Amazon.com, Inc. (NASDAQ: AMZN) today announced financial results for its second quarter ended June 30, 2008.

Operating cash flow was $1.09 billion for the trailing twelve months, compared with $0.89 billion for the trailing twelve months ended June 30, 2007. Free cash flow increased 16% to $0.82 billion for the trailing twelve months, compared with $0.70 billion for the trailing twelve months ended June 30, 2007.

Common shares outstanding plus shares underlying stock-based awards outstanding totaled 446 million on June 30, 2008, compared with 435 million a year ago.

Net sales increased 41% to $4.06 billion in the second quarter, compared with $2.89 billion in second quarter 2007. Excluding the $0.18 billion favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales grew 35% compared with second quarter 2007.

Operating income increased 86% to $217 million in the second quarter compared with $116 million in second quarter 2007. Excluding the $17 million favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, operating income grew 71% compared with second quarter 2007. Included in the second quarter 2008 operating income is a $53 million non-cash gain recognized on the sale of our European DVD rental assets.

Net income increased 102% to $158 million in the second quarter, or $0.37 per diluted share, compared with net income of $78 million, or $0.19 per diluted share, in second quarter 2007.

“Customers continue to take advantage of our low prices, free shipping and Amazon Prime,” said Jeff Bezos, founder and CEO of Amazon.com. “Amazon Prime membership costs less than a tank of gas – more and more customers are joining the program and enjoying its benefits.”

Highlights

• Worldwide Media sales grew 31% to $2.41 billion in second quarter 2008, compared with $1.83 billion in second quarter 2007.
• Worldwide Electronics & Other General Merchandise sales grew 58% to $1.53 billion in second quarter 2008, compared with $0.97 billion in second quarter 2007, and increased to 38% of worldwide net sales compared with 34%.
• North America segment sales, representing the Company’s U.S. and Canadian sites, were $2.17 billion, up 35% from second quarter 2007.
• International segment sales, representing the Company’s U.K., German, Japanese, French and Chinese sites, were $1.89 billion, up 47% from second quarter 2007, and increased to 47% of worldwide net sales compared with 45%. Excluding the favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, International sales grew 34%.
• Amazon.com customers can now take advantage of Bill Me Later, a new alternative payment method. Bill Me Later’s next-generation payments service provides customers another convenient payment option when shopping on Amazon.com.
• The Company acquired Fabric.com, a leading online fabric store that offers custom measured and cut fabrics, as well as patterns, sewing tools and accessories.
• Amazon.co.jp launched Convenience Store Pickup Service, which offers customers the option to pick up their orders at any of the 8,500 Lawson stores throughout Japan.
• Over 400,000 developers have registered to use Amazon Web Services (AWS), up more than 30,000 from last quarter.
• AWS released a new family of instance types, the high CPU family. These instances have proportionally more CPU resources than RAM (compared to standard instances) and are well suited for compute-intensive applications such as rendering, search indexing and computational analysis.
• Amazon.com introduced a limited beta version of Amazon Video On Demand. The service lets customers rent or buy ad-free movies and television shows and watch them instantly within their web browser on Macs or PCs and through Sony BRAVIA television sets with the use of the Sony BRAVIA Internet Video Link.

• Kindle selection continued to grow with more than 140,000 titles available.

Financial Guidance

The following forward-looking statements reflect Amazon.com’s expectations as of July 23, 2008. 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 2008 Guidance

• Net sales are expected to be between $4.200 billion and $4.425 billion, or to grow between 29% and 36% compared with third quarter 2007.
• Operating income is expected to be between $115 million and $160 million, or between 6% decline and 31% growth compared with third quarter 2007. This guidance includes approximately $80 million for stock-based compensation and amortization of intangible assets, and it assumes, among other things, that no additional business acquisitions or investments are concluded and that there are no further revisions to stock-based compensation estimates.

Full Year 2008 Expectations

• Net sales are expected to be between $19.35 billion and $20.10 billion, or to grow between 30% and 35% compared with 2007.
• Operating income is expected to be between $745 million and $920 million, or to grow between 14% and 40% compared with 2007. This guidance includes approximately $295 million for stock-based compensation and amortization of intangible assets, and it assumes, among other things, that no additional business acquisitions or investments are concluded and that there are no further revisions to stock-based compensation estimates.

A conference call will be webcast live today at 2 p.m. PT/5 p.m. ET, and will be available for at least three months 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, the extent to which we owe income taxes, 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, and risks of fulfillment throughput and productivity. Other risks and uncertainties include, among others, risks related to new products, services and technologies, system interruptions, significant indebtedness, government regulation and taxation, payments and fraud. 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, 2007, and subsequent filings.

About Amazon.com

Amazon.com, Inc. (NASDAQ: AMZN), a Fortune 500 company based in Seattle, opened on the World Wide Web in July 1995 and today offers Earth's Biggest Selection. Amazon.com, Inc. 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 its customers the lowest possible prices. Amazon.com and other sellers offer millions of unique new, refurbished and used items in categories such as books, movies, music & games, digital downloads, electronics & computers, home & garden, toys, kids & baby, grocery, apparel, shoes & jewelry, health & beauty, sports & outdoors, tools, and auto & industrial.

Amazon Web Services provides Amazon’s developer customers with access to in-the-cloud infrastructure services based on Amazon's own back-end technology platform, which developers can use to enable virtually any type of business. Examples of the services offered by Amazon Web Services are Amazon Elastic Compute Cloud (Amazon EC2), Amazon Simple Storage Service (Amazon S3), Amazon SimpleDB, Amazon Simple Queue Service (Amazon SQS), Amazon Flexible Payments Service (Amazon FPS) and Amazon Mechanical Turk.

Amazon and its affiliates operate websites, including www.amazon.com, www.amazon.co.uk, www.amazon.de, www.amazon.co.jp, www.amazon.fr, www.amazon.ca, and the Joyo Amazon websites at www.joyo.cn and www.amazon.cn.

As used herein, “Amazon.com,”“we,” “our” and similar terms include Amazon.com, Inc., and its subsidiaries, unless the context indicates otherwise.

Amazon.com, Inc.

Financial and Operational Summary

(unaudited)

Quarterly Results of Operations (comparisons are with the equivalent period of the prior year, unless otherwise stated)

Net Sales

• Revenue is generally recorded gross for sales of our own inventory and net for sales by other sellers. Amounts paid in advance for subscription services, including amounts received for Amazon Prime and other membership programs, are deferred and recognized as revenue over the subscription term. For our products with multiple elements, where a standalone value for each element cannot be established, we recognize the revenue and related cost over the estimated economic life of the product.
• Shipping revenue, which includes amounts earned from our Amazon Prime membership and Fulfillment by Amazon programs, was $186 million, up 22% from $152 million.

Cost of Sales

• Cost of sales consists of the purchase price of products sold by us, inbound and outbound shipping charges, packaging supplies, and costs incurred in operating and staffing our fulfillment and customer service centers on behalf of other businesses.
• Payment processing and related transaction costs, including those associated with seller transactions, are classified in “Fulfillment” on our consolidated statements of operations.
• Shipping charges to receive products from our suppliers are included in our inventory and recognized as “Cost of sales” upon sale of products to our customers.
• Outbound shipping costs totaled $314 million, up 38% from $227 million. Net shipping cost was $128 million, or 3.2% of net sales, up 71% from $75 million, or 2.6% of net sales. One way we offer lower prices is through free-shipping offers that result in a net cost to us in delivery of products.

Operating Expenses

• Depreciation expense for fixed assets, including amortization of internal-use software and website development, was $74 million, up from $63 million. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets (generally two years or less for assets such as internal-use software, two or three years for our technology infrastructure, five years for furniture and fixtures, and ten years for heavy equipment).
• Stock-based compensation was $73 million, compared with $46 million. We utilize the accelerated, rather than a straight-line, method for recognizing stock-based compensation. Under this method, over 50% of the compensation cost would be expensed in the first year of a typical four-year vesting term. The increase in stock-based compensation is primarily attributable to an increase in total stock compensation value granted to our employees.

• Operating expenses with and without stock-based compensation are as follows:

Fulfillment

• Certain of our fulfillment-related costs that are incurred on behalf of other businesses are classified as cost of sales rather than fulfillment.
• The increase in fulfillment costs in absolute dollars relates to variable costs corresponding with sales volume and inventory levels; our mix of product sales; payment processing and related transaction costs, including mix of payment methods and costs from our guarantee for certain seller transactions; and costs from expanding fulfillment capacity.
• Additionally, because payment processing costs associated with seller transactions are based on the gross purchase price of underlying transactions, and payment processing and related transaction costs are higher as a percentage of revenue versus our retail sales, sales by our sellers have higher fulfillment costs as a percent of net sales.
• We expanded our fulfillment capacity during the first six months of 2008 and throughout 2007 through gains in efficiencies and increases in leased warehouse space. This expansion is designed to accommodate greater selection and in-stock inventory levels and meet anticipated shipment volumes from sales of our own products as well as sales by third parties for whom we provide the fulfillment services.

Technology and Content

• Technology and content expenses consist principally of payroll and related expenses for employees involved in application development, category expansion, editorial content, buying, merchandising selection, and systems support, as well as costs associated with the compute, storage and telecommunications infrastructure.
• We continue to invest in several areas of technology and content including seller platforms, web services, and digital initiatives, as well as expansion of new and existing product categories. We are also investing in technology infrastructure so that we can continue to enhance the customer experience and improve our process efficiency and support our infrastructure web services.
• Certain costs relating to development of internal-use software and website development, including development of software to upgrade and enhance our websites and processes supporting our business, are capitalized and amortized over two years.
• During Q2 2008 and Q2 2007, we capitalized $41 million (including $7 million of stock-based compensation) and $33 million (including $5 million of stock-based compensation) of costs associated with internal-use software and website development. Amortization of previously capitalized amounts was $36 million and $28 million for Q2 2008 and Q2 2007.

Stockholders’ Equity and Stock-Based Awards

• As of June 30, 2008, outstanding common shares plus shares underlying outstanding stock-based awards were 446 million, up from 435 million as of June 30, 2007. This total includes all stock-based awards outstanding, without regard for estimated forfeitures, consisting of vested and unvested awards and in-the-money and out-of-the-money stock options.
• In Q2 2008, holders of our 4.75% Convertible Subordinated Notes elected to convert a total of $473 million in outstanding principal amount under a called redemption and we issued 6.1 million shares of common stock as a result of such elections.
• As of June 30, 2008, stock-based awards outstanding were 19.8 million, or 4.6% of shares outstanding, down from 22.1 million, or 5.3% of outstanding shares. Outstanding stock awards consist of 18.4 million shares of restricted stock units and 1.4 million stock options with a $24.41 weighted-average exercise price.
• We granted restricted stock units representing 4.5 million and 5.8 million shares of common stock during Q2 2008 and Q2 2007.

Other Operating Expense (Income), Net

• Other operating expense (income), net, was $(45) million and $3 million during Q2 2008 and Q2 2007. The increase compared to comparable prior year periods is primarily attributable to the gain recognized on the sale of our European DVD rental assets. As a result of this transaction, we recorded a $53 million non-cash gain included in “Other operating expense (income), net” on our consolidated statements of operations. We believe that the positive impact of this gain on operating and net income is not predictive of future results or trends.

Other Expense, Net

• Other expense, net, consists primarily of gains or losses on marketable securities, foreign-currency transaction gains and losses, and other miscellaneous gains and losses.
• The remeasurement of our 6.875% PEACS and intercompany balances can result in significant gains and losses associated with the effect of movements in currency exchange rates.

Income Taxes

• Our provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes we make a cumulative adjustment. The 2008 annual effective tax rate is estimated to be lower than the 35% U.S. federal statutory rate primarily due to anticipated earnings of our subsidiaries outside of the U.S. in jurisdictions where our effective tax rate is lower than in the U.S.
• Included in the total tax provision as a discrete item during Q2 2008 is the impact related to the $53 million non-cash gain associated with the sale of our European DVD rental assets. This gain will be taxed at rates substantially below the 35% U.S. federal statutory rate.
• A majority of our tax provision is non-cash. We have current tax benefits and net operating losses relating to excess stock-based compensation that are being utilized to reduce our taxable income. As such, cash paid for income taxes in Q2 2008 was $15 million compared with $7 million in Q2 2007.

• We are under examination, or may be subject to examination, by the Internal Revenue Service (“IRS”) for calendar years 2004 through 2007. Additionally, any net operating losses that were generated in prior years and utilized in these years may also be subject to examination by the IRS. We are under examination, or may be subject to examination, in the following major jurisdictions for the years specified: Kentucky for 2003 through 2007, France for 2005 through 2007, Germany for 2003 through 2007, Luxembourg for 2003 through 2007, and the United Kingdom for 1999 through 2007. In addition, in 2007, Japanese tax authorities assessed income tax, including penalties and interest, of approximately $100 million against one of our U.S. subsidiaries for the years 2003 through 2005. We believe that these claims are without merit and are disputing the assessment. Further proceedings on the assessment will be stayed during negotiations between U.S. and Japanese authorities over the double taxation issues the assessment raises, and we have provided bank guarantees to suspend enforcement of the assessment. We also may be subject to income tax examination by Japanese tax authorities for 2006 and 2007.

Foreign Exchange

• The effect on our consolidated statements of operations from year-over-year changes in exchange rates versus the U.S. dollar throughout the period is as follows: