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Amazon.com, Inc. (NASDAQ:AMZN) today announced financial results for its second quarter ended June 30, 2006.Operating cash flow declined 2% to $610 million for the trailing twelve months, compared with $624 million for the trailing twelve months ended June 30, 2005. Free cash flow decreased 23% to $375 million for the trailing twelve months, compared with $486 million for the trailing twelve months ended June 30, 2005. The primary driver of the free cash flow decline was our increased expenditure in technology and content. Free cash flow was also reduced by a $40 million patent litigation settlement in third quarter 2005, $34 million from excess tax benefits for stock-based compensation now classified as financing cash flows, and investments in additional fulfillment capacity.
Common shares outstanding plus shares underlying stock-based awards outstanding totaled 443 million at June 30, 2006, compared with 438 million a year ago.
Net sales increased 22% to $2.14 billion in the second quarter, compared with $1.75 billion in second quarter 2005. Excluding the $24 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales grew 23% compared with second quarter 2005.
Operating income decreased 55% to $47 million in the second quarter, compared with $104 million in second quarter 2005. The decline in operating income was mainly due to technology and content investments, lower prices including free shipping and Amazon Prime, and $20 million from a contract termination and related fee dispute.
Net income was $22 million in the second quarter, or $0.05 per diluted share, compared with net income of $52 million, or $0.12 per diluted share in second quarter 2005.
"We're investing in Amazon Prime and future technology initiatives," said Jeff Bezos, founder and CEO of Amazon.com. "Amazon Prime gets customers their products fast, and our investments in technology position us to innovate in seller platforms, web services, and digital. We're looking forward to the coming decrease in our year-over-year growth rates in technology spending in the second half of 2006."
Amazon Prime, Amazon.com's first-ever membership program, was introduced in February 2005. For a flat membership fee of $79 per year, Amazon Prime members get unlimited, express two-day shipping for free, with no minimum purchase requirement on over a million eligible items sold by Amazon.com. Members can order as late as 6:30 p.m. ET and still get their order the next day for only $3.99 per item, and they can share the benefits of Amazon Prime with up to four family members living in their household. Sign up for Amazon Prime at www.amazon.com/prime.
Highlights
-- North America segment sales, representing the Company's U.S.
and Canadian sites, were $1.16 billion, up 21% from second
quarter 2005.
-- International segment sales, representing the Company's U.K.,
German, Japanese, French and Chinese sites, were $982 million,
up 24% from second quarter 2005. Excluding the unfavorable
impact from year-over-year changes in foreign exchange rates
throughout the quarter, International net sales growth was
27%.
-- Worldwide Electronics & Other General Merchandise grew 37% to
$624 million in second quarter 2006, and increased to 29% of
worldwide net sales compared with 26% in second quarter 2005.
-- The Company launched its new Toy and Baby stores on
www.amazon.com, featuring tens of thousands of products
offered by Amazon and leading mass market and specialty
retailers. This is the largest selection of Toy and Baby
products ever offered through Amazon.com, and for the first
time ever, Toy and Baby products are eligible for Free Super
Saver Shipping and Amazon Prime.
-- The Company launched a Grocery store on www.amazon.com, with
over 14,000 dry goods grocery products across more than 1,200
brands - all eligible for Free Super Saver Shipping and Amazon
Prime.
-- Amazon's German website -- Amazon.de -- launched its Sporting
Goods store, offering customers a selection of thousands of
sporting goods in over 25 categories from top brands like
Adidas, Burton, Nike, Puma, Quiksilver and Salomon.
-- The Company extended its Enterprise Solutions agreement with
Target.com through August 2010 and launched a new Sears Canada
branded website providing Sears Canada with the tools and
services to control its brand, merchandising and online
business using Amazon Enterprise Solutions technology.
-- Amazon S3, a simple storage service for software developers,
gained momentum in its first full quarter after launch,
providing businesses of all sizes -- from Microsoft to SmugMug
-- with a web services solution for storing and retrieving any
amount of data, at any time, from anywhere on the web.
Developers continue to adopt Amazon's web services -- over
180,000 have registered to date, up greater than 60%
year-over-year.
Financial Guidance
The following forward-looking statements reflect Amazon.com's expectations as of July 25, 2006. 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.
Third Quarter 2006 Guidance
-- Net sales are expected to be between $2.17 billion and $2.33
billion, or to grow between 17% and 25% compared with third
quarter 2005.
-- Operating income is expected to be between $7 million and $42
million, or between (87%) decline and (24%) decline, compared
with third quarter 2005. This guidance includes $38 million
for stock-based compensation and amortization of intangible
assets, and it assumes, among other things, that no additional
intangible assets are recorded and that there are no further
revisions to stock-based compensation estimates.
Full Year 2006 Expectations
-- Net sales are expected to be between $10.15 billion and $10.65
billion, or to grow between 20% and 25% compared with 2005.
-- Operating income is expected to be between $310 million and
$440 million, or between (28%) decline and 2% growth, compared
with 2005. This guidance includes $120 million for stock-based
compensation and amortization of intangible assets, and it
assumes, among other things, that no additional intangible
assets are recorded and that there are no further revisions to
stock-based compensation estimates.
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, international growth and expansion, the outcomes of legal proceedings and claims, 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, payments risks, and risks of fulfillment throughput and productivity. Other risks and uncertainties include, among others, risk of future losses, significant 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, 2005, and all subsequent filings.
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