Amazon.com 2006 Annual Report Download - page 32

the interests of our shareholders and employees. Restricted stock units result in charges to our consolidated
statements of operations based on the fair value of the awards at the grant date recorded on an accelerated basis
over the underlying service periods, net of estimated cancellations. Total shares outstanding plus outstanding
stock awards were 436 million and 438 million at December 31, 2006 and December 31, 2005. These totals
include all stock awards outstanding, without regard for estimated forfeitures, consisting of vested and unvested
awards and in-the-money and out-of-the-money stock options. In 2006, we repurchased 8 million shares of our
common stock under a repurchase program authorized by our Board of Directors.
We seek to reduce our customer experience variable costs per unit and work to leverage our customer
experience fixed costs. Our customer experience variable costs include product costs, payment processing and
related transaction costs, picking, packaging, and preparing orders for shipment, transportation, customer service
support, and most aspects of our marketing costs. Our customer experience fixed costs include the costs
necessary to build, enhance, and add features to our websites and 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 to publisher
and manufacturer sourcing, maximize 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.
Because of our model we are able to turn our inventory quickly and have a cash-generating operating
cycle2.On average, our high inventory velocity means we generally collect from our customers before our
payments to suppliers come due. Inventory turnover3was 13, 14, and 16 for 2006, 2005, and 2004. Inventory
turnover has declined over the last several years, primarily due to changes in product mix and our continuing
focus on in-stock inventory availability. 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 investment in new geographies and product lines, and the extent we choose to
utilize outsource fulfillment providers. Accounts payable days4were 53, 54, and 53 for 2006, 2005 and 2004. 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, seasonality, 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, software engineers,
and employees involved in category expansion, editorial content, buying, merchandising selection, and systems
support. We will continue to invest in several areas of technology and content, including seller platforms, web
services, digital initiatives, and category expansion as well as in technology infrastructure to enhance the
customer experience and improve our process efficiencies. 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 and consolidated trends. For example, if the U.S. Dollar weakens year-over-year relative to
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.
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