Tom Szkutak, CFO CSFB Annual Technology Conference
December 5, 2003 Amazon.com Agenda
Our Model
Our Progress
Our Growth Drivers
2 Amazon.com
This presentation may contain forward-looking statements, including statements regarding expectations of sales, gross margin, productivity, leverage, operating results, consolidated segment operating results, capital investment, return on capital, free cash flow and other financial statement or balance sheet items or ratios, all of which are inherently difficult to predict. Actual results could differ materially for a variety of reasons, including, among others, the potential changes in general economic conditions, Amazon.com’s risks related to potential future losses, significant amount of indebtedness, competition, commercial agreements and strategic alliances, seasonality, potential fluctuations in operating results and rate of growth, foreign exchange rates, management of potential growth, system interruption, international expansion, consumer trends, inventory, fulfillment center optimization, 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, 2002, and all subsequent filings. Additional information relating to certain of our financial measures contained herein is available in our most recent press release and at our website at www.amazon.com/ir under ‘Financial Documents and Annual Reports’. 3 Our Model Capital Efficiency -- Centralized Distribution
Physical Store Amazon.com
Headquarters
Warehouses
Stores
Lower Invested Capital = Higher Return 4 Our Model
Capital Efficiency -- Average Negative Operating Cycle -- TTM*
25 Days Day 0 19 22 47
Product Product Customer Supplier Received Shipped Payment Paid
Working Capital is a Source of Cash 5
As of 9/30/03 *TTM = Trailing Twelve Months Our Model Balance Sheet -- September 30, 2003 Assets ($MM) Cash & Marketable Securities $1,065 TTM Free Cash Flow $239MM Inventories 242 19 Turns/Low Risk Accounts Receivable, net & Other 104 Categories/CE Exposure Total Current Assets 1,410 Fixed Assets, net 221 Fixed Assets Down 7% Y / Y Other Long Term Assets 118 Total Assets $1,750 Liabilities and Stockholders’ Deficit Current Liabilities $827 1st Principal Payment 2009 Long-Term Debt 2,081 $200MM Partial Call Nov-03 Total Stockholders’ Deficit (1,158) > 2 Times Interest Coverage* Total Liabilities & $1,750 Stockholders’ Deficit
Our Model is Demonstrating its Efficiency 6
*TTM Consolidated Segment Operating Income / TTM Cash Paid for Interest Our Model Pre-orders
Captures Early Demand and Improves Inventory Forecasting 7 Our Model Inventory Velocity
Hypothetical Example -- Digital Camera Physical Store Amazon.com Average Selling Price $300 $300 Turns -- TTM 7.5 19 Obsolescence Hypothetical Value -- One Year Later $210 $210
Obsolescence Loss Per Week $1.7 $1.7 Average Weeks in Inventory 7.0 2.7 Obsolescence Cost Per Unit $12.0 $4.7 As a % of Sales 4.0% 1.6%
Inventory Velocity Translates Into Cash & Margin Benefit 8 Our Model Inventory Velocity -- TTM
Inventory Turns
Gross Inventory 20 Margin Turns Amazon.com Amazon.com 25% 19
Barnes & Noble 27% 3 Costco 11 Best Buy 25% 6 Wal-Mart Home Depot Costco 13% 11 Best Buy Home Depot 32% 5 Barnes & Noble 2 Wal-Mart 22% 7 10% 22.5% 35% Gross Margin
Best of Both Worlds -- High Turns, High Margins 9
Source: Company SEC Filings (Most Recent Available Data as of December 3, 2003) -- Inventory Turns = TTM COGS / TTM Average Inventory Our Model Moore’s Law and Technology
Performance / $
Optical Fiber -- Internet Penetration / Users Doubles 9 months (bits per second) Web Services Data Storage -- Doubles 12 months (bits per square inch) Bandwidth
SiliSiliconcon (Moore’s Law) -- Doubles 18 Months Wireless (number of transistors) Instant On
0 Years 5 Source: Vinod Khosla, Kleiner Perkins Caufield & Byers
Technology is our Ally -- It Will Only Get Better 10 Our Progress Free Cash Flow* -- TTM ($MM)
$49 $33
$131 ($82) $77 ($44) ($49) $239
$206
Q3 03 Change in Change in Depreciation CapEx Restructuring / Other Q3 03 TTM Pro Forma Accounts Inventories & TTM FCF Net Income Payable Amortization
Leverage in Earnings, Working Capital and Fixed Assets 11
* Operating Cash Flow Less Capital Expenditures -- see appendix Our Progress Dilution
(MM) 440 430 433
220 381 400
0 Q3 0 2 Q3 0 3 S ha re s O utsta nding E m pl o y e e S t o c k A w a r ds Out s t a ndi ng Focused on Dilution -- Up 1% Y / Y 12 Our Progress Net Sales -- TTM ($MM) WW Revenue Mix
$5,000 $4,747 $951 (20%) $101 (2%)
Up 31%
$4,000
$3,619 $3,695 (78%)
WW M edia $3,000 WW Electronics and Other General Merchandise Q3 02 Q3 03 WW O ther (Merchant.com & Misc. Marketing) WW TTM Unit Growth Up 37% Y / Y 13 Our Progress International Revenue -- TTM ($MM)
$2,000 Up 71% 35% of WW Revenue From International $1,663 (54% F/X Adjusted) (.co.uk, .de, .co.jp, .fr)
40% of Revenue From Shipments to $973 $1,000 Customers Outside of U.S. (Including Exports)
4% Segment Operating Margin
$0
Q3 02 Q3 03 Long Term Goal -- 50%+ of Sales to Customers Outside the US 14 Our Progress Consolidated Segment Operating Income* -- TTM Operating Income Operating Margin ($MM)
8% $310
$300 Up > 270bps 7% Up > $170MM
4% 4% $150 $137
$0 0%
Q3 02 Q3 03 Q3 02 Q3 03
Long Term Goal -- Low Double Digit Operating Margins 15 * See Appendix Our Growth Drivers Our Vision
Earth’s Biggest Selection Build a place where people can find, discover, and buy anything they want to buy online
Earth’s Most Customer-Centric Company Start with the customer and work backwards
16 Our Growth Drivers Our Virtuous Cycle
Lower Cost Free Shipping Offers in each Lower Geography Structure Prices
Selection & New Categories in each Geography Convenience
Over 550,000 Active Seller Accounts
Sellers Growth Customer Experience
Rated Best Customer Service on or offline by ACSI Active Customer Accounts up 27% Y / Y Traffic
37MM Active Customer Accounts 17 Our Growth Drivers Customer Experience Pillars Price Selection Convenience
18 Selection Leveraging the Platform
Amazon.com Our Inventory as Seller Our Product Detail Pages
Marketplace / 3rd Party Inventory Merchants@ Our Product Detail Pages
Over 550,000 Active Seller Accounts* 19 *Those with an order from one of our customers in the last 12 months Selection Third Party -- Marketplace
20 Selection Third Party -- Marketplace
21 Selection Third Party -- Merchants @ Amazon.com
22 Selection Consumer Electronics and Home & Kitchen in Japan
23 Selection Jewelry & Watches
Mixing Amazon.com and 3rd Party Selection 24 Selection Jewelry & Watches -- Merchants @ Amazon.com
25 Selection Jewelry & Watches -- Merchants @ Amazon.com
26 Selection Jewelry & Watches -- Amazon.com Selection
27 Selection Gourmet Food -- Merchants @ Amazon.com
28 Selection Gourmet Food -- Merchants @ Amazon.com
29 Selection Gourmet Food -- Merchants @ Amazon.com
Merchants Include Dean & Deluca and Harry & David 30 Selection Gourmet Food -- Merchants @ Amazon.com
31 Selection Gourmet Food -- Merchants @ Amazon.com
32 Selection Sporting Goods -- Merchants @ Amazon.com
33 Selection Sporting Goods -- Merchants @ Amazon.com
34 Selection Sporting Goods -- Merchants @ Amazon.com
35 Selection Sporting Goods -- Merchants @ Amazon.com
36 Selection Sporting Goods -- Merchants @ Amazon.com
37 Selection Apparel -- Merchants @ Amazon.com
Over 1500 Brands -- More Than Triple the Number at Launch 38 Selection Leveraging the Platform
Amazon.com Our Inventory as Seller Our Product Detail Pages
Marketplace / 3rd Party Inventory Merchants@ Our Product Detail Pages
Over 550,000 Active Seller Accounts* 39 *Those with an order from one of our customers in the last 12 months Growth Drivers Leveraging our Platform
Amazon.com Our Inventory as Seller Our Product Detail Pages } 78% of Units Syndicated Our Technology & Inventory Stores Co-branded Partner Websites
22% of Units Marketplace / 3rd Party Inventory Merchants@ Our Product Detail Pages
Merchant.com Our Technology Powers Partner Websites 40 Growth Drivers Syndicated Stores
Others: CDNow, HMV, Virgin, WaldenBooks, Waterstones 41 Growth Drivers Merchant.com
42 Selection
Books/Music/DVD/Video Video Games & Software Electronics Third Party Sellers Magazines Toys & Baby Travel Kitchen & Housewares Tools & Hardware Computers Office Products Apparel & Accessories Sporting Goods Gourmet Food Jewelry & Watches Expect More Category and Country Expansion Over Time 43 Convenience Look Inside the Book
Over 250,000 Titles Available 44 Convenience Look Inside the Book
45 Convenience Search Inside the Book
46 Convenience Search Inside the Book
Over 33 Million Searchable Pages 47 Convenience In Store Pick-up
48 Convenience Customer Self Service
49 Convenience Customer Self Service
If You Have to Contact Us -- It’s Not Convenient 50 Customer Satisfaction 88
“Amazon.com continues to show remarkably high levels of customer satisfaction at a level unheard of in the service industry... Can customer satisfaction for Amazon climb more? The latest ACSI data suggest that it is indeed possible. Both service and the value proposition offered by Amazon have increased at a steep rate. “
Highest Retail Score Ever Recorded -- Online or Offline 51 Source: American Customer Satisfaction Index – February 18, 2003. University of Michigan, American Society for Quality, CFI Group. Price Free Shipping
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53 Amazon.com Summary
The Online Retail Model is Advantaged While We Have Much to Do, We are: • Demonstrating Sustained Operational Progress • Well Positioned for Growth & Leverage • Focused on Driving Free Cash Flow & Minimizing Dilution • We Continue to Work for our Customers -- Expanding Selection and Convenience While Lowering Prices
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Appendix Pro Forma Net Income Reconciliation -- TTM
($MM) Q3 02 Q4 02 Q1 03 Q2 03 Q3 03
Pro Forma Net Income $26 $66 $112 $158 $206 Less: Stock-Based Compensation 35 69 85 87 108
Amortization of Other Intangibles 42 5 4 4 4
Restructuring-related and Other 51 42 32 32 (5) Remeasurement of 6.875% PEACS and Other 39 96 124 120 134 Equity in Losses of Equity-method Investees, net 5 4 3 2 1 Cumulative Effect of Change in Accounting Principle 1 1 ------
GAAP Net Loss ($147) ($149) ($136) ($86) ($35) 57 Consolidated Segment Operating Income Reconciliation ($MM)
Q302 Q402 Q103 Q203 Q303 Consolidated Segment Operating Income $27 $102 $67 $67 $74
Less:
Stock-Based Compensation (1) 36 27 24 21
Amortization of Other Intangibles 1 1 111
Restructuring-related and Other 37 (5) ------
GAAP Income (Loss) From ($10) $71 $39 $42 $52 Operations
58 Consolidated Segment Operating Income Reconciliation -- TTM ($MM)
Q3 02 Q4 02 Q1 03 Q2 03 Q3 03
Consolidated Segment Operating Income $137 $180 $223 $264 $310 Less:
Stock-Based Compensation 35 69 85 87 108
Amortization Other Intangibles 42 5 4 4 4
Restructuring-related and Other 51 42 32 32 (5)
GAAP Income From Operations $8 $64 $102 $142 $204
59 Free Cash Flow Reconciliation -- TTM ($MM)
Q3 02 Q4 02 Q1 03 Q2 03 Q3 03
Operating Cash Flow $151 $174 $164 $285 $284
Less: Purchases of Fixed 31 39 41 40 44 Assets
Free Cash Flow $120 $135 $123 $245 $239
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