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<TYPE>EX-99.1
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<FILENAME>dex991.txt
<DESCRIPTION>2001 LETTER TO SHAREHOLDERS
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Exhibit 99.1
[AMAZON.COM LOGO]
To our shareholders:
In July of last year, Amazon.com reached an important way station. After
four years of single-minded focus on growth, and then just under two years
spent almost exclusively on lowering costs, we reached a point where we could
afford to balance growth and cost improvement, dedicating resources and staffed
projects to both. Our major price reduction in July, moving to discount books
over $20 by 30% off list, marked this change.
This balance began to pay off in the fourth quarter, when we both
significantly exceeded our own goals on the bottom line and simultaneously
reaccelerated growth in our business. We lowered prices again in January when
we offered a new class of shipping that is free (year-round) on orders over
$99. Focus on cost improvement makes it possible for us to afford to lower
prices, which drives growth. Growth spreads fixed costs across more sales,
reducing cost per unit, which makes possible more price reductions. Customers
like this, and it's good for shareholders. Please expect us to repeat this loop.
As I mentioned, we exceeded our goals for the fourth quarter with pro forma
operating profit of $59 million and pro forma net profit of $35 million.
Thousands of Amazon.com employees around the world worked hard to achieve that
goal; they are, and should be, proud of the accomplishment. More highlights
from a notable year:
. Sales grew 13% from $2.76 billion in 2000 to $3.12 billion in 2001, and we
achieved our first billion-dollar quarter on reaccelerated sales in Q4.
. We served 25 million customer accounts in 2001, compared to 20 million in
2000 and 14 million in 1999.
. International sales grew 74% in 2001, and more than one-quarter of sales
came from outside the U.S. The U.K. and Germany, our largest international
markets, had a combined pro forma operating profit for the first time in
Q4. Open only a year, Japan grew to a $100 million annual run rate in Q4.
. Hundreds of thousands of small businesses and individuals made money by
selling new and used products to our customers directly from our highly
trafficked product detail pages. These Marketplace orders grew to 15% of
U.S. orders in Q4, far surpassing our expectations when we launched
Marketplace in November 2000.
. Inventory turns increased from 12 in 2000 to 16 in 2001.
. Most important, we stayed relentlessly focused on the customer, as
reflected in a chart-topping score of 84 for the second year in a row on
the widely followed American Customer Satisfaction Index conducted by the
University of Michigan. We are told this is the highest score ever
recorded--not just for any retailer, but for any service company.
Obsess over customers: our commitment continues
Until July, Amazon.com had been primarily built on two pillars of customer
experience: selection and convenience. In July, as I already discussed, we
added a third customer experience pillar: relentlessly lowering prices. You
should know that our commitment to the first two pillars remains as strong as
ever.
We now have more than 45,000 items in our electronics store (about seven
times the selection you're likely to find in a big-box electronics store),
we've tripled our kitchen selection (you'll find all the best brands), we've
launched computer and magazine subscriptions stores, and we've added selection
with strategic partners such as Target and Circuit City.
We've improved convenience with features like Instant Order Update which
warns you if you're about to buy the same item twice (people are busy--they
forget that they've already bought it!).
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We've dramatically improved customer self-service capabilities. Customers
can now easily find, cancel, or modify their own orders. To find an order, just
make sure you are signed in and recognized by the site, and do a regular search
on any product in your order. When you get to that product's detail page, a
link to your order will be at the top of the page.
We built a new feature called Look Inside the Book. Customers can view large
high-resolution images of not only the front cover of a book, but also the back
cover, index, table of contents, and a reasonable sample of the inside pages.
They can Look Inside the Book before making a buying decision. It's available
on over 200,000 of our millions of titles (as a point of comparison, a typical
book superstore carries about 100,000 titles).
As my last example, I'll just point out that one of the most important
things we've done to improve convenience and experience for customers also
happens to be a huge driver of variable cost productivity: eliminating mistakes
and errors at their root. Every year that's gone by since Amazon.com's
founding, we've done a better and better job of eliminating errors, and this
past year was our best ever. Eliminating the root causes of errors saves us
money and saves customers time.
Our consumer franchise is our most valuable asset, and we will nourish it
with innovation and hard work.
An investment framework
In every annual letter (including this one), we attach a copy of our
original 1997 letter to shareholders to help investors decide if Amazon.com is
the right kind of investment for them, and to help us determine if we have
remained true to our original goals and values. I think we have.
In that 1997 letter, we wrote, "When forced to choose between optimizing the
appearance of our GAAP accounting and maximizing the present value of future
cash flows, we'll take the cash flows."
Why focus on cash flows? Because a share of stock is a share of a company's
future cash flows, and, as a result, cash flows more than any other single
variable seem to do the best job of explaining a company's stock price over the
long term.
If you could know for certain just two things--a company's future cash flows
and its future number of shares outstanding--you would have an excellent idea
of the fair value of a share of that company's stock today. (You'd also need to
know appropriate discount rates, but if you knew the future cash flows for
certain, it would also be reasonably easy to know which discount rates to use.)
It's not easy, but you can make an informed forecast of future cash flows by
examining a company's performance in the past and by looking at factors such as
the leverage points and scalability in that company's model. Estimating the
number of shares outstanding in the future requires you to forecast items such
as option grants to employees or other potential capital transactions.
Ultimately, your determination of cash flow per share will be a strong
indicator of the price you might be willing to pay for a share of ownership in
any company.
Since we expect to keep our fixed costs largely fixed, even at significantly
higher unit volumes, we believe Amazon.com is poised over the coming years to
generate meaningful, sustained, free cash flow. Our goal for 2002 reflects just
that. As we said in January when we reported our fourth quarter results, we
plan this year to generate positive operating cash flow, leading to free cash
flow (the difference between the two is up to $75 million of planned capital
expenditures). Our trailing twelve-month pro forma net income should, roughly
but not perfectly, trend like trailing twelve-month cash flow.
Limiting share count means more cash flow per share and more long-term value
for owners. Our current objective is to target net dilution from employee stock
options (grants net of cancellations) to an average of 3% per year over the
next five years, although in any given year it might be higher or lower.
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Relentless commitment to long-term shareholder value
As I've discussed many times before, we are firm believers that the
long-term interests of shareholders are tightly linked to the interests of our
customers: if we do our jobs right, today's customers will buy more tomorrow,
we'll add more customers in the process, and it will all add up to more cash
flow and more long-term value for our shareholders. To that end, we are
committed to extending our leadership in e-commerce in a way that benefits
customers and therefore, inherently, investors--you can't do one without the
other.
As we kick off 2002, I am happy to report that I am as enthusiastic as ever
about this business. There is more innovation ahead of us than behind us, we
are close to demonstrating the operating leverage of our business model, and I
get to work with this amazing team of Amazonians all over the world. I am lucky
and grateful. We thank you, our owners, for your support, your encouragement,
and for joining us on this adventure. If you're a customer, we thank you again!
/s/ Jeffrey P. Bezos
Jeffrey P. Bezos
Founder and Chief Executive Officer
Amazon.com, Inc.
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[AMAZON.COM LOGO]
1997 LETTER TO SHAREHOLDERS
(Reprinted from the 1997 Annual Report)
To our shareholders:
Amazon.com passed many milestones in 1997: by year-end, we had served more
than 1.5 million customers, yielding 838% revenue growth to $147.8 million, and
extended our market leadership despite aggressive competitive entry.
But this is Day 1 for the Internet and, if we execute well, for Amazon.com.
Today, online commerce saves customers money and precious time. Tomorrow,
through personalization, online commerce will accelerate the very process of
discovery. Amazon.com uses the Internet to create real value for its customers
and, by doing so, hopes to create an enduring franchise, even in established
and large markets.
We have a window of opportunity as larger players marshal the resources to
pursue the online opportunity and as customers, new to purchasing online, are
receptive to forming new relationships. The competitive landscape has continued
to evolve at a fast pace. Many large players have moved online with credible
offerings and have devoted substantial energy and resources to building
awareness, traffic, and sales. Our goal is to move quickly to solidify and
extend our current position while we begin to pursue the online commerce
opportunities in other areas. We see substantial opportunity in the large
markets we are targeting. This strategy is not without risk: it requires
serious investment and crisp execution against established franchise leaders.
It's All About the Long Term
We believe that a fundamental measure of our success will be the shareholder
value we create over the long term. This value will be a direct result of our
ability to extend and solidify our current market leadership position. The
stronger our market leadership, the more powerful our economic model. Market
leadership can translate directly to higher revenue, higher profitability,
greater capital velocity, and correspondingly stronger returns on invested
capital.
Our decisions have consistently reflected this focus. We first measure
ourselves in terms of the metrics most indicative of our market leadership:
customer and revenue growth, the degree to which our customers continue to
purchase from us on a repeat basis, and the strength of our brand. We have
invested and will continue to invest aggressively to expand and leverage our
customer base, brand, and infrastructure as we move to establish an enduring
franchise.
Because of our emphasis on the long term, we may make decisions and weigh
tradeoffs differently than some companies. Accordingly, we want to share with
you our fundamental management and decision-making approach so that you, our
shareholders, may confirm that it is consistent with your investment
philosophy:
. We will continue to focus relentlessly on our customers.
. We will continue to make investment decisions in light of long-term
market leadership considerations rather than short-term profitability
considerations or short-term Wall Street reactions.
. We will continue to measure our programs and the effectiveness of our
investments analytically, to jettison those that do not provide
acceptable returns, and to step up our investment in those that work
best. We will continue to learn from both our successes and our
failures.
. We will make bold rather than timid investment decisions where we see a
sufficient probability of gaining market leadership advantages. Some of
these investments will pay off, others will not, and we will have
learned another valuable lesson in either case.
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. When forced to choose between optimizing the appearance of our GAAP
accounting and maximizing the present value of future cash flows, we'll
take the cash flows.
. We will share our strategic thought processes with you when we make bold
choices (to the extent competitive pressures allow), so that you may
evaluate for yourselves whether we are making rational long-term
leadership investments.
. We will work hard to spend wisely and maintain our lean culture. We
understand the importance of continually reinforcing a cost-conscious
culture, particularly in a business incurring net losses.
. We will balance our focus on growth with emphasis on long-term
profitability and capital management. At this stage, we choose to
prioritize growth because we believe that scale is central to achieving
the potential of our business model.
. We will continue to focus on hiring and retaining versatile and talented
employees, and continue to weight their compensation to stock options
rather than cash. We know our success will be largely affected by our
ability to attract and retain a motivated employee base, each of whom
must think like, and therefore must actually be, an owner.
We aren't so bold as to claim that the above is the "right" investment
philosophy, but it's ours, and we would be remiss if we weren't clear in the
approach we have taken and will continue to take.
With this foundation, we would like to turn to a review of our business
focus, our progress in 1997, and our outlook for the future.
Obsess Over Customers
From the beginning, our focus has been on offering our customers compelling
value. We realized that the Web was, and still is, the World Wide Wait.
Therefore, we set out to offer customers something they simply could not get
any other way, and began serving them with books. We brought them much more
selection than was possible in a physical store (our store would now occupy 6
football fields), and presented it in a useful, easy-to-search, and easy-to-
browse format in a store open 365 days a year, 24 hours a day. We maintained a
dogged focus on improving the shopping experience, and in 1997 substantially
enhanced our store. We now offer customers gift certificates, 1-ClickSM
shopping, and vastly more reviews, content, browsing options, and
recommendation features. We dramatically lowered prices, further increasing
customer value. Word of mouth remains the most powerful customer acquisition
tool we have, and we are grateful for the trust our customers have placed in
us. Repeat purchases and word of mouth have combined to make Amazon.com the
market leader in online bookselling.
By many measures, Amazon.com came a long way in 1997:
. Sales grew from $15.7 million in 1996 to $147.8 million--an 838%
increase.
. Cumulative customer accounts grew from 180,000 to 1,510,000--a 738%
increase.
. The percentage of orders from repeat customers grew from over 46% in the
fourth quarter of 1996 to over 58% in the same period in 1997.
. In terms of audience reach, per Media Metrix, our Web site went from a
rank of 90th to within the top 20.
. We established long-term relationships with many important strategic
partners, including America Online, Yahoo!, Excite, Netscape, GeoCities,
AltaVista, @Home, and Prodigy.
Infrastructure
During 1997, we worked hard to expand our business infrastructure to support
these greatly increased traffic, sales, and service levels:
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. Amazon.com's employee base grew from 158 to 614, and we significantly
strengthened our management team.
. Distribution center capacity grew from 50,000 to 285,000 square feet,
including a 70% expansion of our Seattle facilities and the launch of
our second distribution center in Delaware in November.
. Inventories rose to over 200,000 titles at year-end, enabling us to
improve availability for our customers.
. Our cash and investment balances at year-end were $125 million, thanks
to our initial public offering in May 1997 and our $75 million loan,
affording us substantial strategic flexibility.
Our Employees
The past year's success is the product of a talented, smart, hard-working
group, and I take great pride in being a part of this team. Setting the bar
high in our approach to hiring has been, and will continue to be, the single
most important element of Amazon.com's success.
It's not easy to work here (when I interview people I tell them, "You can
work long, hard, or smart, but at Amazon.com you can't choose two out of
three"), but we are working to build something important, something that
matters to our customers, something that we can all tell our grandchildren
about. Such things aren't meant to be easy. We are incredibly fortunate to have
this group of dedicated employees whose sacrifices and passion build
Amazon.com.
Goals for 1998
We are still in the early stages of learning how to bring new value to our
customers through Internet commerce and merchandising. Our goal remains to
continue to solidify and extend our brand and customer base. This requires
sustained investment in systems and infrastructure to support outstanding
customer convenience, selection, and service while we grow. We are planning to
add music to our product offering, and over time we believe that other products
may be prudent investments. We also believe there are significant opportunities
to better serve our customers overseas, such as reducing delivery times and
better tailoring the customer experience. To be certain, a big part of the
challenge for us will lie not in finding new ways to expand our business, but
in prioritizing our investments.
We now know vastly more about online commerce than when Amazon.com was
founded, but we still have so much to learn. Though we are optimistic, we must
remain vigilant and maintain a sense of urgency. The challenges and hurdles we
will face to make our long-term vision for Amazon.com a reality are several:
aggressive, capable, well-funded competition; considerable growth challenges
and execution risk; the risks of product and geographic expansion; and the need
for large continuing investments to meet an expanding market opportunity.
However, as we've long said, online bookselling, and online commerce in
general, should prove to be a very large market, and it's likely that a number
of companies will see significant benefit. We feel good about what we've done,
and even more excited about what we want to do.
1997 was indeed an incredible year. We at Amazon.com are grateful to our
customers for their business and trust, to each other for our hard work, and to
our shareholders for their support and encouragement.
/s/ Jeffrey P. Bezos
Jeffrey P. Bezos
Founder and Chief Executive Officer
Amazon.com, Inc.
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