SEATTLE--(BUSINESS WIRE)-- Amazon.com, Inc. (NASDAQ:AMZN) today announced financial results for its third quarter ended September 30, 2008.
Operating cash flow was $1.27 billion for the trailing twelve months, compared with $1.0 billion for the trailing twelve months ended September 30, 2007. Free cash flow increased 21% to $0.97 billion for the trailing twelve months, compared with $0.80 billion for the trailing twelve months ended September 30, 2007.
Common shares outstanding plus shares underlying stock-based awards outstanding totaled 448 million on September 30, 2008, compared with 435 million a year ago.
Net sales increased 31% to $4.26 billion in the third quarter, compared with $3.26 billion in third quarter 2007. Excluding the $80 million favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales grew 28% compared with third quarter 2007.
Operating income increased 26% to $154 million in the third quarter, compared with $123 million in third quarter 2007. Excluding the $5 million favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, operating income grew 22% compared with third quarter 2007.
Net income increased 48% to $118 million in the third quarter, or $0.27 per diluted share, compared with net income of $80 million, or $0.19 per diluted share, in third quarter 2007. Net income includes a benefit of $15 million related to net foreign currency remeasurements.
"We remain relentlessly focused on delivering value to customers through lower prices, improved selection and our free shipping offers, including Amazon Prime," said Jeff Bezos, founder and CEO of Amazon.com. "Customers saved more than $700 million with our global free-shipping programs over the past twelve months, and we expect more customers than ever will take advantage of the benefits of Amazon Prime this holiday season."
Highlights
- Kindle selection continues to grow, with available book titles more than doubling since launch to over 185,000, including 105 out of 112 of the New York Times bestsellers, all priced at $9.99 or less. Additionally, newspaper, magazine and blog selection have each more than doubled since launch. The Kindle Store has added periodicals such as the Chicago Tribune, Financial Times, Los Angeles Times, MIT Technology Review, and U.S. News & World Report to a list that already included the New York Times, Wall Street Journal, Washington Post, Forbes, Fortune, Newsweek and Time.
- Kindle titles already account for more than 10% of unit sales for books that are available in both digital and print formats.
- Worldwide Media sales grew 19% to $2.49 billion, compared with $2.09 billion in third quarter 2007.
- Worldwide Electronics & Other General Merchandise sales grew 52% to $1.64 billion, compared with $1.08 billion in third quarter 2007, and increased to 38% of worldwide net sales compared with 33%.
- North America segment sales, representing the Company's U.S. and Canadian sites, were $2.30 billion, up 29% from third quarter 2007.
- International segment sales, representing the Company's U.K., German, Japanese, French and Chinese sites, were $1.96 billion, up 33% from third quarter 2007, and increased to 46% of worldwide net sales compared with 45%. Excluding the favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, International sales grew 28%.
- Amazon.com shipped over 1 million units in third quarter 2008 on behalf of sellers who utilized Fulfillment by Amazon.
- Amazon.fr launched Amazon Premium, the local version of Amazon Prime, on October 1, 2008. Members pay an annual fee of EUR 49 for unlimited express delivery throughout France.
- Amazon.co.uk lowered its free shipping threshold from GBP 15 to GBP 5.
- Amazon Europe launched Automotive and Apparel stores on its amazon.de website and a Health and Personal Care store on its amazon.co.uk website, offering customers tens of thousands of new items from hundreds of top brands.
- Amazon Payments launched two new products, Checkout by Amazon and Amazon Simple Pay, enabling merchants to allow their customers to use their Amazon account to complete a transaction.
- Amazon Web Services (AWS) launched the Amazon Elastic Block Store (Amazon EBS), a new persistent storage feature for the Amazon Elastic Compute Cloud (Amazon EC2). With Amazon EBS, storage volumes can be programmatically created, attached to Amazon EC2 instances, and if more durability is desired, can be backed up with a snapshot to the Amazon Simple Storage Service (Amazon S3).
- Oracle announced that they will be supporting Oracle Database 11g on Amazon EC2, as well as supporting other services such as Amazon S3.
Financial Guidance
The following forward-looking statements reflect Amazon.com's expectations as of October 22, 2008. While guidance takes into account recent growth rates, our results are inherently unpredictable and 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 2008 Guidance
- Net sales are expected to be between $6.0 billion and $7.0 billion, or to grow between 6% and 23% compared with fourth quarter 2007.
- Operating income is expected to be between $145 million and $305 million, or between 46% decline and 13% growth compared with fourth quarter 2007. This guidance includes approximately $85 million for stock-based compensation and amortization of intangible assets, and it assumes, among other things, that no additional business acquisitions or investments are concluded and that there are no further revisions to stock-based compensation estimates.
Full Year 2008 Expectations
- Net sales are expected to be between $18.46 billion and $19.46 billion, or to grow between 24% and 31% compared with 2007.
- Operating income is expected to be between $716 million and $876 million, or to grow between 9% and 34% compared with 2007. This guidance includes approximately $300 million for stock-based compensation and amortization of intangible assets and includes the impact of the $53 million non-cash gain recognized in the second quarter 2008 on the sale of the Company's European DVD rental assets. It assumes, among other things, that no additional business acquisitions or investments are concluded and that there are no further revisions to stock-based compensation estimates.
A conference call will be webcast live today at 2 p.m. PT/5 p.m. ET, and will be available for at least three months 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, the extent to which we owe income taxes, competition, management of growth, potential fluctuations in operating results, international growth and expansion, the outcomes of legal proceedings and claims, 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, and risks of fulfillment throughput and productivity. Other risks and uncertainties include, among others, risks related to new products, services and technologies, system interruptions, indebtedness, government regulation and taxation, payments and fraud. In addition, the recent disruptions in the global financial markets amplify many of these risks. More information about factors that potentially could affect Amazon.com's financial results is included in Amazon.com's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2007, and subsequent filings.
About Amazon.com
Amazon.com, Inc. (NASDAQ: AMZN), a Fortune 500 company based in Seattle, opened on the World Wide Web in July 1995 and today offers Earth's Biggest Selection. Amazon.com, Inc. 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 its customers the lowest possible prices. Amazon.com and other sellers offer millions of unique new, refurbished and used items in categories such as books, movies, music & games, digital downloads, electronics & computers, home & garden, toys, kids & baby, grocery, apparel, shoes & jewelry, health & beauty, sports & outdoors, tools, and auto & industrial.
Amazon Web Services provides Amazon's developer customers with access to in-the-cloud infrastructure services based on Amazon's own back-end technology platform, which developers can use to enable virtually any type of business. Examples of the services offered by Amazon Web Services are Amazon Elastic Compute Cloud (Amazon EC2), Amazon Simple Storage Service (Amazon S3), Amazon SimpleDB, Amazon Simple Queue Service (Amazon SQS), Amazon Flexible Payments Service (Amazon FPS) and Amazon Mechanical Turk.
Amazon and its affiliates operate websites, including www.amazon.com, www.amazon.co.uk, www.amazon.de, www.amazon.co.jp, www.amazon.fr, www.amazon.ca, and the Joyo Amazon websites at www.joyo.cn and www.amazon.cn.
As used herein, "Amazon.com," "we," "our" and similar terms include Amazon.com, Inc., and its subsidiaries, unless the context indicates otherwise.
AMAZON.COM, INC. Consolidated Statements of Cash Flows (in millions) (unaudited) Three Months Nine Months Twelve Months Ended Ended Ended September 30, September 30, September 30, --------------- ---------------- ----------------- 2008 2007 2008 2007 2008 2007 ------- ------- -------- ------- -------- --------CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $1,548 $1,004 $ 2,539 $1,022 $ 1,366 $ 693OPERATING ACTIVITIES:Net income 118 80 420 269 627 367Adjustments to reconcile net income to net cash from operating activities: Depreciation of fixed assets, including internal-use software and website development, and other amortization 76 61 210 183 273 242 Stock-based compensation 70 51 197 130 251 161 Other operating expense (income), net 7 3 (32) 6 (29) 8 Losses (gains) on sales of marketable securities, net 1 - (2) 1 (2) 1 Other expense (income), net (24) 3 (17) 12 (18) 12 Deferred income taxes (17) (2) (47) (1) (144) 6 Excess tax benefits from stock-based compensation (53) (34) (160) (93) (323) (157)Changes in operating assets and liabilities: Inventories (243) (223) (130) (72) (361) (199) Accounts receivable, net and other (9) (73) 106 (17) (131) (134) Accounts payable 362 304 (524) (216) 620 372 Accrued expenses and other 101 58 39 29 437 276 Additions to unearned revenue 121 56 286 165 366 240 Amortization of previously unearned revenue (86) (47) (220) (139) (291) (194) ------- ------- -------- ------- -------- -------- Net cash provided by operating activities 424 237 126 257 1,275 1,001INVESTING ACTIVITIES:Purchases of fixed assets, including internal-use software and website development (102) (69) (231) (151) (305) (201)Acquisitions, net of cash acquired, and other (8) (24) (408) (47) (436) (48)Sales and maturities of marketable securities and other investments 582 210 1,033 1,156 1,149 2,025Purchases of marketable securities and other investments (478) (83) (1,229) (777) (1,382) (2,118) ------- ------- -------- ------- -------- -------- Net cash provided by (used in) investing activities (6) 34 (835) 181 (974) (342)FINANCING ACTIVITIES:Proceeds from exercises of stock options 2 35 10 79 23 97Excess tax benefits from stock-based compensation 53 34 160 93 323 157Common stock repurchased - - - (248) - (248)Proceeds from long- term debt and other - 33 52 21 68 31Repayments of long- term debt and capital lease obligations (295) (29) (355) (63) (380) (63) ------- ------- -------- ------- -------- -------- Net cash provided by (used in) financing activities (240) 73 (133) (118) 34 (26)Foreign-currency effect on cash and cash equivalents (76) 18 (47) 24 (51) 40 ------- ------- -------- ------- -------- -------- Net increase (decrease) in cash and cash equivalents 102 362 (889) 344 284 673 ------- ------- -------- ------- -------- --------CASH AND CASH EQUIVALENTS, END OF PERIOD $1,650 $1,366 $ 1,650 $1,366 $ 1,650 $ 1,366 ======= ======= ======== ======= ======== ========SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest $ 14 $ 22 $ 61 $ 67 $ 62 $ 67Cash paid for income taxes 5 4 28 14 38 15Fixed assets acquired under capital leases and other financing arrangements 37 22 104 43 136 50Fixed assets acquired under build-to-suit leases 19 - 35 - 50 -Conversion of debt 132 1 605 1 605 1
AMAZON.COM, INC. Consolidated Statements of Operations (in millions, except per share data) (unaudited) Three Months Nine Months Ended Ended September 30, September 30, --------------- ---------------- 2008 2007 2008 2007 ------- ------- -------- -------Net sales $4,264 $3,262 $12,463 $9,163Cost of sales 3,265 2,500 9,541 6,980 ------- ------- -------- -------Gross profit 999 762 2,922 2,183Operating expenses(1): Fulfillment 393 296 1,109 815 Marketing 108 74 313 211 Technology and content 264 209 755 596 General and administrative 73 57 208 171 Other operating expense (income), net(2) 7 3 (32) 6 ------- ------- -------- ------- Total operating expenses 845 639 2,353 1,799 ------- ------- -------- -------Income from operations 154 123 569 384Interest income 21 23 67 62Interest expense (17) (19) (60) (57)Other income (expense), net 24 (3) 22 (10) ------- ------- -------- ------- Total non-operating income (expense) 28 1 29 (5) ------- ------- -------- -------Income before income taxes 182 124 598 379Provision for income taxes 59 44 167 110Equity-method investment activity, net of tax 5 - 11 - ------- ------- -------- -------Net income $ 118 $ 80 $ 420 $ 269 ======= ======= ======== =======Basic earnings per share $ 0.28 $ 0.19 $ 1.00 $ 0.65 ======= ======= ======== =======Diluted earnings per share $ 0.27 $ 0.19 $ 0.97 $ 0.64 ======= ======= ======== =======Weighted average shares used in computation of earnings per share: Basic 427 414 421 412 ======= ======= ======== ======= Diluted 436 425 431 423 ======= ======= ======== =======__________________________(1) Includes stock-based compensation as follows: Fulfillment $ 15 $ 11 $ 42 $ 27 Marketing 4 2 10 6 Technology and content 38 28 109 72 General and administrative 13 10 36 25(2) Q2 2008 includes a $53 million non-cash gain associated with the sale of our European DVD rental assets.
AMAZON.COM, INC. Segment Information (in millions) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2008 2007 2008 2007 ---------- ------- --------- -------North America Net sales $2,302 $1,788 $ 6,597 $5,012 Cost of sales 1,716 1,328 4,883 3,679 ---------- ------- --------- ------- Gross profit 586 460 1,714 1,333 Direct segment operating expenses(1) 498 381 1,400 1,087 ---------- ------- --------- ------- Segment operating income $ 88 $ 79 $ 314 $ 246 ========== ======= ========= =======International Net sales $1,962 $1,474 $ 5,866 $4,151 Cost of sales 1,549 1,172 4,658 3,301 ---------- ------- --------- ------- Gross profit 413 302 1,208 850 Direct segment operating expenses(1) 270 204 788 576 ---------- ------- --------- ------- Segment operating income $ 143 $ 98 $ 420 $ 274 ========== ======= ========= =======Consolidated Net sales $4,264 $3,262 $12,463 $9,163 Cost of sales 3,265 2,500 9,541 6,980 ---------- ------- --------- ------- Gross profit 999 762 2,922 2,183 Direct segment operating expenses 768 585 2,188 1,663 ---------- ------- --------- ------- Segment operating income 231 177 734 520 Stock-based compensation (70) (51) (197) (130) Other operating income (expense), net(2) (7) (3) 32 (6) ---------- ------- --------- ------- Income from operations 154 123 569 384 Total non-operating income (expense), net 28 1 29 (5) Provision for income taxes (59) (44) (167) (110) Equity-method investment activity, net of tax (5) - (11) - ---------- ------- --------- ------- Net income $ 118 $ 80 $ 420 $ 269 ========== ======= ========= =======Segment Highlights: Y/Y net sales growth: North America 29% 42% 32% 37% International 33 40 41 35 Consolidated 31 41 36 36 Y/Y gross profit growth: North America 28% 34% 29% 34% International 37 47 42 39 Consolidated 31 39 34 36 Y/Y segment operating income growth: North America 12% 263% 27% 128% International 46 94 53 67 Consolidated 31 145 41 91 Net sales mix: North America 54% 55% 53% 55% International 46 45 47 45__________________________(1) A significant majority of our costs for "Technology and content" are incurred in the United States and most of these costs are allocated to our North America segment.(2) Q2 2008 includes a $53 million non-cash gain associated with the sale of our European DVD rental assets.
AMAZON.COM, INC. Supplemental Net Sales Information (in millions) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2008 2007 2008 2007 ---------- ------- --------- -------North America Media $1,245 $1,081 $ 3,599 $2,995 Electronics and other general merchandise 950 631 2,697 1,801 Other 107 76 301 216 ---------- ------- --------- ------- Total North America 2,302 1,788 6,597 5,012International Media 1,249 1,010 3,845 2,919 Electronics and other general merchandise 690 448 1,955 1,195 Other 23 16 66 37 ---------- ------- --------- ------- Total International 1,962 1,474 5,866 4,151Consolidated Media 2,494 2,091 7,444 5,914 Electronics and other general merchandise 1,640 1,079 4,652 2,996 Other 130 92 367 253 ---------- ------- --------- ------- Total Consolidated $4,264 $3,262 $12,463 $9,163 ========== ======= ========= =======Y/Y Net Sales Growth:North America: Media 15% 38% 20% 28% Electronics and other general merchandise 51 54 50 57 Other 41 22 40 18 Total North America 29 42 32 37International: Media 24% 33% 32% 30% Electronics and other general merchandise 54 54 64 47 Other 49 410 78 216 Total International 33 40 41 35Consolidated: Media 19% 36% 26% 29% Electronics and other general merchandise 52 54 55 53 Other 42 41 45 30 Total Consolidated 31 41 36 36Y/Y Net Sales Growth Excluding Effect of Exchange Rates:International: Media 18% 27% 22% 25% Electronics and other general merchandise 48 45 52 38 Other 52 379 71 194 Total International 28 33 31 29Consolidated: Media 17% 32% 21% 27% Electronics and other general merchandise 49 51 51 49 Other 43 39 44 29 Total Consolidated 28 38 31 33Consolidated Net Sales Mix: Media 59% 64% 60% 64% Electronics and other general merchandise 38 33 37 33 Other 3 3 3 3
AMAZON.COM, INC. Consolidated Balance Sheets (in millions, except per share data) September 30, December 31, September 30, 2008 2007 2007 ------------- ------------ -------------ASSETS (unaudited) (unaudited)Current assets: Cash and cash equivalents $ 1,650 $ 2,539 $ 1,366 Marketable securities 674 573 543 Inventories 1,315 1,200 970 Accounts receivable, net and other 597 705 474 Deferred tax assets 194 147 71 ------------- ------------ ------------- Total current assets 4,430 5,164 3,424Fixed assets, net 731 543 491Deferred tax assets 278 260 231Goodwill 405 222 218Other assets 722 296 254 ------------- ------------ ------------- Total assets $ 6,566 $ 6,485 $ 4,618 ============= ============ =============LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities: Accounts payable $ 2,242 $ 2,795 $ 1,674 Accrued expenses and other 860 902 645 Current portion of long- term debt 42 17 - ------------- ------------ ------------- Total current liabilities 3,144 3,714 2,319Long-term debt 393 1,282 1,273Other long-term liabilities 502 292 265Commitments and contingenciesStockholders' equity: Preferred stock, $0.01 par value: Authorized shares -- 500 Issued and outstanding shares -- none - - - Common stock, $0.01 par value: Authorized shares -- 5,000 Issued shares -- 443, 431, and 429 Outstanding shares -- 429, 416, and 415 4 4 4 Treasury stock, at cost (500) (500) (500) Additional paid-in capital 4,051 3,063 2,827 Accumulated other comprehensive income (loss) (73) 5 11 Accumulated deficit (955) (1,375) (1,581) ------------- ------------ ------------- Total stockholders' equity 2,527 1,197 761 ------------- ------------ ------------- Total liabilities and stockholders' equity $ 6,566 $ 6,485 $ 4,618 ============= ============ =============
AMAZON.COM, INC. Supplemental Financial Information and Business Metrics (in millions, except per share data) (unaudited) Y/Y % Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Change ---------------------------------------------------Cash Flows and SharesOperating cash flow -- trailing twelve months (TTM) $ 1,001 $ 1,405 $ 1,039 $ 1,088 $ 1,275 27%Purchases of fixed assets (incl. internal-use software & website development) -- TTM $ 201 $ 224 $ 251 $ 272 $ 305 52%Free cash flow (operating cash flow less purchases of fixed assets) -- TTM $ 800 $ 1,181 $ 788 $ 816 $ 970 21%Free cash flow -- TTM Y/Y growth 118% 143% 51% 16% 21% N/ACommon shares and stock-based awards outstanding 435 435 435 446 448 3%Common shares outstanding 415 416 417 426 429 3%Stock-based awards outstanding 20 18 18 20 19 (5%)Stock-based awards outstanding -- % of common shares outstanding 4.9% 4.4% 4.3% 4.6% 4.5% N/AResults of OperationsWorldwide (WW) net sales $ 3,262 $ 5,673 $ 4,135 $ 4,063 $ 4,264 31%WW net sales -- Y/Y growth, excluding F/X 38% 37% 31% 35% 28% N/AWW net sales -- TTM $13,149 $14,835 $15,955 $17,133 $18,135 38%WW net sales -- TTM Y/Y growth, excluding F/X 32% 35% 35% 35% 33% N/AGross profit $ 762 $ 1,170 $ 956 $ 967 $ 999 31%Gross profit -- Y/Y growth, excluding F/X 36% 33% 28% 32% 29% N/AGross margin -- % of WW net sales 23.4% 20.6% 23.1% 23.8% 23.4% N/AGross profit -- TTM $ 3,032 $ 3,353 $ 3,589 $ 3,855 $ 4,092 35%Gross profit -- TTM Y/Y growth, excluding F/X 31% 33% 33% 32% 31% N/AGross margin -- TTM % of WW net sales 23.1% 22.6% 22.5% 22.5% 22.6% N/AOperating income (1) $ 123 $ 271 $ 198 $ 217 $ 154 26%Operating margin -- % of WW net sales 3.8% 4.8% 4.8% 5.3% 3.6% N/AOperating income -- TTM (1) $ 581 $ 655 $ 708 $ 808 $ 840 45%Operating income -- TTM Y/Y growth, excluding F/X 56% 61% 57% 52% 36% N/AOperating margin -- TTM % of WW net sales 4.4% 4.4% 4.4% 4.7% 4.6% N/ANet income(1) $ 80 $ 207 $ 143 $ 158 $ 118 48%Net income per diluted share $ 0.19 $ 0.48 $ 0.34 $ 0.37 $ 0.27 44%Net income -- TTM(1) $ 367 $ 476 $ 508 $ 588 $ 627 71%Net income per diluted share -- TTM $ 0.87 $ 1.12 $ 1.20 $ 1.38 $ 1.46 68%SegmentsNorth America Segment: Net sales $ 1,788 $ 3,084 $ 2,126 $ 2,168 $ 2,302 29% Net sales -- Y/Y growth, excluding F/X 42% 39% 31% 35% 29% N/A Net sales -- TTM $ 7,219 $ 8,095 $ 8,598 $ 9,166 $ 9,680 34% Gross profit $ 460 $ 698 $ 569 $ 559 $ 586 28% Gross margin -- % of North America net sales 25.7% 22.6% 26.7% 25.8% 25.5% N/A Gross profit -- TTM $ 1,864 $ 2,031 $ 2,160 $ 2,286 $ 2,412 29% Gross margin -- TTM % of North America net sales 25.8% 25.1% 25.1% 24.9% 24.9% N/A Operating income $ 79 $ 153 $ 130 $ 96 $ 88 12% Operating margin -- % of North America net sales 4.4% 5.0% 6.1% 4.4% 3.8% N/A Operating income -- TTM $ 369 $ 400 $ 445 $ 458 $ 468 27% Operating income -- TTM Y/Y growth, excluding F/X 84% 73% 74% 46% 26% N/A Operating margin -- TTM % of North America net sales 5.1% 4.9% 5.2% 5.0% 4.8% N/AInternational Segment: Net sales $ 1,474 $ 2,589 $ 2,009 $ 1,895 $ 1,962 33% Net sales -- Y/Y growth, excluding F/X 33% 35% 31% 34% 28% N/A Net sales -- TTM $ 5,930 $ 6,740 $ 7,357 $ 7,967 $ 8,455 43% Net sales -- TTM % of WW net sales 45% 45% 46% 47% 47% N/A Gross profit $ 302 $ 472 $ 387 $ 408 $ 413 37% Gross margin -- % of International net sales 20.5% 18.2% 19.3% 21.5% 21.1% N/A Gross profit -- TTM $ 1,168 $ 1,322 $ 1,430 $ 1,569 $ 1,680 44% Gross margin -- TTM % of International net sales 19.7% 19.6% 19.4% 19.7% 19.9% N/A Operating income $ 98 $ 175 $ 128 $ 149 $ 143 46% Operating margin -- % of International net sales 6.6% 6.8% 6.4% 7.9% 7.3% N/A Operating income -- TTM $ 380 $ 449 $ 483 $ 550 $ 594 56% Operating income -- TTM Y/Y growth, excluding F/X 37% 53% 44% 47% 41% N/A Operating margin -- TTM % of International net sales 6.4% 6.7% 6.6% 6.9% 7.0% N/A AMAZON.COM, INC. Supplemental Financial Information and Business Metrics (in millions, except inventory turnover, accounts payable days and employee data) (unaudited) Y/Y % Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Change ---------------------------------------------------Segments (continued)Consolidated Segments: Operating expenses $ 585 $ 842 $ 698 $ 722 $ 768 31% Operating expenses -- TTM $ 2,283 $ 2,504 $ 2,661 $ 2,847 $ 3,030 33% Operating income $ 177 $ 328 $ 258 $ 245 $ 231 31% Operating margin -- % of consolidated sales 5.4% 5.8% 6.2% 6.0% 5.4% N/A Operating income -- TTM $ 749 $ 849 $ 928 $ 1,008 $ 1,062 42% Operating income -- TTM Y/Y growth, excluding F/X 59% 64% 59% 49% 35% N/A Operating margin -- TTM % of consolidated net sales 5.7% 5.7% 5.8% 5.9% 5.9% N/ASupplemental North America Segment Net Sales: Media $ 1,081 $ 1,637 $ 1,205 $ 1,148 $ 1,245 15% Media -- Y/Y growth, excluding F/X 37% 30% 21% 24% 15% N/A Media -- TTM $ 4,245 $ 4,630 $ 4,845 $ 5,071 $ 5,235 23% Electronics and other general merchandise $ 631 $ 1,336 $ 826 $ 920 $ 950 51% Electronics and other general merchandise -- Y/Y growth, excluding F/X 54% 53% 46% 52% 51% N/A Electronics and other general merchandise -- TTM $ 2,678 $ 3,139 $ 3,400 $ 3,714 $ 4,033 51% Electronics and other general merchandise -- TTM % of North America net sales 37% 39% 40% 41% 42% N/A Other $ 76 $ 111 $ 95 $ 100 $ 107 41% Other -- TTM $ 296 $ 326 $ 353 $ 381 $ 412 39%Supplemental International Segment Net Sales: Media $ 1,010 $ 1,692 $ 1,338 $ 1,258 $ 1,249 24% Media -- Y/Y growth, excluding F/X 27% 26% 22% 25% 18% N/A Media -- TTM $ 4,167 $ 4,612 $ 4,950 $ 5,299 $ 5,537 33% Electronics and other general merchandise $ 448 $ 877 $ 655 $ 611 $ 690 54% Electronics and other general merchandise -- Y/Y growth, excluding F/X 45% 55% 56% 52% 48% N/A Electronics and other general merchandise -- TTM $ 1,717 $ 2,071 $ 2,344 $ 2,590 $ 2,832 65% Electronics and other general merchandise -- TTM % of International net sales 29% 31% 32% 33% 33% N/A Other $ 16 $ 20 $ 16 $ 26 $ 23 49% Other -- TTM $ 46 $ 57 $ 63 $ 78 $ 86 90%Supplemental Worldwide Net Sales: Media $ 2,091 $ 3,329 $ 2,543 $ 2,406 $ 2,494 19% Media -- Y/Y growth, excluding F/X 32% 28% 21% 25% 17% N/A Media -- TTM $ 8,412 $ 9,242 $ 9,795 $10,370 $10,772 28% Electronics and other general merchandise $ 1,079 $ 2,213 $ 1,481 $ 1,531 $ 1,640 52% Electronics and other general merchandise -- Y/Y growth, excluding F/X 51% 54% 50% 52% 49% N/A Electronics and other general merchandise -- TTM $ 4,395 $ 5,210 $ 5,744 $ 6,304 $ 6,865 56% Electronics and other general merchandise -- TTM % of WW net sales 33% 35% 36% 37% 38% N/A Other $ 92 $ 131 $ 111 $ 126 $ 130 42% Other -- TTM $ 342 $ 383 $ 416 $ 459 $ 498 46%Balance SheetCash and marketable securities(2) $ 2,087 $ 3,309 $ 2,395 $ 2,625 $ 2,572 23%Inventory, net -- ending $ 970 $ 1,200 $ 1,077 $ 1,107 $ 1,315 36%Inventory -- average inventory % of TTM net sales 6.2% 6.1% 5.9% 5.9% 6.3% N/AInventory turnover, average -- TTM 12.4 12.7 13.1 13.0 12.4 0%Fixed assets, net $ 491 $ 543 $ 594 $ 651 $ 731 49%Accounts payable days -- ending 62 57 53 58 63 3%OtherEmployees (full- time and part- time; excludes contractors & temporary personnel) 15,800 17,000 17,800 18,400 20,500 30%Note: The attached "Financial and Operational Summary" is an integral part of this Supplemental Financial Information and Business Metrics.(1) Q2 2008 includes a $53 million non-cash gain associated with the sale of our European DVD rental assets.(2) Includes restricted cash, classified within "Other Assets" on our consolidated balance sheet, of: $179 million Q3 2007, $197 million Q4 2007, $245 million Q1 2008, $245 million Q2 2008 and $248 million Q3 2008.
Amazon.com, Inc. Financial and Operational Summary (unaudited)
Quarterly Results of Operations (comparisons are with the equivalent period of the prior year, unless otherwise stated)
Net Sales
- Revenue is generally recorded gross for sales of our own inventory and net for sales by other sellers. Amounts paid in advance for subscription services, including amounts received for Amazon Prime and other membership programs, are deferred and recognized as revenue over the subscription term. For our products with multiple elements, where a standalone value for each element cannot be established, we recognize the revenue and related cost over the estimated economic life of the product.
- Shipping revenue, which includes amounts earned from our Amazon Prime membership and Fulfillment by Amazon programs, was $191 million, up 12% from $171 million.
Cost of Sales
- Cost of sales consists of the purchase price of products sold by us, inbound and outbound shipping charges, packaging supplies, and costs incurred in operating and staffing our fulfillment and customer service centers on behalf of other businesses.
- Payment processing and related transaction costs, including those associated with seller transactions, are classified in "Fulfillment" on our consolidated statements of operations.
- Shipping charges to receive products from our suppliers are included in our inventory and recognized as "Cost of sales" upon sale of products to our customers.
- Outbound shipping costs totaled $323 million, up 24% from $260 million. Net shipping cost was $132 million, or 3.1% of net sales, up 48% from $89 million, or 2.7% of net sales. One way we offer lower prices is through free-shipping offers that result in a net cost to us in delivery of products.
Operating Expenses
- Depreciation expense for fixed assets, including amortization of internal-use software and website development, was $80 million, up from $65 million. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets (generally two years or less for assets such as internal-use software, two or three years for our technology infrastructure, five years for furniture and fixtures, and ten years for heavy equipment).
- Stock-based compensation was $70 million, compared with $51 million. The increase in stock-based compensation is primarily attributable to an increase in total stock compensation value granted to our employees. We utilize the accelerated, rather than a straight-line, method for recognizing stock-based compensation. Under this method, over 50% of the compensation cost would be expensed in the first year of a typical four-year vesting term. Operating expenses with and without stock-based compensation are as follows:
Three Months Ended Three Months Ended September 30, 2008 September 30, 2007 -------------------------- --------------------------- As Stock-Based As Stock-Based Reported Compensation Net Reported Compensation Net -------------------------- --------------------------- (in millions)Operating Expenses: Fulfillment $ 393 $ (15) $378 $ 296 $ (11) $285 Marketing 108 (4) 104 74 (2) 72 Technology and content 264 (38) 226 209 (28) 181 General and administrative 73 (13) 60 57 (10) 47 Other operating expense (income) net 7 - 7 3 - 3 -------- ------------ ---- -------- ------------ ----- Total operating expenses $ 845 $ (70) $775 $ 639 $ (51) $588 -------- ------------ ---- -------- ------------ -----Year-over-year Percentage Growth: Fulfillment 33% 33% 37% 37% Marketing 46 45 16 15 Technology and content 26 25 22 16 General and administrative 29 28 4 (4)Percent of Net Sales: Fulfillment 9.2% 8.9% 9.1% 8.7% Marketing 2.5 2.5 2.3 2.2 Technology and content 6.2 5.3 6.4 5.6 General and administrative 1.7 1.4 1.7 1.4
Fulfillment
- Certain of our fulfillment-related costs that are incurred on behalf of other businesses are classified as cost of sales rather than fulfillment.
- The increase in fulfillment costs in absolute dollars relates to variable costs corresponding with sales volume and inventory levels; our mix of product sales; payment processing and related transaction costs, including mix of payment methods and costs from our guarantee for certain seller transactions; and costs from expanding fulfillment capacity.
- Additionally, because payment processing costs associated with seller transactions are based on the gross purchase price of underlying transactions, and payment processing and related transaction costs are higher as a percentage of revenue versus our retail sales, sales by our sellers have higher fulfillment costs as a percent of net sales.
- We expanded our fulfillment capacity during the first nine months of 2008 and throughout 2007 through gains in efficiencies and increases in leased warehouse space. This expansion is designed to accommodate greater selection and in-stock inventory levels and meet anticipated shipment volumes from sales of our own products as well as sales by third parties for whom we provide the fulfillment services.
Marketing
- We direct customers to our websites primarily through a number of targeted online marketing channels, such as our Associates program, sponsored search, portal advertising, e-mail campaigns, and other initiatives. Our marketing expenses are largely variable, based on growth in sales and changes in rates. 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 or its effect.
- Marketing costs increased in absolute dollars in Q3 2008 due to increased spending in variable online marketing channels, such as our Associates program and sponsored search programs.
Technology and Content
- Technology and content expenses consist principally of payroll and related expenses for employees involved in application development, category expansion, editorial content, buying, merchandising selection, and systems support, as well as costs associated with the compute, storage and telecommunications infrastructure.
- We seek to efficiently invest in several areas of technology and content including seller platforms, web services, digital initiatives and the expansion of new and existing product categories, as well as in technology infrastructure to enhance the customer experience, improve our process efficiencies and support our infrastructure web services.
- Certain costs relating to development of internal-use software and website development, including development of software to upgrade and enhance our websites and processes supporting our business, are capitalized and amortized over two years.
- During Q3 2008 and Q3 2007, we capitalized $41 million (including $7 million of stock-based compensation) and $35 million (including $6 million of stock-based compensation) of costs associated with internal-use software and website development. Amortization of previously capitalized amounts was $37 million and $30 million for Q3 2008 and Q3 2007.
Stockholders' Equity and Stock-Based Awards
- As of September 30, 2008, outstanding common shares plus shares underlying outstanding stock-based awards were 448 million, up from 435 million as of September 30, 2007. This total includes all stock-based awards outstanding, without regard for estimated forfeitures, consisting of vested and unvested awards and in-the-money and out-of-the-money stock options.
- In Q3 2008 we called for redemption principal amounts of $399 million of our outstanding 4.75% Convertible Subordinated Notes. Holders elected to convert a total of $132 million in principal amount of the 4.75% Convertible Subordinated Notes, and we issued 1.7 million shares of our common stock as a result; we redeemed the remaining $266 million of the called principal amount for cash.
- As of September 30, 2008, stock-based awards outstanding were 19.2 million, or 4.5% of shares outstanding, down from 20.2 million, or 4.9% of outstanding shares. Outstanding stock awards consist of 17.9 million restricted stock units and 1.3 million stock options with a $25.06 weighted-average exercise price.
- We granted restricted stock units representing 0.9 million and 0.4 million shares of common stock during Q3 2008 and Q3 2007.
Other Operating Expense (Income), Net
- Other operating expense (income), net, was $7 million and $3 million during Q3 2008 and Q3 2007.
Other Income (Expense), Net
- Other income (expense), net, was $24 million and ($3) million during Q3 2008 and Q3 2007. The amount consists primarily of gains and losses related to foreign currency remeasurement.
- The remeasurement of our 6.875% PEACS and intercompany balances can result in significant gains and losses associated with the effect of movements in currency exchange rates.
Income Taxes
- Our tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes we make a cumulative adjustment. The 2008 annual effective tax rate is estimated to be lower than the 35% U.S. federal statutory rate primarily due to anticipated earnings of our subsidiaries outside of the U.S. in jurisdictions where our effective tax rate is lower than in the U.S.
- A majority of our tax provision is non-cash. We have current tax benefits and net operating losses relating to excess stock-based compensation that are being utilized to reduce our taxable income. As such, cash paid for income taxes in Q3 2008 was $5 million compared with $4 million in Q3 2007.
- We estimate our 2008 effective tax rate will be approximately 28% and cash taxes paid will be less than $75 million. However, there is a potential for significant volatility of our 2008 effective tax rate due to several factors including variability in accurately predicting the taxable income, the taxable jurisdiction to which it relates, and business acquisitions and investments. We endeavor to optimize our global taxes on a cash basis, rather than on a financial reporting basis.
- We are under examination, or may be subject to examination, by the Internal Revenue Service ("IRS") for calendar years 2004 through 2007. Additionally, any net operating losses that were generated in prior years and utilized in these years may also be subject to examination by the IRS. We are under examination, or may be subject to examination, in the following major jurisdictions for the years specified: Kentucky for 2003 through 2007, France for 2005 through 2007, Germany for 2003 through 2007, Luxembourg for 2003 through 2007, and the United Kingdom for 2003 through 2007. In addition, in 2007, Japanese tax authorities assessed income tax, including penalties and interest, of approximately $101 million against one of our U.S. subsidiaries for the years 2003 through 2005. We believe that these claims are without merit and are disputing the assessment. Further proceedings on the assessment will be stayed during negotiations between U.S. and Japanese authorities over the double taxation issues the assessment raises, and we have provided bank guarantees to suspend enforcement of the assessment. We also may be subject to income tax examination by Japanese tax authorities for 2006 and 2007.
Foreign Exchange
- The effect on our consolidated statements of operations from year-over-year changes in exchange rates versus the U.S. dollar throughout the period is as follows:
Three Months Ended September 30, -------------------------------------------------- 2008 2007 ------------------------ ------------------------- At At Prior Exchange Prior Exchange Year Rate Year Rate Rates Effect As Rates Effect As (1) (2) Reported (1) (2) Reported ------ -------- -------- ------- -------- -------- (in millions)Net sales $4,184 $ 80 $4,264 $3,187 $ 75 $3,262Gross profit 984 15 999 747 15 762Operating expenses 835 10 845 628 11 639Income from operations 149 5 154 118 5 123Net interest income (expense) and other(3) 3 25 28 (4) (1) (5)Net income 98 20 118 78 2 80Diluted earnings per share $ 0.22 $0.05 $ 0.27 $ 0.18 $0.01 $ 0.19
(1) Represents the outcome that would have resulted had exchange rates in the reported period been the same as those in effect in the comparable prior year period for operating results, and if we did not incur the variability associated with remeasurements for our 6.875% PEACS and intercompany balances.
(2) Represents the increase or decrease in reported amounts resulting from changes in exchange rates from those in effect in the comparable prior year period for operating results, and if we did not incur the variability associated with remeasurements for our 6.875% PEACS and intercompany balances.
(3) Includes foreign-currency gains and losses on cross-currency investments, remeasurement of 6.875% PEACS, and intercompany balances.
Net Income
- Net income includes the impact of foreign currency remeasurements included in "Other income (expense), net" which fluctuate with changes in exchange rates. For Q3 2008, these remeasurements resulted in an after tax benefit of $15 million.
Cash Flows and Balance Sheet
- SFAS 123(R) requires the reporting of tax benefits relating to excess stock-based compensation as financing cash flows. Excess tax benefits from stock-based compensation were $53 million in Q3 2008 and $323 million for the trailing twelve months, compared with $34 million in Q3 2007 and $157 million for the trailing twelve months ended September 30, 2007.
- Our cash, cash equivalents and marketable securities of $2.32 billion, at fair value, primarily consist of cash, government and government agency securities, AAA-rated money market funds and other investment grade securities. Included are amounts held in foreign currencies of $1.2 billion, primarily in Euros, British Pounds and Japanese Yen.
- Other assets include, among other things, $248 million of marketable securities restricted for longer than one year, $247 million of certain equity investments, $143 million of intangibles, net, and $44 million of intellectual property rights. Marketable securities restricted for longer than one year relate primarily to collateralization of bank guarantees and debt for our international operations.
- Accrued expenses and other current liabilities include, among other things, liabilities for gift certificates of $216 million, professional fees, marketing activities, workforce costs - including accrued payroll, vacation and other benefits - and current unearned revenue of $158 million, which is recorded when payments are received in advance of performing our service obligations and is recognized over the service period.
- Long-term debt primarily includes the following:
September 30, December 31, 2008 2007 ------------ ------------ (in millions)6.875% PEACS due February 2010 (1) $ 338 $ 3504.75% Convertible Subordinated Notes - 899Other long-term debt 97 50 ------------ ------------ 435 1,299Less current portion of long-term debt (42) (17) ------------ ------------ $ 393 $ 1,282 ============ ============Fair value of long-term debt (2) $ 431 $ 1,466 ============ ============
(1) The 6.875% Premium Adjustable Convertible Securities ("6.875% PEACS") are convertible into our common stock at the holders' option at a conversion price of EUR 84.883 per share ($119.62 per share, based on the exchange rate as of September 30, 2008). Total common stock issuable upon conversion of our outstanding 6.875% PEACS is 2.8 million shares, which is excluded from our calculation of earnings per share as its effect is currently anti-dilutive. The U.S. Dollar equivalent principal, interest, and conversion price fluctuate based on the Euro/U.S. Dollar exchange ratio. We have the right to redeem the 6.875% PEACS, in whole or in part, by paying the principal plus any accrued and unpaid interest.
(2) The fair value of our 6.875% PEACS was $334 million and $358 million at September 30, 2008 and December 31, 2007. The fair value of our 4.75% Convertible Subordinated Notes was $1.1 billion at December 31, 2007. Such amounts are determined based on quoted prices in active markets for similar instruments (Level 2 as defined under SFAS No. 157).
- Other long-term liabilities include tax contingencies, long-term capital lease obligations, deferred tax liabilities, non-current unearned revenue and other long-term obligations.
- In December 2007, we entered into a series of leases and other agreements for the lease of corporate office space to be developed in Seattle, Washington with initial terms of up to 16 years commencing on completion of development in 2010 and 2011. Under these agreements we committed to occupy approximately 1,360,000 square feet of corporate office space. In Q3 2008, we elected to occupy an additional approximately 330,000 square feet subject to a termination fee estimated to be up to approximately $10 million. We also have options to lease up to an additional approximately 500,000 square feet at rates based on fair market values at the time the options are exercised, subject to certain conditions. The amount of space available and our financial and other obligations under the lease agreements are affected by various factors, including government approvals and permits, interest rates, development costs and other expenses and our exercise of certain rights under the lease agreements.
Certain Definitions and Other
- We present segment information for 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 expense, 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. A significant majority of our technology costs are incurred in the U.S. and most of them are allocated to our North America segment.
- The North America segment consists of amounts earned from retail sales of products (including from sellers) and subscriptions through North America-focused websites such as www.amazon.com, www.audible.com, www.shopbop.com, www.endless.com and www.amazon.ca; from our Amazon Prime membership program; and from non-retail activities such as our North America-focused Amazon Enterprise Solutions program, Amazon Web Services, and 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 sellers) and subscriptions through internationally focused websites such as www.amazon.co.uk, www.amazon.de, www.amazon.co.jp, www.amazon.fr, and our Joyo Amazon websites at www.joyo.cn and www.amazon.cn; from our Amazon Prime membership program; and from non-retail activities such as internationally-focused Amazon Enterprise Solutions program, 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 in categories such as books, movies, music, digital downloads, software and video games (including game consoles). Electronics and Other General Merchandise consists of amounts earned from retail sales from all sellers of items in categories not included in Media, such as electronics and computers, devices, home and garden, toys, kids and baby, grocery, apparel, shoes and jewelry, health and beauty, sports and outdoors, tools, and auto and industrial. Other consists of non-retail activities, such as the Amazon Enterprise Solutions program, Amazon Web Services, and miscellaneous marketing and promotional activities, such as our co-branded credit card programs.
- Operating cash flow is net cash provided by (used in) operating activities, including cash outflows for interest and excluding excess tax benefits from stock-based compensation. Free cash flow is operating cash flow less cash outflows for purchases of fixed assets, including internal-use software and website development.
- Operating cycle is number of days of sales in inventory plus number of days of sales in trade accounts receivable minus accounts payable days. Accounts payable days are calculated as the quotient of ending accounts payable to cost of sales, multiplied by the number of days in the period. Inventory turns are calculated as the quotient of trailing-twelve-month cost of sales to average inventory over five quarter ends.
- Return on invested capital is trailing-twelve-month free cash flow divided by average total assets less current liabilities (excluding current portion of our long-term debt) over five quarter ends.
- 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 other sellers on our websites. Customer accounts exclude certain customers, including customers associated with certain of our acquisitions (including Joyo.com customers), Amazon Enterprise Solutions program customers, Amazon.com Payments customers, Amazon Web Services customers, and the customers of select companies with whom we have a technology alliance or marketing and promotional relationship. Customers are considered active when they have placed an order during the preceding twelve-month period.
- References to sellers means seller accounts, which are established when a seller receives an order from a customer account. Seller accounts exclude Amazon Enterprise Solutions sellers. Sellers are considered active when they have received an order from a customer during the preceding twelve-month period.
- References to registered developers mean cumulative registered developer accounts, which are established when potential developers enroll with Amazon Web Services and receive a developer access key.
- References to units mean physical and digital units sold (net of returns and cancellations) by us and 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, www.amazon.ca and the Joyo Amazon websites at www.joyo.cn and www.amazon.cn, as well as Amazon.com-owned items sold through non-Amazon.com domains, such as books, music and movie items ordered from Amazon.com's store at www.target.com. Units sold do not include units associated with certain of our acquisitions or Amazon.com gift certificates.
Source: Amazon.com, Inc.