Amazon.com 2013 Annual Report Download - page 28

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 and data 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 I, “Risk
Factors.”
Overview
Our primary source of revenue is the sale of a wide range of products and services to customers. The products offered on
our consumer-facing websites primarily include merchandise and content we have purchased for resale from vendors and those
offered by third-party sellers, and we also manufacture and sell electronic devices. Generally, we recognize gross revenue from
items we sell from our inventory as product sales and recognize our net share of revenue of items sold by other sellers as
services sales. We also offer other services such as AWS, fulfillment, publishing, digital content subscriptions, advertising, and
co-branded credit cards.
Our financial focus is on long-term, sustainable growth in free cash flow1 per share. Free cash flow is driven primarily by
increasing operating income and efficiently managing working capital2 and capital expenditures. Increases in operating income
primarily result from increases in sales of products and services and efficiently managing our operating costs, partially offset by
investments we make in longer-term strategic initiatives. To increase sales of products and services, we focus on improving all
aspects of the customer experience, including lowering prices, improving availability, offering faster delivery and performance
times, increasing selection, increasing product categories and service offerings, expanding product information, improving ease
of use, improving reliability, and earning customer trust. We also seek to efficiently manage shareholder dilution while
maintaining the flexibility to issue shares for strategic purposes, such as financings, acquisitions, and aligning employee
compensation with shareholders’ interests. We utilize restricted stock units as our primary vehicle for equity compensation
because we believe they align the long-term interests of our shareholders and employees. In measuring shareholder dilution, we
include all vested and unvested stock awards outstanding, without regard to estimated forfeitures. Total shares outstanding plus
outstanding stock awards were 476 million and 470 million as of December 31, 2013 and 2012.
We seek to reduce our variable costs per unit and work to leverage our fixed costs. Our variable costs include product and
content costs, payment processing and related transaction costs, picking, packaging, and preparing orders for shipment,
transportation, customer service support, costs necessary to run AWS, and a portion of our marketing costs. Our fixed costs
include the costs necessary to run our technology infrastructure; to build, enhance, and add features to our websites and web
services, our electronic devices, and digital offerings; and to build and optimize our fulfillment centers. Variable costs generally
change directly with sales volume, while fixed costs generally increase depending on the timing of capacity needs, geographic
expansion, category expansion, and other factors. To decrease our variable costs on a per unit basis and enable us to lower
prices for customers, we seek to increase our direct sourcing, increase discounts available to us from suppliers, and reduce
defects in our processes. To minimize growth in fixed costs, we seek to improve process efficiencies and maintain a lean
culture.
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(1) Free cash flow, a non-GAAP financial measure, is defined as net cash provided by operating activities less cash
expenditures for purchases of property and equipment, including internal-use software and website development, both
of which are presented on our consolidated statements of cash flows. See “Results of Operations—Non-GAAP
Financial Measures” below.
(2) Working capital consists of accounts receivable, inventory, and accounts payable.