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FORM 10-Q
AMAZON COM INC - AMZN
Filed: April 23, 2010 (period: March 31, 2010)
Quarterly report which provides a continuing view of a company's financial position
℠
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
⌧
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
or
�
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
.
Commission File No. 000-22513
Amazon.com, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware
91-1646860
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
410 Terry Avenue North, Seattle, WA 98109-5210
(206) 266-1000
(Address and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ⌧ No �
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes ⌧ No �
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
⌧
Accelerated filer
�
Non-accelerated filer
� (Do not check if a smaller reporting company)
Smaller reporting company
�
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes �
No ⌧
445,671,637 shares of common stock, par value $0.01 per share, outstanding as of April 16, 2010
Source: AMAZON COM INC, 10-Q, April 23, 2010
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AMAZON.COM, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2010
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
3
Consolidated Statements of Cash Flows
3
Consolidated Statements of Operations
4
Consolidated Balance Sheets
5
Notes to Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
14
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
25
Item 4.
Controls and Procedures
27
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
28
Item 1A.
Risk Factors
28
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
37
Item 3.
Defaults Upon Senior Securities
37
Item 4.
Reserved
37
Item 5.
Other Information
37
Item 6.
Exhibits
37
Signatures
38
2
Source: AMAZON COM INC, 10-Q, April 23, 2010
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
Three Months Ended
March 31,
2010
2009
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash from operating activities:
Depreciation of fixed assets, including internal-use software and website
development, and other amortization
Stock-based compensation
Other operating expense (income), net
Losses (gains) on sales of marketable securities, net
Other expense (income), net
Deferred income taxes
Excess tax charges (benefits) from stock-based compensation
Changes in operating assets and liabilities:
Inventories
Accounts receivable, net and other
Accounts payable
Accrued expenses and other
Additions to unearned revenue
Amortization of previously unearned revenue
Net cash provided by (used in) operating activities
INVESTING ACTIVITIES:
Purchases of fixed assets, including internal-use software and website development
Acquisitions, net of cash acquired, and other
Sales and maturities of marketable securities and other investments
Purchases of marketable securities and other investments
Net cash provided by (used in) investing activities
FINANCING ACTIVITIES:
Excess tax benefits (charges) from stock-based compensation
Common stock repurchased
Proceeds from long-term debt and other
Repayments of long-term debt and capital lease obligations
Net cash provided by (used in) financing activities
Foreign-currency effect on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
3,444
$
2,769
Twelve Months Ended
March 31,
2010
2009
$
1,701
$
299
177
119
87
26
0
(6)
(20)
(86)
87
67
11
(2)
2
0
(49)
411
360
118
(2)
(23)
63
(141)
309
288
(19)
(1)
(30)
14
(145)
321
454
(1,892)
(361)
188
(227)
(1,098)
107
167
(1,129)
(122)
206
(107)
(585)
(317)
(195)
1,096
60
1,036
(710)
2,780
(273)
(190)
686
249
576
(386)
1,757
(140)
(19)
872
(1,255)
(542)
$
(55)
(15)
314
(391)
(147)
(458)
(43)
2,524
(4,755)
(2,732)
(326)
(155)
1,348
(1,686)
(819)
86
0
62
(61)
87
(47)
(1,600)
1,844
49
0
3
(343)
(291)
(45)
(1,068)
1,701
141
0
124
(168)
97
(2)
143
1,844
145
(100)
48
(673)
(580)
(153)
205
1,701
$
1,024
1,496
$
679
$
See accompanying notes to consolidated financial statements.
3
Source: AMAZON COM INC, 10-Q, April 23, 2010
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AMAZON.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
Three Months Ended
March 31,
2010
2009
Net sales
$
7,131
$
Operating expenses (1):
Cost of sales
Fulfillment
Marketing
Technology and content
General and administrative
Other operating expense (income), net
Total operating expenses
Income from operations
Interest income
Interest expense
Other income (expense), net
Total non-operating income (expense)
Income before income taxes
Provision for income taxes
Equity-method investment activity, net of tax
Net income
5,501
546
201
366
97
26
6,737
394
11
(7)
3
7
401
(100)
(2)
299
$
4,889
$
3,741
422
128
275
68
11
4,645
244
12
(12)
4
4
248
(69)
(2)
177
Basic earnings per share
$
0.67
$
0.41
Diluted earnings per share
$
0.66
$
0.41
Weighted average shares used in computation of earnings per share:
Basic
445
454
Diluted
(1)
Includes stock-based compensation as follows:
Fulfillment
Marketing
Technology and content
General and administrative
$
429
437
18
5
47
17
$
See accompanying notes to consolidated financial statements.
4
Source: AMAZON COM INC, 10-Q, April 23, 2010
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4
36
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AMAZON.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
March 31,
2010
(unaudited)
December 31,
2009
ASSETS
Current assets:
Cash and cash equivalents
Marketable securities
Inventories
Accounts receivable, net and other
Deferred tax assets
Total current assets
Fixed assets, net
Deferred tax assets
Goodwill
Other assets
Total assets
$
$
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses and other
Total current liabilities
Long-term debt
Other long-term liabilities
Commitments and contingencies
Stockholders’ 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 — 462 and 461
Outstanding shares — 446 and 444
Treasury stock, at cost
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
1,844
3,219
1,820
815
266
7,964
1,436
16
1,234
1,392
12,042
$
3,619
1,574
5,193
131
1,100
$
5
(600)
5,887
(145)
471
5,618
12,042
$
$
3,444
2,922
2,171
988
272
9,797
1,290
18
1,234
1,474
13,813
5,605
1,759
7,364
109
1,083
5
(600)
5,736
(56)
172
5,257
13,813
See accompanying notes to consolidated financial statements.
5
Source: AMAZON COM INC, 10-Q, April 23, 2010
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AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 — Accounting Policies
Unaudited Interim Financial Information
We have prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission
(the “SEC”) for interim financial reporting. These consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of
normal recurring adjustments and accruals necessary for a fair presentation of our consolidated balance sheets, operating results, and cash flows for the periods
presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for 2010 due to seasonal and other factors.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in
the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and accompanying notes in Item 8 of Part II, “Financial Statements and Supplementary Data,”
of our 2009 Annual Report on Form 10-K.
Prior Period Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. We no longer present gross profit in our consolidated
statement of operations as we believe income from operations is a more meaningful measure due to the diversity of our product categories and services.
Principles of Consolidation
The consolidated financial statements include the accounts of Amazon.com, Inc., its wholly-owned subsidiaries, and those entities in which we have a
variable interest and are the primary beneficiary (collectively, the “Company”). Intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosures of contingent liabilities. Estimates are used for, but not limited to, valuation of inventory, sales returns,
income taxes, stock-based compensation, valuation of acquired intangibles and goodwill, determining the selling price of deliverables in multiple element
revenue arrangements, contingencies, valuation of investments, collectability of receivables, incentive discount offers, and depreciable lives of fixed assets and
internally-developed software. Actual results could differ materially from those estimates.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on the consolidation of variable interest entities. The new
guidance requires a qualitative approach to identifying a controlling financial interest in a variable interest entity (“VIE”), and requires ongoing assessment of
whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. We adopted this guidance on January 1, 2010.
Adoption did not have a material impact on our consolidated financial statements.
On January 1, 2010, we prospectively adopted ASU 2009-13, which amends ASC Topic 605, Revenue Recognition. Under this standard, we allocate
revenue in arrangements with multiple deliverables using estimated selling prices if we do not have vendor-specific objective evidence or third-party evidence of
the selling prices of the deliverables. Estimated selling prices are management’s best estimates of the prices that we would charge our customers if we were to
sell the standalone elements separately.
6
Source: AMAZON COM INC, 10-Q, April 23, 2010
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Sales of our Kindle e-reader are considered arrangements with multiple deliverables, consisting of the device, wireless access and delivery, and software
upgrades. Under the prior accounting standard, we accounted for sales of the Kindle ratably over the estimated life of the device. Accordingly, revenue and
associated product cost of the device through December 31, 2009, were deferred at the time of sale and recognized on a straight-line basis over the two year
estimated economic life.
As of January 2010, we account for the sale of the Kindle as three deliverables. The revenue related to the device, which is the substantial portion of the
total sale price, and related costs are recognized upon delivery. Revenue related to wireless access and delivery and software upgrades is amortized over the life
of the device, which remains estimated at two years.
Because we have adopted ASU 2009-13 prospectively, we are recognizing $508 million throughout 2010 and 2011 for revenue previously deferred under
the prior accounting standard.
Note 2 — Cash, Cash Equivalents, and Marketable Securities
As of March 31, 2010, and December 31, 2009, our cash, cash equivalents, and marketable securities primarily consisted of cash, government and
government agency securities, AAA-rated money market funds, and other investment grade securities. Our marketable fixed-income securities have maturities of
less than 5 years. Cash equivalents and marketable securities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures,
the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in
active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be
corroborated by observable market data.
Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other
market participants. These valuations require significant judgment.
We measure the fair value of money market funds and equity securities based on quoted prices in active markets for identical assets or liabilities. All other
financial instruments were valued either based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other
significant inputs derived from or corroborated by observable market data. We did not hold any securities categorized as Level 3 as of March 31, 2010, or
December 31, 2009.
7
Source: AMAZON COM INC, 10-Q, April 23, 2010
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The following table summarizes, by major security type, our cash, cash equivalents, and marketable securities that are measured at fair value on a recurring
basis and are categorized using the fair value hierarchy (in millions):
Cost or
Amortized
Cost
Cash
Level 1 securities:
Money market funds
Equity securities
Level 2 securities:
Foreign government and agency securities
U.S. government and agency securities
Corporate debt securities (1)
Asset-backed securities
Other fixed income securities
March 31, 2010
Gross
Gross
Unrealized
Unrealized
Gains
Losses
Total
Estimated
Fair Value
December 31,
2009
Total
Estimated
Fair Value
$
$
$
$
412
0
$
0
412
391
1,262
1
$
0
0
0
0
1,262
1
2,750
1
1,537
1,894
209
39
7
5,361
10
5
5
2
0
22
0
(2)
0
0
0
(2)
1,547
1,897
214
41
7
5,381
1,999
1,268
211
46
6
6,672
Less: Long-term marketable securities (2)
Total cash, cash equivalents, and marketable securities
$
$
$
(318)
5,063
$
(306)
6,366
(1)
Corporate debt securities include investments in financial, insurance, and corporate institutions. No single issuer represents a significant portion of the total
corporate debt securities portfolio.
(2)
We are required to pledge or otherwise restrict a portion of our marketable securities as collateral for standby letters of credit, guarantees, debt and real
estate lease agreements. We classify cash and marketable securities with use restrictions of twelve months or longer as non-current “Other assets” on our
consolidated balance sheets. See “Note 3 — Commitments and Contingencies.”
Note 3 — Commitments and Contingencies
Commitments
We have entered into non-cancellable operating and capital leases for fixed assets and office, fulfillment, and data center facilities. Rental expense under
operating lease agreements was $48 million and $41 million for Q1 2010 and Q1 2009.
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 between 2010 and 2013, with options to extend for two five-year periods. Related
to these leases, we expect to occupy approximately 1.7 million square feet of office space. We also have an option to lease up to an additional approximately
500,000 square feet at rates based on fair market values at the time the option is exercised, subject to certain conditions. In addition, if interest rates exceed a
certain threshold, we have the option to provide financing for one of the buildings.
8
Source: AMAZON COM INC, 10-Q, April 23, 2010
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The following summarizes our principal contractual commitments, excluding open orders for inventory purchases that support normal operations, as of
March 31, 2010:
Nine Months
Ended
December 31,
2010
2011
Year Ended December 31,
2012
2013
2014
Thereafter
Total
(in millions)
Operating and capital commitments:
Debt principal and interest
Capital leases, including interest
Operating leases
Other commitments (1)(2)
Total commitments
$
$
42
110
134
175
461
$ 52
114
169
105
$ 440
$ 59
63
157
91
$ 370
$ 58
13
149
87
$ 307
$—
$
—
$
5
144
86
$ 235
0
283
1,157
1,440
$
211
305
1,036
1,701
$ 3,253
(1)
Includes the estimated timing and amounts of payments for rent, operating expenses, and tenant improvements associated with approximately 1.7 million
square feet of corporate office space being developed in Seattle, Washington. 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.
(2)
Excludes $184 million of tax contingencies for which we cannot make a reasonably reliable estimate of the amount and period of payment, if any.
Pledged Securities
We have pledged or otherwise restricted a portion of our cash and marketable securities as collateral for standby and trade letters of credit, guarantees, debt
and real estate leases. We classify cash and marketable securities with use restrictions of twelve months or longer as non-current “Other assets” on our
consolidated balance sheets. The amount required to be pledged for certain real estate lease agreements changes over the life of our leases based on our credit
rating and changes in our market capitalization. Information about collateral required to be pledged under these agreements is as follows:
Standby and Trade
Letters of Credit and
Guarantees
Balance at December 31, 2009
Net change in collateral pledged
Balance at March 31, 2010
$
$
142
(4)
138
Debt (1)
(in millions)
$ 157
17
$ 174
Real Estate
Leases (2)
$
$
4
(1)
3
Total
$ 303
12
$ 315
(1)
Represents collateral for certain debt related to our international operations.
(2)
At March 31, 2010, our market capitalization was $61 billion. The required amount of collateral to be pledged will increase by $1.5 million if our market
capitalization is equal to or below $40 billion, an additional $5 million if our market capitalization is equal to or below $18 billion, and an additional $6
million if our market capitalization is equal to or below $13 billion.
Legal Proceedings
The Company is involved from time to time in claims, proceedings and litigation, including the matters described in Item 8 of Part II, “Financial
Statements and Supplementary Data — Note 7, Commitments and Contingencies — Legal Proceedings” of our 2009 Annual Report on Form 10-K, as
supplemented by the following:
In December 2005, Registrar Systems LLC filed a complaint against us and Target Corporation for patent infringement in the United States District Court
for the District of Colorado. The complaint alleges that our website technology, including the method by which Amazon.com enables customers to use
Amazon.com account
9
Source: AMAZON COM INC, 10-Q, April 23, 2010
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information on websites that Amazon.com operates for third parties, such as Target.com, infringes two patents obtained by Registrar Systems purporting to cover
methods and apparatuses for a “World Wide Web Registration Information Processing System” (U.S. Patent Nos. 5,790,785 and 6,823,327) and seeks injunctive
relief, monetary damages in an amount no less than a reasonable royalty, prejudgment interest, costs, and attorneys’ fees. In September 2006, the Court entered
an order staying the lawsuit pending the outcome of the Patent and Trademark Office’s re-examination of the patents in suit. In late 2009, the Patent and
Trademark Office concluded its re-examination and cancelled the patents in suit. Accordingly, the plaintiff voluntarily dismissed this lawsuit without prejudice in
March 2010.
In August 2006, Cordance Corporation filed a complaint against us for patent infringement in the United States District Court for the District of Delaware.
The complaint alleges that our website technology, including our 1-Click ordering system, infringes a patent obtained by Cordance purporting to cover an
“Object-Based Online Transaction Infrastructure” (U.S. Patent No. 6,757,710) and seeks injunctive relief, monetary damages in an amount no less than a
reasonable royalty, treble damages for alleged willful infringement, prejudgment interest, costs, and attorneys’ fees. In response, we asserted a declaratory
judgment counterclaim in the same action alleging that a service that Cordance has advertised its intent to launch infringes a patent owned by us entitled
“Networked Personal Contact Manager” (U.S. Patent No. 6,269,369). In August 2009, a jury trial was held and the jury found that all asserted claims of the ‘710
patent were not infringed by Amazon or were invalid. In February 2010, the Court partially reversed the jury’s findings, ruling that some of the asserted claims of
the ‘710 Patent were valid and were infringed by Amazon. We plan to appeal the Court’s ruling.
In March 2009, the Tobin Family Education and Health Foundation filed a complaint against us for patent infringement in the United States District Court
for the Middle District of Florida. The complaint alleges, among other things, that the technology underlying the Amazon Associates program infringes a patent
owned by Tobin purporting to cover a “Method and System for Customizing Marketing Services on Networks Communication with Hypertext Tagging
Conventions” (U.S. Patent No. 7,505,913) and seeks injunctive relief, monetary damages, costs and attorneys fees. In March 2010, we settled this litigation on
terms that include a nonexclusive license to the patent in suit and, accordingly, the lawsuit has been dismissed with prejudice.
In April 2009, Parallel Networks, LLC filed a complaint against us for patent infringement in the United States District Court for the Eastern District of
Texas. The complaint alleges, among other things, that our website technology infringes a patent owned by Parallel Networks purporting to cover a “Method And
Apparatus For Client-Server Communication Using a Limited Capability Client Over A Low-Speed Communications Link” (U.S. Patent No. 6,446,111) and
seeks injunctive relief, monetary damages, costs and attorneys fees. The complaint was dismissed without prejudice in February 2010, but the plaintiff filed a
new complaint against us the following month containing similar allegations. We dispute the allegations of wrongdoing and intend to vigorously defend
ourselves in this matter.
In June 2009, Bedrock Computer Technologies LLC filed a complaint against us for patent infringement in the United States District Court for the Eastern
District of Texas. The complaint alleges, among other things, that our website technology infringes a patent owned by Bedrock purporting to cover a “Method
And Apparatus For Information Storage and Retrieval Using a Hashing Technique with External Chaining and On-the-Fly Removal of Expired Data” (U.S.
Patent Nos. 5,893,120) and seeks injunctive relief, monetary damages, enhanced damages, a compulsory future royalty, costs and attorneys fees. The complaint
was dismissed without prejudice in March 2010, but the plaintiff filed a new complaint against us the following month containing similar allegations. We dispute
the allegations of wrongdoing and intend to vigorously defend ourselves in this matter.
In February 2010, Texas OCR Technologies LLC filed a complaint against us for patent infringement in the United States District Court for the Eastern
District of Texas. The complaint alleges, among other things, that our Search Inside the Book feature infringes a patent owned by Texas OCR Technologies
purporting to cover a “Methodology for Displaying Search Results Using Character Recognition” (U.S. Patent No. 6,363,179) and seeks monetary damages,
costs and attorneys fees. We dispute the allegations of wrongdoing and intend to vigorously defend ourselves in this matter.
10
Source: AMAZON COM INC, 10-Q, April 23, 2010
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Depending on the amount and the timing, an unfavorable resolution of some or all of the claims, proceedings and litigation in which the Company is
involved could materially affect our business, results of operations, financial position, or cash flows.
See also “Note 6 — Income Taxes.”
Note 4 — Stockholders’ Equity
Stock Award Activity
We granted restricted stock units representing 2.4 million and 0.6 million shares of common stock during Q1 2010 and Q1 2009 with a per share weighted
average fair value of $134.18 and $58.74. In March 2010, we granted approximately 2.0 million annual stock awards and we expect to grant additional annual
stock awards in Q2 2010. In 2009, we granted all of our annual stock awards in Q2.
Common shares outstanding plus shares underlying outstanding stock awards totaled 463 million and 461 million at March 31, 2010 and December 31,
2009. These totals include all stock-based awards outstanding, excluding estimated forfeitures.
The following table summarizes our restricted stock unit activity for Q1 2010 (in millions):
Number of Units
Outstanding at December 31, 2009
Units granted
Units vested
Units forfeited
Outstanding at March 31, 2010
15.7
2.4
(0.9)
(0.3)
16.9
Scheduled vesting for outstanding restricted stock units at March 31, 2010 is as follows (in millions):
Nine Months
Ended
December 31,
2010
Scheduled vesting — restricted stock units
4.9
Year Ended December 31,
2011
2012
2013
2014
Thereafter
5.7
3.9
1.8
0.4
Total
0.2
16.9
As of March 31, 2010, there was $557 million of net unrecognized compensation cost related to unvested stock-based compensation arrangements. This
compensation is recognized on an accelerated basis, with approximately half of the compensation expected to be expensed in the next twelve months, and has a
weighted average recognition period of 1.2 years.
Note 5 — Comprehensive Income
Comprehensive income was $210 million and $157 million for Q1 2010 and Q1 2009. The primary differences between net income as reported and
comprehensive income are foreign currency translation adjustments, net of tax, and changes in unrealized gains and losses on available-for-sale securities, net of
tax.
Note 6 — 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 2010 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 in jurisdictions where our effective tax rate is lower than in the U.S. Cash paid for income taxes was $4 million and $11 million in Q1 2010 and Q1
2009.
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As of March 31, 2010, and December 31, 2009, tax contingencies (gross unrecognized tax benefits) were $184 million and $181 million. Due to the nature
of our business operations, we expect the total amount of tax contingences for prior period tax positions will grow over the next 12 months in comparable
amounts to the prior 12 months. We do not believe it is reasonably possible that the total amount of tax contingencies will significantly decrease within the next
12 months.
We are under examination, or may be subject to examination, by the Internal Revenue Service (“IRS”) for calendar years 2005 through 2009. Additionally,
any net operating losses that were generated in prior years and utilized in 2005 through 2009 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 2005 through 2009, France for 2007
through 2009, Germany for 2003 through 2009, Luxembourg for 2005 through 2009, and the United Kingdom for 2004 through 2009. In addition, in 2007,
Japanese tax authorities assessed income tax, including penalties and interest, of approximately $120 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 have been 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 through 2009.
Note 7 — Segment Information
We have organized our operations into two principal segments: North America and International. We present our segment information along the same
lines that our chief executive reviews our operating results in assessing performance and allocating resources.
We allocate operating expenses to segment results, excluding the line item “Other operating expense (income), net” and operating expenses attributable to
stock-based compensation. 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. There are no internal revenue transactions between our reporting segments.
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Information on reportable segments and reconciliation to consolidated net income was as follows:
Three Months Ended
March 31,
2010
2009
(in millions)
North America
Net sales
Operating expenses
Cost of sales
Direct segment operating expenses (1)
Segment operating income
$
(1)
2,578
2,761
746
273
$
1,884
544
150
$
3,351
$
2,311
$
2,740
377
234
$
1,857
282
172
$
7,131
$
4,889
$
Consolidated
Net sales
Operating expenses
Cost of sales
Direct segment operating expenses (1)
Segment operating income
Stock-based compensation
Other operating income (expense), net
Income from operations
Total non-operating income (expense)
Provision for income taxes
Equity-method investment activity, net of tax
Net income
$
$
International
Net sales
Operating expenses
Cost of sales
Direct segment operating expenses (1)
Segment operating income
3,780
5,501
1,123
507
(87)
(26)
394
7
(100)
(2)
299
$
3,741
826
322
(67)
(11)
244
4
(69)
(2)
177
Represents the fulfillment, marketing, technology and content, and general and administrative operating expenses, excluding stock-based compensation,
that are allocated to segments.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial
position, made in this Quarterly Report on Form 10-Q are forward-looking. We use words such as anticipates, believes, expects, future, intends, and similar
expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual
results could differ materially for a variety of reasons, including, among others, 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, 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, payments risks, and risks of fulfillment throughput and
productivity. In addition, the current global economic climate amplifies many of these risks. These risks and uncertainties, as well as other risks and
uncertainties that could cause our actual results to differ significantly from management’s expectations, are described in greater detail in Item 1A of Part II,
“Risk Factors.”
For additional information, see Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview”
of our 2009 Annual Report on Form 10-K.
Critical Accounting Judgments
The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes.
The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and
results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of
matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have
other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional
information, see Item 8 of Part II, “Financial Statements and Supplementary Data — Note 1 — Description of Business and Accounting Policies,” of our 2009
Annual Report on Form 10-K and Item 1 of Part I, “Financial Statements — Note 1 — Accounting Policies,” of this Form 10-Q. Although we believe that our
estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these
estimates under different assumptions, judgments, or conditions.
Inventories
Inventories, consisting of products available for sale, are primarily accounted for using the first-in first-out (“FIFO”) method, and are valued at the lower
of cost or market value. This valuation requires us to make judgments, based on currently-available information, about the likely method of disposition, such as
through sales to individual customers, returns to product vendors, or liquidations, and expected recoverable values of each disposition category.
These assumptions about future disposition of inventory are inherently uncertain. As a measure of sensitivity, for every 1% of additional inventory
valuation allowance we would have recorded an additional cost of sales of approximately $19 million for Q1 2010.
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Goodwill
We evaluate goodwill for impairment annually and when an event occurs or circumstances change that indicates that the carrying value may not be
recoverable. Our annual testing date is October 1. We test goodwill for impairment by first comparing the book value of net assets to the fair value of the
reporting units. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of impairment as the difference
between the estimated fair value of goodwill and the carrying value. We estimate the fair value of the reporting units using discounted cash flows. Forecasts of
future cash flow are based on our best estimate of future net sales and operating expenses, based primarily on expected category expansion, pricing, market
segment share and general economic conditions. Certain estimates of discounted cash flows involve businesses and geographies with limited financial history and
developing revenue models. Changes in these forecasts could significantly change the amount of impairment recorded, if any.
During the quarter, management monitored the actual performance relative to the fair value assumptions used during our annual goodwill impairment test.
For the periods presented, no triggering events were identified that require an update to our annual impairment test. As a measure of sensitivity, 10% decrease in
the fair value of any of our reporting units as of December 31, 2009 would have had no impact on the carrying value of our goodwill.
Financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital that we use to determine
our discount rate and through our stock price that we use to determine our market capitalization. During times of volatility, significant judgment must be applied
to determine whether credit or stock price changes are a short term swing or a longer-term trend. As a measure of sensitivity, a prolonged 20% decrease from our
March 31, 2010 closing stock price would not be an indicator of possible impairment.
Stock-Based Compensation
We measure compensation cost for stock awards at fair value and recognize it as compensation expense over the service period for awards expected to
vest. The fair value of restricted stock units is determined based on the number of shares granted and the quoted price of our common stock. The estimation of
stock awards that will ultimately vest requires judgment for the amount that will be forfeited, 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. We consider many factors when estimating
expected forfeitures, including employee class, economic environment, and historical experience. We update our estimated forfeiture rate quarterly. A 1% change
to our estimated forfeiture rate would have had an approximately $17 million impact on our Q1 2010 consolidated operating income. Our estimated forfeiture
rates at March 31, 2010 and December 31, 2009 were 32.5% and 33.1%.
We utilize the accelerated method, rather than the straight-line method, for recognizing compensation expense. Under this method, over 50% of the
compensation cost is expensed in the first year of a four year vesting term. The accelerated method also adds a higher level of sensitivity and complexity in
estimating forfeitures. If forfeited early in the life of an award, the forfeited amount is much greater under an accelerated method than under a straight-line
method.
Income Taxes
We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and
determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax
determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have
lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and
liabilities, or by changes in
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the relevant tax, accounting and other laws, regulations, principles and interpretations. We are subject to audit in various jurisdictions, and such jurisdictions may
assess additional income tax against us. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation
could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our
operating results or cash flows in the period or periods for which that determination is made.
If we determine that additional portions of our deferred tax assets are realizable, the majority of the benefit will come from the assets associated with the
stock-based compensation that was not recognized in the financial statements, but was claimed on the tax return. Since this compensation did not originally run
through our consolidated statements of operations, the benefit generated will be recorded to stockholders’ equity.
Recent Accounting Pronouncements
See Item 1 of Part I, “Financial Statements — Note 1 — Accounting Policies — Recent Accounting Pronouncements.”
Liquidity and Capital Resources
Cash flow information is as follows:
Three Months Ended
March 31,
2010
2009
(in millions)
Operating activities
Investing activities
Financing activities
$
(1,098)
(542)
87
$
(585)
(147)
(291)
Twelve Months Ended
March 31,
2010
2009
(in millions)
$
2,780
(2,732)
97
$
1,757
(819)
(580)
Our financial focus is on long-term, sustainable growth in free cash flow1. Free cash flow, a non-GAAP financial measure, was $2.32 billion for the
trailing twelve months ended March 31, 2010, compared to $1.43 billion for the trailing twelve months ended March 31, 2009, an increase of 62%. See
“Non-GAAP Financial Measures” below for a reconciliation of free cash flow to cash provided by operating activities. The increase in free cash flow for the
trailing twelve months ended March 31, 2010 compared to the comparable prior year period was due to increased operating income, changes in working capital,
and increased deferred revenue, partially offset by increased capital expenditures. Operating cash flows and free cash flows can be volatile and are sensitive to
many factors, including changes in working capital and the timing and magnitude of capital expenditures. Working capital at any specific point in time is subject
to many variables, including seasonality, inventory management and category expansion, the timing of cash receipts and payments, vendor payment terms,
valuation of cash equivalents and marketable securities, and fluctuations in foreign exchange rates.
Our principal sources of liquidity are cash flows generated from operations and our cash, cash equivalents, and marketable securities balances, which, at
fair value, were $5.1 billion and $6.4 billion at March 31, 2010 and December 31, 2009. Amounts held in foreign currencies were $2.3 billion and $2.8 billion at
March 31, 2010 and December 31, 2009, and were primarily Euros, British Pounds, and Japanese Yen.
Cash provided by (used in) operating activities was $(1,098) million and $(585) million for Q1 2010 and Q1 2009. Our operating cash flows result
primarily from cash received from our customers, sellers, and activities such as AWS, miscellaneous marketing and promotional agreements, and our co-branded
credit card agreements, offset by cash payments we make for products and services, employee compensation (less amounts capitalized
(1)
Free cash flow, a non-GAAP financial measure, is defined as net cash provided by operating activities less purchases of fixed assets, including capitalized
internal-use software and website development, both of which are presented on our consolidated statements of cash flows. See “Non-GAAP Financial
Measures” below.
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related to internal use software that are reflected as cash used in investing activities), payment processing and related transaction costs, and operating leases. Cash
received from customers, sellers, developers, and other activities generally corresponds to our net sales. Because our customers primarily use credit cards to buy
from us, our receivables from customers settle quickly. Changes to our operating cash flows have historically been driven primarily by changes in operating
income and changes to the components of working capital, including changes to receivable and payable days and inventory turns, as well as changes to non-cash
items such as excess stock-based compensation and deferred taxes.
Cash provided by (used in) investing activities corresponds with purchases, sales, and maturities of marketable securities, cash outlays for acquisitions,
equity-method investments, and intellectual property rights, and purchases of fixed assets, including leasehold improvements and internal-use software and
website development costs. Cash provided by (used in) investing activities was $(542) million and $(147) million for Q1 2010 and Q1 2009, with the variability
caused primarily by purchases, maturities, and sales of marketable securities and other investments and increased capital expenditures. Capital expenditures were
$140 million and $55 million during Q1 2010 and Q1 2009. The increase in capital expenditures reflects additional investments in technology infrastructure
including AWS, additional investments in support of continued business growth, including capacity to support our fulfillment operations, and investments in
corporate office space, which we expect to continue throughout 2010. Capital expenditures included $40 million and $34 million for internal-use software and
website development during Q1 2010 and Q1 2009. Stock-based compensation capitalized for internal-use software and website development costs does not
affect cash flows. During Q1 2010 and Q1 2009, we made cash payments, net of acquired cash, related to acquisition and investment activity of $19 million and
$15 million.
Cash provided by (used in) financing activities was $87 million and $(291) million for Q1 2010 and Q1 2009. Cash inflows from financing activities
primarily result from proceeds from tax benefits relating to excess stock-based compensation deductions and proceeds from long-term debt. Tax benefits relating
to excess stock-based compensation deductions are presented as financing cash flows. Cash inflows from tax benefits related to stock-based compensation
deductions were $86 million and $49 million for Q1 2010 and Q1 2009. Cash inflows from proceeds from long-term debt were $62 million in Q1 2010;
long-term debt proceeds were not significant in Q1 2009. Cash outflows from financing activities result from payments on capital lease obligations and
repayments of long-term debt. Payments on capital lease obligations and repayments of long-term debt were $61 million and $343 million in Q1 2010 and Q1
2009.
We recorded net tax provisions of $100 million and $69 million in Q1 2010 and Q1 2009. A majority of this provision is non-cash. We have current tax
benefits and net operating loss carryforwards relating to excess stock-based compensation deductions that are being utilized to reduce our U.S. taxable income.
As such, cash taxes paid were $4 million and $11 million for Q1 2010 and Q1 2009. As our federal and state net operating losses and tax credits are utilized, cash
paid for taxes will increase. We endeavor to optimize our global taxes on a cash basis, rather than on a financial reporting basis.
In January 2010, our Board of Directors authorized a program to repurchase up to $2 billion of our common stock. We did not repurchase common stock
in Q1 2010.
See Item 1 of Part I, “Financial Statements — Note 3 — Commitments and Contingencies” for additional discussion of our principal contractual
commitments, as well as our pledged securities. Purchase obligations and open purchase orders, consisting of inventory and significant non-inventory
commitments, were $882 million at March 31, 2010.
On average, our high inventory velocity means we collect from our customers before our payments to suppliers come due. Inventory turnover2 was 13 for
both Q1 2010 and Q1 2009. We expect some variability in inventory turnover over time as it is affected by several factors, including our product mix, the mix of
sales by us
(2)
Inventory turnover is the quotient of trailing twelve month cost of sales to average inventory over five quarter ends.
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and by other sellers, our continuing focus on in-stock inventory availability, our investment in new geographies and product lines, and the extent to which we
choose to utilize outsource fulfillment providers.
We believe that current cash, cash equivalents, and marketable securities balances will be sufficient to meet our anticipated operating cash needs for at
least the next 12 months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. See Item 1A of Part II, “Risk
Factors.” We continually evaluate opportunities to sell additional equity or debt securities, obtain credit facilities, repurchase common stock, pay dividends, or
repurchase, refinance, or otherwise restructure our debt for strategic reasons or to further strengthen our financial position. The sale of additional equity or
convertible debt securities would likely be dilutive to our shareholders. In addition, we will, from time to time, consider the acquisition of, or investment in,
complementary businesses, products, services, and technologies, which might affect our liquidity requirements or cause us to issue additional equity or debt
securities. There can be no assurance that additional lines-of-credit or financing instruments will be available in amounts or on terms acceptable to us, if at all.
Results of Operations
We have organized our operations into two principal segments: North America and International. We present our segment information along the same
lines that our chief executive reviews our operating results in assessing performance and allocating resources.
Net Sales
Net sales information is as follows:
Three Months Ended
March 31,
2010
2009
(in millions)
Net Sales:
North America
International
Consolidated
$
$
Year-over-year Percentage Growth:
North America
International
Consolidated
Year-over-year Percentage Growth, excluding effect of exchange rates:
North America
International
Consolidated
Net Sales Mix:
North America
International
Consolidated
3,780
3,351
7,131
$
$
2,578
2,311
4,889
47%
45
46
21%
15
18
46%
37
42
22%
28
25
53%
47
100%
53%
47
100%
Sales increased 46% in Q1 2010. Changes in currency exchange rates positively affected net sales by $185 million for Q1 2010. For a discussion of the
effect on sales growth of exchange rates, see “Effect of Exchange Rates” below.
The North America sales growth rate was 47% for Q1 2010. This sales growth primarily reflects increased unit sales, a larger base of sales in faster
growing categories such as electronics and other general merchandise, and our adoption of ASU 2009-13 (see Item 1 of Part I, “Financial Statements — Note 1
— Accounting Policies — Recent Accounting Pronouncements”). Increased unit sales were driven largely by our continued efforts to
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reduce prices for our customers, including from our free shipping offers and Amazon Prime, by increased in-stock inventory availability and increased selection
of product offerings, and by the impact of Zappos, which we acquired in Q4 2009.
The International sales growth rate was 45% for Q1 2010. This sales growth primarily reflects increased unit sales and a larger base of sales in faster
growing categories such as electronics and other general merchandise. Increased unit sales were driven largely by our continued efforts to reduce prices for our
customers, including from our free shipping offers and Amazon Prime, and by increased in-stock inventory availability and increased selection of product
offerings. Additionally, changes in currency exchange rates positively affected International net sales by $175 million for Q1 2010.
As we continue to offer increased selection, lower prices, and additional product lines within our electronics and other general merchandise category, we
expect to see the relative mix of sales from this category increase.
Sales of products by other sellers on our websites represented 31% of unit sales for both Q1 2010 and Q1 2009. Since revenues from these sales are
recorded as a net amount, they generally result in lower revenues but higher gross margin per unit. Since we focus on profit dollars rather than margins, we are
largely neutral on whether an item is sold by us or by another seller.
We expect that, over time, our International segment will represent 50% or more of our consolidated net sales. Additionally, as we continue to offer
increased selection, lower prices, and additional product lines within our electronics and other general merchandise category, we expect to see the relative mix of
sales from this category increase. See “Supplemental Information” below.
Supplemental Information
Supplemental information about shipping results is as follows:
Three Months Ended
March 31,
2010
2009
(in millions)
Shipping Activity:
Shipping revenue (1)(2)
Outbound shipping costs
Net shipping cost
$
$
Year-over-year Percentage Growth:
Shipping revenue
Outbound shipping costs
Net shipping cost
Percent of Net Sales:
Shipping revenue
Outbound shipping costs
Net shipping cost
248
(518)
(270)
$
$
190
(358)
(168)
30%
45
61
3.5%
(7.3)
(3.8)%
(1)
3.9%
(7.3)
(3.4)%
Excludes amounts earned on shipping activities by third-party sellers where we do not provide the fulfillment service.
(2)
(1)%
12
31
Includes amounts earned from Amazon Prime membership and Fulfillment by Amazon programs.
We believe that offering low prices to our customers is fundamental to our future success. One way we offer lower prices is through free-shipping offers
that result in a net cost to us in delivering products, as well as through membership in Amazon Prime. To the extent our customers accept and use our free
shipping offers at an increasing rate, including memberships in Amazon Prime, our net cost of shipping will increase. We seek to partially mitigate the costs of
lowering prices over time through achieving higher sales volumes, negotiating better terms with our suppliers, and achieving better operating efficiencies.
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Supplemental information about our net sales is as follows:
Three Months Ended
March 31,
2010
2009
(in millions)
Net sales:
North America
Media
Electronics and other general merchandise
Other (1)
Total North America
$
$
International
Media
Electronics and other general merchandise
Other (1)
Total International
$
$
Consolidated
Media
Electronics and other general merchandise
Other (1)
Total consolidated
$
$
Year-over-year percentage growth:
North America
Media
Electronics and other general merchandise
Other
Total North America
International
Media
Electronics and other general merchandise
Other
Total International
Consolidated
Media
Electronics and other general merchandise
Other
Total consolidated
Year-over-year percentage growth:
Excluding the effect of exchange rates
International
Media
Electronics and other general merchandise
Other
Total International
Consolidated
Media
Electronics and other general merchandise
Other
Total consolidated
Consolidated net sales mix:
Media
Electronics and other general merchandise
Other
Total consolidated
(1)
1,597
2,024
159
3,780
$
1,833
1,489
29
3,351
$
3,430
3,513
188
7,131
$
$
$
$
1,305
1,172
101
2,578
1,418
874
19
2,311
2,723
2,046
120
4,889
22%
73
57
47
8%
42
7
21
29%
70
57
45
6%
34
14
15
26%
72
57
46
7%
38
8
18
23%
61
47
37
17%
50
40
28
22%
68
56
42
13%
46
11
25
48%
49
3
100%
56%
42
2
100%
Includes non-retail activities, such as AWS, miscellaneous marketing and promotional agreements, other seller sites, and our co-branded credit card
agreements.
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Operating Expenses
Information about operating expenses with and without stock-based compensation was as follows (in millions):
As
Reported
Operating Expenses:
Cost of sales
Fulfillment
Marketing
Technology and content
General and administrative
Other operating expense (income), net
Total operating expenses
$
$
5,501
546
201
366
97
26
6,737
Three Months Ended
March 31, 2010
Stock-Based
Compensation
$
0
(18)
(5)
(47)
(17)
0
(87)
$
Net
$ 5,501
528
196
319
80
26
$ 6,650
As
Reported
$
$
Three Months Ended
March 31, 2009
Stock-Based
Compensation
3,741
422
128
275
68
11
4,645
$
Net
0
(15)
(4)
(36)
(12)
0
(67)
$
3,741
407
124
239
56
11
$ 4,578
Year-over-year Percentage Growth:
Fulfillment
Marketing
Technology and content
General and administrative
29%
56
33
43
30%
57
34
44
19%
25
18
11
19%
24
18
8
Percent of Net Sales:
Fulfillment
Marketing
Technology and content
General and administrative
7.7%
2.8
5.1
1.4
7.4%
2.7
4.5
1.1
8.6%
2.6
5.6
1.4
8.3%
2.5
4.9
1.1
Operating expenses without stock-based compensation are non-GAAP financial measures. See “Non-GAAP Financial Measures” below.
Cost of Sales
Cost of sales consists of the purchase price of consumer products and content where we are the seller of record, inbound and outbound shipping charges,
and packaging supplies. 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.
Cost of sales increased in absolute dollars in Q1 2010 compared to the comparable prior year period due to increased product and shipping costs resulting
from increased sales and to our adoption of ASU 2009-13 (see Item 1 of Part I, “Financial Statements — Note 1 — Accounting Policies — Recent Accounting
Pronouncements”), offset by improvements in inventory management, including vendor pricing.
Consolidated gross profit and gross margin for each of the periods presented was as follows:
Three Months Ended
March 31,
2010
2009
Gross Profit (in millions)
Gross Margin
$
1,630
22.9%
$
1,148
23.5%
Gross margin decreased compared to the comparable prior year period due primarily to lower prices for our customers, including free shipping offers and
Amazon Prime, offset by changes in product category and service mix, including the impact of Zappos, which we acquired in Q4 2009. We believe that income
from operations is
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a more meaningful measure than gross profit and gross margin due to the diversity of our product categories and services. In addition, our focus is on growing
profit dollars rather than maximizing margin percentages.
Fulfillment
The increase in fulfillment costs in absolute dollars in Q1 2010 compared to the comparable prior year period 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.
Fulfillment costs as a percentage of net sales may vary due to several factors, such as payment processing and related transaction costs, including those
from our guarantee for certain seller transactions, our level of productivity and accuracy, changes in volume, size, and weight of units received and fulfilled, the
extent we utilize fulfillment services provided by third parties, and our ability to affect customer service contacts per unit by implementing improvements in our
operations and enhancements to our customer self-service features. 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 seek to expand our fulfillment capacity 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 which we provide the fulfillment services. We periodically evaluate our facility requirements as
necessary.
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 Q1 2010 compared to the comparable prior year period due to increased spending in variable online
marketing channels, such as our Associates program and sponsored search programs, and television advertising.
While costs associated with free shipping are not included in marketing expense, we view free shipping offers and Amazon Prime as effective worldwide
marketing tools, and intend to continue offering them indefinitely.
Technology and Content
We seek to efficiently invest in several areas of technology and content including seller platforms, AWS, digital initiatives, and expansion of new and
existing product categories, as well as technology infrastructure so that we can continue to enhance the customer experience, improve our process efficiency and
support our infrastructure web services. We expect spending in technology and content to increase over time as we continue to add employees to our staff and
add technology infrastructure.
During Q1 2010 and Q1 2009, we capitalized $47 million (including $8 million of stock-based compensation) and $41 million (including $6 million of
stock-based compensation) of costs associated with internal-use software and website development. Amortization of previously capitalized amounts was $43
million and $40 million for Q1 2010 and Q1 2009.
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