Amazon.com 2004 Annual Report Download - page 34

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,
fulfillment center optimization, risks of inventory management, seasonality, the degree to which the Company
enters into, maintains, and develops commercial agreements, acquisitions, and strategic transactions, and risks of
fulfillment throughput and productivity. 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 1 of Part I, “Additional Factors That May Affect Future Results,” which, along with the previous
discussion, describes some, but not all, of the factors that could cause actual results to differ significantly from
management’s expectations.
Overview
Our primary source of revenue is the sale of a wide range of products and services to customers of our
global websites.The products offered on our websites include products we have purchased from distributors,
publishers, and manufacturers and products offered by third parties on our websites. Generally, we recognize
gross revenue from items we sell from our inventory and recognize our net share of revenue of items sold by
third parties.
Our financial focus is on long-term, sustainable growth in free cash flow1.Free cash flow is driven
primarily by increasing operating income and efficiently managing working capital and capital expenditures.
Increases in operating income result from increases in sales through our websites and a focus on keeping our
operating costs low, offset by investments we make in longer-term strategic initiatives including hiring additional
software engineers and computer scientists. To increase sales, we focus on improving all aspects of the customer
experience, including lowering prices, improving availability, increasing selection, expanding product
information, improving ease of use, and earning customer trust. Our price reductions take several forms: we
reduce the sales prices of products we sell, we recruit third-party sellers to compete with us on product detail
pages, and we reduce or eliminate the cost of shipping to the consumer.
We also seek to efficiently manage shareholder dilution while maintaining the flexibility to issue shares for
strategic purposes, such as financings and aligning employee interests with shareholders. We moved to restricted
stock units as our primary vehicle for equity compensation in late 2002 because we believe they better align the
interests of our shareholders and employees. Restricted stock units result in charges to our income statement
based on the fair value of the awards at the grant date recorded over the underlying service periods. Total shares
outstanding plus outstanding stock awards were 434 million at December 31, 2004, compared with 433 million at
December 31, 2003 and 2002.
We seek to leverage our fixed customer experience costs and work to reduce our variable costs per unit. Our
customer experience costs, specifically the costs necessary to build, enhance, and add features to our websites
and build and optimize our fulfillment centers, are largely fixed in that they do not vary directly with sales. The
customer experience costs that remain variable as a percentage of sales include product costs; credit-card
processing fees; bad debt; picking, packaging, and preparing orders for shipment; transportation; customer
service support; and most aspects of our marketing costs. To decrease our variable costs on a per unit basis and
enable us to lower prices for customers, we seek to increase our direct to publisher and manufacturer sourcing;
seek to maximize volume discounts available to us from suppliers; and focus on maintaining a lean culture,
including by reducing defects in our processes.
1Free cash flow 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
statements of cash flows.
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