Amazon.com Announces Free Cash Flow Growth

October 22, 2004; 12:00 AM

SEATTLE - October 21, 2004 - (PromotionWorld) -  Amazon.com, Inc. (www.amazon.com) today announced financial results for its third quarter ended September 30, 2004.

Operating cash flow was $490 million for the trailing twelve months, compared with $284 million for the trailing twelve months ended September 30, 2003. Free cash flow grew 76% to $420 million for the trailing twelve months, compared with $239 million for the 2003 period.

Common shares outstanding plus shares underlying stock-based awards outstanding totaled 434 million at September 30, 2004, compared with 433 million a year ago.

Net sales were $1.46 billion in the third quarter, compared with $1.13 billion in third quarter 2003, an increase of 29%. Net sales, excluding the $57 million benefit from changes in foreign exchange rates, grew 24% compared with 2003.

Operating income was $81 million in the third quarter, compared with $52 million in third quarter 2003. Consolidated segment operating income grew 29% to $95 million in the third quarter, compared with $74 million in the third quarter 2003. Excluding the $4 million benefit from changes in foreign exchange rates, consolidated segment operating income grew 23% compared with third quarter 2003.

Net income was $54 million in the third quarter, or $0.13 per diluted share, compared with net income of $16 million, or $0.04 per diluted share, in third quarter 2003. Pro forma net income in the third quarter grew 52% to $73 million, or $0.17 per diluted share, compared with $48 million, or $0.11 per diluted share, in third quarter 2003.

"Our decision to put dollars into lower prices and free shipping instead of TV advertising continues to be embraced by customers," said Jeff Bezos, founder and CEO of Amazon.com. "Customer adoption of free shipping hit another record high this quarter."

Amazon.com continues to lower shipping and product prices for its worldwide customers. Customers shopping at www.amazon.co.uk now qualify for free shipping on orders of £19 or more, down from the prior threshold of £25.

See "Financial Measures" for additional information.

Highlights

North America segment sales, representing the Company's U.S. and Canadian sites, were $816 million, up 15% compared with third quarter 2003. Segment operating income declined $5 million to $57 million, compared with third quarter 2003. Increased adoption of free shipping contributed to an increase of $7 million in net shipping loss compared with the third quarter of 2003.
International segment sales, representing the Company's U.K., German, French, Japanese, and Chinese sites, were $646 million, up 52% compared with third quarter 2003, and accounted for 44% of worldwide net sales. Excluding the benefit from exchange rates, net sales growth was 39%. Segment operating income grew $26 million to $38 million, compared with third quarter 2003.
Electronics & Other General Merchandise sales grew 55% to $1.47 billion for the trailing twelve months, representing 23% of worldwide net sales. For the first time, North America Electronics & Other General Merchandise sales were over $1 billion on a trailing-twelve-month basis.
A9.com, a subsidiary of Amazon.com, launched a search engine at www.a9.com, to make Internet search more effective. The "search engine with a memory" helps users manage and organize their search results, and discover additional information sources such as the Internet Movie Database and Amazon.com's Search Inside the Book results.
Star Wars Trilogy was the top-selling DVD worldwide, and the U.K. site received a record 85,000 pre-orders.
The Company introduced Toy stores at both its German and Japanese websites. Customers now have their choice of over 20,000 toys, games, and hobby products, and enjoy discounts up to 30%.
Amazon Web Services released Amazon E-Commerce Service 4.0 (ECS 4.0), offering software developers and website owners unprecedented access to Amazon's technology platform and product data. Additionally, the Alexa Web Information Service (AWIS) gives first-ever access to the vast database of website information and usage data compiled by Alexa Internet (www.alexa.com). Access to both ECS 4.0 and AWIS is available at www.amazon.com/webservices, where over 65,000 individuals have registered and downloaded the free Amazon Web Services Software Developers Kit.
Amazon.com's second U.K. fulfillment center in Scotland is fully operational and prepared to help meet holiday demand from European customers.
The Company acquired Joyo.com Limited, a British Virgin Islands Company, which operates the Joyo.com website in cooperation with Chinese subsidiaries and affiliates. The Joyo.com website is the largest online retailer of books, music, and videos in China, and is Amazon.com's seventh global website.
Financial Guidance

The following forward-looking statements reflect Amazon.com's expectations as of October 21, 2004. Results may be materially affected by many factors, such as 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, and the various factors detailed below.

Fourth Quarter 2004 Guidance
Net sales are expected to be between $2.295 billion and $2.545 billion, or grow between 18% and 31%, compared with fourth quarter 2003.
Consolidated segment operating income is expected to be between $162 million and $222 million, or grow between 6% and 45%, compared with fourth quarter 2003.
Operating income is expected to be between $137 million and $197 million, assuming, among other things, that the Company does not record any further revisions to its restructuring-related estimates and that the closing price of Amazon.com common stock on December 31, 2004, is identical to the closing price of $40.86 on September 30, 2004.
Full Year 2004 Guidance

Net sales are expected to be between $6.675 billion and $6.925 billion, or grow between 27% and 32%, compared with 2003.
Consolidated segment operating income is expected to be between $475 million and $535 million, or grow between 31% and 48%, compared with 2003.
Operating income is expected to be between $415 million and $475 million, assuming, among other things, that the Company does not record any further revisions to its restructuring-related estimates and that the closing price of Amazon.com common stock on December 31, 2004, is identical to the closing price of $40.86 on September 30, 2004.

Full Year 2005 Expectations
Net sales are expected to be between $7.40 billion and $8.15 billion.
Consolidated segment operating income is expected to be between $500 million and $625 million.
Operating income is expected to be between $400 million and $525 million, excluding any impact from SFAS No. 123R, and assuming, among other things, that the Company does not record any further revisions to its restructuring-related estimates and that the closing price of Amazon.com common stock on December 31, 2005, is identical to the closing price of $40.86 on September 30, 2004.
A conference call will be webcast live today at 2 p.m. PT/5 p.m. ET, and will be available at least through December 31, 2004, at www.amazon.com/ir. This call will contain forward-looking statements and other material information regarding the Company's financial and operating results.

These forward-looking statements are inherently difficult to predict. Actual results could differ materially for a variety of reasons, including, in addition to the factors discussed above, 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; competition; management of growth; potential fluctuations in operating results; fulfillment center optimization; risks of inventory management; seasonality; the degree to which the Company enters into, maintains and develops commercial agreements, acquisitions and strategic transactions; international growth and expansion; and risks of fulfillment throughput and productivity. Other risks and uncertainties include, among others, risk of future losses, significant amount of indebtedness, system interruptions, consumer trends, limited operating history, government regulation and taxation, fraud, and new business areas. More information about factors that potentially could affect Amazon.com's financial results is included in Amazon.com's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2003, and all subsequent filings.

Financial Measures

The following measures are defined by the Securities and Exchange Commission as non-GAAP financial measures.

Free Cash Flow

Operating cash flow is net cash provided by (used in) operating activities, including cash outflows for interest and excluding proceeds from the exercise of stock-based employee awards. Free cash flow is operating cash flow less cash outflows for purchases of fixed assets, including internal-use software and website development. A tabular reconciliation of differences from the comparable GAAP measure-operating cash flow-is included in the attached "Supplemental Financial Information and Business Metrics."

Consolidated Segment Operating Income

Consolidated segment operating income is the sum of segment operating income of our individual segments and excludes the following line items on the Company's statements of operations:

    Stock-based compensation and
    Other operating expense (income).

A tabular reconciliation of differences from the comparable GAAP measure-operating income-is included in the attached "Pro Forma Statements of Operations."

Pro Forma Net Income

Pro forma net income excludes the following line items on the Company's statements of operations:

    Stock-based compensation,
    Other operating expense (income), and
    Remeasurements and other.

A tabular reconciliation of differences from the comparable GAAP measure-net income (loss)-is included in the attached "Pro Forma Statements of Operations."

For additional information regarding these non-GAAP financial measures, see Exhibit 99.2 to our Form 8-K filed contemporaneously with the issuance of this release.

About Amazon.com

Amazon.com (NASDAQ: AMZN), a Fortune 500 company based in Seattle, opened its virtual doors on the World Wide Web in July 1995 and today offers Earth's Biggest Selection. Amazon.com seeks to be Earth's most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer customers the lowest possible prices. Amazon.com and third-party sellers offer millions of unique new, refurbished, and used items in categories such as health and personal care, jewelry and watches, gourmet food, sports and outdoors, apparel and accessories, books, music, DVDs, electronics and office, toys and baby, and home and garden.

Amazon.com and its affiliates operate seven websites: www.amazon.com, www.amazon.co.uk, www.amazon.de, www.amazon.co.jp, www.amazon.fr, www.amazon.ca, and www.joyo.com.