Amazon.com Announces Record Sales Driven by Lower Prices and Expanded Selection; Launches Jewelry Store; Raises Financial Guidance

AMAZON.COM ANNOUNCES RECORD SALES DRIVEN BY LOWER PRICES AND EXPANDED SELECTION; LAUNCHES JEWELRY STORE; RAISES FINANCIAL GUIDANCE

SEATTLE--(BUSINESS WIRE)--April 22, 2004--Amazon.com, Inc. (NASDAQ: AMZN) today announced financial results for its first quarter ended March 31, 2004.

Operating cash flow was $393 million for the trailing twelve months, compared with $164 million for the trailing twelve months ended March 31, 2003. Free cash flow grew $221 million, or 180%, to $344 million for the trailing twelve months, compared with $123 million for the trailing twelve months ended March 31, 2003.

Common shares outstanding plus shares underlying stock-based awards totaled 432 million at March 31, 2004, flat compared with a year ago.

Net sales were $1.53 billion in the first quarter, compared with $1.08 billion in first quarter 2003, an increase of 41%. Net sales, excluding the $87 million benefit from changes in foreign exchange rates, grew 33% compared with first quarter 2003.

Operating income was $110 million in the first quarter, compared with $39 million in first quarter 2003. Consolidated segment operating income grew 73% to $117 million in the first quarter, compared with $67 million in first quarter 2003. Consolidated segment operating income, excluding the $7 million benefit from changes in foreign exchange rates, grew 64% compared with first quarter 2003.

Net income was $111 million in the first quarter, or $0.26 per diluted share, compared with a net loss of $10 million, or $0.03 per share, in first quarter 2003. Pro forma net income in the first quarter grew 141% to $97 million, or $0.23 per diluted share, compared with $40 million, or $0.10 per diluted share, in first quarter 2003.

"During our beta test more than 100,000 customers ordered items from our Jewelry store," said Jeff Bezos, founder and CEO of Amazon.com. "While the average margin in jewelry retailing is approximately 45% to 50%, we target substantially lower margins on our jewelry sales, and lower still -- about 13% -- on diamond jewelry. This is in keeping with our strategy of driving growth through low prices."

Amazon.com continues to offer Free Super Saver Shipping on orders over $25 at www.amazon.com and also has free shipping offers at its U.K., German, French, Japanese and Canadian sites. Amazon.com offers 30% off books over $15 and continues to lower prices every day across its product offerings, ranging from electronics to jewelry to sports and outdoors items to tools.

See "Financial Measures" for additional information.

Quarterly Highlights

• North America segment sales, representing the Company's U.S. and Canadian sites, grew 20% to $847 million and segment operating income grew 46% to $76 million, compared with first quarter 2003.
• International segment sales, representing the Company's U.K., German, French and Japanese sites, grew 80% to $684 million. Net sales, excluding the benefit from changes in foreign exchange rates, grew 58% compared with first quarter 2003. International segment operating income grew 163% to $41 million, compared with $16 million in first quarter 2003.
• For the first time, half of net sales came from products delivered to customers outside the U.S.
• Inventory turns for the trailing twelve months were 19, down from 20 a year ago.
• On February 26, 2004, the Company redeemed $150 million of its 4.75% Convertible Subordinated Notes due 2009 for $154 million, a redemption price of 102.375%.
• During the first quarter the Company also launched a Home & Garden store in Germany, and two new stores in the U.K.: Do-It-Yourself & Tools and Garden & Outdoors.
• Again this year, the widely followed American Customer Satisfaction Index gave Amazon.com a score of 88—the highest customer satisfaction score ever recorded in any service industry, online or off.

Financial Guidance

The following forward-looking statements reflect Amazon.com's expectations as of April 22, 2004. Results may be materially affected by many factors, such as fluctuations in foreign exchange rates, changes in global economic conditions and consumer spending, world events, the emerging nature and rate of growth of the Internet and online commerce, and the various factors detailed below.

Second Quarter 2004 Guidance

• Second quarter net sales are expected to be between $1.34 billion and $1.44 billion, or grow between 22% and 31%, compared with second quarter 2003.
• Consolidated segment operating income is expected to be between $85 million and $105 million, or grow between 27% and 56%, compared with second quarter 2003.
• Operating income is expected to be between $65 million and $85 million, assuming, among other things, that the Company does not record any revisions to its restructuring-related estimates and that the closing price of Amazon.com common stock on June 30, 2004, is identical to the closing price of $43.28 on March 31, 2004.

Full Year 2004 Expectations

• Net sales are expected to be between $6.45 billion and $6.85 billion.
• Consolidated segment operating income is expected to be between $455 million and $535 million.
• Operating income is expected to be between $380 million and $460 million, assuming, among other things, that the Company does not record any revisions to its restructuring-related estimates and that the closing price of Amazon.com common stock on December 31, 2004, is identical to the closing price of $43.28 on March 31, 2004.

A conference call will be Webcast live today at 2 p.m. PT/5 p.m. ET and will be available at least through June 30, 2004, at www.amazon.com/ir. This call will contain forward-looking statements and other material information regarding the Company's financial and operating results.

These forward-looking statements are inherently difficult to predict. Actual results could differ materially for a variety of reasons, including, in addition to the factors discussed above, the amount that Amazon.com invests in new business opportunities and the timing of those investments; the mix of products sold to customers; the mix of net sales derived from products as compared with services; competition; risks of inventory management; the degree to which the Company enters into, maintains and develops commercial agreements and strategic transactions; seasonality; international growth and expansion; and risks of fulfillment throughput and productivity. Other risks and uncertainties include, among others, risk of future losses, significant amount of indebtedness, potential fluctuations in operating results, management of potential growth, system interruptions, consumer trends, fulfillment center optimization, 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, 2003, and all subsequent filings.

Financial Measures

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

Free Cash Flow

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

Consolidated Segment Operating Income

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

• Stock-based compensation, and
• Other operating expense (income).

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

Pro Forma Net Income
Pro forma net income excludes the following line items on the Company's statements of operations:

• Stock-based compensation,
• Other operating expense (income), and
• Remeasurements and other.
   
  

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

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

About Amazon.com

Amazon.com, 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 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 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, kids and baby, and home and garden.

Amazon.com operates six websites: www.amazon.com, www.amazon.co.uk, www.amazon.de, www.amazon.fr, www.amazon.co.jp and www.amazon.ca.

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Supplemental Revenue Information

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Balance Sheets

Supplemental Financial Information and Business Metrics

AMAZON.COM, INC.
Financial and Operational Highlights
(unaudited)

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

Net Sales

• As our financial reporting currency is the U.S. Dollar, our total revenue, profit, and operating and free cash flow has recently benefited significantly from weakness in the U.S. Dollar in comparison to the currencies of our international websites. While we believe that our increasing diversification beyond the U.S. economy through our international businesses benefits our shareholders, it is important to evaluate our growth rates after the effect of currency changes.
• Shipping revenue, which excludes amounts earned from third-party sellers, was approximately $94 million, up 20% from $78 million.

Gross Profit

• Gross profit benefited by approximately $17 million from changes in foreign exchange rates compared with first quarter 2003.
• Net shipping cost was approximately $43 million, up from a cost of $27 million, as a result of our free shipping offers. We view our shipping offers as an effective marketing tool and intend to continue offering them.

Fulfillment

• Fulfillment costs represent those costs incurred in operating and staffing our fulfillment and customer service centers, credit card fees and bad debt costs, including costs associated with our guarantee for certain third-party seller transactions. Fulfillment costs also include amounts paid to third parties, who assist us in fulfillment and customer service operations.
• Costs incurred in operating and staffing our fulfillment and customer service centers on behalf of other businesses, such as Toysrus.com and Target, are classified as cost of sales rather than fulfillment.
• Credit card fees associated with third-party seller transactions are based on the gross purchase price of underlying transactions, and therefore represent a larger percentage of our recorded commission revenue than credit card fees on our retail sales. Accordingly, this negatively affects fulfillment as a percentage of net sales.

Stock-Based Compensation

• We granted less than a half million stock awards during the quarter at a weighted average fair value of $47.
• Stock-based awards generally vest over service periods of between three to six years.
• At March 31, 2004, there were 27 million stock awards outstanding, which are excluded from common stock outstanding, consisting of 23 million stock options ($13 average exercise price) and 4 million restricted stock units. Additionally, 1 million shares of restricted stock are included in common stock outstanding.
• Since October 2002, we have awarded restricted stock units as our primary form of stock-based compensation. Restricted stock units, under fixed accounting, are generally measured at fair value on the date of grant based on the number of shares granted and the quoted price of our common stock. Such value is recognized as an expense over the corresponding service period. To the extent that restricted stock units are forfeited prior to vesting, the corresponding previously recognized expense is reversed as an offset to stock-based compensation.
• At March 31, 2004, 1 million stock awards were subject to variable accounting. Stock option grants after December 31, 2002, are subject to variable accounting treatment. Variable accounting treatment results in expense or contra-expense recognition using the cumulative expense method, calculated based on the quoted price of our common stock and vesting schedules of underlying awards. For example, since the closing price of our common stock on March 31, 2004, was less than the closing price on December 31, 2003, we recorded a contra-expense associated with variable accounting treatment for the first quarter of 2004.
• Stock-based compensation consisted of $3 million contra-expense for stock awards under variable accounting and $10 million for stock awards under fixed accounting. "Stock-based compensation" includes matching stock contributions under our 401(k) program but excludes payroll tax expense resulting from exercises of stock-based awards.

Other Operating Expense (Income)

• Included in "Other operating expense (income)" are restructuring-related expenses and amortization of other intangibles.
• Our first quarter 2001 operational restructuring plan is complete; however, we may periodically adjust our restructuring-related estimates in the future, such as lease obligations, if necessary.
• During the first quarter we determined that some of the office space previously vacated as part of our 2001 restructuring, which we had been unable to sublease due to poor real estate market conditions, was necessary for our future needs. Future lease payments for this office space will be expensed over the lease period and classified to the corresponding operating expense categories on the consolidated statements of operations.
• Cash payments resulting from our operational restructuring were $2 million, compared with $16 million in first quarter 2003.
• We estimate, based on currently available information, the remaining net cash outflows associated with restructuring-related leases and other commitments will be $4 million in 2004, and $23 million thereafter. Amounts due within 12 months are included within "Accrued expenses and other current liabilities" and the remaining amounts within "Long-term debt and other" on our balance sheet. These amounts are net of anticipated sublease income of approximately $33 million (we have signed sublease agreements for $14 million).

Remeasurements and Other

• "Remeasurements and other" primarily consisted of foreign-currency gains on remeasurement of 6.875% PEACS from Euros to U.S. Dollars of $20 million, compared with a loss of $25 million in first quarter 2003.
• Other includes a $3 million loss from remeasurement of intercompany balances, corresponding with a decision reached during the fourth quarter of 2003 that intercompany balances denominated in foreign currencies would be repaid amongst subsidiaries. Also, during the first quarter, approximately $135 million of these balances were repaid among the entities.
• In connection with our February 2004 $150 million redemption of our 4.75% Convertible Subordinated Notes due 2009, we recorded a charge of $6 million, consisting of a $4 million (2.375%) premium and approximately $2 million of remaining deferred issuance charges.
• Other also includes a gain of $6 million relating to the settlement of a contractual dispute.
• In April 2004, we entered into an agreement to sell one of our equity investments. At closing, which is anticipated in the second quarter of 2004, we expect to record a gain of approximately $14 million classified in "Remeasurements and other."

Income Taxes

• At March 31, 2004, we had net operating loss carryforwards (NOLs) of approximately $2.8 billion primarily related to U.S. federal taxes. Utilization of NOLs, which begin to expire at various times starting in 2010, may be subject to certain limitations. Approximately $1.7 billion of our NOLs relate to tax deductible stock-based compensation in excess of amounts recognized for financial reporting purposes—to the extent that any of this amount is realized for tax purposes but not financial reporting purposes, the resulting tax benefits will be credited to stockholders' equity, rather than results of operations.

Net Income (Loss)

• We do not believe that our reported net income for the quarter ended March 31, 2004, should be viewed, on its own, as a material positive event or should be considered predictive of future results. For example, we are unable to forecast the effect on our future reported results of certain items, including the effect that fluctuations in foreign currency rates will have on the remeasurement of our 6.875% PEACS and intercompany balances. Additionally, we are unable to forecast the effect on stock-based compensation of changes in the quoted price of our common stock due to variable accounting treatment. The remeasurement of our 6.875% PEACS represented significant gains during the quarter and may result in significant charges or gains in future periods.

Cash Flows and Balance Sheet

• Operating cash flows and free cash flows can be volatile and are sensitive to many factors, including changes in working capital. Working capital at any specific point in time is subject to many variables, including world events, seasonality, the timing of expense payments, discounts offered by vendors, vendor payment terms and fluctuations in foreign exchange rates.
• Our cash, cash equivalents and marketable securities of $998 million, at fair value, primarily consist of cash, commercial paper and short-term securities, U.S. Treasury notes and bonds, asset-backed and agency securities, and certificates of deposit. Included is amounts held in foreign currencies of $578 million, primarily in Euros and British Pounds.
• We have pledged approximately $86 million of our marketable securities as collateral for property leases and other contractual obligations, compared with $105 million as of March 31, 2003.
• "Other assets" includes, among other things, deferred issuance costs on long-term debt, intangibles and other equity investments.
• "Unearned revenue" is recorded when payments are received from third parties in advance of our providing the associated service.
• "Accrued expenses and other current liabilities" includes, among other things, liabilities for gift certificates, marketing activities, and workforce costs, including accrued payroll, vacation, and other benefits.

• "Long-term debt and other" primarily includes the following (in millions):

   

	Principal at Maturity	Interest Rate	Principal Due Date
Convertible Subordinated Notes..........	$ 900 (1)	4.750%	February 2009
PEACS...........................................	849 (2)	6.875%	February 2010

• We present segment information along two lines: North America and International. We measure operating results of our segments using an internal performance measure of direct segment operating expenses that excludes stock-based compensation and other operating expenses (income), each of which is not allocated to segment results. Other centrally incurred operating costs are fully allocated to segment results. Our operating results, particularly for the International segment, are affected by movements in foreign exchange rates.
• The North America segment consists of amounts earned from retail sales of consumer products (including from third-party sellers) through www.amazon.com and www.amazon.ca; from North America focused Syndicated Stores, such as www.cdnow.com; from our mail-order tool catalog; and from non-retail activities such as North America focused Merchant.com, marketing and promotional agreements.
• The International segment consists of amounts earned from retail sales of consumer products (including from third-party sellers) through www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp; from internationally focused Syndicated Stores; and from non-retail activities such as internationally focused marketing and promotional agreements. This segment includes export sales from www.amazon.co.uk, www.amazon.de, www.amazon.fr and www.amazon.co.jp (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 revenue information within each segment for three categories: "Media", "Electronics and other general merchandise" and "Other." Media consists of amounts earned from retail sales from all sellers of books, music, DVD/video, magazine subscriptions, software, video games and video game consoles. Electronics and other general merchandise consists of amounts earned from retail sales from all sellers of items not included in Media, such as electronics and office, kids and baby, home and garden, apparel, sports and outdoors, gourmet food, jewelry, and health and personal care. The Other category consists of non-retail activities, such as the Merchant.com program and miscellaneous marketing and promotional activities.
• Operating cycle is number of days of sales in inventory plus number of days of sales in accounts receivable minus accounts payable days. Inventory turnover is the quotient of annualized cost of sales to average inventory. Accounts payable days is calculated as the quotient of accounts payable to cost of sales, multiplied by the number of days in the period.
• 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 Merchant.com Program customers, Amazon.com Payments customers, our catalog customers and the customers of select companies with whom we have a technology alliance or marketing and promotional relationships. A customer is considered active upon placing an order.
• References to units mean units sold (net of returns and cancellations) by us and third-party sellers at Amazon.com domains worldwide—such as www.amazon.com, www.amazon.ca, www.amazon.fr, www.amazon.co.uk, www.amazon.de and www.amazon.co.jp—and at Syndicated Stores domains, as well as Amazon.com-owned items sold at non-Amazon.com domains, such as books, music and DVD/video items ordered from Amazon.com's store at www.target.com. Units do not include Amazon.com gift certificates.

Contacts:

Amazon.com Investor Relations Amazon.com Public Relations
Tim Stone, 206/266-2171, ir@amazon.com Patty Smith, 206/266-7180
www.amazon.com/ir