- Gross profit grew 21% to $206 million or grew 18% excluding FX, while gross margin decreased 130 basis points to 19.6%, which reflects price decreases and product mix.
- International segment operating income decreased $4 million or 8% to $50 million, a 4.8% operating margin. Excluding the favorable impacts of foreign exchange, international operating income decreased 9%.
The combination of operating income in North American and International segments is consolidated segment operating income or CSOI.
Segment information reconciled CSOI to GAAP operating income. CSOI declined 40% to $72 million. The decline in operating income was mainly due to technology and content investments. Unlike CSOI, GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income decreased 28% to $40 million. Third quarter 2005 operating income included a negative impact of $40 million, related to a patent litigation settlement.
- Provision for income taxes was $19 million and current estimate of annual effective tax rate is 51%.
- Effective tax rate remains higher than the 35% statutory rate, primarily due to taxable income associated with the transfer of certain operating assets in connection with establishing EU Headquarters in Luxembourg.
The company expects these assets transfers to beneficially impact effective tax rate over time.
Since the company has deferred tax assets related to NOLs, these asset transfers will not have impact on cash taxes paid in 2006, which the company expects to be approximately $25 million compared with $12 million in 2005.
GAAP net income was $19 million or 5 cents per share compared with $30 million and 7 cents per share.
- Cash from marketable securities decreased $199 million to $1.2 billion.
- The company repurchased $252 million of its common stock.
- Inventory increased 61% to $736 million and turns decreased 11% to 13.2 as the company expanded selection and improved in-stock levels across product categories.
- Investment in net fixed assets, which includes net capitalized software development costs, increased to $449 million.
- Capital expenditures were $62 million, of which $28 million were software development costs.
Growth continues to be fueled by relentless focus on the primary inputs of customer experience, convenience, selection and price.
Some recent examples of progress include Amazon Prime. The company continued to see strong quarter-to-quarter sequential growth for new Prime memberships. The company continues to see increased purchases by Amazon Prime customers across more categories, with especially heavy purchases in electronics, kitchen, and health and personal care.
- The company launched Amazon Unbox, a digital video download service offering customers thousands of television shows, movies, and other video content from more then 30 studio and network partners from Hollywood and around the world.
- Amazon Business Solutions launched, in beta, Web Store by Amazon and Fulfillment by Amazon, giving small and medium-sized businesses access to Amazon''s order fulfillment, customer service, and customer shipping offers and underlying website technology.
- Japanese website launched its health and beauty store, offering customers a selection of over 35,000 items in 12 categories including supplements, drinking water and soft drinks, condiments, processed foods and health foods as well as cosmetics and products for bath care, nursing care and relaxation.
- Automotive Parts and Accessories store now has over 1 million automotive products offered by Amazon in leading mass market and specialty retailers. The company saw a wide range of auto part purchases from air filters, shock absorbers, and handheld diagnostics scanners to a recon engine Ford 302 5 liter Xtreme OHV Remanufactured long block engine delivered to a customer in Spokane, Washington.
- Amazon''s innovative Part Finder allows owners of approximately 10,000 different cars and truck models to find the correct replacement parts, performance parts, or accessories for their vehicle.
- Amazon Web services launched in Amazon Elastic Compute Cloud, Amazon EC2, in limited public beta. Amazon EC2 is a web service that provides resizable compute capacity, making web scale computing easier for developers. Just as Amazon Simple Storage Service, Amazon S3, enables Storage in the Cloud, Amazon EC2 enables Compute in the Cloud. Developers continue to adopt Amazon''s web services. Over 200,000 have registered to date up greater than 60% year-over-year.
- Third-party sales remain a key part of selection expansion. Worldwide active seller accounts were approximately 1.1 million and third-party units representing marketplace and merchants units sold on Amazon sites were 30% of total units, flat with the prior year. Additionally, international third-party business expanded with the launch of Merchants in the UK and Germany.
- Some pricing highlights include the average customer discount for music purchased on www.amazon.com increased more than 350 basis points year-over-year. The average customer discount for DVDs purchased on www.amazon.com increased more than 200 basis points year-over-year. Over the past 12 months, customers have saved over $0.5 billion on shipping through worldwide free shipping offers in Amazon Prime.
Fourth Quarter 2006 Outlook
- The company expects net sales of between $3.625 billion and $3.95 billion, a growth of between 22% and 33%. This guidance anticipates approximately 225 basis points of positive impact from foreign exchange.
- GAAP operating income is expected to be between $145 million and to $235 million or between a 12% decline and 43% growth. This includes stock-based compensation and amortization of intangible assets of approximately $35 million.
- The company anticipates consolidated segment operating income, which excludes stock-based compensation and other operating expense, to be between $180 million and $270 million or between a 3% decline and 46% growth.
Fiscal 2006 Outlook
- The company expects net sales of between $10.35 billion and $10.675 billion, a growth of between 22% and 26%. This guidance anticipates a small negative impact from foreign exchange.
- GAAP operating income is expected to be between $339 million and $429 million or between a 22% decline and a 1% decline. This includes approximately $113 million of stock-based compensation and amortization of intangible assets.
- The company anticipates Consolidated Segment Operating Income, which excludes stock-based compensation and other operating expense, to be between $452 million and $542 million, or a 20% decline and 4% decline.
- The company anticipates 2006 free cash flow growth rate to trend similar to operating profit growth rate year-over-year with some variability from changes in working capital. This excludes the impact of FAS 123R, which could be up to $100 million of excess tax benefits from stock-based compensation being classified as positive financing cash flows instead of operating cash flows, up from $7 million in 2005.
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