What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-04-30 compared with 2020-10-30 · 77 added, 118 removed, 227 unchanged (46% of the section changed)

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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.

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, variability in demand, 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 and additional or unforeseen effects from the COVID-19 pandemic amplify many of these risks.

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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,” of our 2019 Annual Report on Form 10-K and Item 1 of Part I, “Financial Statements — Note 1 — Accounting Policies and Supplemental Disclosures,” of this Form 10-Q.

For additional information, see Item 8 of Part II, “Financial Statements and Supplementary Data — Note 1 — Description of Business, Accounting Policies, and Supplemental Disclosures” of our 2020 Annual Report on Form 10-K and Item 1 of Part I, “Financial Statements — Note 1 — Accounting Policies and Supplemental Disclosures,” of this Form 10-Q.

Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available.

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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 September 30, 2020, we would have recorded an additional cost of sales of approximately $265 million.

As a measure of sensitivity, for every 1% of additional inventory valuation allowance as of March 31, 2021, we would have recorded an additional cost of sales of approximately $275 million.

In addition, we enter into supplier commitments for certain electronic device components and certain products.

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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 to our forecasts of income and loss and the mix of jurisdictions to which they relate, 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.

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.

In addition, a number of countries have enacted or are actively pursuing changes to their tax laws applicable to corporate multinationals.

We are also currently subject to tax controversies in various jurisdictions, and these jurisdictions may assess additional income tax liabilities against us.

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Three Months Ended

September 30, Nine Months Ended

September 30, Twelve Months Ended

September 30,

March 31, Twelve Months Ended

2020 2021 2020 2021

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Financing activities (2,591) (3,476) (10,280) (1,989)

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 $55.0 billion and $68.4 billion as of December 31, 2019 and September 30, 2020.

Amounts held in foreign currencies were $15.3 billion and $15.6 billion as of December 31, 2019 and September 30, 2020, and were primarily Euros, British Pounds, and Japanese Yen.

Cash provided by (used in) operating activities was $7.9 billion and $12.0 billion for Q3 2019 and Q3 2020, and $18.9 billion and $35.6 billion for the nine months ended September 30, 2019 and 2020.

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 $84.4 billion and $73.3 billion as of December 31, 2020 and March 31, 2021.

Amounts held in foreign currencies were $23.5 billion and $19.8 billion as of December 31, 2020 and March 31, 2021, and were primarily Euros, British Pounds, and Japanese Yen.

Cash provided by (used in) operating activities was $3.1 billion and $4.2 billion for Q1 2020 and Q1 2021.

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.

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Because consumers primarily use credit cards to buy from us, our receivables from consumers settle quickly.

The increase in operating cash flow for the trailing twelve months ended September 30, 2020, compared to the comparable prior year period, was primarily due to the increase in net income, excluding non-cash expenses, and 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.

The increase in operating cash flow for the trailing twelve months ended March 31, 2021, compared to the comparable prior year period, was primarily due to the increase in net income, excluding non-cash expenses, and changes in working capital.

Working capital at any specific point in time is subject to many variables, including variability in demand, 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 $(5.1) billion and $(15.9) billion for Q3 2019 and Q3 2020, and $(20.7) billion and $(42.6) billion for the nine months ended September 30, 2019 and 2020, 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 $3.4 billion and $9.8 billion during Q3 2019 and Q3 2020, and $8.7 billion and $21.9 billion for the nine months ended September 30, 2019 and 2020, which primarily reflect investments in additional capacity to support our fulfillment operations and in support of continued business growth in technology infrastructure (the majority of which is to support AWS), which investments we expect to continue over time.

We made cash payments, net of acquired cash, related to acquisition and other investment activity of $398 million and $1.7 billion during Q3 2019 and Q3 2020, and $1.7 billion and $1.9 billion for the nine months ended September 30, 2019 and 2020.

Cash provided by (used in) financing activities was $(2.0) billion and $(4.1) billion for Q3 2019 and Q3 2020, and $(6.5) billion and $712 million for the nine months ended September 30, 2019 and 2020.

Cash inflows from financing activities resulted from proceeds of short-term debt, and other and long-term debt of $702 million and $1.3 billion for Q3 2019 and Q3 2020, and $1.2 billion and $14.4 billion for the nine months ended September 30, 2019 and 2020.

Cash outflows from financing activities resulted from payments of short-term debt, and other, long-term debt, finance leases, and financing obligations of $2.7 billion and $5.4 billion in Q3 2019 and Q3 2020, and $7.7 billion and $13.6 billion for the nine months ended September 30, 2019 and 2020.

Property and equipment acquired under finance leases was $3.6 billion during Q3 2019 and Q3 2020, and $9.5 billion and $8.9 billion for the nine months ended September 30, 2019 and 2020, reflecting investments in support of continued business growth primarily due to investments in technology infrastructure for AWS.

We had no borrowings outstanding under the Credit Agreement, $725 million of borrowings outstanding under the Commercial Paper Program, and $413 million of borrowings outstanding under our Credit Facility as of September 30, 2020.

Cash provided by (used in) investing activities was $(8.9) billion and $(8.7) billion for Q1 2020 and Q1 2021, with the variability caused primarily by our decision to purchase or lease property and equipment and purchases, sales, and maturities of marketable securities.

Cash capital expenditures were $5.4 billion and $11.2 billion during Q1 2020 and Q1 2021, which primarily reflect investments in additional capacity to support our fulfillment operations and in support of continued business growth in technology infrastructure (the majority of which is to support AWS), which investments we expect to continue over time.

We made cash payments, net of acquired cash, related to acquisition and other investment activity of $91 million and $630 million during Q1 2020 and Q1 2021.

Cash provided by (used in) financing activities was $(2.6) billion and $(3.5) billion for Q1 2020 and Q1 2021.

Cash inflows from financing activities resulted from proceeds from short-term debt, and other and long-term debt of $693 million and $2.0 billion for Q1 2020 and Q1 2021.

Cash outflows from financing activities resulted from payments of short-term debt, and other, long-term debt, finance leases, and financing obligations of $3.3 billion and $5.5 billion in Q1 2020 and Q1 2021.

Property and equipment acquired under finance leases was $2.2 billion and $2.1 billion during Q1 2020 and Q1 2021, reflecting investments in support of continued business growth primarily due to investments in technology infrastructure for AWS.

We had no borrowings outstanding under the Credit Agreement, $725 million of borrowings outstanding under the Commercial Paper Program, and $429 million of borrowings outstanding under our Credit Facility as of March 31, 2021.

See Item 1 of Part I, “Financial Statements — Note 5 — Debt” for additional information.

We recorded net tax provisions of $494 million and $569 million in Q3 2019 and Q3 2020, and $1.6 billion and $2.3 billion for the nine months ended September 30, 2019 and 2020.

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.

Certain foreign subsidiary earnings and losses are subject to current U.S.

taxation and the subsequent repatriation of those earnings is not subject to tax in the U.S.

We intend to invest substantially all of our foreign subsidiary earnings, as well as our capital in our foreign subsidiaries, indefinitely outside of the U.S.

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taxable income.

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 $241 million and $502 million for Q3 2019 and Q3 2020, and $692 million and $1.3 billion for the nine months ended September 30, 2019 and 2020.

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.

tax rules provide for enhanced accelerated depreciation deductions by allowing the election of full expensing of qualified property, primarily equipment, through 2022.

Cash taxes paid (net of refunds) were $305 million and $801 million for Q1 2020 and Q1 2021.

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, 2019 and September 30, 2020, restricted cash, cash equivalents, and marketable securities were $321 million and $275 million.

As of December 31, 2020 and March 31, 2021, restricted cash, cash equivalents, and marketable securities were $257 million and $323 million.

See Item 1 of Part I, “Financial Statements — Note 4 — Commitments and Contingencies” and “Financial Statements — Note 5 — Debt” 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 $31.4 billion as of September 30, 2020.

Additionally, purchase obligations and open purchase orders, consisting of inventory and significant non-inventory commitments, were $32.6 billion as of March 31, 2021.

These purchase obligations and open purchase orders are generally cancellable in full or in part through the contractual provisions.

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The COVID-19 pandemic and resulting global disruptions have caused significant market volatility.

This disruption can contribute to defaults in our accounts receivable, affect asset valuations resulting in impairment charges, and affect the availability of lease and financing credit as well as other segments of the credit markets.

These disruptions can contribute to defaults in our accounts receivable, affect asset valuations resulting in impairment charges, and affect the availability of lease and financing credit as well as other segments of the credit markets.

We have utilized a range of financing methods to fund our operations and capital expenditures and expect to continue to maintain financing flexibility in the current market conditions.

However, due to the rapidly evolving global situation, it is not possible to predict whether unanticipated consequences of the pandemic are reasonably likely to materially affect our liquidity and capital resources in the future.

The sale of additional equity or convertible debt securities would likely be dilutive to our shareholders.

The sale of additional equity or convertible debt securities would 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.

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Effects of COVID-19

The COVID-19 pandemic and resulting global disruptions have continued to affect our businesses, as well as those of our customers, suppliers, and third-party sellers.

To serve our customers while also providing for the safety of our employees and service providers, we have adapted numerous aspects of our logistics, transportation, supply chain, purchasing, and third-party seller processes.

Beginning in Q1 2020, we made numerous process updates across our operations worldwide, and adapted our fulfillment network, to implement employee and customer safety measures, such as enhanced cleaning and physical distancing, personal protective gear, disinfectant spraying, and temperature checks.

Since February 2020, we have hired over 250,000 full-time and part-time employees to increase our fulfillment network capacity.

We incurred more than $2.5 billion in COVID-19 related costs in Q3 2020, for a total of more than $7.5 billion in the first three quarters of 2020.

We will continue to prioritize employee and customer safety and comply with evolving federal, state, and local standards as well as to implement standards or processes that we determine to be in the best interests of our employees, customers, and communities.

As reflected in the discussion below, the impact of the pandemic and actions taken in response to it had varying effects on our Q3 2020 results of operations.

As reflected in the discussion below, the impact of the COVID-19 pandemic and actions taken in response to it had varying effects on our Q1 2021 results of operations.

Higher net sales in the North America and International segments reflect increased demand, particularly as people are staying at home, including for household staples and other essential and home products, partially offset by fulfillment network capacity and supply chain constraints.

Other effects in the North America and International segments include increased cost of sales and fulfillment costs as a percentage of net sales, primarily due to the impact of lower productivity, costs to maintain safe workplaces, and increased employee hiring and benefits.

We expect the effects of fulfillment network capacity and supply chain constraints, elevated collection risk in our accounts receivable, and increased cost of sales and fulfillment costs as a percentage of net sales to continue into all or portions of Q4 2020.

Other effects in the North America and International segments include increased fulfillment costs and cost of sales as a percentage of net sales, primarily due to the impact of lower productivity and costs to maintain safe workplaces.

We incurred approximately $2.0 billion in COVID-19 related costs in Q1 2021.

We expect the effects of fulfillment network capacity and supply chain constraints, elevated collection risk in our accounts receivable, and the negative impact on fulfillment costs and cost of sales as a percentage of net sales to continue into all or portions of Q2 2021.

However, it is not possible to determine the duration and scope of the pandemic, including any recurrence, the actions taken in response to the pandemic, the scale and rate of economic recovery from the pandemic, any ongoing effects on consumer demand and spending patterns, or other impacts of the pandemic, and whether these or other currently unanticipated consequences of the pandemic are reasonably likely to materially affect our results of operations.

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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.

Service sales primarily represent third-party seller fees, which includes commissions and any related fulfillment and shipping fees, AWS sales, advertising services, Amazon Prime membership fees, and certain digital content subscriptions.

Net sales information is as follows (in millions):

Three Months Ended

September 30, Nine Months Ended

September 30,

2019 2020 2019 2020

North America $ 46,127 $ 64,366

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International 18 60

AWS 35 29 38 30

Consolidated 26 44

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International 20 50

AWS 35 29 38 30

Consolidated 27 41

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International 25 28

AWS 13 12 13 12

Consolidated 100 % 100 %

Sales increased 37% in Q3 2020 and 35% for the nine months ended September 30, 2020 compared to the comparable prior year periods.

Changes in foreign currency exchange rates impacted net sales by $691 million for Q3 2020 and by $(278) million for the nine months ended September 30, 2020.

For a discussion of the effect on sales growth of foreign exchange rates, see “Effect of Foreign Exchange Rates” below.

North America sales increased 39% in Q3 2020, and 37% for the nine months ended September 30, 2020 compared to the comparable prior year periods.

Sales increased 44% in Q1 2021 compared to the comparable prior year period.

Changes in foreign currency exchange rates impacted net sales by $2.1 billion for Q1 2021.

For a discussion of the effect of foreign exchange rates on sales growth, see “Effect of Foreign Exchange Rates” below.

North America sales increased 40% in Q1 2021, compared to the comparable prior year period.

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, and increased demand, including for household staples and other essential and home products, partially offset by fulfillment network capacity and supply chain constraints.

International sales increased 37% in Q3 2020 and 31% for the nine months ended September 30, 2020 compared to the comparable prior year periods.

International sales increased 60% in Q1 2021, compared to the comparable prior year period.

The sales growth primarily reflects increased unit sales, including sales by third-party sellers.

Changes in foreign currency exchange rates impacted International net sales by $747 million for Q3 2020, and by $(59) million for the nine months ended September 30, 2020.

AWS sales increased 29% in Q3 2020 and 30% for the nine months ended September 30, 2020 compared to the comparable prior year periods.

Changes in foreign currency exchange rates impacted International net sales by $1.9 billion for Q1 2021.

AWS sales increased 32% in Q1 2021, compared to the comparable prior year period.

The sales growth primarily reflects increased customer usage, partially offset by pricing changes.

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Three Months Ended

September 30, Nine Months Ended

September 30,

2019 2020 2019 2020

Operating Income (Loss):

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Consolidated $ 3,989 $ 8,865

Operating income increased from $3.2 billion in Q3 2019 to $6.2 billion in Q3 2020, and increased from $10.7 billion for the nine months ended September 30, 2019, to $16.0 billion for the nine months ended September 30, 2020.

Operating income increased from $4.0 billion in Q1 2020 to $8.9 billion in Q1 2021.

We believe that operating income (loss) is a more meaningful measure than gross profit and gross margin due to the diversity of our product catego ries and services.

The increase in North America operating income in absolute dollars in Q3 2020 and for the nine months ended September 30, 2020, compared to the comparable prior year periods, 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 shipping and fulfillment costs due in part to COVID-19.

The increase in North America operating income in absolute dollars in Q1 2021 compared to the comparable prior year period, 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 shipping and fulfillment costs due in part to COVID-19.

We expect North America operating income to continue to be negatively impacted through at least Q2 2021 by COVID-19 related costs.

The International operating income in Q3 2020 and for the nine months ended September 30, 2020 , as compared to the operating loss in the comparable prior year periods, 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 shipp ing and fulfillment costs due in part to COVID-19.

Changes in foreign exchange rates impacted operating income by $8 million for Q1 2021.

The International operating income in Q1 2021 as compared to the operating loss in the comparable prior year period, 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 shipp ing and fulfillment costs due in part to COVID-19.

We expect International operating income to continue to be negatively impacted through at least Q2 2021 by COVID-19 related costs.

Changes in foreign exchange rates impacted operating income (loss) by $152 million for Q3 2020, and by $180 million for the nine months ended September 30, 2020.

The increase in AWS operating income in absolute dollars in Q3 2020 and for the nine months ended September 30, 2020, compared to the comparable prior year periods, is primarily due to increased customer usage and cost structure productivity, including a reduction in depreciation and amortization expense from our change in the estimated useful life of our servers, partially offset by increased spending on technology infrastructure and payroll and related expenses, bo th of which were primarily driven by additional investments to support the business growth, and reduced prices for our customers .

Changes in foreign exchange rates impacted operating income by $(20) million for Q3 2020, and by $127 million for the nine months ended September 30, 2020.

Changes in foreign exchange rates impacted operating income by $270 million for Q1 2021.

The increase in AWS operating income in absolute dollars in Q1 2021 compared to the comparable prior year period is primarily due to increased customer usage and cost structure productivity, partially offset by increased spending on technology infrastructure, payroll and related expenses, and software licensing expenses, all of which were primarily driven by additional investments to support the business growth, and reduced prices for our customers.

Changes in foreign exchange rates impacted operating income by $(171) million for Q1 2021.

Operating Expenses

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Three Months Ended

September 30, Nine Months Ended

September 30,

2019 2020 2019 2020

Operating expenses:

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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 Q3 2020 and for the nine months ended September 30, 2020, compared to the comparable prior year periods, is primarily due to increased product and shipping costs resulting from increased sales.

The increase in cost of sales in absolute dollars in Q1 2021 compared to the comparable prior year period, is primarily due to increased product and shipping costs resulting from increased sales.

We expect cost of sales as a percentage of net sales to continue to be negatively impacted through at least Q2 2021 by COVID-19 related costs.

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 $9.6 billion and $15.1 billion in Q3 2019 and Q3 2020, and $25.1 billion and $39.7 billion for the nine months ended September 30, 2019 and 2020.

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.

Shipping costs, which include sortation and delivery centers and transportation costs, were $10.9 billion and $17.2 billion in Q1 2020 and Q1 2021.

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 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.

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Additionally, sales by our sellers have higher payment processing and related transaction costs as a percentage of net sales compared to our retail sales because payment processing costs are based on the gross purchase price of underlying transactions.

The increase in fulfillment costs in absolute dollars in Q3 2020 and for the nine months ended September 30, 2020, compared to the comparable prior year periods, is primarily due to variable costs corresponding with increased product and service sales volume and inventory levels, costs from expanding our fulfillment network, and the COVID-19 related impact of lower productivity, costs to maintain safe workplaces, and increased employee hiring and benefits.

The increase in fulfillment costs in absolute dollars in Q1 2021, compared to the comparable prior year period, is primarily due to variable costs corresponding with increased product and service sales volume and inventory levels, costs from expanding our fulfillment network, and the COVID-19 related impact of lower productivity and costs to maintain safe workplaces.

We expect fulfillment costs as a percentage of net sales to continue to be negatively impacted through at least Q2 2021 by COVID-19 related costs.

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These costs are allocated to segments based on usage.

The increase in technology and content costs in absolute dollars in Q3 2020 and for the nine months ended September 30, 2020, compared to the comparable prior year periods, is primarily due to 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 and an increase in spending on technology infrastructure, offset by a reduction in depreciation and amortization expense from our change in the estimated useful life of our servers.

The increase in technology and content costs in absolute dollars in Q1 2021, compared to the comparable prior year period, 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.

See Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” of our 2020 Annual Report on Form 10-K for a discussion of how management views advances in technology and the importance of innovation.

See Item 1 of Part I, “Financial Statements — Note 1 — Accounting Policies and Supplemental Disclosures — Use of Estimates” for additional information on our change in the estimated useful life of our servers.

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.

We direct customers to our stores primarily through a number of marketing channels, such as our sponsored search, social and online advertising, third party customer referrals, 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 Q3 2020 and for the nine months ended September 30, 2020, compared to the comparable prior year periods, is primarily due to increased payroll and related expenses for personnel engaged in marketing and selling activities, partially offset by lower spending on marketing channels as a result of COVID-19.

We expect marketing costs as a percentage of net sales to continue to be favorably impacted through at least Q4 2020 by COVID-19.

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.

The increase in marketing costs in absolute dollars in Q1 2021, compared to the comparable prior year period, is primarily due to increased payroll and related expenses for personnel engaged in marketing and selling activities and higher spending on marketing channels.

While costs associated with Amazon Prime membership benefits 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.

General and Administrative

The increase in general and administrative costs in absolute dollars in Q3 2020 and for the nine months ended September 30, 2020, compared to the comparable prior year periods, is primarily due to increases in payroll and related expenses.

The increase in general and administrative costs in absolute dollars in Q1 2021, compared to the comparable prior year period, is primarily due to increases in payroll and related expenses and professional service fees.

Other Operating Expense (Income), Net

Other operating expense (income), net was $55 million and $62 million for Q3 2019 and Q3 2020, and $136 million and $421 million for the nine months ended September 30, 2019 and 2020, and was primarily related to a lease impairment in Q2 2020 and the amortization of intangible assets.

Other operating expense (income), net was $70 million and $38 million for Q1 2020 and Q1 2021, and was primarily related to the amortization of intangible assets.

Interest Income and Expense

Our interest income was $224 million and $118 million during Q3 2019 and Q3 2020, and $621 million and $455 million for the nine months ended September 30, 2019 and 2020.

Our interest income was $202 million and $105 million during Q1 2020 and Q1 2021.

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 $396 million and $428 million during Q3 2019 and Q3 2020, and $1.1 billion and $1.2 billion for the nine months ended September 30, 2019 and 2020, and was primarily related to debt and finance leases.

Interest expense was $402 million and $399 million during Q1 2020 and Q1 2021, and was primarily related to debt and finance leases.

Other Income (Expense), Net

Other income (expense), net was $(353) million and $925 million during Q3 2019 and Q3 2020, and $(215) million and $1.2 billion for the nine months ended September 30, 2019 and 2020.

The primary components of other income (expense), net are related to warrant and equity securities valuations and adjustments and foreign currency.

Our income tax provisions for the nine months ended September 30, 2019 and 2020 were $1.6 billion and $2.3 billion, which included $1.0 billion and $1.5 billion of net discrete tax benefits primarily attributable to excess tax benefits from stock-based compensation.

Other income (expense), net was $(406) million and $1.7 billion during Q1 2020 and Q1 2021.

The primary components of other income (expense), net are related to equity securities valuations and adjustments, equity warrant valuations, and foreign currency.

Our income tax provisions for the three months ended March 31, 2020 and 2021 were $744 million and $2.2 billion, which included $273 million and $349 million of net discrete tax benefits primarily attributable to excess tax benefits from stock-based compensation.

See Item 1 of Part I, “Financial Statements — Note 7 — Income Taxes” for additional information.

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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 the trailing twelve months ended September 30, 2019 and 2020 (in millions):

Twelve Months Ended

September 30,

Net cash provided by (used in) operating activities $ 39,732 $ 67,213

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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 the trailing twelve months ended September 30, 2019 and 2020 (in millions):

Twelve Months Ended

September 30,

Net cash provided by (used in) operating activities $ 39,732 $ 67,213

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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 the trailing twelve months ended September 30, 2019 and 2020 (in millions):

Twelve Months Ended

September 30,

Net cash provided by (used in) operating activities $ 39,732 $ 67,213

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___________________

(1) For the twelve months ended September 30, 2019 and 2020, this amount relates to equipment included in “Property and equipment acquired under finance leases” of $13,222 million and $13,075 million.

(2) For the twelve months ended September 30, 2019 and 2020, this amount relates to property included in “Principal repayments of finance leases” of $8,754 million and $11,054 million.

(1) For the twelve months ended March 31, 2020 and 2021, this amount relates to equipment included in “Property and equipment acquired under finance leases” of $13,262 million and $11,489 million.

(2) For the twelve months ended March 31, 2020 and 2021, this amount relates to property included in “Principal repayments of finance leases” of $10,013 million and $11,448 million.

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.

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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):

Three Months Ended September 30, Nine Months Ended September 30,

2019 2020 2019 2020

Reported Exchange

Effect (1) At Prior

Rates (2) As Reported Exchange

Effect (1) At Prior

Three Months Ended March 31,

Reported Exchange

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(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.

We provided guidance on October 29, 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 October 29, 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 thos e outlined in Item 1A of Part II, “Risk Factors.” This guidance reflects our estimates as of October 29, 2020 regarding the impact of the COVID-19 pandemic on our operations, including those discussed above, and is highly dependent on numerous factors that we may not be able to predict or control, including:

We provided guidance on April 29, 2021, in our earnings release furnished on Form 8-K as set forth below.

These forward-looking statements reflect Amazon.com’s expectations as of April 29, 2021, 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 thos e outlined in Item 1A of Part II, “Risk Factors.” This guidance reflects our estimates as of April 29, 2021 regarding the impact of the COVID-19 pandemic on our operations, including those discussed above, and is highly dependent on numerous factors that we may not be able to predict or control, including:

the duration and scope of the pandemic, including any recurrence;

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and consumer demand and spending patterns, as well as the effects on suppliers, creditors, and third-party sellers, all of which are uncertain.

This guidance also assumes the impacts on consumer demand and spending patterns, including impacts due to concerns over the current economic outlook, will be in line with those experienced during the fourth quarter to date, and the additional assumptions set forth below.

However, it is not possible to determine the ultimate impact on our operations for the fourth quarter, or whether other currently unanticipated direct or indirect consequences of the pandemic are reasonably likely to materially affect our operations.

Fourth Quarter 2020 Guidance

• Net sales are expected to be between $112.0 billion and $121.0 billion, or to grow between 28% and 38% compared with fourth quarter 2019.

This guidance also assumes the impacts on consumer demand and spending patterns, including impacts due to concerns over the current economic outlook, will be in line with those experienced during the second quarter of 2021 to date, and the additional assumptions set forth below.

However, it is not possible to determine the ultimate impact on our operations for the second quarter of 2021, or whether other currently unanticipated direct or indirect consequences of the pandemic are reasonably likely to materially affect our operations.

Second Quarter 2021 Guidance

• Net sales are expected to be between $110.0 billion and $116.0 billion, or to grow between 24% and 30% compared with second quarter 2020.

This guidance anticipates a favorable impact of approximately 200 basis points from foreign exchange rates.

• Operating income is expected to be between $1.0 billion and $4.5 billion, compared with $3.9 billion in fourth quarter 2019.

• Operating income is expected to be between $4.5 billion and $8.0 billion, compared with $5.8 billion in second quarter 2020.

This guidance assumes approximately $1.5 billion of costs related to COVID-19.

• This guidance assumes that Prime Day occurs in second quarter 2021.

• This guidance assumes, among other things, that no additional business acquisitions, investments, restructurings, or legal settlements are concluded.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis