ticker,form_type,accession_number,filing_date,text
AMZN,10-Q,0001018724-19-000043,2019-04-26,"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 could differ materially for a variety of
reasons, including, among others, fluctuations in foreign exchange rates,
changes in global economic conditions and customer spending, world events, the
rate of growth of the Internet, online commerce, and cloud services, the
amount that Amazon.com invests in new business opportunities and the timing of
those investments, the mix of products and services sold to customers, the mix
of net sales derived from products as compared with services, the extent to
which we owe income or other taxes, competition, management of growth,
potential fluctuations in operating results, international growth and
expansion, the outcomes of legal proceedings and claims, fulfillment,
sortation, delivery, and data center optimization, risks of inventory
management, seasonality, the degree to which we enter into, maintain, and
develop commercial agreements, proposed and completed acquisitions and
strategic transactions, payments risks, and risks of fulfillment throughput
and productivity. In addition, the current global economic climate amplifies
many of these risks. These risks and uncertainties, as well as other risks and
uncertainties that could cause our actual results 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 2018 Annual Report on Form 10-K.

Critical Accounting Judgments

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.
The SEC has defined a company’s critical accounting policies as the ones that
are most important to the portrayal of the company’s financial condition and
results of operations, and which require the company to make its most
difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on this definition,
we have identified the critical accounting policies and judgments 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 and
Accounting Policies,” of our 2018 Annual Report on Form 10-K and Item 1 of
Part I, “Financial Statements — Note 1 — Accounting Policies,” 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, 2019, we would have recorded an additional cost of sales of
approximately $185 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. Our effective tax rates could be
affected by numerous factors, such as changes in our business operations,
acquisitions, investments, entry into new businesses and geographies,
intercompany transactions, the relative amount of our foreign earnings,
including earnings being lower than anticipated in jurisdictions where

we have lower statutory rates and higher than anticipated in jurisdictions
where we have higher statutory rates, losses incurred in jurisdictions for
which we are not able to realize related tax benefits, the applicability of
special tax regimes, changes in foreign currency exchange rates, changes in
our stock price, changes in our deferred tax assets and liabilities and their
valuation, changes in the laws, regulations, administrative practices,
principles, and interpretations related to tax, including changes to the
global tax framework, competition, and other laws and accounting rules in
various jurisdictions. In addition, a number of countries are actively
pursuing changes to their tax laws applicable to corporate multinationals,
such as the U.S. tax reform legislation commonly known as the U.S. Tax Cuts
and Jobs Act of 2017 (the “U.S. Tax Act”). Finally, foreign governments may
enact tax laws in response to the U.S. Tax Act that could result in further
changes to global taxation and materially affect our financial position and
results of operations.

The U.S. Tax Act significantly changed how the U.S. taxes corporations. The
U.S. Tax Act requires complex computations to be performed that were not
previously required by U.S. tax law, significant judgments to be made in
interpretation of the provisions of the U.S. Tax Act, significant estimates in
calculations, and the preparation and analysis of information not previously
relevant or regularly produced. The U.S. Treasury Department, the IRS, and
other standard-setting bodies will continue to interpret or issue guidance on
how provisions of the U.S. Tax Act will be applied or otherwise administered.
As future guidance is issued, we may make adjustments to amounts that we have
previously recorded that may materially impact our provision for income taxes
in the period in which the adjustments are made.

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.

Recent Accounting Pronouncements

See Item 1 of Part I, “Financial Statements — Note 1 — Accounting Policies.”

Liquidity and Capital Resources

Cash flow information is as follows (in millions):

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 $41.3 billion and $37.0 billion as of December 31, 2018 and
March 31, 2019. Amounts held in foreign currencies were $13.8 billion and
$10.2 billion as of December 31, 2018 and March 31, 2019, and were primarily
Euros, British Pounds, and Japanese Yen.

Cash provided by (used in) operating activities was $(1.8) billion and $1.8
billion for Q1 2018 and Q1 2019. 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. Cash received from our customers and other activities
generally corresponds to our net sales. Because consumers primarily use credit
cards to buy from us, our receivables from consumers settle quickly. The
increase in operating cash flow for the trailing twelve months ended March 31,
2019, compared to the comparable prior year period, is primarily due to the
increase in net income, excluding non-cash charges such as depreciation,
amortization, and stock-based compensation. Cash provided by (used in)
operating activities is also subject to changes in working capital. Working
capital at any specific point in time is subject to many variables, including
seasonality, inventory management and category expansion, the timing of cash
receipts and payments, vendor payment terms, and fluctuations in foreign
exchange rates.

Cash provided by (used in) investing activities corresponds with cash capital
expenditures, including leasehold improvements, incentives received from
property and equipment vendors, 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 $(533) million and $(8.1) billion for Q1 2018 and Q1 2019, with
the variability caused primarily by our decision to purchase or lease property
and equipment and purchases, maturities, and sales of marketable securities.
Cash capital expenditures were $2.7 billion during Q1 2018 and Q1 2019, which
primarily reflect additional capacity to support our fulfillment operations
and additional investments in support of continued business growth in
technology infrastructure (the majority of which is to support AWS). We made
cash payments, net of acquired cash, related to acquisition and other
investment activity of $13 million and $1.2 billion during Q1 2018 and Q1

Cash provided by (used in) financing activities was $(2.2) billion and $(2.4)
billion for Q1 2018 and Q1 2019. Cash outflows from financing activities
result from principal repayments of finance leases and financing obligations
and repayments of long-term debt and other and were $2.3 billion and $2.6
billion in Q1 2018 and Q1 2019. Property and equipment acquired under finance
leases was $2.3 billion and $2.6 billion during Q1 2018 and Q1 2019,
reflecting investments in support of continued business growth primarily due
to investments in technology infrastructure for AWS, which investments we
expect to continue over time.

We had no borrowings outstanding under the Commercial Paper Program or Credit
Agreement and $539 million of borrowings outstanding under our Credit Facility
as of March 31, 2019. See Item 1 of Part I, “Financial Statements — Note 5 —
Debt” for additional information.

We recorded net tax provisions of $287 million and $836 million in Q1 2018 and
Q1 2019. Certain foreign subsidiary earnings are subject to U.S. taxation
under the U.S. Tax Act, which also repeals U.S. taxation on the subsequent
repatriation of those earnings. 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.

We have tax benefits relating to excess stock-based compensation deductions
and accelerated depreciation deductions that are being utilized to reduce our
U.S. taxable income. The U.S. Tax Act enhanced and extended the option to
claim accelerated depreciation deductions by allowing full expensing of
qualified property, primarily equipment, through 2022. Cash taxes paid (net of
refunds) were $513 million and $168 million for Q1 2018 and Q1 2019. As of
December 31, 2018, our federal net operating loss carryforward was
approximately $627 million and we had approximately $1.4 billion of federal
tax credits potentially available to offset future tax liabilities. Our
federal tax credits are primarily related to the U.S. federal research and
development credit. As we utilize our federal net operating losses and tax
credits we expect cash paid for taxes to increase. We

endeavor to manage our global taxes on a cash basis, rather than on a
financial reporting basis. In connection with the European Commission’s
October 2017 decision against us on state aid, Luxembourg tax authorities
computed an initial recovery amount, consistent with the European Commission’s
decision, of approximately €250 million, that we deposited into escrow in
March 2018, subject to adjustment pending conclusion of all appeals.

Our liquidity is also affected by restricted cash balances that are pledged as
collateral for real estate leases, amounts due to third-party sellers in
certain jurisdictions, debt, and standby and trade letters of credit. To the
extent we process payments for third-party sellers or offer certain types of
stored value to our customers, some jurisdictions may restrict our use of
those funds. These restrictions would result in the reclassification of a
portion of our cash and cash equivalents from “Cash and cash equivalents” to
restricted cash, which is classified within “Accounts receivable, net and
other” and “Other assets” on our consolidated balance sheets. As of December
31, 2018 and March 31, 2019, restricted cash, cash equivalents, and marketable
securities were $426 million and $394 million. See Item 1 of Part I,
“Financial Statements — Note 4 — Commitments and Contingencies” and “Financial
Statements — Note 5 — Debt” for additional discussion of our principal
contractual commitments, as well as our pledged assets. Additionally, purchase
obligations and open purchase orders, consisting of inventory and significant
non-inventory commitments, were $13.3 billion as of March 31, 2019. 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 likely 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.

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.”

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, Amazon Prime membership fees, advertising services,
and certain digital content subscriptions. Net sales information is as follows
(in millions):

Sales increased 17% in Q1 2019 compared to the comparable prior year period.
Changes in foreign currency exchange rates impacted net sales by $(1.1)
billion for Q1 2019. For a discussion of the effect on sales growth of foreign
exchange rates, see “Effect of Foreign Exchange Rates” below.

North America sales increased 17% in Q1 2019 compared to the comparable prior
year period. The sales growth primarily reflects increased unit sales,
including sales by third-party sellers. Increased unit sales were driven
largely by our continued efforts to reduce prices for our customers, including
from our shipping offers, increased in-stock inventory availability, and
increased selection.

International sales increased 9% in Q1 2019 compared to the comparable prior
year period. The sales growth primarily reflects increased unit sales,
including sales by third-party sellers. Increased unit sales were driven
largely by our continued efforts to reduce prices for our customers, including
from our shipping offers, increased in-stock inventory availability, and
increased selection. Changes in foreign currency exchange rates impacted
International net sales by $(1.1) billion for Q1 2019.

AWS sales increased 41% in Q1 2019 compared to the comparable prior year
period. 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.

Operating Income (Loss)

Operating income (loss) by segment is as follows (in millions):

Operating income increased from $1.9 billion in Q1 2018 to $4.4 billion in Q1
2019. 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 increase in North America operating income in absolute dollars in Q1 2019,
compared to the comparable prior year period, is primarily due to increased
unit sales, including sales by third-party sellers, advertising sales, and
slower growth in certain operating expenses, partially offset by increased
marketing expense.

The decrease in International operating loss in absolute dollars in Q1 2019,
compared to the comparable prior year period, is primarily due to increased
unit sales, including sales by third-party sellers, advertising sales, and
slower growth in certain operating expenses, partially offset by increased
marketing expense. Changes in foreign exchange rates impacted operating loss
by $(39) million for Q1 2019.

The increase in AWS operating income in absolute dollars in Q1 2019, compared
to the comparable prior year period, is primarily due to increased customer
usage and cost structure productivity, partially offset by pricing changes and
increased spending on technology infrastructure and payroll and related
expenses, which was primarily driven by additional investments to support the
business growth. Changes in foreign exchange rates impacted operating income
by $110 million for Q1 2019.

Operating Expenses

Information about operating expenses is as follows (in millions):

Cost of Sales

Cost of sales primarily consists of the purchase price of consumer products,
digital media content costs where we record revenue gross, including video and
music, packaging supplies, sortation and delivery centers and related
equipment costs, and inbound and outbound shipping costs, including where we
are the transportation service provider.

The increase in cost of sales in absolute dollars in Q1 2019, compared to the
comparable prior year period, is primarily due to increased product and
shipping costs resulting from increased sales.

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 $6.1 billion and $7.3 billion in Q1 2018 and Q1
2019. We expect our cost of shipping to continue to increase to the extent our
customers accept and use our shipping offers at an increasing rate, we reduce
shipping rates, we use more expensive shipping methods, which may include
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, customer
service centers, and physical stores 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.” 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, 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, because payment processing and fulfillment costs associated with
seller transactions are based on the gross purchase price of underlying
transactions, and payment processing and related transaction and fulfillment
costs are higher as a percentage of sales versus our retail sales, sales by
our sellers have higher fulfillment costs as a percent of net sales.

The increase in fulfillment costs in absolute dollars in Q1 2019, compared to
the comparable prior year period, is primarily due to costs from expanding our
fulfillment network, which includes physical stores, and variable costs
corresponding with increased product and service sales volume and inventory
levels.

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.

Marketing

We direct customers to our stores primarily through a number of targeted
online marketing channels, such as our sponsored search, third party customer
referrals, social and online advertising, television advertising, and other
initiatives. Our marketing costs are largely variable, based on growth in
sales and changes in rates. To the extent there is increased or decreased
competition for these traffic sources, or to the extent our mix of these
channels shifts, we would expect to see a corresponding change in our
marketing costs.

The increase in marketing costs in absolute dollars in Q1 2019, compared to
the comparable prior year period, is primarily due to increased spending on
online marketing channels, as well as payroll and related expenses for
personnel engaged in marketing and selling activities.

While costs associated with Amazon Prime memberships and other shipping offers
are not included in marketing expense, we view these offers as effective
worldwide marketing tools, and intend to continue offering them indefinitely.

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, 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.

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 2019, compared to the comparable prior year
period, is primarily due to an increase in spending on technology
infrastructure and increased payroll and related costs associated with
technical teams responsible for expanding our existing products and services
and initiatives to introduce new products and service offerings. See Item 7 of
Part II, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Overview” of our 2018 Annual Report on Form 10-K for a
discussion of how management views advances in technology and the importance
of innovation.

General and Administrative

The increase in general and administrative costs in absolute dollars in Q1
2019, compared to the comparable prior year period, is primarily due to
increases in payroll and related expenses.

Other Operating Expense (Income), Net

Other operating expense (income), net was $63 million and $(5) million for Q1
2018 and Q1 2019, and was primarily related to the amortization of intangible
assets and in Q1 2019 was offset by a gain on the sale of a business.

Interest Income and Expense

Our interest income was $80 million and $183 million during Q1 2018 and Q1
2019. 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 $330 million and $366 million during Q1 2018 and Q1 2019,
and was primarily related to long-term debt and finance leases.

Other Income (Expense), Net

Other income (expense), net was $239 million and $164 million during Q1 2018
and Q1 2019. The primary components of other income (expense), net are related
to equity warrant valuation, equity securities gains, and foreign currency.

Income Taxes

Our tax provision or benefit from income taxes for interim periods is
determined using an estimate of our annual effective tax rate, adjusted for
discrete items, if any, that are taken into account in the relevant period.
Each quarter we update our estimate of the annual effective tax rate, and if
our estimated tax rate changes, we make a cumulative adjustment.

Our quarterly tax provision, and our quarterly estimate of our annual
effective tax rate, is subject to significant variation due to several
factors, including variability in accurately predicting our pre-tax and
taxable income and loss and the mix of jurisdictions to which they relate,
intercompany transactions, the applicability of special tax regimes, changes
in how we do business, acquisitions, investments, audit-related developments,
changes in our stock price, changes in our deferred tax assets and liabilities
and their valuation, foreign currency gains (losses), changes in statutes,
regulations, case law, and 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, and
relative changes of expenses or losses for which tax benefits are not
recognized. Additionally, our effective tax rate can be more or less volatile
based on the amount of pre-tax income or loss. For example, the impact of
discrete items and non-deductible expenses on our effective tax rate is
greater when our pre-tax income is lower.

For 2019, we estimate that our effective tax rate will be favorably affected
by the impact of excess tax benefits from stock-based compensation and the
U.S. federal research and development credit and adversely affected by state
income taxes and losses incurred in certain foreign jurisdictions for which we
may not realize a tax benefit. Losses for which we may not realize a related
tax benefit, primarily due to losses of foreign subsidiaries, reduce our pre-
tax income without a corresponding reduction in our tax expense, and therefore
increase our effective tax rate. We record valuation allowances against the
deferred tax assets associated with losses for which we may not realize a
related tax benefit.

Our income tax provisions for the three months ended March 31, 2018 and March
31, 2019 were $287 million and $836 million, which included $368 million and
$261 million of net discrete tax benefits primarily attributable to excess tax
benefits from stock-based compensation.

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.
We adopted new lease accounting guidance on January 1, 2019 without
retrospectively adjusting prior periods. As a result, the line items used in
our calculation of measures of free cash flows have changed. See Item 1 of
Part I, “Financial Statements — Note 1 — Accounting Policies.”

Free Cash Flow

Free cash flow is cash flow from operations reduced by “Purchases of property
and equipment, net of proceeds from property and equipment 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, 2018 and 2019 (in millions):

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, 2018 and 2019 (in millions):

(1) Amounts for 2018 have not been retrospectively adjusted.

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,” 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, 2018 and 2019 (in millions):

For the twelve months ended March 31, 2019, this amount relates to equipment
included in “Property and equipment acquired under finance leases” of $10,972
million. Amounts for 2018 have not been retrospectively adjusted.  

For the twelve months ended March 31, 2019, this amount relates to property
included in “Principal repayments of finance leases” of $7,649 million.
Amounts for 2018 have not been retrospectively adjusted.  

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 periods. The
effect on our net sales, operating expenses, and operating income from changes
in our foreign exchange rates versus the U.S. Dollar is as follows (in
millions):

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.  

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.  

Guidance

We provided guidance on April 25, 2019, 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 25, 2019, and are subject to substantial
uncertainty. Our results are inherently unpredictable and may be materially
affected by many factors, such as fluctuations in foreign exchange rates,
changes in global economic conditions and customer spending, world events, the
rate of growth of the Internet, online commerce, and cloud services, as well
as those outlined in Item 1A of Part II, “Risk Factors.”

Second Quarter 2019 Guidance

Net sales are expected to be between $59.5 billion and $63.5 billion, or to
grow between 13% and 20% compared with second quarter 2018. This guidance
anticipates an unfavorable impact of approximately 150 basis points from
foreign exchange rates.  

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