Amazon.com 2003 Annual Report Download - page 39

Unearned Revenue
Unearned revenue was $38 million and $48 million at December 31, 2003 and 2002. Unearned revenue
represents payments received by us in advance of our service obligations. As we continue to structure our
agreements to align the timing of our cash receipts with the service provided, we expect that, over time, balances
of unearned revenue may continue to decline. We believe this trend in unearned revenue is not significant
relative to the trend in our cash flows or operating results. See “Net Sales and Gross Profit” above.
Non-GAAP Financial Measures
Regulation G, “Conditions for Use of Non-GAAP Financial Measures,” and other provisions of the
Securities Exchange Act of 1934 (“1934 Act”) define and prescribe the conditions for use of certain non-GAAP
financial information. We believe that certain of our financial measures which meet the definition of a non-
GAAP financial measure are important supplemental information to investors. We provide: “consolidated
segment operating income (loss),” “pro forma net income (loss),” “pro forma net earnings (loss) per share,” and
“free cash flow.”
We use these non-GAAP financial measures for internal managerial purposes, when publicly providing
guidance on possible future results, and as a means to evaluate period-to-period comparisons. These non-GAAP
financial measures are used in addition to and in conjunction with results presented in accordance with GAAP.
These non-GAAP financial measures should not be relied upon to the exclusion of GAAP financial measures.
These non-GAAP financial measures reflect an additional way of viewing aspects of our operations that, when
viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial
measures, provide a more complete understanding of factors and trends affecting our business. Management
strongly encourages investors to review our financial statements and publicly-filed reports in their entirety and to
not rely on any single financial measure.
Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial
measures with other companies’ non-GAAP financial measures having the same or similar names. For example,
certain companies disclose a financial measure of earnings before certain charges such as interest, taxes,
depreciation, and amortization, commonly referred to as EBITDA. We considered the use of EBITDA as a
supplemental performance measure to GAAP, but believe consolidated segment operating income (loss) and pro
forma net income (loss) are superior for our Company as certain periodic costs associated with our invested capital,
such as fixed asset depreciation expense and amortization of software development costs, and certain costs
associated with our capital structure, such as interest expense, are relevant and important factors affecting our
management decisions. For information about our financial results as reported in accordance with GAAP, see Item
8 of Part II, “Financial Statements and Supplementary Data.” For a quantitative reconciliation of our non-GAAP
financial measures to the most comparable GAAP financial measures, see “Reconciliation Tables” below.
Consolidated Segment Operating Income (Loss)
We measure operating results of our segments using an internal performance measure of direct segment
operating expenses that excludes:
• Stock-based compensation;
• Amortization of other intangibles; and
• Restructuring-related and other.
These operating expense line items are not allocated to segment results, and all other centrally-incurred
operating costs are fully allocated to segment results. The sum of our individual segment results is consolidated
segment operating income (loss), which we reconcile to GAAP operating income (loss). Pursuant to SEC staff
interpretations of Regulation G, when presented in our financial statement footnotes, consolidated segment
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