Amazon.com 2004 Annual Report Download - page 35

Because we are able to turn our inventory quickly, we have a negative operating cycle that is a source of
cash flow2.On average, our high inventory velocity means we generally collect from our customers before our
payments to suppliers come due. Inventory turnover3was 16, 18, 19 for 2004, 2003, and 2002. We expect some
variability in inventory turnover over time since it is affected by several factors, including our product mix, our
mix of third-party sales, our continuing focus on in-stock inventory availability, our future investment in new
geographies and product lines, and the extent we choose to utilize outsource fulfillment providers. Accounts
payable days4were 53, 50, and 52 for 2004, 2003 and 2002. We expect some variability in accounts payable days
over time since it is affected by several factors, including the mix of product sales, the mix of third-party sales,
the mix of suppliers, and changes in payment terms over time, including the effect of negotiating better pricing
from our suppliers in exchange for shorter payment terms.
Our spending in technology and content will increase as we add computer scientists and software engineers
to continue to improve our process efficiency and enhance the customer experience on our websites. We believe
that advances in technology, specifically the speed and reduced cost of processing power, the improved consumer
experience of the Internet outside of the workplace through lower-cost broadband service to the home, and the
advances of wireless connectivity will continue to improve the consumer experience on the Internet and increase
its ubiquity in people’s lives. Our challenge will be to continue to build and deploy innovative and efficient
software that will best take advantage of continued advances in technology.
Our financial reporting currency is the U.S. Dollar and changes in exchange rates significantly affect our
reported results, including trends. For example, our total revenue, profit, and operating and free cash flow have
recently benefited significantly from weakness in the U.S. Dollar in comparison to the currencies of our
internationally-focused websites. While we believe that our increasing diversification beyond the U.S. economy
through our growing international businesses benefits our shareholders, it is important to also evaluate our
growth rates before the effect of currency changes. For example, while our revenues increased 31% during 2004
in comparison with the prior year, holding currency exchange constant with the prior year our growth would have
been 26%. In the future, this trend may reverse, and our consolidated U.S. Dollar revenue growth rates would be
less than our local-currency growth rates.
We may have significant variation in our future reported results. We believe that our reported net income
for 2004 should not be viewed, on its own, as a material positive event, and the year-over-year increase in net
income of $553 million is not necessarily predictive of our future results for a variety of reasons. For example, in
2004 we had a primarily non-cash net benefit from income taxes of $233 million resulting primarily from
changes in valuation of deferred tax assets associated with our net operating loss carryforwards attributable to
continuing operations. Additionally, the remeasurement of our 6.875% Premium Adjustable Convertible
Securities (“PEACS”) and intercompany balances resulted in significant gains and charges associated with the
effect of movements in currency exchange rates. Accordingly, we encourage readers of our financial statements
to evaluate the effect on our operating trends of these items since future income taxes and changes in currency
exchange rates may create significant variability in our future operating results.
For additional information about each line item summarized above, refer to Item 8 of Part II, “Financial
Statements—Note 1—Description of Business and Accounting Policies.”
Critical Accounting Judgments
The preparation of financial statements in conformity with generally accepted accounting principles of the
United States (“GAAP”) requires estimates and assumptions that affect the reported amounts of assets and
2The operating cycle is number of days of sales in inventory plus number of days of sales in accounts
receivable minus accounts payable days.
3Inventory turnover is the quotient of annualized cost of sales to average inventory over five quarters.
4Accounts payable days, calculated as the quotient of accounts payable to cost of sales, multiplied by the
number of days in the period.
27