ 344     50 %

Electronics and other general merchandise — TTM

   $ 951     $ 1,103     $ 1,244     $ 1,360     $ 1,474     55 %

Other

   $ 27     $ 39     $ 24     $ 25     $ 24     (10 %)

Other — TTM

   $ 101     $ 112     $ 116     $ 115     $ 113     11 %

Supplemental North America Segment Net Sales:

                                              

Media

   $ 502     $ 751     $ 599     $ 542     $ 564     12 %

Media — TTM

   $ 2,167     $ 2,269     $ 2,351     $ 2,394     $ 2,455     13 %

Electronics and other general merchandise

   $ 180     $ 353     $ 224     $ 226     $ 229     27 %

Electronics and other general merchandise — TTM

   $ 816     $ 879     $ 935     $ 983     $ 1,031     26 %

Other

   $ 27     $ 38     $ 24     $ 25     $ 24     (10 %)

Other — TTM

   $ 100     $ 110     $ 115     $ 113     $ 111     10 %

Supplemental International Segment Net Sales:

                                              

Media

   $ 375     $ 683     $ 576     $ 496     $ 530     41 %

Media — TTM

   $ 1,527     $ 1,779     $ 2,000     $ 2,129     $ 2,285     50 %

Electronics and other general merchandise

   $ 50     $ 121     $ 107     $ 99     $ 116     132 %

Electronics and other general merchandise — TTM

   $ 135     $ 225     $ 309     $ 377     $ 442     228 %

Other

   $ 0     $ 0     $ 0     $ 1     $ 0     17 %

Other — TTM

   $ 1     $ 1     $ 1     $ 2     $ 2     48 %

Balance Sheet

                                              

Cash and marketable securities

   $ 1,065     $ 1,395     $ 998     $ 1,151     $ 1,185     11 %

Inventory, net — ending

   $ 242     $ 294     $ 282     $ 284     $ 357     48 %

Inventory — average inventory % of TTM net sales

     4.0 %     4.1 %     4.1 %     4.3 %     4.6 %   N/A  

Inventory turnover, average — TTM

     18.9       18.4       18.7       17.9       16.6     (12 %)

Fixed assets, net

   $ 221     $ 224     $ 217     $ 216     $ 227     2 %

Accounts payable days — ending

     54       50       44       51       57     6 %

Other *

                                              

Employees (full-time and part-time; excludes contractors & temporary personnel)

     7,900       7,800       8,100       8,200       8,800     11 %

 

Note: The attached “Financial and Operational Highlights” are an integral part of this Supplemental Financial Information and Business Metrics

 

* Includes over 250 employees of Joyo.com.

 

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AMAZON.COM, INC.

Financial and Operational Highlights

(unaudited)

 

Quarterly Results of Operations (comparisons are with the equivalent period of the prior year, unless otherwise stated)

 

Net Sales

 

  Shipping revenue, which excludes amounts earned from third-party sellers, was $87 million, up 13% from $77 million.

 

Cost of Sales

 

  Cost of sales consists of the purchase price of consumer products sold by us, inbound and outbound shipping charges to us, packaging supplies, and costs incurred in operating and staffing our fulfillment and customer service centers on behalf of other businesses, such as Toysrus.com and Target.com.

 

  Outbound shipping-related costs totaled $128 million, up from $104 million. Net shipping loss was $41 million, up from a net loss of $27 million, resulting primarily from our free-shipping offers. We view free-shipping offers as an effective worldwide marketing tool and intend to continue offering them indefinitely.

 

Direct Segment Operating Expense

 

  Third quarter direct segment operating expenses as a percentage of net sales were as follows:

 

     2004

    2003

 

Fulfillment

   9.3 %   9.4 %

Technology and content

   4.4 %   4.7 %

Marketing

   2.3 %   2.6 %

General and administrative

   1.8 %   2.0 %

 

  Depreciation was $19 million in third quarter 2004 and $72 million over the trailing twelve months.

 

Fulfillment

 

  Fulfillment costs include those costs incurred in operating and staffing our fulfillment and customer service centers, credit card fees, and bad debt costs, including costs associated with our guarantee for certain third-party seller transactions. Fulfillment costs also include amounts paid to third parties, who assist us in fulfillment and customer service operations.

 

  Credit card fees associated with third-party seller transactions are based on the gross purchase price of underlying transactions, and therefore represent a larger percentage of our recorded revenue than credit card fees on our retail sales. Bad debt costs, including costs associated with our guarantee program, are also higher as a percentage of recorded revenue versus our retail sales. Accordingly, fulfillment costs as a percentage of net sales are higher for third-party seller transactions than for our retail sales.

 

  Our new fulfillment center in Scotland began fulfilling customer orders in the third quarter and is now fully operational. The center is approximately 300,000 square feet and currently employs over 200 permanent associates.

 

  Fulfillment costs decreased as a percentage of sales from the prior year, but increased in absolute dollars due to variable costs corresponding with sales volume, our mix of product sales, credit card fees, and bad debt costs, including costs associated with our guarantee for certain third-party seller transactions. We expect absolute amounts spent in fulfillment to increase over time.

 

Technology and Content

 

  Our spending in technology and content has increased as we are adding computer scientists and software engineers to enhance the customer experience on our websites and those websites powered by us, and improve our process efficiency. Additionally, we continue to invest in several areas of technology, including seller platform, A9.com, web services, and additional development centers. We intend to continue investing in these and other initiatives and expect absolute dollars spent in technology and content to increase over time as we continue to add computer scientists and software engineers to our staff.

 

  A significant majority of these costs are incurred in the U.S. and most of them are allocated to our North America segment.

 

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  We expense all costs related to the development of internal-use software other than those incurred during the application development stage. Costs incurred during the application development stage are capitalized and amortized over the estimated useful life of the software, generally two years. For the three months ended September 30, 2004 and 2003, we capitalized $12 million and $9 million of internal-use software costs, which was offset by amortization of previously capitalized amounts of $8 million and $6 million.

 

Marketing

 

  Marketing efforts include targeted online marketing channels, such as our Associates and Syndicated Stores programs, portal advertising, e-mail campaigns, sponsored search, and other initiatives. Since our marketing expenses are largely variable, we expect absolute amounts spent in marketing to increase over time. To the extent there is increased or decreased competition for these traffic sources, or to the extent our mix of these channels shifts, we would expect to see a corresponding change in our marketing expense. While costs associated with free shipping are not included in marketing expense, we view our free-shipping offers as an effective worldwide marketing tool and intend to continue offering them indefinitely.

 

General and Administrative

 

  General and Administrative costs increased primarily due to increases in professional fees. We expect absolute dollars spent in general and administrative to increase over time.

 

Stock-Based Compensation

 

  Since October 2002, we have awarded restricted stock units as our primary form of stock-based compensation. Restricted stock units, under fixed accounting, are generally measured at fair value on the date of grant based on the number of shares granted and the quoted price of our common stock. Such value is recognized as an expense on an accelerated basis over the corresponding service period. To the extent that restricted stock units are forfeited prior to vesting, the corresponding previously recognized expense is reversed as an offset to stock-based compensation.

 

  Stock-based awards generally fully vest over service periods of between three and six years.

 

  Stock-based compensation was $9 million for the quarter, consisting of $6 million in contra-expense for stock awards under variable accounting, and $15 million for stock awards under fixed accounting plus matching stock contributions under our 401(k) program. Payroll tax expense resulting from exercises of stock-based awards is not classified in “Stock-based compensation,” but is allocated to the corresponding operating expense categories on the statement of operations.

 

  We granted 0.7 million stock awards, primarily restricted stock units, during the quarter at a per-share weighted average fair value of $40.12. Year-to-date we have granted 2.7 million stock awards, primarily restricted stock units, at a per-share average fair value of $44.59.

 

  At September 30, 2004, there were 27 million stock awards outstanding, consisting of 20 million stock options with a $12.90 weighted average exercise price, 6 million restricted stock units, and 0.5 million shares of restricted stock (included in common stock outstanding).

 

  At September 30, 2004, 1.4 million outstanding stock awards, primarily options, were subject to variable accounting. Stock option grants after December 31, 2002, are subject to variable accounting treatment. Variable accounting treatment results in expense or contra-expense recognition using the cumulative expense method, calculated based on the quoted price of our common stock and vesting schedules of underlying awards. For example, since the closing price of our common stock on September 30, 2004, $40.86, was lower than the closing price on June 30, 2004, $54.40, we recorded a contra-expense associated with variable accounting treatment for the third quarter of 2004.

 

Other Operating Expense (Income)

 

  Included in “Other operating expense (income)” are restructuring-related expenses or credits and amortization of other intangibles. Amortization of other intangibles was $0.3 million and $1 million for the three months ended September 30, 2004 and 2003.

 

  Our first quarter 2001 operational restructuring plan is complete; however, we may periodically adjust our restructuring-related estimates, such as lease obligations, in the future if necessary.

 

  Cash payments resulting from our 2001 operational restructuring were $2 million, compared with $3 million in 2003.

 

  We streamlined our organizational structure in France to reduce our operating costs. The severance terms associated with these efforts were finalized in the third quarter, and corresponding costs of $4 million were recorded. We expect payment to occur in the fourth quarter of 2004.

 

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  We estimate, based on currently available information, the remaining net cash outflows associated with restructuring-related leases and other commitments will be $5 million in 2004, and $16 million thereafter. Amounts due within twelve months are included within “Accrued expenses and other current liabilities” and the remaining amounts within “Long-term debt and other” on our balance sheet. These amounts are net of anticipated sublease income of $25 million (we have signed sublease agreements for $13 million).

 

Other Income (Expense), Net

 

  Other expense in third quarter 2004 was primarily foreign, state, and other income taxes.

 

Remeasurements and Other

 

  Remeasurements includes foreign-currency losses on remeasurement of 6.875% PEACS from Euros to U.S. Dollars of $17 million, compared with a loss of $12 million.

 

  Other includes a $7 million gain from the remeasurement of foreign-currency intercompany balances, which are to be repaid amongst subsidiaries, and a $4 million gain on sales of Euro-denominated investments.

 

Income Taxes

 

  At September 30, 2004, we had net operating loss carryforwards (NOLs) of approximately $2.8 billion, primarily related to U.S. federal taxes. Utilization of NOLs, which begin to expire at various times starting in 2010, may be subject to certain limitations. Approximately $1.0 billion of our NOLs are attributable to continuing operations, and the related tax benefits, if realized, will be credited to results of operations for both financial reporting and tax reporting purposes. The remainder, approximately $1.8 billion, relates to tax deductible stock-based compensation in excess of amounts recognized for financial reporting purposes, and the related tax benefits, if realized, will be credited to stockholders’ equity rather than to results of operations for financial reporting purposes.

 

Net Income (Loss)

 

  We believe that our reported net income for the third quarter 2004 should not be viewed, on its own, as a material positive event and is not necessarily predictive of future results for a variety of reasons. For example, we are unable to forecast the effect on our future reported results of certain items, including the effect that fluctuations in foreign currency rates will have on the remeasurement of our 6.875% PEACS and intercompany balances. The remeasurement of our 6.875% PEACS represented a significant charge during the quarter and may result in significant charges or gains in future periods.

 

  Additionally, we are unable to forecast the effect of stock-based compensation, which is based in part on the quoted price of our common stock in accordance with variable accounting treatment. In the third quarter of 2004 variable accounting treatment resulted in a credit to our operating results of $6 million due to a decline in price of our common stock. Comparisons to prior year quarter and year-to-date periods show improvement in operating income of $16 million and $46 million resulting from the effects of changing stock prices on variable accounting treatment. Variable accounting has resulted in significant expense and contra-expense in past periods and will continue to be unpredictable going forward.

 

Foreign Exchange

 

  As our financial reporting currency is the U.S. Dollar, our total sales, profit, and operating and free cash flow have benefited significantly the past nine quarters from weakness in the U.S. Dollar in comparison to the currencies of our international websites. We believe it is important to evaluate our growth rates after the effect of currency changes.

 

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The effect of changes in exchange rates in the third quarter is as follows (in millions):

 

Effect of exchange rate on:    2004

    2003

 

Net sales

   $ 57     $ 29  

Gross profit

     12       6  

Operating expenses

     (7 )     (5 )

Operating income

     4       1  

Net interest expense and other

     (1 )     (2 )

Remeasurements and other (1)

     (6 )     (12 )

Net income (loss)

     (3 )     (13 )

Diluted earnings (loss) per diluted share

   $ (0.01 )   $ (0.03 )

 

(1) Includes foreign-currency gains (losses) on remeasurement of 6.875% PEACS and intercompany balances, and realized currency-related gains associated with sales of Euro-denominated investments held by a U.S. functional-currency subsidiary.

 

These amounts represent the impact on reported results that is due to year-over-year changes in exchange rates. Absent year-over-year changes in exchange rates, reported amounts would have been lower (higher) by these amounts.

 

Cash Flows and Balance Sheet

 

  Operating cash flows and free cash flows can be volatile and are sensitive to many factors, including changes in working capital. Working capital at any specific point in time is subject to many variables, including world events, seasonality, the timing of expense payments, discounts offered by vendors, vendor payment terms, and fluctuations in foreign exchange rates.

 

  Our cash, cash equivalents, and marketable securities of $1.18 billion, at fair value, primarily consist of cash, commercial paper and short-term securities, U.S. Treasury notes and bonds, asset-backed, and agency securities and certificates of deposit. Included is amounts held in foreign currencies of $693 million, primarily in Euros, British Pounds, and Yen.

 

  We have pledged $76 million of our marketable securities as collateral for property leases and other contractual obligations, compared with $87 million as of December 31, 2003.

 

  On September 7, 2004 we acquired all outstanding shares of Joyo.com Limited, a British Virgin Islands Company, which operates the Joyo.com website in cooperation with Chinese subsidiaries and affiliates. The Joyo.com website is the largest online retailer of books, music, and videos in China, and is Amazon.com’s seventh global website. Results of operations for Joyo.com have been included in our consolidated results from the date of acquisition forward. Results were not significant in the third quarter, and are not expected to be significant in the fourth quarter. The purchase price was $74 million, composed of $72 million in cash, the assumption of employee stock options, and transaction-related costs. We recorded $68 million in goodwill related to the acquisition.

 

  “Other assets” includes, among other things, deferred issuance costs on long-term debt, other equity investments, and intangibles.

 

  “Unearned revenue” is recorded when payments are received from third parties in advance of our providing the associated service.

 

  “Accrued expenses and other current liabilities” includes, among other things, liabilities for gift certificates, marketing activities, and workforce costs, including accrued payroll, vacation, and other benefits.

 

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  “Long-term debt and other” primarily includes the following (in millions):

 

    

Principal

at Maturity


   

Interest
Rate


  

Principal

Due Date


Convertible Subordinated Notes

   $ 900 (1)(2)   4.750%    February 2009

PEACS (3)

     858 (4)   6.875%    February 2010
    


        
     $ 1,758 (5)         
    


        

 

(1) Convertible at the holders’ option into our common stock at $78.0275 per share. We have the right to redeem the Convertible Subordinated Notes, in whole or in part, at a redemption price of 102.375% of the principal, which decreases every February by 47.5 basis points until maturity, plus any accrued and unpaid interest.

 

(2) During the previous twelve-month period we redeemed an aggregate principal amount of $350 million: $150 million in February 2004 and $200 million in November 2003.

 

(3) PrEmium Adjustable Convertible Securities.

 

(4) €690 million principal amount, convertible at the holders’ option into our common stock at €84.883 per share ($105.56 per share based on the exchange rate as of September 30, 2004). We have the right to redeem the PEACS, in whole or in part, by paying the principal amount, plus any accrued and unpaid interest. We do not hedge any portion of the PEACS. The U.S. Dollar equivalent principal, interest, and conversion price fluctuates based on the Euro/U.S. Dollar exchange ratio. Due to fluctuations in this exchange ratio, our principal debt obligation since issuance in February 2000 has increased by $178 million as of September 30, 2004.

 

(5) The “if converted” number of shares associated with our convertible debt instruments (approximately 20 million total shares) are excluded from diluted shares as their effect is anti-dilutive.

 

Certain Definitions and Other

 

  We present segment information along two lines: North America and International. We measure operating results of our segments using an internal performance measure of direct segment operating expenses that excludes stock-based compensation and other operating expenses (income), each of which is not allocated to segment results. Other centrally incurred operating costs are fully allocated to segment results. Our operating results, particularly for the International segment, are affected by movements in foreign exchange rates.

 

  The North America segment consists of amounts earned from retail sales of consumer products (including from third-party sellers) through www.amazon.com and www.amazon.ca; from North America focused Syndicated Stores, such as www.cdnow.com; from our mail-order tool catalog; and from non-retail activities such as North America focused Merchant.com, marketing, and promotional agreements. This segment includes export sales from www.amazon.com and www.amazon.ca.

 

  The International segment consists of amounts earned from retail sales of consumer products (including from third-party sellers) through www.amazon.co.uk, www.amazon.de, www.amazon.co.jp, www.amazon.fr, and, since September 7, 2004, www.joyo.com; from internationally focused Syndicated Stores; and from non-retail activities such as internationally focused marketing and promotional agreements. This segment includes export sales from these internationally based sites (including export sales from these sites to customers in the U.S. and Canada), but excludes export sales from www.amazon.com and www.amazon.ca.

 

  We provide supplemental sales information within each segment for three categories: “Media,” “Electronics and other general merchandise,” and “Other.” Media consists of amounts earned from retail sales from all sellers of books, music, DVD/video, magazine subscriptions, software, video games, and video game consoles. Electronics and other general merchandise consists of amounts earned from retail sales from all sellers of items not included in Media, such as electronics and office, toys and baby, tools, home and garden, apparel, sports and outdoors, gourmet food, jewelry, health and personal care, beauty, and musical instruments. The Other category consists of non-retail activities, such as the Merchant.com program and miscellaneous marketing and promotional activities.

 

  Operating cycle is number of days of sales in inventory plus number of days of sales in accounts receivable minus accounts payable days. Inventory turnover is the quotient of trailing-twelve-months cost of sales to average inventory. Accounts payable days is calculated as the quotient of accounts payable to cost of sales, multiplied by the number of days in the period.

 

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  References to customers mean customer accounts, which are unique e-mail addresses, established either when a customer’s initial order is shipped or when a customer orders from certain third-party sellers on our websites. Customer accounts include customers of Amazon Marketplace, Auctions and zShops, and our Merchants@ and Syndicated Stores programs, but exclude Joyo.com customers, Merchant.com program customers, Amazon.com Payments customers, our catalog customers, and the customers of select companies with whom we have a technology alliance or marketing and promotional relationship. A customer is considered active when they have placed an order during the preceding twelve-month period.

 

  References to sellers or merchants mean active seller accounts, which are established when a seller receives an order from a customer account. Seller accounts include sellers in Amazon’s Marketplace, Auctions, zShops, and Merchants@ platforms, but exclude Merchant.com sellers. A seller is considered active when they have received an order during the preceding twelve-month period.

 

  References to units mean units sold (net of returns and cancellations) by us and third-party sellers at Amazon.com domains worldwide—such as www.amazon.com, www.amazon.co.uk, www.amazon.de, www.amazon.co.jp, www.amazon.fr, and www.amazon.ca—and at Syndicated Stores domains, as well as Amazon.com-owned items sold through catalogs and at non-Amazon.com domains, such as books, music, and DVD/video items ordered from Amazon.com’s store at www.target.com. Units do not include Joyo.com units sold or Amazon.com gift certificates.

 

Contacts:    

Amazon.com Investor Relations

Tim Stone, 206/266-2171, ir@amazon.com

www.amazon.com/ir

 

Amazon.com Public Relations

Patty Smith, 206/266-7180

 

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