- The company expects net sales of between $9.85 billion and $10.45 billion, a growth of between 16% and 23%. This guidance anticipates approximately $100 million or over a 100 basis points of negative impact from foreign exchange rates.
- GAAP operating income is expected to be between $370 million and $510 million or between a 14% decline and an 18% growth. This includes approximately $135 million for stock-based compensation and amortization of intangible assets.
- The company anticipates consolidated segment operating income, which includes the negative impact of foreign exchange and excludes stock-based compensation and other operating expense to be between $505 million and $645 million or 11% decline and 14% growth.

- Operating leverage should accelerate in second half of the year compared with the first half of the year. The company expects 2006 free cash flow growth rate to trend similar to the operating profit growth rate year-over-year. This excludes the impact of FAS 123R, which may result in up to $100 million of tax benefits from stock-based compensation to be classified as positive financing cash flows instead of operating cash flows up from $7 million in 2005. The company expects capital expenditures including capitalized software development cost to be approximately $225 million.

Key questions from the fourth quarter earnings call conducted by Amazon.com, Inc. on February 2, 2006.

Anthony Noto (Goldman Sachs): Do you worry about the profitability of the books, music and video business giving the digital margins are much lower than the physical margins?

Thomas J. Szkutak: If you look at our digital investment, we are excited about the opportunity there going forward. In this physical world, now that is where the vast majority of media products are sold today in physical stores. As we move forward with digital, we think Amazon is especially well-positioned to capture bigger part of that business, while media products are physical, it makes a lot of sense for a big fraction of them to be sold in physical stores, and there will be a sustainable margins there after those players who can create a good customer experience, and that is what we are working on doing.

Anthony Noto (Goldman Sachs): 2006 is going to be the third year in which your incremental margins have trended below the prior year, which means you continue to invest. At what point does that investment end and you start to a rise in your incremental margins and a return in that investment?

Thomas J. Szkutak: 2005 was a year where we increased our cost structure significantly. We did that deliberately and we did it because we see a lot of opportunity going forward. I do think that we will see over the next couple of years that we will be able to – we will start to see the utilization of that cost structure over the next couple of years.

Robert Peck (Bear Stearns): What portions of the investments you are making are going to newer initiatives A9, Alexa, what portion is going for Amazon Prime?

Thomas J. Szkutak: We are making a number of investments that are short-term, intermediate and longer term. We have not quantified the pieces but we should look at the investments we are making in A9 as being longer term, our digital web services are longer-term initiatives for us. We are making a number of different initiatives, Amazon Prime is one that we are investing in today, it is expensive, and that being said, the earlier results that we see we like, we are seeing, the customers that are Amazon Prime members are shopping more, they are doing more cross-shopping, we saw a nice increase in subscriptions and fourth quarter with subscriptions doubling from November-December so, we are seeing some positive signs, it is still early but we see positive signs and we would like, so we would like what we see there.

Jeffrey P. Bezos: Amazon Prime while expensive, we see in at the same potential that we had with the three supersaver shipping. That was expensive and yet it improved the customer experience and we think to have a good business results over the medium-term and that is exactly what we would expect to have happen with Amazon Prime.

Robert Peck (Bear Stearns): Could you give your thoughts on competition from eBay Express, Google Base and Freemont?

Thomas J. Szkutak: We have a long standing practice of not talking about other companies but more generally, what I can tell you is that we believe and have believed for a long time that the internet is driving better and better consumer information. As a result, we believe the companies that delivers sincerely better customer experiences, which includes competitive pricing, it includes reliable fast delivery, it includes having the right selection and the inventory and stock and available that those important customer experience and drivers will shine through in a world that has increasingly better consumer information. I think many of the things that we see happening on the internet fit into that trend of better and better information, more empowerment for consumers, from where we sit because of the way we have operated the business, we like that trend.

Heath Terry (Credit Suisse Asset Management): Can you talk about your international product strategy and what is the thought process behind expanding your product portfolio internationally to mere the one that you have got in the US?

Thomas J. Szkutak: In terms of additional selection, you should expect going forward that we are going to add additional influx in the categories that we are in. You should expect that we are going to launch new category overtime in international as well. When we launch new categories, I was trying to learn how to give the best possible customer experience that we can, we have learned from that and then we expand to other geographies. That is how we think about it, and traditionally, that has happened before starting with the US, but over the past few years, we have all, focused on that and all of the geographies we are in.

Heath Terry (Credit Suisse Asset Management): Are there certain limitations in the international markets that have tapped you from entering categories there that have been successful here?

Jeffrey P. Bezos: No, I would not say there are structural limitations there, as we build out categories we need to build supply chains, vendor relationships and so on. So there is the deliberate effort that takes time as we go through in opening those categories, we used the data from whatever market we first open in, we use that data to help prioritize which category as we do next in other geographies. But our selection goals, first of all in terms of category expansion, our long-term vision it has got all of the geographies to be the same. In any category you see in any geography you will see in all the geographies. So that is a long-term vision. Within each category, we also continue to add selection. Even in categories, even in US books, the category that we have been working on the longest, even in that category over this past year, we added significant selection.

Paul Keung (CIBC World Markets): Do you manage actively the guidance for next year to the same growth comparable to your topline?

Thomas J. Szkutak: We have a focus on trying to make sure that we grow free cash flow and free cash flow per share overtime. It is a key element that we look at and most important measure. That being said we are going to make sure we do the right thing for long-term investors as well and as you look at 2006 specifically, we think that free cash flow will trend largely with operating income. As you look at the guidance you can see that based on the first quarter guidance that we have given and the total year guidance that we have given, that we expect that the leverage would be better in the second half versus the first half. As you look at free cash flow it will trend inline with how I described.

Paul Keung (CIBC World Markets): Is that more specific to your OpEx, or is it the capital spending that is causing them?

Thomas J. Szkutak: Yes, if you look at the operating expense for 2005, and the buildup that we have had through the course of the year, you have seen that our total operating expenses are up 127 basis points, our technology and content is 115 basis points of that increase. That is because of the opportunities that we see. We are going to still increase technology and content next year, we are going to hire more software development engineers and computer scientists, but I would not expect that the increased technology and content in 2006 to be as great as 2005. You have the base that we have that as you see as in fourth quarter, and then the elements that I described, which would mean that, as you get closer to the back half of the year, will be lapping some of the big increases that you saw in 2005.