Amazon.com 2006 Annual Report Download - page 48

with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows.
Management strongly encourages shareholders to review our financial statements and publicly-filed reports in
their entirety and not to rely on any single financial measure.
Free cash flow, which we reconcile to “Net cash provided by operating activities,” is cash flow from
operations reduced by “Purchases of fixed assets, including internal-use software and website development.” We
use free cash flow, and ratios based on it, to conduct and evaluate our business because, although it is similar to
cash flow from operations, we believe it is a more conservative measure of cash flows since purchases of fixed
assets are a necessary component of ongoing operations. In limited circumstances in which proceeds from sales
of fixed assets exceed purchases, free cash flow would exceed cash flow from operations. However, since we do
not anticipate being a net seller of fixed assets, we expect free cash flow to be less than operating cash flows.
Free cash flow has limitations due to the fact that it does not represent the residual cash flow available for
discretionary expenditures. For example, free cash flow does not incorporate payments made on capital lease
obligations or cash payments for business acquisitions. Therefore, we believe it is important to view free cash
flow as a complement to our entire consolidated statements of cash flows.
The following is a reconciliation of free cash flow to the most comparable GAAP measure, “Net cash
provided by operating activities” for 2006, 2005, and 2004 (in millions):
Year Ended December 31,
2006 2005 2004
Net cash provided by operating activities ................................. $702 $733 $566
Purchases of fixed assets, including internal-use software and website
development ..................................................... (216) (204) (89)
Free cash flow ...................................................... $486 $529 $477
Net cash used in investing activities ..................................... $(333) $(778) $(317)
Net cash used in financing activities ..................................... $(400) $(193) $ (97)
In addition, we provide operating expenses with and without stock-based compensation. We provide this
information to show the impact of stock-based compensation, which is non-cash and excluded from our internal
operating plans and measurement of financial performance (although we consider the dilutive impact to our
shareholders when awarding stock-based compensation and value such awards accordingly). In addition, unlike
other centrally-incurred operating costs, stock-based compensation is not allocated to segment results and
therefore excluding it from operating expense is consistent with our segment presentation in our footnotes to the
consolidated financial statements.
Operating expenses without stock-based compensation have limitations due to the fact that they do not
include all expenses primarily related to our workforce. More specifically, if we did not pay out a portion of our
compensation in the form of stock-based compensation, our cash salary expense included in the “Fulfillment”,
“Technology and content”, “Marketing”, and “General and administrative” line items would be higher. We
compensate for this limitation by providing supplemental information about outstanding stock-based awards in
the footnotes to our financial statements. Stock-based compensation programs are an important element of the
Company’s compensation structure and all forms of stock-based awards are valued and included as appropriate in
results of operations.
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