Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. All statements
other than statements of historical fact, including statements regarding
guidance, industry prospects, or future results of operations or financial
position, made in this Annual Report on Form 10-K are forward-looking. We use
words such as anticipates, believes, expects, future, intends, and similar
expressions to identify forward-looking statements. Forward-looking statements
reflect management's current expectations and are inherently uncertain. Actual
results could differ materially for a variety of reasons, including, among
others, fluctuations in foreign exchange rates, changes in global economic
conditions and customer spending, world events, the rate of growth of the
Internet, online commerce, and cloud services, the amount that Amazon.com
invests in new business opportunities and the timing of those investments, the
mix of products and services sold to customers, the mix of net sales derived
from products as compared with services, the extent to which we owe income or
other taxes, competition, management of growth, potential fluctuations in
operating results, international growth and expansion, the outcomes of claims,
litigation, government investigations, and other proceedings, fulfillment,
sortation, delivery, and data center optimization, risks of inventory
management, seasonality, the degree to which we enter into, maintain, and
develop commercial agreements, proposed and completed acquisitions and strategic
transactions, payments risks, and risks of fulfillment throughput and
productivity. In addition, the global economic climate amplifies many of these
risks. These risks and uncertainties, as well as other risks and uncertainties
that could cause our actual results to differ significantly from management's
expectations, are described in greater detail in Item 1A of Part I, "Risk
Factors."
Overview
Our primary source of revenue is the sale of a wide range of products and
services to customers. The products offered through our stores include
merchandise and content we have purchased for resale and products offered by
third-party sellers, and we also manufacture and sell electronic devices and
produce media content. Generally, we recognize gross revenue from items we sell
from our inventory as product sales and recognize our net share of revenue of
items sold by third-party sellers as service sales. We seek to increase unit
sales across our stores, through increased product selection, across numerous
product categories. We also offer other services such as compute, storage, and
database offerings, fulfillment, advertising, publishing, and digital content
subscriptions.
Our financial focus is on long-term, sustainable growth in free cash flows1.
Free cash flows are driven primarily by increasing operating income and
efficiently managing working capital2 and cash capital expenditures, including
our decision to purchase or lease property and equipment. Increases in operating
income primarily result from increases in sales of products and services and
efficiently managing our operating costs, partially offset by investments we
make in longer-term strategic initiatives, including capital expenditures
focused on improving the customer experience. To increase sales of products and
services, we focus on improving all aspects of the customer experience,
including lowering prices, improving availability, offering faster delivery and
performance times, increasing selection, producing original content, increasing
product categories and service offerings, expanding product information,
improving ease of use, improving reliability, and earning customer trust.
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 build and run our technology infrastructure; to build, enhance, and
add features to our online stores, web services, electronic devices, and digital
offerings; and to build and optimize our fulfillment and delivery networks and
related facilities. Variable costs generally change directly with sales volume,
while fixed costs generally are dependent 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 from suppliers, and
reduce defects in our processes. To minimize unnecessary growth in fixed costs,
we seek to improve process efficiencies and maintain a lean culture.




_______________________

(1) See "Results of Operations - Non-GAAP Financial Measures" below for

additional information on our non-GAAP free cash flows financial measures.

(2) Working capital consists of accounts receivable, inventory, and accounts


    payable.



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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.
We expect variability in inventory turnover over time since it is affected by
numerous factors, including our product mix, the mix of sales by us and by
third-party 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 third-party fulfillment
providers. We also 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 third-party 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, designers, software and hardware engineers, and
merchandising employees. Our technology and content investment and capital
spending projects often support a variety of product and service offerings due
to geographic expansion and the cross-functionality of our systems and
operations. We seek to invest efficiently in several areas of technology and
content, including AWS, and expansion of new and existing product categories and
service 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, the advances of wireless connectivity, and the practical applications of
artificial intelligence and machine learning, 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 electronic devices. We are also investing in AWS, which offers a broad set
of global compute, storage, database, and other service offerings to developers
and enterprises of all sizes.
We seek to efficiently manage shareholder dilution while maintaining the
flexibility to issue shares for strategic purposes, such as financings,
acquisitions, and aligning employee compensation with shareholders' interests.
We utilize restricted stock units as our primary vehicle for equity compensation
because we believe this compensation model aligns the long-term interests of our
shareholders and employees. In measuring shareholder dilution, we include all
vested and unvested stock awards outstanding, without regard to estimated
forfeitures. Total shares outstanding plus outstanding stock awards were 507
million and 512 million as of December 31, 2018 and 2019.
Our financial reporting currency is the U.S. Dollar and changes in foreign
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 losses associated with the effect of movements in foreign
currency exchange rates. Currency volatilities may continue, which may
significantly impact (either positively or negatively) our reported results and
consolidated trends and comparisons.
For additional information about each line item addressed above, refer to Item 8
of Part II, "Financial Statements and Supplementary Data - Note 1 - Description
of Business and Accounting Policies."
Our Annual Report on Form 10-K for the year ended December 31, 2018 includes a
discussion and analysis of our financial condition and results of operations for
the year ended December 31, 2017 in Item 7 of Part II, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."












_______________________

(3) The operating cycle is the number of days of sales in inventory plus the

number of days of sales in accounts receivable minus accounts payable days.





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Critical Accounting Judgments
The preparation of financial statements in conformity with generally accepted
accounting principles of the United States ("GAAP") requires estimates and
assumptions that affect the reported amounts of assets and liabilities, revenues
and expenses, and related disclosures of contingent liabilities in the
consolidated financial statements and accompanying notes. The SEC has defined a
company's critical accounting policies as the ones that are most important to
the portrayal of the company's financial condition and results of operations,
and which require the company to make its most difficult and subjective
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Based on this definition, we have identified the critical
accounting policies and judgments addressed below. We also have other key
accounting policies, which involve the use of estimates, judgments, and
assumptions that are significant to understanding our results. For additional
information, see Item 8 of Part II, "Financial Statements and Supplementary Data
- Note 1 - Description of Business and Accounting Policies." Although we believe
that our estimates, assumptions, and judgments are reasonable, they are based
upon information presently available. Actual results may differ significantly
from these estimates under different assumptions, judgments, or conditions.
Inventories
Inventories, consisting of products available for sale, are primarily accounted
for using the first-in first-out method, and are valued at the lower of cost and
net realizable value. This valuation requires us to make judgments, based on
currently available information, about the likely method of disposition, such as
through sales to individual customers, returns to product vendors, or
liquidations, and expected recoverable values of each disposition category.
These assumptions about future disposition of inventory are inherently uncertain
and changes in our estimates and assumptions may cause us to realize material
write-downs in the future. As a measure of sensitivity, for every 1% of
additional inventory valuation allowance as of December 31, 2019, we would have
recorded an additional cost of sales of approximately $230 million.
In addition, we enter into supplier commitments for certain electronic device
components and certain products. These commitments are based on forecasted
customer demand. If we reduce these commitments, we may incur additional costs.
Income Taxes
We are subject to income taxes in the U.S. (federal and state) and numerous
foreign jurisdictions. Tax laws, regulations, administrative practices,
principles, and interpretations in various jurisdictions may be subject to
significant change, with or without notice, due to economic, political, and
other conditions, and significant judgment is required in evaluating and
estimating our provision and accruals for these taxes. There are many
transactions that occur during the ordinary course of business for which the
ultimate tax determination is uncertain. Our effective tax rates could be
affected by numerous factors, such as changes in our business operations,
acquisitions, investments, entry into new businesses and geographies,
intercompany transactions, the relative amount of our foreign earnings,
including earnings being lower than anticipated in jurisdictions where we have
lower statutory rates and higher than anticipated in jurisdictions where we have
higher statutory rates, losses incurred in jurisdictions for which we are not
able to realize related tax benefits, the applicability of special tax regimes,
changes in foreign currency exchange rates, changes in our stock price, changes
in our deferred tax assets and liabilities and their valuation, changes in the
laws, regulations, administrative practices, principles, and interpretations
related to tax, including changes to the global tax framework, competition, and
other laws and accounting rules in various jurisdictions. In addition, a number
of countries are actively pursuing changes to their tax laws applicable to
corporate multinationals, such as the U.S. tax reform legislation commonly known
as the U.S. Tax Cuts and Jobs Act of 2017 (the "U.S. Tax Act"). Finally, foreign
governments may enact tax laws in response to the U.S. Tax Act that could result
in further changes to global taxation and materially affect our financial
position and results of operations.
The U.S. Tax Act significantly changed how the U.S. taxes corporations. The U.S.
Tax Act requires complex computations to be performed that were not previously
required by U.S. tax law, significant judgments to be made in interpretation of
the provisions of the U.S. Tax Act, significant estimates in calculations, and
the preparation and analysis of information not previously relevant or regularly
produced. The U.S. Treasury Department, the IRS, and other standard-setting
bodies will continue to interpret or issue guidance on how provisions of the
U.S. Tax Act will be applied or otherwise administered. As future guidance is
issued, we may make adjustments to amounts that we have previously recorded that
may materially impact our provision for income taxes in the period in which the
adjustments are made.
We are also currently subject to tax controversies in various jurisdictions, and
these jurisdictions may assess additional income tax liabilities against us.
Developments in an audit, investigation, or other tax controversy could have a
material effect on our operating results or cash flows in the period or periods
for which that development occurs, as well as for prior and subsequent periods.
We regularly assess the likelihood of an adverse outcome resulting from these
proceedings to determine the adequacy of our tax accruals. Although we believe
our tax estimates are reasonable, the final outcome of audits, investigations,
and any other tax controversies could be materially different from our
historical income tax provisions and accruals.

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Recent Accounting Pronouncements
See Item 8 of Part II, "Financial Statements and Supplementary Data - Note 1 -
Description of Business and Accounting Policies."
Liquidity and Capital Resources
Cash flow information, which reflects retrospective adjustments to our
consolidated statements of cash flows as described in Item 8 of Part II,
"Financial Statements and Supplementary Data - Note 1 - Description of Business
and Accounting Policies," is as follows (in millions):

                               Year Ended December 31,
                                 2018             2019
Cash provided by (used in):
Operating activities        $     30,723       $ 38,514
Investing activities             (12,369 )      (24,281 )
Financing activities              (7,686 )      (10,066 )


Our principal sources of liquidity are cash flows generated from operations and
our cash, cash equivalents, and marketable securities balances, which, at fair
value, were $41.3 billion and $55.0 billion as of December 31, 2018 and 2019.
Amounts held in foreign currencies were $13.8 billion and $15.3 billion as of
December 31, 2018 and 2019, and were primarily Euros, British Pounds, and
Japanese Yen.
Cash provided by (used in) operating activities was $30.7 billion and $38.5
billion in 2018 and 2019. Our operating cash flows result primarily from cash
received from our consumer, seller, developer, enterprise, and content creator
customers, and advertisers, offset by cash payments we make for products and
services, employee compensation, payment processing and related transaction
costs, operating leases, and interest payments on our long-term obligations.
Cash received from our customers and other activities generally corresponds to
our net sales. Because consumers primarily use credit cards to buy from us, our
receivables from consumers settle quickly. The increase in operating cash flow
in 2019, compared to the prior year, is primarily due to the increase in net
income, excluding non-cash charges such as depreciation, amortization, and
stock-based compensation. Cash provided by (used in) operating activities is
also subject to changes in working capital. Working capital at any specific
point in time is subject to many variables, including seasonality, inventory
management and category expansion, the timing of cash receipts and payments,
vendor payment terms, and fluctuations in foreign exchange rates.
Cash provided by (used in) investing activities corresponds with cash capital
expenditures, including leasehold improvements, incentives received from
property and equipment vendors, proceeds from asset sales, cash outlays for
acquisitions, investments in other companies and intellectual property rights,
and purchases, sales, and maturities of marketable securities. Cash provided by
(used in) investing activities was $(12.4) billion and $(24.3) billion in 2018
and 2019, with the variability caused primarily by our decision to purchase or
lease property and equipment and purchases, maturities, and sales of marketable
securities. Cash capital expenditures were $11.3 billion, and $12.7 billion in
2018 and 2019, which primarily reflect additional capacity to support our
fulfillment operations and additional investments in support of continued
business growth in technology infrastructure (the majority of which is to
support AWS). We made cash payments, net of acquired cash, related to
acquisition and other investment activity of $2.2 billion and $2.5 billion in
2018 and 2019.
Cash provided by (used in) financing activities was $(7.7) billion and $(10.1)
billion in 2018 and 2019. Cash outflows from financing activities result from
principal repayments of finance leases and financing obligations and repayments
of long-term debt and other, and were $8.5 billion and $12.3 billion in 2018 and
2019. Property and equipment acquired under finance leases was $10.6 billion and
$13.7 billion in 2018 and 2019, with the increase reflecting investments in
support of continued business growth primarily due to investments in technology
infrastructure for AWS, which investments we expect to continue over time.
We had no borrowings outstanding under the commercial paper program (the
"Commercial Paper Program") or unsecured revolving credit facility (the "Credit
Agreement") and $740 million of borrowings outstanding under our $740 million
secured revolving credit facility (the "Credit Facility") as of December 31,
2019. See Item 8 of Part II, "Financial Statements and Supplementary Data - Note
6 - Debt" for additional information.
In 2018 and 2019, we recorded net tax provisions of $1.2 billion and $2.4
billion. Certain foreign subsidiary earnings are subject to U.S. taxation under
the U.S. Tax Act, which also repeals U.S. taxation on the subsequent
repatriation of those earnings. We intend to invest substantially all of our
foreign subsidiary earnings, as well as our capital in our foreign

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subsidiaries, indefinitely outside of the U.S. in those jurisdictions in which
we would incur significant, additional costs upon repatriation of such amounts.
As of December 31, 2019, cash, cash equivalents, and marketable securities held
by foreign subsidiaries was $13.4 billion.
Tax benefits relating to excess stock-based compensation deductions and
accelerated depreciation deductions are reducing our U.S. taxable income. The
U.S. Tax Act enhanced and extended accelerated depreciation deductions by
allowing full expensing of qualified property, primarily equipment, through
2022. Cash taxes paid (net of refunds) were $1.2 billion and $881 million for
2018 and 2019. As of December 31, 2019, we had approximately $1.7 billion of
federal tax credits potentially available to offset future tax liabilities. Our
federal tax credits are primarily related to the U.S. federal research and
development credit. As we utilize our federal tax credits we expect cash paid
for taxes to increase. We endeavor to manage our global taxes on a cash basis,
rather than on a financial reporting basis. In connection with the European
Commission's October 2017 decision against us on state aid, Luxembourg tax
authorities computed an initial recovery amount, consistent with the European
Commission's decision, of approximately €250 million, that we deposited into
escrow in March 2018, subject to adjustment pending conclusion of all appeals.
Our liquidity is also affected by restricted cash balances that are pledged as
collateral for real estate leases, amounts due to third-party sellers in certain
jurisdictions, debt, and standby and trade letters of credit. To the extent we
process payments for third-party sellers or offer certain types of stored value
to our customers, some jurisdictions may restrict our use of those funds. These
restrictions would result in the reclassification of a portion of our cash and
cash equivalents from "Cash and cash equivalents" to restricted cash, which is
classified within "Accounts receivable, net and other" and "Other assets" on our
consolidated balance sheets. As of December 31, 2018 and 2019, restricted cash,
cash equivalents, and marketable securities were $426 million and $321 million.
See Item 8 of Part II, "Financial Statements and Supplementary Data - Note 7 -
Commitments and Contingencies" for additional discussion of our principal
contractual commitments, as well as our pledged assets. Additionally, purchase
obligations and open purchase orders, consisting of inventory and significant
non-inventory commitments, were $15.7 billion as of December 31, 2019. These
purchase obligations and open purchase orders are generally cancellable in full
or in part through the contractual provisions.
We believe that cash flows generated from operations and our cash, cash
equivalents, and marketable securities balances, as well as our borrowing
arrangements, will be sufficient to meet our anticipated operating cash needs
for at least the next twelve months. However, any projections of future cash
needs and cash flows are subject to substantial uncertainty. See Item 1A of Part
I, "Risk Factors." We continually evaluate opportunities to sell additional
equity or debt securities, obtain credit facilities, obtain finance and
operating lease arrangements, enter into financing obligations, repurchase
common stock, pay dividends, or repurchase, refinance, or otherwise restructure
our debt for strategic reasons or to further strengthen our financial position.
The sale of additional equity or convertible debt securities would likely be
dilutive to our shareholders. In addition, we will, from time to time, consider
the acquisition of, or investment in, complementary businesses, products,
services, capital infrastructure, and technologies, which might affect our
liquidity requirements or cause us to secure additional financing, or issue
additional equity or debt securities. There can be no assurance that additional
credit lines or financing instruments will be available in amounts or on terms
acceptable to us, if at all.


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Results of Operations
We have organized our operations into three segments: North America,
International, and AWS. These segments reflect the way the Company evaluates its
business performance and manages its operations. See Item 8 of Part II,
"Financial Statements and Supplementary Data - Note 10 - Segment Information."
Net Sales
Net sales include product and service sales. Product sales represent revenue
from the sale of products and related shipping fees and digital media content
where we record revenue gross. Service sales primarily represent third-party
seller fees, which includes commissions and any related fulfillment and shipping
fees, AWS sales, Amazon Prime membership fees, advertising services, and certain
digital content subscriptions. Net sales information is as follows (in
millions):
                                                               Year Ended December 31,
                                                                 2018             2019
Net Sales:
North America                                               $    141,366      $  170,773
International                                                     65,866          74,723
AWS                                                               25,655          35,026
Consolidated                                                $    232,887      $  280,522
Year-over-year Percentage Growth:
North America                                                         33 %            21 %
International                                                         21              13
AWS                                                                   47              37
Consolidated                                                          31              20
Year-over-year Percentage Growth, excluding the effect of
foreign exchange rates:
North America                                                         33 %            21 %
International                                                         19              17
AWS                                                                   47              37
Consolidated                                                          30              22
Net sales mix:
North America                                                         61 %            61 %
International                                                         28              27
AWS                                                                   11              12
Consolidated                                                         100 %           100 %


Sales increased 20% in 2019, compared to the prior year. Changes in foreign
currency exchange rates impacted net sales by $1.3 billion and $(2.6) billion
for 2018 and 2019. For a discussion of the effect on sales growth of foreign
exchange rates, see "Effect of Foreign Exchange Rates" below.
North America sales increased 21% in 2019, compared to the prior year. The sales
growth primarily reflects increased unit sales, including sales by third-party
sellers. Increased unit sales were driven largely by our continued efforts to
reduce prices for our customers, including from our shipping offers, increased
in-stock inventory availability, and increased selection.
International sales increased 13% in 2019, compared to the prior year. The sales
growth primarily reflects increased unit sales, including sales by third-party
sellers. Increased unit sales were driven largely by our continued efforts to
reduce prices for our customers, including from our shipping offers, increased
in-stock inventory availability, and increased selection. Changes in foreign
currency exchange rates impacted International net sales by $1.3 billion and
$(2.4) billion in 2018 and 2019.
AWS sales increased 37% in 2019, compared to the prior year. The sales growth
primarily reflects increased customer usage, partially offset by pricing
changes. Pricing changes were driven largely by our continued efforts to reduce
prices for our customers.


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Operating Income (Loss)
Operating income (loss) by segment is as follows (in millions):
                            Year Ended December 31,

                              2018             2019
Operating Income (Loss):
North America            $      7,267       $  7,033
International                  (2,142 )       (1,693 )
AWS                             7,296          9,201
Consolidated             $     12,421       $ 14,541


Operating income was $12.4 billion and $14.5 billion for 2018 and 2019. We
believe that operating income (loss) is a more meaningful measure than gross
profit and gross margin due to the diversity of our product categories and
services.
The decrease in North America operating income in absolute dollars in 2019,
compared to the prior year, is primarily due to increased shipping costs and
marketing expense, partially offset by increased unit sales, including sales by
third-party sellers, and advertising sales and slower growth in certain
operating expenses. Changes in foreign exchange rates impacted operating income
by $17 million and $23 million for 2018 and 2019.
The decrease in International operating loss in absolute dollars in 2019,
compared to the prior year, is primarily due to increased unit sales, including
sales by third-party sellers, and advertising sales, and slower growth in
certain operating expenses, partially offset by increased marketing expense.
Changes in foreign exchange rates impacted operating loss by $258 million and
$(116) million for 2018 and 2019.
The increase in AWS operating income in absolute dollars in 2019, compared to
the prior year, is primarily due to increased customer usage and cost structure
productivity, partially offset by pricing changes and increased spending on
technology infrastructure and payroll and related expenses, which was primarily
driven by additional investments to support the business growth. Changes in
foreign exchange rates impacted operating income by $(49) million and $273
million for 2018 and 2019.

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Operating Expenses
Information about operating expenses is as follows (in millions):

                                         Year Ended December 31,
                                           2018            2019
Operating expenses:
Cost of sales                         $    139,156     $ 165,536
Fulfillment                                 34,027        40,232
Technology and content                      28,837        35,931
Marketing                                   13,814        18,878
General and administrative                   4,336         5,203
Other operating expense (income), net          296           201
Total operating expenses              $    220,466     $ 265,981
Year-over-year Percentage Growth:
Cost of sales                                   24 %          19  %
Fulfillment                                     35            18
Technology and content                          27            25
Marketing                                       37            37
General and administrative                      18            20
Other operating expense (income), net           38           (32 )
Percent of Net Sales:
Cost of sales                                 59.8 %        59.0  %
Fulfillment                                   14.6          14.3
Technology and content                        12.4          12.8
Marketing                                      5.9           6.7
General and administrative                     1.9           1.9
Other operating expense (income), net          0.1           0.1


Cost of Sales
Cost of sales primarily consists of the purchase price of consumer products,
inbound and outbound shipping costs, including costs related to sortation and
delivery centers and where we are the transportation service provider, and
digital media content costs where we record revenue gross, including video and
music.
The increase in cost of sales in absolute dollars in 2019, compared to the prior
year, is primarily due to increased product and shipping costs resulting from
increased sales.
Shipping costs to receive products from our suppliers are included in our
inventory and recognized as cost of sales upon sale of products to our
customers. Shipping costs, which include sortation and delivery centers and
transportation costs, were $27.7 billion and $37.9 billion in 2018 and 2019. We
expect our cost of shipping to continue to increase to the extent our customers
accept and use our shipping offers at an increasing rate, we reduce shipping
rates, we use more expensive shipping methods, including faster delivery, and we
offer additional services. We seek to mitigate costs of shipping over time in
part through achieving higher sales volumes, optimizing our fulfillment network,
negotiating better terms with our suppliers, and achieving better operating
efficiencies. We believe that offering low prices to our customers is
fundamental to our future success, and one way we offer lower prices is through
shipping offers.
Costs to operate our AWS segment are primarily classified as "Technology and
content" as we leverage a shared infrastructure that supports both our internal
technology requirements and external sales to AWS customers.

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Fulfillment


Fulfillment costs primarily consist of those costs incurred in operating and
staffing our North America and International fulfillment centers, physical
stores, and customer service centers and payment processing costs. While AWS
payment processing and related transaction costs are included in fulfillment,
AWS costs are primarily classified as "Technology and content." Fulfillment
costs as a percentage of net sales may vary due to several factors, such as
payment processing and related transaction costs, our level of productivity and
accuracy, changes in volume, size, and weight of units received and fulfilled,
the extent to which third party sellers utilize Fulfillment by Amazon services,
timing of fulfillment network and physical store expansion, the extent we
utilize fulfillment services provided by third parties, mix of products and
services sold, and our ability to affect customer service contacts per unit by
implementing improvements in our operations and enhancements to our customer
self-service features. 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 sales versus our retail sales, sales by our sellers have higher
payment processing costs as a percent of net sales.
The increase in fulfillment costs in absolute dollars in 2019, compared to the
prior year, is primarily due to variable costs corresponding with increased
product and service sales volume and inventory levels and costs from expanding
our fulfillment network, which includes physical stores.
We seek to expand our fulfillment network to accommodate a greater selection and
in-stock inventory levels and to meet anticipated shipment volumes from sales of
our own products as well as sales by third parties for which we provide the
fulfillment services. We regularly evaluate our facility requirements.
Technology and Content
Technology and content costs include payroll and related expenses for employees
involved in the research and development of new and existing products and
services, development, design, and maintenance of our stores, curation and
display of products and services made available in our online stores, and
infrastructure costs. Infrastructure costs include servers, networking
equipment, and data center related depreciation and amortization, rent,
utilities, and other expenses necessary to support AWS and other Amazon
businesses. Collectively, these costs reflect the investments we make in order
to offer a wide variety of products and services to our customers.
We seek to invest efficiently in numerous areas of technology and content so we
may continue to enhance the customer experience and improve our process
efficiency through rapid technology developments, while operating at an ever
increasing scale. Our technology and content investment and capital spending
projects often support a variety of product and service offerings due to
geographic expansion and the cross-functionality of our systems and operations.
We expect spending in technology and content to increase over time as we
continue to add employees and technology infrastructure. These costs are
allocated to segments based on usage. The increase in technology and content
costs in absolute dollars in 2019, compared to the prior year, is primarily due
to an increase in spending on technology infrastructure and increased payroll
and related costs associated with technical teams responsible for expanding our
existing products and services and initiatives to introduce new products and
service offerings. We expect technology and content costs to grow at a slower
rate in 2020 due to an increase in the estimated useful life of our servers,
which will impact each of our segments. See Item 8 of Part II, "Financial
Statements and Supplementary Data - Note 1 - Description of Business and
Accounting Policies - Use of Estimates" for additional information on the change
in estimated useful life of our servers.
Marketing
Marketing costs include advertising and payroll and related expenses for
personnel engaged in marketing and selling activities, including sales
commissions related to AWS. We direct customers to our stores primarily through
a number of marketing channels, such as our sponsored search, third party
customer referrals, social and online advertising, television advertising, and
other initiatives. Our marketing costs are largely variable, based on growth in
sales and changes in rates. To the extent there is increased or decreased
competition for these traffic sources, or to the extent our mix of these
channels shifts, we would expect to see a corresponding change in our marketing
costs.
The increase in marketing costs in absolute dollars in 2019, compared to the
prior year, is primarily due to increased spending on marketing channels, as
well as payroll and related expenses for personnel engaged in marketing and
selling activities.
While costs associated with Amazon Prime memberships and other shipping offers
are not included in marketing expense, we view these offers as effective
worldwide marketing tools, and intend to continue offering them indefinitely.

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General and Administrative
The increase in general and administrative costs in absolute dollars in 2019,
compared to the prior year, is primarily due to increases in payroll and related
expenses.
Other Operating Expense (Income), Net
Other operating expense (income), net was $296 million and $201 million during
2018 and 2019, and is primarily related to the amortization of intangible
assets.
Interest Income and Expense
Our interest income was $440 million and $832 million during 2018 and 2019. We
generally invest our excess cash in AAA-rated money market funds and investment
grade short- to intermediate-term fixed income securities. Our interest income
corresponds with the average balance of invested funds based on the prevailing
rates, which vary depending on the geographies and currencies in which they are
invested.
Interest expense was $1.4 billion and $1.6 billion in 2018 and 2019. The
increase is primarily related to finance leases.
Our long-term lease liabilities were $9.7 billion and $39.8 billion as of
December 31, 2018 and 2019. Our long-term debt was $23.5 billion and $23.4
billion as of December 31, 2018 and 2019. See Item 8 of Part II, "Financial
Statements and Supplementary Data - Note 4 - Leases and Note 6 - Debt" for
additional information.
Other Income (Expense), Net
Other income (expense), net was $(183) million and $203 million during 2018 and
2019. The primary components of other income (expense), net are related to
equity securities and warrant valuations and foreign currency.
Income Taxes
Our effective tax rate is subject to significant variation due to several
factors, including variability in our pre-tax and taxable income and loss and
the mix of jurisdictions to which they relate, intercompany transactions, the
applicability of special tax regimes, changes in how we do business,
acquisitions, investments, audit-related developments, changes in our stock
price, changes in our deferred tax assets and liabilities and their valuation,
foreign currency gains (losses), changes in statutes, regulations, case law, and
administrative practices, principles, and interpretations related to tax,
including changes to the global tax framework, competition, and other laws and
accounting rules in various jurisdictions, and relative changes of expenses or
losses for which tax benefits are not recognized. Additionally, our effective
tax rate can be more or less volatile based on the amount of pre-tax income or
loss. For example, the impact of discrete items and non-deductible expenses on
our effective tax rate is greater when our pre-tax income is lower.
We recorded a provision for income taxes of $1.2 billion and $2.4 billion in
2018 and 2019. Our provision for income taxes in 2019 was higher than in 2018
primarily due to an increase in U.S. pre-tax income, a decline in excess tax
benefits from stock-based compensation, and the one-time provisional tax benefit
of the U.S. Tax Act recognized in 2018.
Tax benefits relating to excess stock-based compensation deductions and
accelerated depreciation deductions are reducing our U.S. taxable income. The
U.S. Tax Act enhanced and extended accelerated depreciation deductions by
allowing full expensing of qualified property, primarily equipment, through
2022. As of December 31, 2019, we had approximately $1.7 billion of federal tax
credits potentially available to offset future tax liabilities. Our federal tax
credits are primarily related to the U.S. federal research and development
credit.
See Item 8 of Part II, "Financial Statements and Supplementary Data - Note 9 -
Income Taxes" for additional information.
Non-GAAP Financial Measures
Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other SEC
regulations define and prescribe the conditions for use of certain non-GAAP
financial information. Our measures of free cash flows and the effect of foreign
exchange rates on our consolidated statements of operations meet the definition
of non-GAAP financial measures.
We provide multiple measures of free cash flows because we believe these
measures provide additional perspective on the impact of acquiring property and
equipment with cash and through finance leases and financing obligations. We
adopted new lease accounting guidance on January 1, 2019 without retrospectively
adjusting prior periods. As a result, the line items used in our calculation of
measures of free cash flows have changed. See Item 8 of Part II, "Financial
Statements and Supplementary Data - Note 1 - Description of Business and
Accounting Policies."

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Free Cash Flow
Free cash flow is cash flow from operations reduced by "Purchases of property
and equipment, net of proceeds from sales and incentives." The following is a
reconciliation of free cash flow to the most comparable GAAP cash flow measure,
"Net cash provided by (used in) operating activities," for 2018 and 2019 (in
millions):
                                                               Year Ended December 31,
                                                                 2018             2019

Net cash provided by (used in) operating activities $ 30,723

   $   38,514
Purchases of property and equipment, net of proceeds from
sales and incentives                                             (11,323 )       (12,689 )
Free cash flow                                              $     19,400      $   25,825

Net cash provided by (used in) investing activities $ (12,369 )

   $  (24,281 )
Net cash provided by (used in) financing activities         $     (7,686 )

$ (10,066 )




Free Cash Flow Less Principal Repayments of Finance Leases and Financing
Obligations
Free cash flow less principal repayments of finance leases and financing
obligations is free cash flow reduced by "Principal repayments of finance
leases" and "Principal repayments of financing obligations." Principal
repayments of finance leases and financing obligations approximates the actual
payments of cash for our finance leases and financing obligations. The following
is a reconciliation of free cash flow less principal repayments of finance
leases and financing obligations to the most comparable GAAP cash flow measure,
"Net cash provided by (used in) operating activities," for 2018 and 2019 (in
millions):
                                                               Year Ended December 31,
                                                                 2018             2019

Net cash provided by (used in) operating activities $ 30,723

$ 38,514 Purchases of property and equipment, net of proceeds from sales and incentives

                                             (11,323 )       (12,689 )
Free cash flow                                                    19,400    

25,825


Principal repayments of finance leases (1)                        (7,449 )        (9,628 )
Principal repayments of financing obligations (1)                   (337 )  

(27 ) Free cash flow less principal repayments of finance leases and financing obligations

$     11,614

$ 16,170

Net cash provided by (used in) investing activities $ (12,369 )

   $  (24,281 )
Net cash provided by (used in) financing activities         $     (7,686 )

$ (10,066 )

_______________

(1) Amounts for 2018 have not been retrospectively adjusted.


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Free Cash Flow Less Equipment Finance Leases and Principal Repayments of All
Other Finance Leases and Financing Obligations
Free cash flow less equipment finance leases and principal repayments of all
other finance leases and financing obligations is free cash flow reduced by
equipment acquired under finance leases, which is included in "Property and
equipment acquired under finance leases," principal repayments of all other
finance lease liabilities, which is included in "Principal repayments of finance
leases," and "Principal repayments of financing obligations." All other finance
lease liabilities and financing obligations consists of property. In this
measure, equipment acquired under finance leases is reflected as if these assets
had been purchased with cash, which is not the case as these assets have been
leased. The following is a reconciliation of free cash flow less equipment
finance leases and principal repayments of all other finance leases and
financing obligations to the most comparable GAAP cash flow measure, "Net cash
provided by (used in) operating activities," for 2018 and 2019 (in millions):
                                                               Year Ended December 31,
                                                                 2018             2019

Net cash provided by (used in) operating activities $ 30,723

$ 38,514 Purchases of property and equipment, net of proceeds from sales and incentives

                                             (11,323 )       (12,689 )
Free cash flow                                                    19,400    

25,825


Equipment acquired under finance leases (1)                      (10,615 )       (12,916 )
Principal repayments of all other finance leases (2)                   -            (392 )
Principal repayments of financing obligations                       (337 )  

(27 ) Free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations

$      8,448

$ 12,490

Net cash provided by (used in) investing activities $ (12,369 )

   $  (24,281 )
Net cash provided by (used in) financing activities         $     (7,686 )

$ (10,066 )

___________________

(1) For the twelve months ended December 31, 2019, this amount relates to

equipment included in "Property and equipment acquired under finance leases"

of $13,723 million. Amounts for 2018 have not been retrospectively adjusted.

(2) For the twelve months ended December 31, 2019, this amount relates to


    property included in "Principal repayments of finance leases" of $9,628
    million. Amounts for 2018 have not been retrospectively adjusted.



All of these free cash flows measures have limitations as they omit certain
components of the overall cash flow statement and do not represent the residual
cash flow available for discretionary expenditures. For example, these measures
of free cash flows do not incorporate the portion of payments representing
principal reductions of debt or cash payments for business acquisitions.
Additionally, our mix of property and equipment acquisitions with cash or other
financing options may change over time. Therefore, we believe it is important to
view free cash flows measures only as a complement to our entire consolidated
statements of cash flows.

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Effect of Foreign Exchange Rates
Information regarding the effect of foreign exchange rates, versus the
U.S. Dollar, on our net sales, operating expenses, and operating income is
provided to show reported period operating results had the foreign exchange
rates remained the same as those in effect in the comparable prior year periods.
The effect on our net sales, operating expenses, and operating income from
changes in our foreign exchange rates versus the U.S. Dollar is as follows (in
millions):
                                          Year Ended December 31, 2018                    Year Ended December 31, 2019
                                                    Exchange        At Prior                         Exchange        At Prior
                                       As             Rate            Year             As              Rate            Year
                                    Reported       Effect (1)      Rates (2)        Reported        Effect (1)      Rates (2)
Net sales                         $   232,887     $    (1,253 )   $ 

231,634 $ 280,522 $ 2,560 $ 283,082 Operating expenses

                    220,466          (1,027 )      219,439         265,981             2,740        268,721
Operating income                       12,421            (226 )       12,195          14,541              (180 )       14,361


___________________

(1) Represents the change in reported amounts resulting from changes in foreign

exchange rates from those in effect in the comparable prior year period for

operating results.

(2) Represents the outcome that would have resulted had foreign exchange rates in

the reported period been the same as those in effect in the comparable prior

year period for operating results.

Guidance


We provided guidance on January 30, 2020, in our earnings release furnished on
Form 8-K as set forth below. These forward-looking statements reflect
Amazon.com's expectations as of January 30, 2020, and are subject to substantial
uncertainty. Our results are inherently unpredictable and may be materially
affected by many factors, such as fluctuations in foreign exchange rates,
changes in global economic conditions and customer spending, world events, the
rate of growth of the Internet, online commerce, and cloud services, as well as
those outlined in Item 1A of Part I, "Risk Factors."
First Quarter 2020 Guidance
•      Net sales are expected to be between $69.0 billion and $73.0 billion, or

to grow between 16% and 22% compared with first quarter 2019. This

guidance anticipates a favorable impact of approximately 5 basis points

from foreign exchange rates.

• Operating income is expected to be between $3.0 billion and $4.2 billion,

compared with $4.4 billion in first quarter 2019. This guidance includes

approximately $800 million lower depreciation expense due to an increase


       in the estimated useful life of our servers beginning on January 1, 2020.

• This guidance assumes, among other things, that no additional business


       acquisitions, investments, restructurings, or legal settlements are
       concluded.




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