Amazon.com 2007 Annual Report Download

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Table of contents

  • Page 1

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  • Page 3
    ... with wireless access to more than 110,000 books, blogs, magazines, and newspapers. The wireless connectivity isn't WiFi-instead it uses the same wireless network as advanced cell phones, which means it works when you're at home in bed or out and moving around. You can buy a book directly from the...

  • Page 4
    ... led to a significant step-change in the cost of books. Physical books ushered in a new way of collaborating and learning. Lately, networked tools such as desktop computers, laptops, cell phones and PDAs have changed us too. They've shifted us more toward information snacking, and I would argue...

  • Page 5
    ... entry. But this is Day 1 for the Internet and, if we execute well, for Amazon.com. Today, online commerce saves customers money and precious time. Tomorrow, through personalization, online commerce will accelerate the very process of discovery. Amazon.com uses the Internet to create real value for...

  • Page 6
    ... a useful, easyto-search, and easy-to-browse format in a store open 365 days a year, 24 hours a day. We maintained a dogged focus on improving the shopping experience, and in 1997 substantially enhanced our store. We now offer customers gift certificates, 1-ClickSM shopping, and vastly more reviews...

  • Page 7
    ... Our goal remains to continue to solidify and extend our brand and customer base. This requires sustained investment in systems and infrastructure to support outstanding customer convenience, selection, and service while we grow. We are planning to add music to our product offering, and over time we...

  • Page 8
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  • Page 9
    ...and telephone number, including area code, of registrant's principal executive offices) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock, par value $.01 per share Nasdaq Global Select Market Securities registered...

  • Page 10
    ... Market for the Registrant's Common Stock, Related Shareholder Matters and Issuer Purchases of Equity Securities ...Selected Consolidated Financial Data ...Management's Discussion and Analysis of Financial Condition and Results of Operations ...Financial Statements and Supplementary Data ...Changes...

  • Page 11
    ... customers, seller customers and developer customers. In addition, we generate revenue through co-branded credit card agreements and other marketing and promotional services, such as online advertising. We have organized our operations into two principal segments: North America and International...

  • Page 12
    ... yet shipped, change delivery instructions and payment options, combine orders, edit gift options, and return items. Additionally, when customers have questions, we provide an email address and phone number to contact customer service directly and an intuitive click-to-call feature on our help pages...

  • Page 13
    ...or promotional offers, we view such offers as effective marketing tools. Seller Customers Through Amazon Services, we offer programs that enable seller customers to sell their products on our websites and fulfill orders through us, allow consumer customers to shop for products owned by sellers using...

  • Page 14
    ... retain qualified personnel. Available Information Our investor relations website is www.amazon.com/ir. We make available on this website under "Financial Documents," free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those...

  • Page 15
    ... 40 42 57 47 43 47 48 41 45 President, Chief Executive Officer, and Chairman of the Board Senior Vice President, Business Development Senior Vice President, Seller Services Senior Vice President, Web Services Senior Vice President, Worldwide Digital Media Senior Vice President, Worldwide Operations...

  • Page 16
    ... and web services. Many of our current and potential competitors have greater resources, longer histories, more customers, and greater brand recognition. They may secure better terms from vendors, adopt more aggressive pricing and devote more resources to technology, fulfillment, and marketing. 8

  • Page 17
    ... of sellers; our ability to acquire merchandise, manage inventory, and fulfill orders; the introduction of competitive websites, products, services, price decreases, or improvements; changes in usage of the Internet and e-commerce, including in non-U.S. markets; timing, effectiveness, and costs of...

  • Page 18
    ... technology infrastructure; shorter payable and longer receivable cycles and the resultant negative impact on cash flow; laws and regulations regarding consumer and data protection, privacy, network security, encryption, and restrictions on pricing or discounts; lower levels of use of the Internet...

  • Page 19
    ...will be able to operate our network effectively. We rely on a limited number of shipping companies to deliver inventory to us and completed orders to our customers. If we are not able to negotiate acceptable terms with these companies or they experience performance problems or other difficulties, it...

  • Page 20
    ... center optimization and inventory. We generally have payment terms with our vendors that extend beyond the amount of time necessary to collect proceeds from our customers. As a result of holiday sales, at December 31 of each year, our cash, cash equivalents, and marketable securities balances...

  • Page 21
    ...expenses related to intangible assets, any of which could reduce our profitability and harm our business. We Have Foreign Exchange Risk The results of operations of, and certain of our intercompany balances associated with, our international websites are exposed to foreign exchange rate fluctuations...

  • Page 22
    ... access to our websites and the speed with which a customer navigates and makes purchases on our websites affect our net sales, operating results and the attractiveness of our products and services. We experience occasional system interruptions and delays that make our websites unavailable or slow...

  • Page 23
    ...variations in operating results; fluctuations in the stock market in general and market prices for Internet-related companies in particular; changes in financial estimates by us or securities analysts and recommendations by securities analysts; changes in our capital structure, including issuance of...

  • Page 24
    ... and other communications, consumer protection, the provision of online payment services, unencumbered Internet access to our services, the design and operation of websites, and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as...

  • Page 25
    ...vendors and sellers do not indemnify us from product liability. We Are Subject to Payments-Related Risks We accept payments using a variety of methods, including credit card, debit card, credit accounts (including promotional financing), gift certificates, direct debit from a customer's bank account...

  • Page 26
    ... for Fraudulent or Unlawful Activities of Sellers The law relating to the liability of providers of online payment services is currently unsettled. In addition, governmental agencies could require changes in the way this business is conducted. Under our seller programs, we may be unable to prevent...

  • Page 27
    ...lease additional corporate office, fulfillment and warehouse operations, customer service, and..., we also lease corporate office, fulfillment and warehouse operations, customer service, and other facilities,...Submission of Matters to a Vote of Security Holders No matters were submitted for a vote of...

  • Page 28
    ... Related Shareholder Matters and Issuer Purchases of Equity Securities Market Information Our common stock is traded on the Nasdaq Global Select Market under the symbol "AMZN." The following table sets forth the high and low closing prices for our common stock for the periods indicated, as reported...

  • Page 29
    ... of Business and Accounting Policies." (2) Free cash flow, a non-GAAP financial measure, 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 consolidated...

  • Page 30
    ...items we sell from our inventory and recognize our net share of revenue of items sold by other sellers. We also offer services such as Amazon Web Services, Amazon Enterprise Solutions, co-branded credit cards, fulfillment, and miscellaneous marketing and promotional offers. Our financial focus is on...

  • Page 31
    ..., customer service support, and most aspects of our marketing costs. Our fixed costs include the costs necessary to run our technology infrastructure, build, enhance, and add features to our websites and build and optimize our fulfillment centers. Variable costs generally change directly with...

  • Page 32
    ...are determined using a percentage, a fixed-payment schedule, or a combination of the two, we generally record the net amounts as commissions earned. Product sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are recorded when the products are shipped and title...

  • Page 33
    ...included in our consolidated balance sheets. Internal-Use Software and Website Development Included in fixed assets is the capitalized cost of internal-use software and website development, including software used to upgrade and enhance our websites and processes supporting our business. As required...

  • Page 34
    ... bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. The majority of our gross deferred tax assets relate to net operating loss carryforwards that related to differences in stock-based compensation between the financial statements and our tax...

  • Page 35
    ...magnitude of capital expenditures. Working capital at any specific point in time is subject to many variables, including seasonality, inventory management and category expansion, the timing of cash receipts and payments, vendor payment terms, and fluctuations in foreign exchange rates. Our principal...

  • Page 36
    ...), payment processing and related transaction costs, operating leases, and interest payments on our long-term debt obligations. Cash received from customers, sellers, developers, and other activities generally corresponds to our net sales. Because our customers primarily use credit cards to buy from...

  • Page 37
    ...of our Euro-denominated interest payable are classified as "Other income (expense), net" on our consolidated statements of operations. On average, our high inventory velocity means we collect from our customers before our payments to suppliers come due. Inventory turnover was 13, 13, and 14 for 2007...

  • Page 38
    ... standby letters of credit, guarantees, debt, and real estate leases. We classify cash and marketable securities with use restrictions of twelve months or longer as non-current "Other assets" on our consolidated balance sheets. The balance of pledged securities at December 31, 2007 consisted of $14...

  • Page 39
    ...in-stock inventory availability, and increased selection of product offerings. Additionally, changes in currency exchange rates positively affected International net sales by $390 million in 2007. We expect that, over time, our International segment will represent 50% or more of our consolidated net...

  • Page 40
    ..., offset by lower prices for customers including from free shipping offers and Amazon Prime. Generally, our gross margins fluctuate based on several factors, including our product, service, and geographic mix of sales; sales volumes by marketplace sellers; changes in vendor pricing, including the...

  • Page 41
    ... products, as well as through membership in Amazon Prime. To the extent our customers accept and use our free shipping offers at an increasing rate, including memberships in Amazon Prime, our net cost of shipping will increase. We seek to partially mitigate the costs of lowering prices over time...

  • Page 42
    ... 28 19% 43 23 26 66% 31 3 100% 17% 62 247 25 17% 39 74 24 70% 27 3 100% (1) Includes non-retail activities, such as Amazon Enterprise Solutions, our co-branded credit card agreements, and miscellaneous marketing and promotional services. 34

  • Page 43
    ...shipment volumes from sales of our own products as well as sales by third parties for which we provide the fulfillment. Marketing We direct customers to our websites primarily through a number of targeted online marketing channels, such as our Associates program, sponsored search, portal advertising...

  • Page 44
    ... increased spending in variable online marketing channels, such as our Associates program, sponsored search, and other variable marketing initiatives. While costs associated with free shipping are not included in marketing expense, we view free shipping offers and Amazon Prime as effective worldwide...

  • Page 45
    ...$59 million, and $44 million during 2007, 2006, and 2005. We generally invest our excess cash in investment grade short- to intermediate-term fixed income securities and AAA-rated money market mutual funds. Our interest income corresponds with the average balance of invested funds and the prevailing...

  • Page 46
    ... of our net tax provision to be non-cash. Effect of Exchange Rates The effect on our consolidated statements of operations from changes in exchange rates versus the U.S. Dollar is as follows (in millions, except per share data): Year Ended December 31, 2007 At Prior Exchange Year Rate As Rates...

  • Page 47
    ...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...

  • Page 48
    ...risk for changes in interest rates relates primarily to our investment portfolio and our long-term debt. All of our cash equivalent and marketable fixed income securities are designated as available-for-sale and, accordingly, are presented at fair value on our balance sheets. We generally invest our...

  • Page 49
    ...and marketable fixed income securities, including principal cash flows by expected maturity and the related weighted average interest rates at December 31, 2007 (in millions, except percentages): Estimated Fair Value at December 31, 2007 2008 2009 2010 2011 2012 Thereafter Total Money market...

  • Page 50
    ... 31, 2006 (outstanding principal of â,¬240 million). Foreign Exchange Risk During 2007, net sales from our International segment accounted for 45% of our consolidated revenues. Net sales and related expenses generated from our international websites, as well as those relating to www.amazon.ca (which...

  • Page 51
    ... Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Ernst & Young LLP, Independent Registered Public Accounting Firm ...Consolidated Statements of Cash Flows ...Consolidated Statements of Operations ...Consolidated Balance Sheets ...Consolidated Statements of Stockholders...

  • Page 52
    ... Registered Public Accounting Firm The Board of Directors and Stockholders Amazon.com, Inc. We have audited the accompanying consolidated balance sheets of Amazon.com, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders' equity, and cash...

  • Page 53
    ...: Purchases of fixed assets, including internal-use software and website development ...Acquisitions, net of cash acquired, and other ...Sales and maturities of marketable securities and other investments ...Purchases of marketable securities and other investments ...Net cash provided by (used in...

  • Page 54
    AMAZON.COM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in millions, except per share data) Year Ended December 31, 2007 2006 2005 Net sales ...Cost of sales ...Gross profit ...Operating expenses (1): Fulfillment ...Marketing ...Technology and content ...General and administrative ...Other ...

  • Page 55
    AMAZON.COM, INC. CONSOLIDATED BALANCE SHEETS (in millions, except per share data) December 31, 2007 2006 ASSETS Current assets: Cash and cash equivalents ...Marketable securities ...Inventories ...Accounts receivable, net and other ...Deferred tax assets ...Total current assets ...Fixed assets, net...

  • Page 56
    ... income ... Exercise of common stock options, net and vesting of restricted stock ...Change in accounting principle ...Excess tax benefits from stock-based compensation ...Stock-based compensation and issuance of employee benefit plan stock ... 48 6 (8) - - 414 - - - - Balance at December 31, 2005...

  • Page 57
    ...developer customers with direct access to Amazon.com's robust technology platform in order to enable them to build innovative applications on their own. In addition, we generate revenue through co-branded credit card agreements and other marketing and promotional services, such as online advertising...

  • Page 58
    ... have estimated useful lives of between one and three years. The excess of purchase price over the fair value of the net assets acquired was $19 million and is classified as "Goodwill" on our consolidated balance sheets. The results of operations of each of the businesses acquired in 2007, 2006, and...

  • Page 59
    ... to individual customers, returns to product vendors, or liquidations, and expected recoverable values of each disposition category. Based on this evaluation, we adjust the carrying amount of our inventories to lower of cost or market value. We provide fulfillment-related services in connection with...

  • Page 60
    ... in "Other assets" on our consolidated balance sheets are amounts primarily related to marketable securities restricted for longer than one year; intellectual property rights; certain equity investments; and intangible assets, net of amortization. At December 31, 2007 and 2006, the cost basis and...

  • Page 61
    ... generally invest our excess cash in investment grade short to intermediate term fixed income securities and AAA-rated money market mutual funds. Such investments are included in "Cash and cash equivalents," or "Marketable securities" on the accompanying consolidated balance sheets and are reported...

  • Page 62
    ...our consolidated balance sheets. Current unearned revenue was $91 million and $78 million at December 31, 2007 and 2006. Income Taxes Income tax expense includes U.S. and international income taxes. We do not provide for U.S. taxes on our undistributed earnings of foreign subsidiaries, totaling $126...

  • Page 63
    ... and amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination of the two, we generally record the net amounts as commissions earned. Product sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are recorded when the...

  • Page 64
    ...and customer service centers, including costs attributable to buying, receiving, inspecting, and warehousing inventories; picking, packaging, and preparing customer orders for shipment; payment processing and related transaction costs, including costs associated with our guarantee for certain seller...

  • Page 65
    ..., including accounting, finance, tax, legal, and human relations, among others; costs associated with use by these functions of facilities and equipment, such as depreciation expense and rent; professional fees and litigation costs; and other general corporate costs. Stock-Based Compensation As of...

  • Page 66
    ... type, our cash, cash equivalents and marketable securities (in millions): Cost or Amortized Cost December 31, 2007 Gross Gross Unrealized Unrealized Gains Losses (1) Estimated Fair Value Cash ...Money market funds ...Corporate debt securities ...U.S. government and agency securities ...Asset...

  • Page 67
    ... ...Money market funds ...Bank of certificates of deposits ...Corporate debt securities ...U.S. government and agency securities ...Asset-backed securities ...Foreign government and agency securities ...Equity securities ...Other securities ...Total cash, cash equivalents, and marketable securities...

  • Page 68
    ...in progress (1) ...Other corporate assets ...Gross fixed assets ...Accumulated Depreciation: Fulfillment and customer service ...Technology infrastructure ...Internal-use software, content, and website development ...Other corporate assets ...Total accumulated depreciation ...Total fixed assets, net...

  • Page 69
    ...the exchange rates as of December 31, 2007). Total common stock issuable, as of December 31, 2007, upon conversion of our outstanding 6.875% PEACS was 2.8 million shares, which is excluded from our calculation of earnings per share as its effect is currently anti-dilutive. The U.S. Dollar equivalent...

  • Page 70
    ... fixed assets, primarily related to technology, have been acquired under capital leases. Long-term capital lease obligations were as follows: December 31, 2007 (in millions) Gross capital lease obligations ...Less imputed interest ...Present value of net minimum lease payments ...Less current...

  • Page 71
    ... construction period under generally accepted accounting principles. Accordingly, as the landlord incurs the construction project costs, the assets and corresponding financial obligation are recorded in "Fixed assets, net" and "Other long-term liabilities" on our consolidated balance sheet. Once the...

  • Page 72
    ... standby letters of credit, guarantees, debt, and real estate leases. We classify cash and marketable securities with use restrictions of twelve months or longer as non-current "Other assets" on our consolidated balance sheets. The balance of pledged securities at December 31, 2007 consisted of $14...

  • Page 73
    ... District Court for the District of Colorado. The complaint alleges that our website technology, including the method by which Amazon.com enables customers to use Amazon.com account information on websites that Amazon.com operates for third parties, such as Target.com, infringes two patents obtained...

  • Page 74
    ... of credit limits. Note 7-STOCKHOLDERS' EQUITY Preferred Stock We have authorized 500 million shares of $0.01 par value Preferred Stock. No preferred stock was outstanding for any period presented. Stock Repurchase Activity In August 2006, our Board of Directors authorized a 24-month program to...

  • Page 75
    AMAZON.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Stock Award Plans Employees vest in restricted stock unit awards and stock options over the corresponding service term, generally between two and five years. Outstanding stock options generally have a term of 10 years from the ...

  • Page 76
    ...15 million shares of common stock for years ended 2007 and 2006. Shares granted as matching contributions under our 401(k) plan are included in outstanding common stock when issued. As of December 31, 2007, there was $252 million of net unrecognized compensation cost related to unvested stock-based...

  • Page 77
    ... well as foreign-currency gains and losses on cross-currency investments. Since interest payments on our 6.875% PEACS are settled in Euros, the balance of interest payable is subject to gains or losses resulting from changes in exchange rates between the U.S. Dollar and Euro between reporting dates...

  • Page 78
    ...in the U.S. The effective tax rate in 2006 was higher than the 35% U.S. federal statutory rate resulting from establishment of our European headquarters in Luxembourg. Associated with the establishment of our European headquarters, we transferred certain of our operating assets in 2005 and 2006 from...

  • Page 79
    ...total gross deferred tax assets relating to our excess stock-based compensation NOLs at December 31, 2007 and 2006 were $339 million and $501 million (relating to approximately $1.1 billion and $1.6 billion of NOLs). (2) Presented net of fully reserved deferred tax assets associated with tax credits...

  • Page 80
    ... income tax benefits, on our balance sheet. Interest and penalties recognized for the year ended December 31, 2007 was $1 million, net of federal income tax benefits. We are under examination, or may be subject to examination, by the Internal Revenue Service ("IRS") for calendar years 2004 through...

  • Page 81
    ....amazon.de, www.amazon.co.jp, www.amazon.fr, and our Joyo Amazon websites at www.joyo.cn and www.amazon.cn; from our Amazon Prime membership program; and from non-retail activities such as internationally focused Amazon Enterprise Solutions, Amazon Web Services and marketing and promotional services...

  • Page 82
    ...$ 190 Net sales shipped to customers outside of the U.S. represented approximately half of net sales for 2007, 2006, and 2005. Net sales from www.amazon.co.uk, www.amazon.de, and www.amazon.co.jp each represented 10% or more of consolidated net sales in 2007, 2006 and 2005. Net fixed assets held in...

  • Page 83
    ... 997 51 1,234 (1) The fair value of marketable securities is determined from publicly quoted prices. See "Note 2-Cash, Cash Equivalents, and Marketable Securities." (2) The fair value of other equity investments is determined from publicly quoted prices, plus the carrying amount of privately-held...

  • Page 84
    ...05 418 426 $2,279 547 96 45 51 $ 0.12 $ 0.12 417 426 (1) The sum of quarterly amounts, including per share amounts, may not equal amounts reported for year-to-date periods. This is due to the effects of rounding and changes in the number of weighted-average shares outstanding for each period. 76

  • Page 85
    ... is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as...

  • Page 86
    ..., in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Amazon.com, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three...

  • Page 87
    ...we intend to disclose amendments to our Code of Business Conduct and Ethics, as well as waivers of the provisions thereof, on our investor relations website under the heading "Corporate Governance" at www.amazon.com/ir website. Item 11. Executive Compensation Information required by Item 11 of Part...

  • Page 88
    Consolidated Balance Sheets as of December 31, 2007 and 2006 Consolidated Statements of Stockholders' Equity for each of the three years ended December 31, 2007 Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Registered Public Accounting Firm (2) Index to ...

  • Page 89
    ...Form of Restricted Stock Agreement (incorporated by reference to the Company's Annual Report on Form 10-K for the Year Ended December 31, 2001). Computation of Ratio of Earnings to Fixed Charges. List of Significant Subsidiaries. Consent of Ernst & Young LLP, Independent Registered Public Accounting...

  • Page 90
    ...thereunto duly authorized, as of February 8, 2008. AMAZON.COM, INC. By: /s/ Jeffrey P. Bezos Jeffrey P. Bezos President, Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons...

  • Page 91
    ... any dividends, based on closing prices, for the period from December 31, 2002 to December 31, 2007. $500 $400 $300 $200 $100 $0 2002 Dollars 2003 2004 2005 2006 2007 Calendar Year Ended December 31 Cumulative Total Return Legend Amazon.com Morgan Stanley Technology Index NASDAQ U.S. Index...

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