SEATTLE--(BUSINESS WIRE)--July 25, 2006--Amazon.com, Inc. (NASDAQ:AMZN) today announced financial results for its second quarter ended June 30, 2006.
Operating cash flow declined 2% to $610 million for the trailing twelve months, compared with $624 million for the trailing twelve months ended June 30, 2005. Free cash flow decreased 23% to $375 million for the trailing twelve months, compared with $486 million for the trailing twelve months ended June 30, 2005. The primary driver of the free cash flow decline was our increased expenditure in technology and content. Free cash flow was also reduced by a $40 million patent litigation settlement in third quarter 2005, $34 million from excess tax benefits for stock-based compensation now classified as financing cash flows, and investments in additional fulfillment capacity.
Common shares outstanding plus shares underlying stock-based awards outstanding totaled 443 million at June 30, 2006, compared with 438 million a year ago.
Net sales increased 22% to $2.14 billion in the second quarter, compared with $1.75 billion in second quarter 2005. Excluding the $24 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales grew 23% compared with second quarter 2005.
Operating income decreased 55% to $47 million in the second quarter, compared with $104 million in second quarter 2005. The decline in operating income was mainly due to technology and content investments, lower prices including free shipping and Amazon Prime, and $20 million from a contract termination and related fee dispute.
Net income was $22 million in the second quarter, or $0.05 per diluted share, compared with net income of $52 million, or $0.12 per diluted share in second quarter 2005.
"We're investing in Amazon Prime and future technology initiatives," said Jeff Bezos, founder and CEO of Amazon.com. "Amazon Prime gets customers their products fast, and our investments in technology position us to innovate in seller platforms, web services, and digital. We're looking forward to the coming decrease in our year-over-year growth rates in technology spending in the second half of 2006."
Amazon Prime, Amazon.com's first-ever membership program, was introduced in February 2005. For a flat membership fee of $79 per year, Amazon Prime members get unlimited, express two-day shipping for free, with no minimum purchase requirement on over a million eligible items sold by Amazon.com. Members can order as late as 6:30 p.m. ET and still get their order the next day for only $3.99 per item, and they can share the benefits of Amazon Prime with up to four family members living in their household. Sign up for Amazon Prime at www.amazon.com/prime.
Highlights
- North America segment sales, representing the Company's U.S. and Canadian sites, were $1.16 billion, up 21% from second quarter 2005.
- International segment sales, representing the Company's U.K., German, Japanese, French and Chinese sites, were $982 million, up 24% from second quarter 2005. Excluding the unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, International net sales growth was 27%.
- Worldwide Electronics & Other General Merchandise grew 37% to $624 million in second quarter 2006, and increased to 29% of worldwide net sales compared with 26% in second quarter 2005.
- The Company launched its new Toy and Baby stores on www.amazon.com, featuring tens of thousands of products offered by Amazon and leading mass market and specialty retailers. This is the largest selection of Toy and Baby products ever offered through Amazon.com, and for the first time ever, Toy and Baby products are eligible for Free Super Saver Shipping and Amazon Prime.
- The Company launched a Grocery store on www.amazon.com, with over 14,000 dry goods grocery products across more than 1,200 brands - all eligible for Free Super Saver Shipping and Amazon Prime.
- Amazon's German website -- Amazon.de -- launched its Sporting Goods store, offering customers a selection of thousands of sporting goods in over 25 categories from top brands like Adidas, Burton, Nike, Puma, Quiksilver and Salomon.
- The Company extended its Enterprise Solutions agreement with Target.com through August 2010 and launched a new Sears Canada branded website providing Sears Canada with the tools and services to control its brand, merchandising and online business using Amazon Enterprise Solutions technology.
- Amazon S3, a simple storage service for software developers, gained momentum in its first full quarter after launch, providing businesses of all sizes -- from Microsoft to SmugMug -- with a web services solution for storing and retrieving any amount of data, at any time, from anywhere on the web. Developers continue to adopt Amazon's web services -- over 180,000 have registered to date, up greater than 60% year-over-year.
Financial Guidance
The following forward-looking statements reflect Amazon.com's expectations as of July 25, 2006. 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.
Third Quarter 2006 Guidance
- Net sales are expected to be between $2.17 billion and $2.33 billion, or to grow between 17% and 25% compared with third quarter 2005.
- Operating income is expected to be between $7 million and $42 million, or between (87%) decline and (24%) decline, compared with third quarter 2005. This guidance includes $38 million for stock-based compensation and amortization of intangible assets, and it assumes, among other things, that no additional intangible assets are recorded and that there are no further revisions to stock-based compensation estimates.
Full Year 2006 Expectations
- Net sales are expected to be between $10.15 billion and $10.65 billion, or to grow between 20% and 25% compared with 2005.
- Operating income is expected to be between $310 million and $440 million, or between (28%) decline and 2% growth, compared with 2005. This guidance includes $120 million for stock-based compensation and amortization of intangible assets, and it assumes, among other things, that no additional intangible assets are recorded 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, 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, payments risks, and risks of fulfillment throughput and productivity. Other risks and uncertainties include, among others, risk of future losses, significant 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 with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2005, and all subsequent filings.
About Amazon.com
Amazon.com (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 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 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 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.
AMAZON.COM, INC. Consolidated Statements of Cash Flows (in millions) (unaudited) Three Months Six Months Twelve Months Ended Ended Ended June 30, June 30, June 30, ------------- -------------- --------------- 2006 2005 2006 2005 2006 2005 ------ ------ ------ ------ ------ -------CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 507 $ 533 $1,013 $1,303 $ 629 $ 701OPERATING ACTIVITIES:Net income 22 52 73 130 302 531Adjustments to reconcile net income to net cash from operating activities: Depreciation of fixed assets, including internal-use software and website development, and other amortization 43 26 83 55 149 95 Stock-based compensation 30 26 41 45 84 74 Other operating expense 3 2 6 3 10 2 Losses (gains) on sales of marketable securities, net (1) - 1 - - - Remeasurements and other (12) (18) (9) (32) (19) 5 Non-cash interest expense and other 1 1 2 3 5 5 Deferred income taxes (2) 44 8 94 (15) (154) Cumulative effect of change in accounting principle - - - (26) - (26)Changes in operating assets and liabilities: Inventories 30 13 63 85 (128) (93) Accounts receivable, net and other current assets 16 9 66 19 (37) 8 Accounts payable 4 54 (438) (370) 207 150 Accrued expenses and other current liabilities 1 28 (71) (66) 54 15 Additions to unearned revenue 38 38 92 66 181 125 Amortization of previously unearned revenue (43) (31) (90) (56) (183) (113) ----- ----- ------ ------ ------- ------- Net cash provided by (used in) operating activities 130 244 (173) (50) 610 624INVESTING ACTIVITIES:Purchases of fixed assets, including internal-use software and website development (58) (46) (104) (73) (235) (138)Acquisitions, net of cash acquired - (5) (28) (20) (32) (91)Sales and maturities of marketable securities and other investments 249 142 537 490 883 1,305Purchases of marketable securities (232) (235) (362) (738) (1,009) (1,568) ----- ----- ------ ------ ------- ------- Net cash provided by (used in) investing activities (41) (144) 43 (341) (393) (492)FINANCING ACTIVITIES:Proceeds from exercises of stock options 7 8 13 17 55 42Excess tax benefit on stock awards 21 1 29 2 34 2Proceeds from long- term debt and other 66 - 69 - 82 -Repayments of long- term debt and capital lease obligations (21) - (334) (266) (341) (267) ----- ----- ------ ------ ------- ------- Net cash provided by (used in) financing activities 73 9 (223) (247) (170) (223)Foreign-currency effect on cash and cash equivalents 14 (13) 23 (36) 7 19 ----- ----- ------ ------ ------- ------- Net increase (decrease) in cash and cash equivalents 176 96 (330) (674) 54 (72) ----- ----- ------ ------ ------- -------CASH AND CASH EQUIVALENTS, END OF PERIOD $ 683 $ 629 $ 683 $ 629 $ 683 $ 629 ===== ===== ====== ====== ======= =======SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest $ - $ - $ 63 $ 84 $ 84 $ 105Cash paid for income taxes 3 1 8 5 15 8 AMAZON.COM, INC. Consolidated Statements of Operations (in millions, except per share data) (unaudited) Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- 2006 2005 2006 2005 ------- ------- -------- -------Net sales $ 2,139 $ 1,753 $ 4,418 $ 3,655Cost of sales 1,630 1,303 3,361 2,746 ------- ------- ------- -------Gross profit 509 450 1,057 909Operating expenses (1): Fulfillment 189 158 383 324 Marketing 53 42 107 87 Technology and content 167 106 314 198 General and administrative 50 38 95 85 Other operating expense 3 2 6 3 ------- ------- ------- ------- Total operating expenses 462 346 905 697 ------- ------- ------- -------Income from operations 47 104 152 212Interest income 13 9 27 18Interest expense (19) (22) (38) (48)Other income (expense), net 1 (1) - 2Remeasurements and other 12 18 9 32 ------- ------- ------- ------- Total non-operating income (expense) 7 4 (2) 4 ------- ------- ------- -------Income before income taxes 54 108 150 216Provision for income taxes 32 56 77 112 ------- ------- ------- -------Income before cumulative effect of change in accounting principle 22 52 73 104Cumulative effect of change in accounting principle - - - 26 ------- ------- ------- -------Net income $ 22 $ 52 $ 73 $ 130 ======= ======= ======= =======Basic earnings per share: Prior to cumulative effect of change in accounting principle $ 0.05 $ 0.13 $ 0.18 $ 0.25 Cumulative effect of change in accounting principle - - - 0.07 ------- ------- ------- ------- $ 0.05 $ 0.13 $ 0.18 $ 0.32 ======= ======= ======= =======Diluted earnings per share: Prior to cumulative effect of change in accounting principle $ 0.05 $ 0.12 $ 0.17 $ 0.24 Cumulative effect of change in accounting principle - - - 0.07 ------- ------- ------- ------- $ 0.05 $ 0.12 $ 0.17 $ 0.31 ======= ======= ======= =======Weighted average shares used in computation of earnings per share: Basic 418 411 417 410 ======= ======= ======= ======= Diluted 426 425 426 425 ======= ======= ======= =======(1) Includes stock-based compensation as follows: Fulfillment $ 7 $ 5 $ 10 $ 8 Marketing 1 2 2 3 Technology and content 16 13 23 23 General and administrative 6 6 6 11 AMAZON.COM, INC. Segment Information (in millions) (unaudited) Three Months Ended Six Months Ended June 30, June 30, -------------- --------------- 2006 2005 2006 2005 ------ ------ ------ ------North America Net sales $1,157 $ 960 $2,404 $1,987 Cost of sales 848 682 1,753 1,430 ------ ------ ------ ------ Gross profit 309 278 651 557 Direct segment operating expenses (1) 284 206 565 420 ------ ------ ------ ------ Segment operating income 25 72 86 137International Net sales 982 793 2,014 1,668 Cost of sales 782 621 1,608 1,316 ------ ------ ------ ------ Gross profit 200 172 406 352 Direct segment operating expenses (1) 145 112 293 229 ------ ------ ------ ------ Segment operating income 55 60 113 123Consolidated Net sales 2,139 1,753 4,418 3,655 Cost of sales 1,630 1,303 3,361 2,746 ------ ------ ------ ------ Gross profit 509 450 1,057 909 Direct segment operating expenses 429 318 858 649 ------ ------ ------ ------ Segment operating income 80 132 199 260 Stock-based compensation (30) (26) (41) (45) Other operating expense (3) (2) (6) (3) ------ ------ ------ ------ Income from operations 47 104 152 212 Total non-operating income (expense), net 7 4 (2) 4 Provision for income taxes (32) (56) (77) (112) Cumulative effect of change in accounting principle - - - 26 ------ ------ ------ ------ Net income $ 22 $ 52 $ 73 $ 130 ====== ====== ====== ======Segment Highlights: Y/Y net sales growth: North America 21% 21% 21% 21% International 24 33 21 30 Consolidated 22 26 21 25 Y/Y gross profit growth: North America 11% 27% 17% 25% International 16 42 16 37 Consolidated 13 32 16 29 Y/Y segment operating income growth: North America (66%) 9% (37%) (3%) International (8) 72 (8) 61 Consolidated (39) 31 (23) 20 Net sales mix: North America 54% 55% 54% 54% International 46 45 46 46(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. AMAZON.COM, INC. Supplemental Net Sales Information (in millions) (unaudited) Three Months Ended Six Months Ended June 30, June 30, -------------- -------------- 2006 2005 2006 2005 ------ ------ ------ ------North America Media $ 730 $ 632 $1,545 $1,331 Electronics and other general merchandise 365 278 738 559 Other 62 50 121 97 ------ ------ ------ ------ Total North America 1,157 960 2,404 1,987International Media 718 614 1,481 1,289 Electronics and other general merchandise 259 178 524 377 Other 5 1 9 2 ------ ------ ------ ------ Total International 982 793 2,014 1,668Consolidated Media 1,448 1,246 3,026 2,620 Electronics and other general merchandise 624 456 1,262 936 Other 67 51 130 99 ------ ------ ------ ------ Total Consolidated $2,139 $1,753 $4,418 $3,655 ====== ====== ====== ======Y/Y Net Sales Growth:North America: Media 15% 17% 16% 17% Electronics and other general merchandise 32 23 32 24 Other 25 105 25 100 Total North America 21 21 21 21International: Media 17% 24% 15% 20% Electronics and other general merchandise 45 80 39 83 Other 354 35 388 49 Total International 24 33 21 30Consolidated: Media 16% 20% 16% 18% Electronics and other general merchandise 37 40 35 43 Other 32 103 31 99 Total Consolidated 22 26 21 25Y/Y Net Sales Growth Excluding Effect of Exchange Rates:International: Media 20% 20% 22% 17% Electronics and other general merchandise 48 75 46 77 Other 362 32 412 45 Total International 27 29 28 26Consolidated: Media 18% 18% 19% 17% Electronics and other general merchandise 38 39 38 41 Other 32 103 32 99 Total Consolidated 23 25 24 23Consolidated Net Sales Mix: Media 68% 71% 68% 71% Electronics and other general merchandise 29 26 29 26 Other 3 3 3 3 AMAZON.COM, INC. Consolidated Balance Sheets (in millions, except per share data) June 30, December 31, June 30, 2006 2005 2005 ----------- ----------- -----------ASSETS (unaudited) (unaudited)Current assets: Cash and cash equivalents $683 $1,013 $629 Marketable securities 736 987 696 Inventories 521 566 383 Deferred tax assets, current portion 66 89 63 Accounts receivable, net and other current assets 225 274 155 ----------- ----------- ----------- Total current assets 2,231 2,929 1,926Fixed assets, net 405 348 267Deferred tax assets, long-term portion 208 223 206Goodwill 193 159 154Other assets 128 37 48 ----------- ----------- ----------- Total assets $3,165 $3,696 $2,601 =========== =========== ===========LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)Current liabilities: Accounts payable $943 $1,366 $735 Accrued expenses and other current liabilities 515 563 409 ----------- ----------- ----------- Total current liabilities 1,458 1,929 1,144Long-term debt and other 1,324 1,521 1,521Commitments and contingenciesStockholders' Equity (Deficit): 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 and outstanding shares -- 419, 416 and 412 4 4 4 Additional paid-in capital 2,334 2,263 2,161 Accumulated other comprehensive (loss) income (2) 6 27 Accumulated deficit (1,953) (2,027) (2,256) ----------- ----------- -----------Total stockholders' equity (deficit) 383 246 (64) ----------- ----------- -----------Total liabilities and stockholders' equity (deficit) $3,165 $3,696 $2,601 =========== =========== =========== AMAZON.COM, INC. Supplemental Financial Information and Business Metrics (in millions, except per share data) (unaudited)---------------------------------------------------------------------- Y/Y % Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Change -----------------------------------------------Cash Flows and SharesOperating cash flow -- trailing twelve months (TTM) (1) $ 624 $ 661 $ 733 $ 724 $ 610 (2%)Purchase of fixed assets (incl. internal-use software & website development) -- TTM $ 138 $ 186 $ 204 $ 223 $ 235 70%Free cash flow (operating cash flow less purchases of fixed assets) -- TTM (1) $ 486 $ 475 $ 529 $ 501 $ 375 (23%)Common shares and stock-based awards outstanding 438 438 438 438 443 1%Common shares outstanding 412 414 416 417 419 2%Stock-based awards outstanding 26 24 22 21 24 (6%)Stock-based awards outstanding -- % of common shares outstanding 6.3% 5.8% 5.2% 4.9% 5.8% N/AResults of OperationsWorldwide (WW) net sales $1,753 $1,858 $2,977 $2,279 $2,139 22%WW net sales -- Y/Y growth, excluding the effect of foreign exchange rates 24.6% 27.6% 21.9% 24.8% 23.4% N/AWW net sales -- TTM $7,658 $8,054 $8,490 $8,867 $9,253 21%WW net sales -- TTM Y/Y growth, excluding the effect of foreign exchange rates 24.4% 25.2% 23.7% 24.3% 24.0% N/AGross profit $ 450 $ 463 $ 667 $ 547 $ 509 13%Gross margin -- % of WW net sales 25.7% 24.9% 22.4% 24.0% 23.8% N/AGross profit -- TTM $1,809 $1,917 $2,039 $2,128 $2,187 21%Gross margin -- TTM % of WW net sales 23.6% 23.8% 24.0% 24.0% 23.6% N/AOperating income (1)(3) $ 104 $ 55 $ 165 $ 106 $ 47 (55%)Operating margin -- % of WW net sales (1) 6.0% 3.0% 5.5% 4.6% 2.2% N/AOperating income -- TTM (1)(3) $ 456 $ 430 $ 432 $ 430 $ 372 (18%)Operating margin -- TTM % of WW net sales (1) 6.0% 5.3% 5.1% 4.8% 4.0% N/ANet income (1)(2) $ 52 $ 30 $ 199 $ 51 $ 22 (58%)Net income per diluted share (1)(2) $ 0.12 $ 0.07 $ 0.47 $ 0.12 $ 0.05 (58%)Net income -- TTM (1)(2) $ 531 $ 507 $ 359 $ 332 $ 302 (43%)Net income per diluted share -- TTM (1)(2) $ 1.25 $ 1.19 $ 0.84 $ 0.78 $ 0.71 (43%)SegmentsNorth America Segment: Net sales $ 960 $1,041 $1,683 $1,247 $1,157 21% Net sales -- Y/Y growth, excluding the effect of foreign exchange rates 21.0% 27.4% 20.8% 21.3% 20.4% N/A Net sales -- TTM $4,195 $4,420 $4,711 $4,931 $5,128 22% Gross profit $ 278 $ 292 $ 418 $ 341 $ 309 11% Gross margin -- % of North America net sales 29.0% 28.1% 24.8% 27.3% 26.7% N/A Gross profit -- TTM $1,135 $1,204 $1,267 $1,329 $1,361 20% Gross margin -- TTM % of North America net sales 27.1% 27.2% 26.9% 27.0% 26.5% N/A Operating income (3) $ 72 $ 66 $ 92 $ 62 $ 25 (66%) Operating margin -- % of North America net sales 7.5% 6.4% 5.5% 5.0% 2.1% N/A Operating income -- TTM (3) $ 317 $ 326 $ 296 $ 292 $ 245 (23%) Operating margin -- TTM % of North America net sales 7.6% 7.4% 6.3% 5.9% 4.8% N/AInternational Segment: Net sales $ 793 $ 817 $1,294 $1,032 $ 982 24% Net sales -- Y/Y growth, excluding the effect of foreign exchange rates 29.3% 27.8% 23.2% 28.9% 27.0% N/A Net sales -- TTM $3,463 $3,634 $3,779 $3,936 $4,125 19% Net sales -- TTM % of WW net sales 45.2% 45.1% 44.5% 44.4% 44.6% N/A Gross profit $ 172 $ 171 $ 249 $ 206 $ 200 16% Gross margin -- % of International net sales 21.7% 20.9% 19.3% 20.0% 20.4% N/A Gross profit -- TTM $ 674 $ 713 $ 772 $ 799 $ 827 23% Gross margin -- TTM % of International net sales 19.5% 19.6% 20.4% 20.3% 20.0% N/A Operating income $ 60 $ 55 $ 93 $ 58 $ 55 (8%) Operating margin -- % of International net sales 7.6% 6.7% 7.1% 5.6% 5.6% N/A Operating income -- TTM $ 216 $ 233 $ 270 $ 265 $ 260 21% Operating margin -- TTM % of International net sales 6.2% 6.4% 7.1% 6.7% 6.3% 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 % Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Change ---------------------------------------------------Segments (continued)Consolidated Segments: Operating expenses $ 318 $ 342 $ 482 $ 427 $ 429 35% Operating expenses -- TTM $ 1,276 $ 1,358 $ 1,473 $ 1,570 $ 1,681 32% Operating income (3) $ 132 $ 121 $ 185 $ 120 $ 80 (39%) Operating margin -- % of consolidated sales 7.5% 6.5% 6.2% 5.3% 3.7% N/A Operating income -- TTM (3) $ 533 $ 559 $ 566 $ 558 $ 506 (5%) Operating margin -- TTM % of consolidated net sales 7.0% 6.9% 6.7% 6.3% 5.5% N/ASupplemental North America Segment Net Sales: Media $ 632 $ 684 $ 1,030 $ 815 $ 730 15% Media -- TTM $ 2,780 $ 2,901 $ 3,046 $ 3,163 $ 3,260 17% Electronics and other general merchandise $ 278 $ 304 $ 580 $ 374 $ 365 32% Electronics and other general merchandise -- TTM $ 1,236 $ 1,311 $ 1,443 $ 1,534 $ 1,622 31% Electronics and other general merchandise -- TTM % of North America net sales 29% 30% 31% 31% 32% N/A Other $ 50 $ 53 $ 73 $ 58 $ 62 25% Other -- TTM $ 178 $ 208 $ 222 $ 234 $ 246 38%Supplemental International Segment Net Sales: Media $ 614 $ 629 $ 968 $ 763 $ 718 17% Media -- TTM $ 2,730 $ 2,828 $ 2,885 $ 2,972 $ 3,077 13% Electronics and other general merchandise $ 178 $ 187 $ 321 $ 265 $ 259 45% Electronics and other general merchandise -- TTM $ 730 $ 801 $ 886 $ 952 $ 1,033 42% Electronics and other general merchandise -- TTM % of International net sales 21% 22% 23% 24% 25% N/A Other $ 1 $ 1 $ 5 $ 4 $ 5 354% Other -- TTM $ 3 $ 4 $ 8 $ 11 $ 15 399%Supplemental Worldwide Net Sales: Media $ 1,246 $ 1,313 $ 1,998 $ 1,578 $ 1,448 16% Media -- TTM $ 5,510 $ 5,730 $ 5,931 $ 6,135 $ 6,337 15% Electronics and other general merchandise $ 456 $ 491 $ 901 $ 639 $ 624 37% Electronics and other general merchandise -- TTM $ 1,966 $ 2,113 $ 2,329 $ 2,486 $ 2,655 35% Electronics and other general merchandise -- TTM % of WW net sales 26% 26% 27% 28% 29% N/A Other $ 51 $ 54 $ 78 $ 62 $ 67 32% Other -- TTM $ 181 $ 211 $ 230 $ 245 $ 261 44%Balance SheetCash and marketable securities $ 1,325 $ 1,419 $ 2,000 $ 1,334 $ 1,419 7%Inventory, net -- ending $ 383 $ 456 $ 566 $ 538 $ 521 36%Inventory -- average inventory % of TTM net sales 5.0% 5.2% 5.4% 5.3% 5.3% N/AInventory turnover, average -- TTM 15.3 14.8 14.1 14.4 14.3 (6%)Fixed assets, net $ 267 $ 322 $ 348 $ 361 $ 405 52%Accounts payable days -- ending $ 51 $ 58 $ 54 $ 48 $ 53 3%OtherEmployees (full- time and part- time; excludes contractors & temporary personnel) 10,200 11,200 12,000 12,400 12,700 24%----------------------------------------------------------------------Note: The attached "Financial and Operational Summary" is an integralpart of this Supplemental Financial Information and Business Metrics.(1) The Company settled a patent lawsuit on terms including a one-time payment of $40 million in Q3 2005. This negatively impacts TTM operating cash flow and free cash flow by $40 million for all periods that include Q3 2005. The settlement negatively affected Q3 2005 operating income by $40 million, and Q3 2005 net income by $20 million after tax.(2) Q4 2005 net income includes a tax benefit of $90 million related to determining that certain of our deferred tax assets are realizable.(3) In Q2 2006, a fee dispute with Toysrus.com reduced our operating income by $20 million.
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
- Shipping revenue was $128 million, up 24% from $103 million.
- Amounts paid in advance for subscription services, including amounts received from online DVD rentals, Amazon Prime and other membership programs, are deferred and recognized as revenue over the subscription term.
- Net sales include fixed fees, commissions and per-unit fees earned from third-party sellers and similar amounts earned through Amazon Enterprise Solutions.
Cost of Sales
- Cost of sales consists of the purchase price of products sold by us, inbound and outbound shipping charges, packaging supplies, amortization of our DVD rental library and service costs such as those incurred in operating and staffing our fulfillment and customer service centers on behalf of third parties.
- Inbound shipping charges to receive products from our suppliers are included in inventory cost and recognized as cost of sales upon sale to our customers.
- Outbound shipping costs totaled $188 million, up 27% from $148 million. Net shipping loss was $60 million, or 2.8% of net sales, up 33% from a net shipping loss of $45 million, or 2.6% of net sales, resulting primarily from our free shipping offers and Amazon Prime. To the extent our customers use our free shipping offers at an increasing rate, including memberships in Amazon Prime, our net cost of shipping will increase.
- While costs associated with free shipping, including Amazon Prime, 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. We offer free membership trials for Amazon Prime and expect to continue to offer these trials in the future.
Operating Expenses
- Depreciation expense for fixed assets, including amortization of internal-use software and website development, was $41 million, up from $26 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 and our DVD rental library, three years for our technology infrastructure, five years for furniture and fixtures and ten years for heavy equipment. Depreciation expense is generally classified within operating expense categories on the consolidated statements of operations, and certain assets, such as our DVD rental library, are amortized to cost of sales.
- Stock-based compensation was $30 million compared to $26 million in the prior year. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised.
- Operating expenses with and without stock-based compensation are as follows:
Three Months Ended Three Months Ended June 30, 2006 June 30, 2005 -------------------------- -------------------------- As Stock-Based As Stock-Based Reported Compensation Net Reported Compensation Net -------- ----------------- -------- -----------------OperatingExpenses: Fulfillment $ 189 $ (7) $182 $ 158 $ (5) $153 Marketing 53 (1) 52 42 (2) 40 Technology and content 167 (16) 151 106 (13) 93 General and administrative 50 (6) 44 38 (6) 32 Other operating expense 3 - 3 2 - 2 ------- -------- ---- ------- -------- ---- Total operating expenses $ 462 $ (30) $432 $ 346 $ (26) $320 ======= ======== ==== ======= ======== ====Year-over-yearPercentage Growth: Fulfillment 20% 20% 25% 25% Marketing 26 28 24 26 Technology and content 58 63 49 59 General and administrative 32 37 25 19Percent of NetSales: Fulfillment 8.9% 8.5% 9.0% 8.7% Marketing 2.5 2.4 2.4 2.3 Technology and content 7.8 7.1 6.0 5.3 General and administrative 2.4 2.1 2.2 1.8
Fulfillment
- Fulfillment costs represent those costs incurred in operating and staffing our fulfillment and customer service centers, including costs attributable to buying, receiving, inspecting and warehousing inventories; picking, packaging and preparing customer orders for shipment; and payment processing fees and transaction costs, including costs associated with our guarantee of certain third-party seller transactions and responding to inquiries from customers. Fulfillment costs also include amounts paid to third parties who assist us in fulfillment and customer service operations.
- Payment processing fees charged to us associated with third-party seller sales are based on the gross purchase price of underlying transactions, and transaction costs, such as our A to Z Guarantee, are higher as a percentage of revenue versus our retail sales. Accordingly, third-party sales have higher fulfillment costs as a percentage of net sales.
- The increase in fulfillment costs in absolute dollars relates to costs from expanding fulfillment capacity and variable costs. Variable costs correspond with sales volume and inventory levels, our mix of product sales, and payment processing and related transaction costs, including mix of payment methods and costs from our guarantee for certain third-party seller transactions.
- We expanded our fulfillment capacity in the first half of 2006 and throughout 2005 through gains in efficiencies as well as increases in leased warehouse space. We plan to continue expanding our worldwide fulfillment capacity--although to add less space than in 2005--in order to accommodate greater selection and to meet anticipated shipment volumes from sales of our own products as well as sales by third parties for which we provide the fulfillment. We expect absolute amounts spent in fulfillment and fulfillment-related cost of sales to increase over time.
Marketing
- Marketing costs increased in absolute terms, primarily corresponding with revenue growth as we utilized variable online marketing channels, such as our Associates program, sponsored search and other variable marketing initiatives. 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. We expect absolute amounts spent in marketing to increase over time.
Technology and Content
- Technology and content expenses consist principally of payroll and related expenses for employees involved in research and development, including application development, editorial content, merchandising selection, and systems and telecommunications support, as well as costs associated with systems and telecommunications infrastructure.
- In 2005, we added a significant number of computer scientists, software engineers and employees involved in editorial content, merchandising selection and systems support. We are investing in several areas of technology including seller platforms, web services and digital initiatives. In addition, we increased spending on our technology infrastructure so that we can continue to enhance the customer experience and improve our process efficiency.
- We expect the year-over-year percentage growth in technology and content, excluding stock-based compensation, to decrease in the second half of 2006.
- A significant majority of our technology costs are incurred in the U.S. and are allocated to our North America segment.
- Certain costs relating to the development of internal-use software and website development, including software to upgrade and enhance our websites and processes supporting our business, are capitalized and depreciated over two years. In Q2 2006 and Q2 2005, we capitalized $32 million (including $5 million of stock-based compensation) and $22 million (including $3 million of stock-based compensation) of costs associated with internal-use software and website development. Amortization of previously capitalized amounts was $20 million and $12 million for Q2 2006 and Q2 2005.
- We expect absolute amounts spent in technology and content to increase over time.
General and Administrative
- The increase in general and administrative costs in Q2 2006 is primarily due to increases in payroll and related expenses.
- Additionally, in Q1 2005 we recorded a charge of $8 million related to possible settlements of outstanding litigation, and in Q2 2005 the favorable resolution of one of these matters resulted in a $3 million expense reduction.
- We expect absolute amounts spent in general and administrative to increase over time.
Stock-Based Compensation
- Stock-based compensation was $30 million, up from $26 million, reflecting grants to new employees and our annual performance-based awards that are granted in Q2 of each year.
- As of January 1, 2005, we adopted SFAS 123(R), which requires measurement of compensation cost for stock-based awards at grant date fair value. The fair value of restricted stock and restricted stock units is determined based on the number of shares granted and the quoted price of our common stock, while the fair value of stock options is determined using a Black-Scholes valuation model. The fair value is recognized as an expense over the service period, net of estimated forfeitures, using the accelerated method under SFAS 123(R). The adoption of SFAS 123(R) in Q1 2005 resulted in a cumulative benefit from accounting change of $26 million, which reflects the net cumulative impact of estimating forfeitures in the determination of period expense, rather than recording forfeitures when they occur as previously permitted.
- Stock-based awards generally vest over service periods of between two and five years.
- Payroll tax expense resulting from exercises of stock-based awards is a cash expense and is not categorized as stock-based compensation.
- We granted stock awards, substantially all of which have been restricted stock units since October 2002, of 6 million shares in the quarter. Our annual stock awards are granted in the second quarter.
- As of June 30, 2006, there were 24 million shares underlying outstanding stock awards, consisting of 10 million shares underlying stock options with a $15 weighted-average exercise price and 14 million shares underlying restricted stock units. As of June 30, 2005, there were 26 million shares underlying outstanding stock awards.
- As of June 30, 2006, outstanding common shares plus shares underlying outstanding stock-based awards were 443 million, up 1% from 438 million as of June 30, 2005. 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.
Other Operating Expense
- Other operating expense primarily includes costs related to intangibles amortization.
- We acquired one company during Q1 2006 for a purchase price of $47 million, including a $28 million cash payment in Q1 2006 and $19 million due in 2007. The excess of purchase price over the fair value of the net assets acquired was $33 million and is classified as goodwill on our consolidated balance sheets. Acquired other intangibles totaled $14 million and have estimated useful lives of between one and ten years. The results of operations of the acquired business have been included in our consolidated results from the closing date forward. The effect of this acquisition on consolidated net sales and operating income during the first half of 2006 was not significant.
Remeasurements and Other
- The remeasurement of our 6.875% PEACS and intercompany balances can result in significant gains and charges associated with the effect of movements in currency exchange rates.
- Remeasurement of the principal amount of our 6.875% PEACS from Euros to U.S. dollars resulted in a foreign-currency loss of $16 million, compared with a gain of $42 million.
- Remeasurement of foreign-currency intercompany balances that are to be repaid among subsidiaries represented a $26 million gain, compared with a loss of $25 million.
Income Taxes
- Our tax provision for interim periods is determined using an estimate of the annual effective tax rate. Our provision for income taxes was $32MM in Q2 - or a 59% rate for the quarter - which includes a $4 million year-to-date adjustment to reflect our current estimate of our annual effective tax rate of 51%.
- There is a potential for significant volatility of our 2006 effective tax rate due to several factors, including from variability in accurately predicting our taxable income and the taxable jurisdictions to which it relates.
- The effective tax rate was higher than the 35% statutory rate, resulting from steps we initiated to establish our European headquarters in Luxembourg, which we expect will benefit our effective tax rate over time.
- We expect cash taxes paid in 2006 to be approximately $25 million compared with $12 million in 2005. We endeavor to optimize our global taxes on a cash basis, rather than on a financial reporting basis.
Foreign Exchange
- Our financial reporting currency is the U.S. dollar, and changes in exchange rates significantly affect our reported results and consolidated trends. For example, during Q2 2006 our consolidated revenue and operating income were negatively affected by the strengthening of the U.S. dollar in comparison to the currencies of internationally focused websites, but our consolidated revenue and operating income from Q2 2002 through Q2 2005 benefited from weakness in the U.S. dollar in comparison to the same currencies.
- 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 June 30, ----------------------------------------------------- 2006 2005 ------------------------- ------------------------- At At Prior Exchange Prior Exchange Year Rate Year Rate Rates Effect As Rates Effect As (1) (2) Reported (1) (2) Reported ------- -------- --------- ------- -------- --------- (in millions, except per share amounts)Net sales $2,163 $ (24) $ 2,139 $1,728 $ 25 $ 1,753Gross profit 514 (5) 509 445 5 450Operating expenses 460 2 462 343 3 346Income from operations 49 (2) 47 102 2 104Net interest expense and other (4) (1) (5) (14) - (14)Remeasurements and other (3) 2 10 12 1 17 18Net income 19 3 22 43 9 52Diluted earnings per share $ 0.04 $ 0.01 $ 0.05 $ 0.10 $ 0.02 $ 0.12 (1) Represents the outcome that would have resulted had currency exchange rates in the current 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 (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 (losses) on remeasurement of 6.875% PEACS and intercompany balances compared to prior quarter, and realized currency-related gains associated with sales of Euro-denominated investments held by a U.S. subsidiary. Other -- In March 2006, the Superior Court of New Jersey terminated our contract with Toysrus.com LLC but declined to award damages to either party. We continued to provide services to Toysrus.com during the contractual wind-down period in Q2 2006, but Toysrus.com is contesting the amount of fees owed to compensate us for that work. This fee dispute reduced our income from operations for Q2 2006 by approximately $20 million, and the fee dispute together with the termination of the Toysrus.com contract reduced our operating cash flows and free cash flows for Q2 2006 by approximately $20 million. Had we not retained $13 million against payments otherwise due to Toysrus.com, our operating cash flows and free cash flows for Q2 2006 would have been lower by that amount. We are appealing the trial court's initial rulings in Toysrus.com's favor regarding the contract termination and the fee dispute. 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 and timing of capital expenditures. Working capital at any specific point in time is subject to many variables, including seasonality, the timing of expense payments, discounts offered by vendors, vendor payment terms and fluctuations in foreign exchange rates. -- Additionally, prior to our adoption of SFAS 123(R), cash retained as a result of excess tax deductions relating to stock-based compensation was presented in operating cash flows, along with other tax cash flows. SFAS 123(R) requires benefits relating to excess stock-based compensation deductions to be presented as financing cash inflows--effectively a reclassification between operating cash flows and financing cash flows. Tax benefits resulting from stock-based compensation deductions in excess of amounts reported for financial reporting purposes--which negatively impacted operating cash flow--were $21 million in Q2 2006 and $34 million for the trailing twelve months; such amounts should be less than $100 million in 2006 - compared with $7 million for 2005 - but are subject to considerable variability. Accordingly, amounts presented for operating cash flows and free cash flows for 2006 will be negatively affected in comparison to prior results; however, there is no change in economic substance resulting from this change in reporting classification. -- Our cash, cash equivalents and marketable securities of $1.42 billion, at fair value, primarily consist of cash, investment grade securities and AAA-rated money market mutual funds. Included are amounts held in foreign currencies of $738 million, primarily in Euros, British Pounds and Japanese Yen. -- Accounts receivable, net and other current assets include accounts receivable from merchant partners, vendors and credit card companies, interest receivables and prepaid expenses. -- Fixed assets include assets such as furniture and fixtures, heavy equipment, technology infrastructure, internal-use software and website development, and our DVD rental library. -- Other assets include, among other things, $85 million of restricted long-term marketable securities, $9 million of deferred issuance costs on long-term debt, $8 million of certain equity investments, and $21 million of other intangibles, net. Marketable securities restricted for longer than one year are related to collateralization of debt for our international operations - such amounts at December 31, 2005 were insignificant. -- Accrued expenses and other current liabilities include, among other things, liabilities for gift certificates of $126 million, professional fees, marketing activities, workforce costs--including accrued payroll, vacation and other benefits--and unearned revenue of $53 million, which is recorded when payments are received or due in advance of performing our service obligations and is amortized over the service period. -- Long-term debt and other primarily include the following (in millions): Principal Interest Principal at Maturity Rate Due Date -----------------------------------------Convertible Subordinated Notes $ 900 (1) 4.750% February 2009Premium Adjustable Convertible Securities ("PEACS") 307 (2) (4) 6.875% February 2010 ---------- $1,207 (3) ==========(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 101.425% of the principal, which decreases every February 1 by 47.5 basis points until maturity, plus any accrued and unpaid interest.(2) EUR 240 million principal amount, convertible at the holders' option into our common stock at EUR 84.883 per share ($109 per share based on the Euro/U.S. dollar exchange rate as of June 30, 2006). 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 fluctuate based on the Euro/U.S. dollar exchange ratio.(3) The "if converted" number of shares associated with our convertible debt instruments (approximately 14 million total shares) is excluded from diluted shares as they are antidilutive.(4) As previously announced, in Q1 2006 we redeemed EUR 250 million--or $300 million at the Euro to U.S. dollar exchange rate on the redemption date--in principal amount of our PEACS at par.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.
- The North America segment consists of amounts earned from retail sales of consumer products (including from third-party sellers) and subscriptions through North America-focused websites such as www.amazon.com and www.amazon.ca; from North America-focused Syndicated Stores, such as www.borders.com; from our mail-order tool catalog phone orders; from our Amazon Prime membership program; and from non-retail activities such as North America-focused Amazon Enterprise Solutions program, 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 third-party sellers) and subscriptions through internationally focused websites such as www.amazon.co.uk, www.amazon.de, www.amazon.co.jp, www.amazon.fr, and www.joyo.com; from internationally focused Syndicated Stores; from our DVD rental service; 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 DVD rentals and 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, camera and photo, toys and baby, tools, home and garden, apparel, sports and outdoors, kitchen and housewares, gourmet food, jewelry, health and personal care, beauty and musical instruments. The Other category consists of non-retail activities, such as the Amazon Enterprise Solutions program 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 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.
- Operating cycle is number of days of sales in inventory plus number of days of sales in accounts receivable minus accounts payable days. Accounts payable days are calculated as the quotient of 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 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 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 certain customers, including DVD rental customers, customers associated with certain of our acquisitions (including Joyo.com customers), Amazon Enterprise Solutions 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. Customers are 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 Marketplace, Auctions, zShops, and Merchants@ platforms, but exclude Amazon Enterprise Solutions sellers. Sellers are 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 by 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 sold do not include units associated with certain of our acquisitions (including Joyo.com units), Amazon.com gift certificates or DVD rentals.
CONTACT: Amazon.com Investor Relations
Kim Nelson, 206-266-2171
ir@amazon.com
www.amazon.com/ir
or
Amazon.com Public Relations
Patty Smith, 206-266-7180
SOURCE: Amazon.com, Inc.