Amazon.com 2012 Annual Report Download - page 26

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, our Kindle 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.
Because of our model we are able to turn our inventory quickly and have a cash-generating operating
cycle3.On average, our high inventory velocity means we generally collect from consumers before our payments
to suppliers come due. Inventory turnover4was 9, 10, and 11 for 2012, 2011, and 2010. We expect variability in
inventory turnover over time since it is affected by several factors, including our product mix, the mix of sales by
us and by other sellers, our continuing focus on in-stock inventory availability and selection of product offerings,
our investment in new geographies and product lines, and the extent to which we choose to utilize outsource
fulfillment providers. Accounts payable days5were 76, 74, and 72 for 2012, 2011, and 2010. We expect some
variability in accounts payable days over time since they are affected by several factors, including the mix of
product sales, the mix of sales by other sellers, the mix of suppliers, seasonality, and changes in payment terms
over time, including the effect of balancing pricing and timing of payment terms with suppliers.
We expect spending in technology and content will increase over time as we add computer scientists,
software engineers, and merchandising employees. We seek to efficiently invest in several areas of technology
and content such as digital initiatives and expansion of new and existing physical and digital product categories
and offerings, 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 and the advances of wireless connectivity, will continue to improve the consumer experience
on the Internet and increase its ubiquity in people’s lives. To best take advantage of these continued advances in
technology, we are investing in initiatives to build and deploy innovative and efficient software and devices. We
are also investing in AWS, which provides technology services that give developers and enterprises of all sizes
access to technology infrastructure that enables virtually any type of business.
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
currencies in our international locations, our consolidated net sales, and operating expenses will be higher than if
currencies had remained constant. Likewise, if the U.S. Dollar strengthens year-over-year relative to currencies
in our international locations, our consolidated net sales, and operating expenses will be lower than if currencies
had remained constant. We believe that our increasing diversification beyond the U.S. economy through our
growing international businesses benefits our shareholders over the long term. We also believe it is useful to
evaluate our operating results and growth rates before and after the effect of currency changes.
In addition, the remeasurement of our intercompany balances can result in significant gains and charges
associated with the effect of movements in currency exchange rates. Currency volatilities may continue, which
3The operating cycle is number of days of sales in inventory plus number of days of sales in accounts receivable
minus accounts payable days.
4Inventory turnover is the quotient of trailing-twelve-month cost of sales to average inventory over five quarter-
ends.
5Accounts payable days, calculated as the quotient of accounts payable to current quarter cost of sales,
multiplied by the number of days in the current quarter.
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