AMAZON COM INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance, industry prospects, or future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward-looking. We use words such as anticipates, believes, expects, future, intends, and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results 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 demand and spending, inflation, interest rates, regional labor market 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 circumstances, developments, or events may give rise to or 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.” For additional information, see Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” of our 2022 Annual Report on Form 10-K. Critical Accounting Estimates The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. Critical accounting estimates are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the Company. Based on this definition, we have identified the critical accounting estimates addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Item 8 of Part II, “Financial Statements and Supplementary Data — Note 1 — Description of Business, Accounting Policies, and Supplemental Disclosures” of our 2022 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. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions. Inventories Inventories, consisting of products available for sale, are primarily accounted for using the first-in first-out method, and are valued at the lower of cost and net realizable value. This valuation requires us to make judgments, based on currently available information, about the likely method of disposition, such as through sales to individual customers, returns to product vendors, or liquidations, and expected recoverable values of each disposition category. These assumptions about future disposition of inventory are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future. As a measure of sensitivity, for every 1% of additional inventory valuation allowance as of March 31, 2023, we would have recorded an additional cost of sales of approximately $390 million. In addition, we enter into supplier commitments for certain electronic device components and certain products. These commitments are based on forecasted customer demand. If we reduce these commitments, we may incur additional costs. Income Taxes We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations, administrative practices, principles, and interpretations in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. In addition, our actual and forecasted earnings are subject to 22 Table of Contents change due to economic, political, and other conditions and significant judgment is required in determining our ability to use our deferred tax assets. 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 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 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. Developments in an audit, investigation, or other tax controversy could have a material effect on our operating results or cash flows in the period or periods for which that development occurs, as well as for prior and subsequent periods. We regularly assess the likelihood of an adverse outcome resulting from these proceedings to determine the adequacy of our tax accruals. Although we believe our tax estimates are reasonable, the final outcome of audits, investigations, and any other tax controversies could be materially different from our historical income tax provisions and accruals. Liquidity and Capital Resources Cash flow information is as follows (in millions): Three Months Ended March 31, Twelve Months Ended March 31, 2022 2023 2022 2023 Cash provided by (used in): Operating activities $ (2,790) $ 4,788 $ 39,324 $ 54,330 Investing activities 906 (15,806) (48,582) (54,313) Financing activities 1,990 6,354 11,757 14,082 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 $70.0 billion and $64.4 billion as of December 31, 2022 and March 31, 2023. Amounts held in foreign currencies were $18.3 billion and $13.3 billion as of December 31, 2022 and March 31, 2023. Our foreign currency balances include British Pounds, Canadian Dollars, Euros, and Japanese Yen. Cash provided by (used in) operating activities was $(2.8) billion and $4.8 billion for Q1 2022 and Q1 2023. 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. Cash received from our customers and other activities generally corresponds to our net sales. The increase in operating cash flow for the trailing twelve months ended March 31, 2023, compared to the comparable prior year period, was primarily due to changes in net income (loss), 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, customer and 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 $906 million and $(15.8) billion for Q1 2022 and Q1 2023, with the variability caused primarily by purchases, sales, and maturities of marketable securities. Cash capital expenditures were $13.7 billion and $13.1 billion during Q1 2022 and Q1 2023, 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 cash capital expenditures to decrease in 2023, primarily due to lower spending on our fulfillment network. We made cash payments, net of acquired cash, related to acquisition and other investment activity of $6.3 billion and $3.5 billion during Q1 2022 and Q1 2023. We funded the acquisitions of MGM Holdings Inc. in 2022 and One Medical in 2023 with cash on hand. We expect to fund the acquisition of iRobot Corporation with cash on hand. Cash provided by (used in) financing activities was $2.0 billion and $6.4 billion for Q1 2022 and Q1 2023. Cash inflows from financing activities resulted from proceeds from short-term debt, and other and long-term debt of $13.7 billion and $12.8 billion for Q1 2022 and Q1 2023. Cash outflows from financing activities resulted from repurchases of common stock, 23 Table of Contents payments of short-term debt, and other, long-term debt, finance leases, and financing obligations of $11.8 billion and $6.4 billion in Q1 2022 and Q1 2023. Property and equipment acquired under finance leases was $166 million and $8 million during Q1 2022 and Q1 2023. We had no borrowings outstanding under the two unsecured revolving credit facilities, $7.8 billion of borrowings outstanding under the commercial paper programs, $972 million of borrowings outstanding under our Credit Facility, and $8.0 billion of borrowings outstanding under the Term Loan as of March 31, 2023. See Item 1 of Part I, “Financial Statements — Note 5 — Debt” for additional information. 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. in those jurisdictions in which we would incur significant, additional costs upon repatriation of such amounts. Our U.S. taxable income is reduced by accelerated depreciation deductions and increased by the impact of capitalized research and development expenses. U.S. tax rules provide for enhanced accelerated depreciation deductions by allowing us to expense a portion of qualified property, primarily equipment. These enhanced deductions are scheduled to phase out annually from 2023 through 2026. Additionally, effective January 1, 2022, research and development expenses are required to be capitalized and amortized for U.S. tax purposes, which delays the deductibility of these expenses. As a result, we expect the cash taxes we pay in 2023 to increase significantly. Cash taxes paid (net of refunds) were $453 million and $619 million for Q1 2022 and Q1 2023. As of December 31, 2022 and March 31, 2023, restricted cash, cash equivalents, and marketable securities were $365 million and $391 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, we have purchase obligations and open purchase orders, including for inventory and capital expenditures, that support normal operations and are primarily due in the next twelve months. These purchase obligations and open purchase orders are generally cancellable in full or in part through the contractual provisions. We believe that cash flows generated from operations and our cash, cash equivalents, and marketable securities balances, as well as our borrowing arrangements, will be sufficient to meet our anticipated operating cash needs for at least the next twelve months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. See Item 1A of Part II, “Risk Factors.” We continually evaluate opportunities to sell additional equity or debt securities, obtain credit facilities, obtain finance and operating lease arrangements, enter into financing obligations, repurchase common stock, pay dividends, or repurchase, refinance, or otherwise restructure our debt for strategic reasons or to further strengthen our financial position. The sale of additional equity or convertible debt securities would be dilutive to our shareholders. In addition, we will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services, capital infrastructure, and technologies, which might affect our liquidity requirements or cause us to secure additional financing, or issue additional equity or debt securities. There can be no assurance that additional credit lines or financing instruments will be available in amounts or on terms acceptable to us, if at all. In addition, economic conditions and actions by policymaking bodies are contributing to rising interest rates and significant capital market volatility, which, along with increases in our borrowing levels, could increase our future borrowing costs. 24 Table of Contents Results of Operations We have organized our operations into three segments: North America, International, and AWS. These segments reflect the way the Company evaluates its business performance and manages its operations. See Item 1 of Part I, “Financial Statements — Note 8 — Segment Information.” Overview Macroeconomic factors, including inflation, increased interest rates, significant capital market and supply chain volatility, 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, rising fuel, utility, and food costs, rising interest rates, and recessionary fears may impact customer demand and our ability to forecast consumer spending patterns. We also expect the current macroeconomic environment and enterprise customer cost optimization efforts to impact our AWS revenue growth rates. We expect some or all of these factors to continue to impact our operations into Q2 2023. Net Sales Net sales include product and service sales. Product sales represent revenue from the sale of products and related shipping fees and digital media content where we record revenue gross. Service sales primarily represent third-party seller fees, which includes commissions and any related fulfillment and shipping fees, AWS sales, advertising services, Amazon Prime membership fees, and certain digital content subscriptions. Net sales information is as follows (in millions): Three Months Ended March 31, 2022 2023 Net Sales: North America $ 69,244 $ 76,881 International 28,759 29,123 AWS 18,441 21,354 Consolidated $ 116,444 $ 127,358 Year-over-year Percentage Growth (Decline): North America 8 % 11 % International (6) 1 AWS 37 16 Consolidated 7 9 Year-over-year Percentage Growth, excluding the effect of foreign exchange rates: North America 8 % 11 % International 0 9 AWS 37 16 Consolidated 9 11 Net sales mix: North America 59 % 60 % International 25 23 AWS 16 17 Consolidated 100 % 100 % Sales increased 9% in Q1 2023 compared to the comparable prior year period. Changes in foreign exchange rates reduced net sales by $2.4 billion for Q1 2023. For a discussion of the effect of foreign exchange rates on sales growth, see “Effect of Foreign Exchange Rates” below. North America sales increased 11% in Q1 2023 compared to the comparable prior year period. The sales growth primarily reflects increased unit sales, primarily 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. International sales increased 1% in Q1 2023 compared to the comparable prior year period, primarily due to increased unit sales, primarily by third-party sellers, advertising sales, and subscription services, partially offset by the impact of changes in 25 Table of Contents foreign exchange rates. 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 exchange rates reduced International net sales by $2.3 billion for Q1 2023. AWS sales increased 16% in Q1 2023 compared to the comparable prior year period. The sales growth primarily reflects increased customer usage, partially offset by pricing changes, primarily driven by long-term customer contracts. Operating Income (Loss) Operating income (loss) by segment is as follows (in millions): Three Months Ended March 31, 2022 2023 Operating Income (Loss) North America $ (1,568) $ 898 International (1,281) (1,247) AWS 6,518 5,123 Consolidated $ 3,669 $ 4,774 Operating income increased from $3.7 billion in Q1 2022 to $4.8 billion in Q1 2023. 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 income in Q1 2023, as compared to the operating loss in the comparable prior year period, is primarily due to increased unit sales, primarily by third-party sellers, and increased advertising sales, partially offset by increased technology and content costs, increased fulfillment and shipping costs, and growth in certain operating expenses. Changes in foreign exchange rates positively impacted operating income by $41 million for Q1 2023. The decrease in International operating loss in absolute dollars in Q1 2023, compared to the comparable prior year period, is primarily due to increased unit sales, primarily by third-party sellers, and increased advertising sales, partially offset by increased technology and content costs, increased fulfillment and shipping costs, and growth in certain operating expenses. Changes in foreign exchange rates negatively impacted operating loss by $174 million for Q1 2023. The decrease in AWS operating income in absolute dollars in Q1 2023, compared to the comparable prior year period, is primarily due to increased payroll and related expenses and spending on technology infrastructure, both of which were primarily driven by additional investments to support AWS business growth, partially offset by increased sales. Changes in foreign exchange rates positively impacted operating income by $272 million for Q1 2023. 26 Table of Contents Operating Expenses Information about operating expenses is as follows (in millions): Three Months Ended March 31, 2022 2023 Operating expenses: Cost of sales $ 66,499 $ 67,791 Fulfillment 20,271 20,905 Technology and content 14,842 20,450 Sales and marketing 8,320 10,172 General and administrative 2,594 3,043 Other operating expense (income), net 249 223 Total operating expenses $ 112,775 $ 122,584 Year-over-year Percentage Growth (Decline): Cost of sales 7 % 2 % Fulfillment 23 3 Technology and content 19 38 Sales and marketing 34 22 General and administrative 31 17 Other operating expense (income), net 562 (11) Percent of Net Sales: Cost of sales 57.1 % 53.2 % Fulfillment 17.4 16.4 Technology and content 12.7 16.1 Sales and marketing 7.1 8.0 General and administrative 2.2 2.4 Other operating expense (income), net 0.2 0.2 Cost of Sales Cost of sales primarily consists of the purchase price of consumer products, inbound and outbound shipping costs, including costs related to sortation and delivery centers and where we are the transportation service provider, and digital media content costs where we record revenue gross, including video and music. The increase in cost of sales in absolute dollars in Q1 2023, compared to the comparable prior year period, is primarily due to increased product and shipping costs resulting from increased sales, partially offset by fulfillment network efficiencies. Changes in foreign exchange rates reduced cost of sales by $1.6 billion for Q1 2023. 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 $19.6 billion and $19.9 billion in Q1 2022 and Q1 2023. 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. We believe that offering low prices to our customers is fundamental to our future success, and one way we offer lower prices is through shipping offers. Costs to operate our AWS segment are primarily classified as “Technology and content” as we leverage a shared infrastructure that supports both our internal technology requirements and external sales to AWS customers. Fulfillment Fulfillment costs primarily consist of those costs incurred in operating and staffing our North America and International fulfillment centers, physical stores, and customer service centers and payment processing costs. While AWS payment processing and related transaction costs are included in “Fulfillment,” AWS costs are primarily classified as “Technology and content.” 27 Table of Contents Fulfillment costs as a percentage of net sales may vary due to several factors, such as payment processing and related transaction costs, our level of productivity and accuracy, changes in volume, size, and weight of units received and fulfilled, the extent to which third-party sellers utilize Fulfillment by Amazon services, timing of fulfillment network and physical store expansion, the extent we utilize fulfillment services provided by third parties, mix of products and services sold, and our ability to affect customer service contacts per unit by implementing improvements in our operations and enhancements to our customer self-service features. Additionally, 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 Q1 2023, compared to the comparable prior year period, is primarily due to increased sales, partially offset by fulfillment network efficiencies. Changes in foreign exchange rates reduced fulfillment costs by $396 million for Q1 2023. We seek to expand our fulfillment network to accommodate a greater selection and in-stock inventory levels and to meet anticipated shipment volumes from sales of our own products as well as sales by third parties for which we provide the fulfillment services. We regularly evaluate our facility requirements. Technology and Content Technology and content costs include payroll and related expenses for employees involved in the research and development of new and existing products and services, development, design, and maintenance of our stores, curation and display of products and services made available in our online stores, and infrastructure costs. Infrastructure costs include servers, networking equipment, and data center related depreciation and amortization, rent, utilities, and other expenses necessary to support AWS and other Amazon businesses. Collectively, these costs reflect the investments we make in order to offer a wide variety of products and services to our customers, including expenditures related to initiatives to build and deploy innovative and efficient software and electronic devices and the development of a satellite network for global broadband service and autonomous vehicles for ride-hailing services. We seek to invest efficiently in numerous areas of technology and content so we may continue to enhance the customer experience and improve our process efficiency through rapid technology developments, while operating at an ever increasing scale. Our technology and content investment and capital spending projects often support a variety of product and service offerings due to geographic expansion and the cross-functionality of our systems and operations. We expect spending in technology and content to increase over time as we continue to add employees and technology infrastructure. These costs are allocated to segments based on usage. The increase in technology and content costs in absolute dollars in Q1 2023, compared to the comparable prior year period, 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. Changes in foreign exchange rates reduced technology and content costs by $304 million for Q1 2023. See Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” of our 2022 Annual Report on Form 10-K for a discussion of how management views advances in technology and the importance of innovation. Sales and Marketing Sales and 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, 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 sales and marketing costs in absolute dollars in Q1 2023, compared to the comparable prior year period, is primarily due to increased payroll and related expenses for personnel engaged in marketing and selling activities. 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 Q1 2023, compared to the comparable prior year period, is primarily due to an increase in payroll and related expenses. 28 Table of Contents Other Operating Expense (Income), Net Other operating expense (income), net was $249 million and $223 million for Q1 2022 and Q1 2023, and was primarily related to asset impairments for physical store closures in Q1 2022 and for fulfillment network facilities in Q1 2023, and the amortization of intangible assets. Interest Income and Expense Our interest income was $108 million and $611 million during Q1 2022 and Q1 2023, primarily due to an increase in prevailing rates. 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 $472 million and $823 million during Q1 2022 and Q1 2023, and was primarily related to debt and finance leases. See Item 1 of Part I, “Financial Statements — Note 3 — Leases and Note 5 — Debt” for additional information. Other Income (Expense), Net Other income (expense), net was $(8.6) billion and $(443) million during Q1 2022 and Q1 2023. 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 gain (loss) of $(7.6) billion and $(467) million in Q1 2022 and Q1 2023, from our equity investment in Rivian. Income Taxes Our income tax benefit for the three months ended March 31, 2022 was $1.4 billion, which included $2.1 billion of net discrete tax benefits primarily attributable to a valuation loss related to our equity investment in Rivian. Our income tax provision for the three months ended March 31, 2023 was $948 million, which included $48 million of net discrete tax expense. See Item 1 of Part I, “Financial Statements — Note 7 — Income Taxes” for additional information. Non-GAAP Financial Measures Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other SEC regulations define and prescribe the conditions for use of certain non-GAAP financial information. Our measures of free cash flows and the effect of foreign exchange rates on our consolidated statements of operations meet the definition of non-GAAP financial measures. We provide multiple measures of free cash flows because we believe these measures provide additional perspective on the impact of acquiring property and equipment with cash and through finance leases and financing obligations. 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 March 31, 2022 and 2023 (in millions): Twelve Months Ended March 31, 2022 2023 Net cash provided by (used in) operating activities $ 39,324 $ 54,330 Purchases of property and equipment, net of proceeds from sales and incentives (57,951) (57,649) Free cash flow $ (18,627) $ (3,319) Net cash provided by (used in) investing activities $ (48,582) $ (54,313) Net cash provided by (used in) financing activities $ 11,757 $ 14,082 29 Table of Contents Free Cash Flow Less Principal Repayments of Finance Leases and Financing Obligations Free cash flow less principal repayments of finance leases and financing obligations is free cash flow reduced by “Principal repayments of finance leases” and “Principal repayments of financing obligations.” Principal repayments of finance leases and financing obligations approximates the actual payments of cash for our finance leases and financing obligations. The following is a reconciliation of free cash flow less principal repayments of finance leases and financing obligations to the most comparable GAAP cash flow measure, “Net cash provided by (used in) operating activities,” for the trailing twelve months ended March 31, 2022 and 2023 (in millions): Twelve Months Ended March 31, 2022 2023 Net cash provided by (used in) operating activities $ 39,324 $ 54,330 Purchases of property and equipment, net of proceeds from sales and incentives (57,951) (57,649) Free cash flow (18,627) (3,319) Principal repayments of finance leases (10,534) (6,544) Principal repayments of financing obligations (174) (226) Free cash flow less principal repayments of finance leases and financing obligations $ (29,335) (10,089) Net cash provided by (used in) investing activities $ (48,582) $ (54,313) Net cash provided by (used in) financing activities $ 11,757 $ 14,082 Free Cash Flow Less Equipment Finance Leases and Principal Repayments of All Other Finance Leases and Financing Obligations Free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations is free cash flow reduced by equipment acquired under finance leases, which is included in “Property and equipment acquired under finance leases, net of remeasurements and modifications,” principal repayments of all other finance lease liabilities, which is included in “Principal repayments of finance leases,” and “Principal repayments of financing obligations.” All other finance lease liabilities and financing obligations consists of property. In this measure, equipment acquired under finance leases is reflected as if these assets had been purchased with cash, which is not the case as these assets have been leased. The following is a reconciliation of free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations to the most comparable GAAP cash flow measure, “Net cash provided by (used in) operating activities,” for the trailing twelve months ended March 31, 2022 and 2023 (in millions): Twelve Months Ended March 31, 2022 2023 Net cash provided by (used in) operating activities $ 39,324 $ 54,330 Purchases of property and equipment, net of proceeds from sales and incentives (57,951) (57,649) Free cash flow (18,627) (3,319) Equipment acquired under finance leases (1) (2,764) (285) Principal repayments of all other finance leases (2) (714) (625) Principal repayments of financing obligations (174) (226) Free cash flow less equipment finance leases and principal repayments of all other finance leases and financing obligations $ (22,279) $ (4,455) Net cash provided by (used in) investing activities $ (48,582) $ (54,313) Net cash provided by (used in) financing activities $ 11,757 $ 14,082 ___________________ (1) For the twelve months ended March 31, 2022 and 2023, this amount relates to equipment included in “Property and equipment acquired under finance leases, net of remeasurements and modifications” of $5,160 million and $517 million. (2) For the twelve months ended March 31, 2022 and 2023, this amount relates to property included in “Principal repayments of finance leases” of $10,534 million and $6,544 million. 30 Table of Contents All of these free cash flows measures have limitations as they omit certain components of the overall cash flow statement and do not represent the residual cash flow available for discretionary expenditures. For example, these measures of free cash flows do not incorporate the portion of payments representing principal reductions of debt or cash payments for business acquisitions. Additionally, our mix of property and equipment acquisitions with cash or other financing options may change over time. Therefore, we believe it is important to view free cash flows measures only as a complement to our entire consolidated statements of cash flows. Effect of Foreign Exchange Rates Information regarding the effect of foreign exchange rates, versus the U.S. Dollar, on our net sales, operating expenses, and operating income is provided to show reported period operating results had the foreign exchange rates remained the same as those in effect in the comparable prior year period. 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 March 31, 2022 2023 As Reported Exchange Rate Effect (1) At Prior Year Rates (2) As Reported Exchange Rate Effect (1) At Prior Year Rates (2) Net sales $ 116,444 $ 1,841 $ 118,285 $ 127,358 $ 2,436 $ 129,794 Operating expenses 112,775 1,967 114,742 122,584 2,575 125,159 Operating income 3,669 (126) 3,543 4,774 (139) 4,635 ___________________ (1) Represents the change in reported amounts resulting from changes in foreign exchange rates from those in effect in the comparable prior year period for operating results. (2) Represents the outcome that would have resulted had foreign exchange rates in the reported period been the same as those in effect in the comparable prior year period for operating results. 31 Table of Contents Guidance We provided guidance on April 27, 2023, 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 27, 2023, 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 and geopolitical conditions and customer demand and spending (including the impact of recessionary fears), inflation, interest rates, regional labor market 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.” Second Quarter 2023 Guidance • Net sales are expected to be between $127.0 billion and $133.0 billion, or to grow between 5% and 10% compared with second quarter 2022. This guidance anticipates an unfavorable impact of approximately 30 basis points from foreign exchange rates. • Operating income is expected to be between $2.0 billion and $5.5 billion, compared with $3.3 billion in second quarter 2022. • This guidance assumes, among other things, that no additional business acquisitions, restructurings, or legal settlements are concluded. 32 Table of Contents