What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-28 compared with 2022-07-29 · 84 added, 78 removed, 234 unchanged (41% of the section changed)

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Forward-looking statements reflect management’s current expectations and are inherently uncertain.

Actual results and outcomes could differ materially for a variety of reasons, including, among others, fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, inflation, regional labor market and global supply chain constraints, 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, global economic conditions and additional or unforeseen effects from the COVID-19 pandemic amplify many of these risks.

Actual results and outcomes could differ materially for a variety of reasons, including, among others, fluctuations in foreign exchange rates, changes in global economic conditions and customer spending, inflation, interest rates, regional labor market and global supply chain constraints, 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, global economic and geopolitical conditions and additional or unforeseen effects from the COVID-19 pandemic amplify many of these risks.

These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results or outcomes to differ significantly from management’s expectations, are described in greater detail in Item 1A of Part II, “Risk Factors.”

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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 June 30, 2022, we would have recorded an additional cost of sales of approximately $425 million.

As a measure of sensitivity, for every 1% of additional inventory valuation allowance as of September 30, 2022, we would have recorded an additional cost of sales of approximately $405 million.

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

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Three Months Ended

June 30, Six Months Ended

June 30, Twelve Months Ended

September 30, Nine Months Ended

September 30, Twelve Months Ended

September 30,

2021 2022 2021 2022 2021 2022

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Financing activities (2,776) 3,016 9,391 9,632 7,575 6,532

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 $96.0 billion and $60.7 billion as of December 31, 2021 and June 30, 2022.

Amounts held in foreign currencies were $22.7 billion and $12.4 billion as of December 31, 2021 and June 30, 2022.

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 $96.0 billion and $58.7 billion as of December 31, 2021 and September 30, 2022.

Amounts held in foreign currencies were $22.7 billion and $11.6 billion as of December 31, 2021 and September 30, 2022.

Our foreign currency balances include British Pounds, Canadian Dollars, Euros, and Japanese Yen.

Cash provided by (used in) operating activities was $12.7 billion and $9.0 billion for Q2 2021 and Q2 2022, and $16.9 billion and $6.2 billion for the six months ended June 30, 2021 and 2022.

Cash provided by (used in) operating activities was $7.3 billion and $11.4 billion for Q3 2021 and Q3 2022, and $24.2 billion and $17.6 billion for the nine months ended September 30, 2021 and 2022.

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 decrease in operating cash flow for the trailing twelve months ended June 30, 2022, compared to the comparable prior year period, was primarily due to changes in working capital, as well as changes in net income (loss), excluding non-cash expenses.

The decrease in operating cash flow for the trailing twelve months ended September 30, 2022, compared to the comparable prior year period, was primarily due to changes in working capital, as well as changes in net income (loss), excluding non-cash expenses.

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 $(22.1) billion and $(12.1) billion for Q2 2021 and Q2 2022, and $(30.7) billion and $(11.2) billion for the six months ended June 30, 2021 and 2022, with the variability caused primarily by purchases, sales, and maturities of marketable securities.

Cash capital expenditures were $13.0 billion and $14.1 billion during Q2 2021 and Q2 2022, and $24.2 billion and $27.8 billion for the six months ended June 30, 2021 and 2022, which primarily reflect investments in technology infrastructure (the majority of which is to support AWS business growth) and in additional capacity to support our fulfillment network.

We expect to continue these investments over time, with increased spending on technology infrastructure in 2022.

We made cash payments, net of acquired cash, related to acquisition and other investment activity of $320 million and $259 million during Q2 2021 and Q2 2022, and $950 million and $6.6 billion for the six months

ended June 30, 2021 and 2022.

We funded the acquisition of MGM Holdings Inc.

Cash provided by (used in) investing activities was $(14.8) billion and $(15.6) billion for Q3 2021 and Q3 2022, and $(45.6) billion and $(26.8) billion for the nine months ended September 30, 2021 and 2022, with the variability caused primarily by purchases, sales, and maturities of marketable securities.

Cash capital expenditures were $14.8 billion and $15.0 billion during Q3 2021 and Q3 2022, and $38.9 billion and $42.9 billion for the nine months ended September 30, 2021 and 2022, which primarily reflect investments in technology infrastructure (the majority of which is to support AWS business growth) and in additional capacity to support our fulfillment network.

We expect to continue these investments over time, with increased spending on technology infrastructure and decreased spending on our fulfillment network in 2022.

We made cash payments, net of acquired cash, related to acquisition and other investment activity of $654 million and $885 million during Q3 2021 and Q3 2022, and $1.6 billion and $7.5 billion for the nine months ended September 30, 2021 and 2022.

We funded the

acquisition of MGM Holdings Inc.

with cash on hand.

We expect to fund the acquisition of 1Life Healthcare, Inc.

(One Medical) with cash on hand.

Cash provided by (used in) financing activities was $15.6 billion and $4.6 billion for Q2 2021 and Q2 2022, and $12.2 billion and $6.6 billion for the six months ended June 30, 2021 and 2022.

Cash inflows from financing activities resulted from proceeds from short-term debt, and other and long-term debt of $19.7 billion and $17.7 billion for Q2 2021 and Q2 2022, and $21.7 billion and $31.4 billion for the six months ended June 30, 2021 and 2022.

Cash outflows from financing activities resulted from repurchases of common stock, payments of short-term debt, and other, long-term debt, finance leases, and financing obligations of $4.0 billion and $13.1 billion in Q2 2021 and Q2 2022, and $9.6 billion and $24.8 billion for the six months ended June 30, 2021 and 2022.

Property and equipment acquired under finance leases was $1.6 billion and $61 million during Q2 2021 and Q2 2022, and $3.7 billion and $227 million for the six months ended June 30, 2021 and 2022.

We had no borrowings outstanding under the Credit Agreement, $8.2 billion of borrowings outstanding under the Commercial Paper Programs, and $935 million of borrowings outstanding under our Credit Facility as of June 30, 2022.

We expect to fund the acquisitions of 1Life Healthcare, Inc.

(One Medical) and iRobot Corporation with cash on hand.

Cash provided by (used in) financing activities was $(2.8) billion and $3.0 billion for Q3 2021 and Q3 2022, and $9.4 billion and $9.6 billion for the nine months ended September 30, 2021 and 2022.

Cash inflows from financing activities resulted from proceeds from short-term debt, and other and long-term debt of $2.4 billion and $12.4 billion for Q3 2021 and Q3 2022, and $24.1 billion and $43.9 billion for the nine months ended September 30, 2021 and 2022.

Cash outflows from financing activities resulted from repurchases of common stock, payments of short-term debt, and other, long-term debt, finance leases, and financing obligations of $5.1 billion and $9.4 billion in Q3 2021 and Q3 2022, and $14.7 billion and $34.2 billion for the nine months ended September 30, 2021 and 2022.

Property and equipment acquired under finance leases was $1.7 billion and $131 million during Q3 2021 and Q3 2022, and $5.5 billion and $358 million for the nine months ended September 30, 2021 and 2022.

We had no borrowings outstanding under the Credit Agreement, $11.7 billion of borrowings outstanding under the Commercial Paper Programs, and $1.0 billion of borrowings outstanding under our Credit Facility as of September 30, 2022.

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

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tax purposes, which delays the deductibility of these expenses.

Cash taxes paid (net of refunds) were $1.8 billion and $3.1 billion for Q2 2021 and Q2 2022, and $2.6 billion and $3.6 billion for the six months ended June 30, 2021 and 2022.

As of December 31, 2021 and June 30, 2022, restricted cash, cash equivalents, and marketable securities were $260 million and $222 million.

Cash taxes paid (net of refunds) were $750 million and $742 million for Q3 2021 and Q3 2022, and $3.4 billion and $4.3 billion for the nine months ended September 30, 2021 and 2022.

As of December 31, 2021 and September 30, 2022, restricted cash, cash equivalents, and marketable securities were $260 million and $231 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.

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See Item 1 of Part I, “Financial Statements — Note 8 — Segment Information.”

Macroeconomic factors, including increased inflation rates, the prolonged COVID-19 pandemic, global supply chain constraints, and global economic and geopolitical developments, have direct and indirect impacts on our results of operations that are difficult to isolate and quantify.

In addition, the COVID-19 pandemic and the related societal impacts, such as lockdowns, caused a significant increase in growth rates across our North America and International segments throughout much of 2020 and 2021, and we are seeing a return to pre-pandemic demand patterns as consumers’ mobility increases.

The factors described above contributed to a deceleration in our net sales growth rate and increases in our operating costs during Q2 2022, particularly across our North America and International segments, primarily due to a return to more normal, seasonal demand volumes in relation to our fulfillment network fixed costs as well as increased transportation costs, increased wage rates and incentives, and fulfillment network inefficiencies resulting from regional labor market and global supply chain constraints.

Macroeconomic factors, including increased inflation and interest rates, the prolonged COVID-19 pandemic, global supply chain constraints, and global economic and geopolitical developments, have direct and indirect impacts on our results of operations that are difficult to isolate and quantify.

These factors contributed to increases in our operating costs during Q3 2022, particularly across our North America and International segments, primarily due to a return to more normal, seasonal demand volumes in relation to our fulfillment network fixed costs, increased transportation and utility costs, and increased wage rates.

In addition, rising fuel, utility, and food costs, rising interest rates, and recessionary fears may impact customer demand.

We expect some or all of these factors to continue to impact our operations into Q4 2022.

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2021 2022 2021 2022

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Consolidated 15 15 28 10

Year-over-year Percentage Growth (Decline), excluding the effect of foreign exchange rates:

Year-over-year Percentage Growth, excluding the effect of foreign exchange rates:

North America 10 % 20 % 22 % 13 %

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Consolidated 100 % 100 % 100 % 100 %

Sales increased 7% in Q2 2022, and 7% for the six months ended June 30, 2022 compared to the comparable prior year periods.

Changes in foreign currency exchange rates impacted net sales by $(3.6) billion for Q2 2022 and by $(5.4) billion for the six months ended June 30, 2022.

Sales increased 15% in Q3 2022, and 10% for the nine months ended September 30, 2022 compared to the comparable prior year periods.

Changes in foreign currency exchange rates impacted net sales by $(5.0) billion for Q3 2022 and by $(10.5) billion for the nine months ended September 30, 2022.

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

North America sales increased 10% in Q2 2022, and 9% for the six months ended June 30, 2022 compared to the comparable prior year periods.

North America sales increased 20% in Q3 2022, and 13% for the nine months ended September 30, 2022 compared to the comparable prior year periods.

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

Increased unit sales were driven largely by our continued focus on price, selection, and convenience for our customers, including from our shipping offers.

International sales decreased 12% in Q2 2022, and 9% for the six months ended June 30, 2022 compared to the comparable prior year periods, primarily due to the impact of foreign currency exchange rates, and also due to decreased unit sales, partially offset by increased subscription services and advertising sales.

Unit sales decreased compared to the higher levels we experienced in the comparable prior year periods due to widespread regional and national COVID-19 lockdowns in the 2021 periods.

Changes in foreign currency exchange rates impacted International net sales by $(3.5) billion for Q2 2022, and by $(5.3) billion for the six months ended June 30, 2022 .

AWS sales increased 33% in Q2 2022, and 35% for the six months ended June 30, 2022 compared to the comparable prior year periods.

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.

International sales decreased 5% in Q3 2022, and 8% for the nine months ended September 30, 2022, compared to the comparable prior year periods, primarily due to the impact of foreign currency exchange rates, partially offset by increased unit sales, including sales by third-party sellers, advertising sales, and subscription services.

Increased unit sales were driven largely by our continued focus on price, selection, and convenience for our customers, including from our shipping offers.

Changes in foreign currency exchange rates impacted International net sales by $(4.9) billion for Q3 2022, and by $(10.2) billion for the nine months ended September 30, 2022 .

AWS sales increased 27% in Q3 2022, and 32% for the nine months ended September 30, 2022 compared to the comparable prior year periods.

The sales growth primarily reflects increased customer usage, partially offset by pricing changes, primarily driven by long-term customer contracts.

Operating Income (Loss)

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2021 2022 2021 2022

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Consolidated $ 4,852 $ 2,525 $ 21,419 $ 9,511

Operating income decreased from $7.7 billion in Q2 2021 to $3.3 billion in Q2 2022, and decreased from $16.6 billion for the six months ended June 30, 2021 to $7.0 billion for the six months ended June 30, 2022.

Operating income decreased from $4.9 billion in Q3 2021 to $2.5 billion in Q3 2022, and decreased from $21.4 billion for the nine months ended September 30, 2021 to $9.5 billion for the nine months ended September 30, 2022.

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

The North America operating loss in Q2 2022 and for the six months ended June 30, 2022, as compared to the operating income in the comparable prior year periods, is primarily due to increased shipping and fulfillment costs, due in part to increased investments in our fulfillment network, increased transportation costs, increased wage rates and incentives, and fulfillment network inefficiencies, and growth in certain operating expenses, partially offset by increased unit sales, including sales by third-party sellers, and advertising sales.

Changes in foreign exchange rates positively impacted operating income (loss) by $61 million for Q2 2022, and by $103 million for the six months ended June 30, 2022.

The International operating loss in Q2 2022 and for the six months ended June 30, 2022, as compared to the operating income in the comparable prior year periods, is primarily due to:

increased shipping and fulfillment costs, due in part to increased investments in our fulfillment network, increased transportation costs, increased wage rates and incentives, and fulfillment network inefficiencies;

decreased unit sales;

and growth in certain operating expenses;

partially offset by increased advertising sales.

Changes in foreign exchange rates negatively impacted operating income (loss) by $231 million for Q2 2022, and by $310 million for the six months ended June 30, 2022.

The increase in AWS operating income in absolute dollars in Q2 2022 and for the six months ended June 30, 2022, 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 lives of our servers and networking equipment, partially offset by increased payroll and related expenses and spending on technology infrastructure, all of which were primarily driven by additional investments to support AWS business growth, and reduced prices for our customers.

Changes in foreign exchange rates positively impacted operating income by $335 million for Q2 2022, and by $498 million for the six months ended June 30, 2022.

The North America operating loss in Q3 2022, as compared to the operating income in the comparable prior year period, is primarily due to increased shipping and fulfillment costs, due in part to increased investments in our fulfillment network and increased transportation costs, and growth in certain operating expenses, partially offset by increased unit sales, including sales by third-party sellers, and advertising sales.

The North America operating loss for the nine months ended September 30, 2022, as compared to the operating income in the comparable prior year period, is primarily due to increased shipping and fulfillment costs, due in part to increased investments in our fulfillment network, increased transportation costs, increased wage rates and incentives, and fulfillment network inefficiencies, and growth in certain operating expenses, partially offset by increased unit sales, including sales by third-party sellers, and advertising sales.

Changes in foreign exchange rates positively impacted operating income (loss) by $95 million for Q3 2022, and by $198 million for the nine months ended September 30, 2022.

The increase in International operating loss in absolute dollars in Q3 2022, compared to the comparable prior year period, is primarily due to increased shipping and fulfillment costs, due in part to increased investments in our fulfillment network and increased transportation costs, and growth in certain operating expenses, partially offset by increased unit sales, including sales by third-party sellers, and advertising sales.

The International operating loss for the nine months ended September 30, 2022, as compared to the operating income in the comparable prior year period, is primarily due to increased shipping and fulfillment costs, due in part to increased investments in our fulfillment network, increased transportation costs, and increased wage rates and incentives, and growth in certain operating expenses, partially offset by increased advertising sales.

Changes in foreign exchange rates negatively impacted operating income (loss) by $216 million for Q3 2022, and by $526 million for the nine months ended September 30, 2022.

The increase in AWS operating income in absolute dollars in Q3 2022 and for the nine months ended September 30, 2022, compared to the comparable prior year periods, is primarily due to increased sales and cost structure productivity, including a reduction in depreciation and amortization expense from our change in the estimated useful lives of our servers and networking equipment, partially offset by increased payroll and related expenses and spending on technology infrastructure, all of which were primarily driven by additional investments to support AWS business growth.Changes in foreign exchange rates positively impacted operating income by $478 million for Q3 2022, and by $976 million for the nine months ended September 30, 2022.

Operating Expenses

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2021 2022 2021 2022

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Total operating expenses $ 105,960 $ 124,576 $ 310,991 $ 355,268

Year-over-year Percentage Growth:

Year-over-year Percentage Growth (Decline):

Cost of sales 10 % 12 % 23 % 7 %

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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 Q2 2022, and for the six months ended June 30, 2022, compared to the comparable prior year periods, is primarily due to increased product and shipping costs resulting from increased sales, increased investments in our fulfillment network, as well as increased transportation costs, increased wage rates and incentives, and fulfillment network inefficiencies resulting from regional labor market and global supply chain constraints.

Changes in foreign exchange rates reduced cost of sales by $2.5 billion for Q2 2022, and by $3.8 billion for the six months ended June 30, 2022.

The increase in cost of sales in absolute dollars in Q3 2022, compared to the comparable prior year period, is primarily due to increased product and shipping costs resulting from increased sales, increased investments in our fulfillment network, increased transportation costs, and increased wage rates.

The increase in cost of sales in absolute dollars for the nine months ended September 30, 2022, compared to the comparable prior year period, is primarily due to increased product and shipping costs resulting from increased sales, increased investments in our fulfillment network, increased transportation costs, increased wage rates and incentives, and fulfillment network inefficiencies.

Changes in foreign exchange rates reduced cost of sales by $3.6 billion for Q3 2022, and by $7.4 billion for the nine months ended September 30, 2022.

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 $17.7 billion and $19.3 billion in Q2 2021 and Q2 2022, and $34.9 billion and $38.9 billion for the six months ended June 30, 2021 and 2022.

Shipping costs, which include sortation and delivery centers and transportation costs, were $18.1 billion and $19.9 billion in Q3 2021 and Q3 2022, and $53.0 billion and $58.8 billion for the nine months ended September 30, 2021 and 2022.

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.

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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 Q2 2022 and for the six months ended June 30, 2022, compared to the comparable prior year periods, is primarily due to increased investments in our fulfillment network and variable costs corresponding with increased product and service sales volume and inventory levels, increased wage rates and incentives and fulfillment network inefficiencies resulting from regional labor market and global supply chain constraints.

The increase in fulfillment costs in absolute dollars in Q3 2022, compared to the comparable prior year period, is primarily due to increased investments in our fulfillment network and variable costs corresponding with increased product and service sales volume and inventory levels.

The increase in fulfillment costs in absolute dollars for the nine months ended September 30, 2022, compared to the comparable prior year period, is primarily due to increased investments in our fulfillment network and variable costs corresponding with increased product and service sales volume and inventory levels, and increased wage rates and incentives.

Changes in foreign exchange rates reduced fulfillment costs by $810 million for Q3 2022, and by $1.7 billion for the nine months ended September 30, 2022.

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.

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These costs are allocated to segments based on usage.

The increase in technology and content costs in absolute dollars in Q2 2022 and for the six months ended June 30, 2022, 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, partially offset by a reduction in depreciation and amortization expense from our change in the estimated useful lives of our servers and networking equipment.

The increase in technology and content costs in absolute dollars in Q3 2022 and for the nine months ended September 30, 2022, 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, partially offset by a reduction in depreciation and amortization expense from our change in the estimated useful lives of our servers and networking equipment.

See Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” of our 2021 Annual Report on Form 10-K for a discussion of how management views advances in technology and the importance of innovation.

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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 sales and marketing costs in absolute dollars in Q2 2022 and for the six months ended June 30, 2022, compared to the comparable prior year periods, is primarily due to increased payroll and related expenses for personnel engaged in marketing and selling activities and higher marketing spend.

The increase in sales and marketing costs in absolute dollars in Q3 2022 and for the nine months ended September 30, 2022, compared to the comparable prior year periods, is primarily due to increased payroll and related expenses for personnel engaged in marketing and selling activities and higher marketing spend.

While costs associated with Amazon Prime membership benefits and other shipping offers are not included in sales and 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 Q2 2022 and for the six months ended June 30, 2022, compared to the comparable prior year periods, is primarily due to increases in payroll and related expenses and professional fees.

The increase in general and administrative costs in absolute dollars in Q3 2022 and for the nine months ended September 30, 2022, compared to the comparable prior year periods, is primarily due to increases in payroll and related expenses and professional fees.

Other Operating Expense (Income), Net

Other operating expense (income), net was $11 million and $90 million for Q2 2021 and Q2 2022, and $49 million and $339 million for the six months ended June 30, 2021 and 2022, and was primarily related to impairments of property and equipment and operating leases in 2022 and the amortization of intangible assets.

Other operating expense (income), net was $(11) million and $165 million for Q3 2021 and Q3 2022, and $38 million and $504 million for the nine months ended September 30, 2021 and 2022, and was primarily related to impairments of property and equipment and operating leases in 2022 and the amortization of intangible assets.

Interest Income and Expense

Our interest income was $106 million and $159 million during Q2 2021 and Q2 2022, and $211 million and $267 million for the six months ended June 30, 2021 and 2022.

Our interest income was $119 million and $277 million during Q3 2021 and Q3 2022, and $330 million and $544 million for the nine months ended September 30, 2021 and 2022.

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 $435 million and $584 million during Q2 2021 and Q2 2022, and $834 million and $1.1 billion for the six months ended June 30, 2021 and 2022, and was primarily related to debt and finance leases.

Interest expense was $493 million and $617 million during Q3 2021 and Q3 2022, and $1.3 billion and $1.7 billion for the nine months ended September 30, 2021 and 2022, and was primarily related to debt and finance leases.

Other Income (Expense), Net

Other income (expense), net was $1.3 billion and $(5.5) billion during Q2 2021 and Q2 2022, and $3.0 billion and $(14.1) billion for the six months ended June 30, 2021 and 2022.

Other income (expense), net was $(163) million and $759 million during Q3 2021 and Q3 2022, and $2.8 billion and $(13.4) billion for the nine months ended September 30, 2021 and 2022.

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

Included in other income (expense), net is a marketable equity securities valuation loss of $3.9 billion in Q2 2022, and $11.5 billion for the six months ended June 30, 2022, from our equity investment in Rivian.

Our income tax provision for the six months ended June 30, 2021 was $3.0 billion, which included $1.4 billion of net discrete tax benefits primarily attributable to excess tax benefits from stock-based compensation and audit-related developments.

Our income tax benefit for the six months ended June 30, 2022 was $2.1 billion, which included $3.2 billion of net discrete tax benefits primarily attributable to a valuation loss related to our equity investment in Rivian.

Included in other income (expense), net is a marketable equity securities valuation gain (loss) of $1.1 billion in Q3 2022, and $(10.4) billion for the nine months ended September 30, 2022, from our equity investment in Rivian.

Our income tax provision for the nine months ended September 30, 2021 was $4.2 billion, which included $1.7 billion of net discrete tax benefits primarily attributable to excess tax benefits from stock-based compensation and audit-related developments.

Our income tax benefit for the nine months ended September 30, 2022 was $2.0 billion, which included $3.3 billion of net discrete tax benefits primarily attributable to a valuation loss related to our equity investment in Rivian.

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 June 30, 2021 and 2022 (in millions):

Twelve Months Ended

September 30,

Net cash provided by (used in) operating activities $ 54,671 $ 39,665

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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 June 30, 2021 and 2022 (in millions):

Twelve Months Ended

September 30,

Net cash provided by (used in) operating activities $ 54,671 $ 39,665

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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 June 30, 2021 and 2022 (in millions):

Twelve Months Ended

September 30,

Net cash provided by (used in) operating activities $ 54,671 $ 39,665

8 unchanged sentences

___________________

(1) For the twelve months ended June 30, 2021 and 2022, this amount relates to equipment included in “Property and equipment acquired under finance leases, net of remeasurements and modifications” of $9,976 million and $3,579 million.

(2) For the twelve months ended June 30, 2021 and 2022, this amount relates to property included in “Principal repayments of finance leases” of $11,435 million and $9,789 million.

(1) For the twelve months ended September 30, 2021 and 2022, this amount relates to equipment included in “Property and equipment acquired under finance leases, net of remeasurements and modifications” of $8,149 million and $1,966 million.

(2) For the twelve months ended September 30, 2021 and 2022, this amount relates to property included in “Principal repayments of finance leases” of $11,271 million and $8,561 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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Dollar is as follows (in millions):

Three Months Ended June 30, Six Months Ended June 30,

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

2021 2022 2021 2022

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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 July 28, 2022, in our earnings release furnished on Form 8-K as set forth below.

These forward-looking statements reflect Amazon.com’s expectations as of July 28, 2022, and are subject to substantial uncertainty.

Our results are inherently unpredictable and may be materially affected by many factors, such as uncertainty regarding the impacts of the COVID-19 pandemic, fluctuations in foreign exchange rates, changes in global economic conditions and customer demand and spending, inflation, regional labor market and global supply chain constraints, world events, the rate of growth of the Internet, online commerce, and cloud services, as well as those outlined in Item 1A of Part II, “Risk Factors.” This guidance reflects our estimates as of July 28, 2022 regarding the impacts of the COVID-19 pandemic on our operations as well as the effect of other factors discussed above.

Third Quarter 2022 Guidance

• Net sales are expected to be between $125.0 billion and $130.0 billion, or to grow between 13% and 17% compared with third quarter 2021.

We provided guidance on October 27, 2022, 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 27, 2022, and are subject to substantial uncertainty.

Our results are inherently unpredictable and may be materially affected by many factors, such as uncertainty regarding the impacts of the COVID-19 pandemic, fluctuations in foreign exchange rates, changes in global economic and geopolitical conditions and customer demand and spending (including the impact of recessionary fears), inflation, interest rates, regional labor market and global supply chain constraints, world events, the rate of growth of the Internet, online commerce, and cloud services, as well as those outlined in Item 1A of Part II, “Risk Factors.” This guidance reflects our estimates as of October 27, 2022 regarding the impacts of the COVID-19 pandemic on our operations as well as the effect of other factors discussed above.

Fourth Quarter 2022 Guidance

• Net sales are expected to be between $140.0 billion and $148.0 billion, or to grow between 2% and 8% compared with fourth quarter 2021.

This guidance anticipates an unfavorable impact of approximately 460 basis points from foreign exchange rates.

• Operating income is expected to be between $0 and $3.5 billion, compared with $4.9 billion in third quarter 2021.

• Operating income is expected to be between $0 and $4.0 billion, compared with $3.5 billion in fourth quarter 2021.

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