This excerpt taken from the AMZN 8-K filed Apr 5, 2005.
Our Most Important Financial Measure: Free Cash Flow Per Share
Amazon.coms financial focus is on long-term growth in free cash flow per share.
Amazon.coms free cash flow is driven primarily by increasing operating profit dollars and efficiently managing both working capital and capital expenditures. We work to increase operating profit by focusing on improving all aspects of the customer experience to grow sales and by maintaining a lean cost structure.
We have a cash generative operating cycle1 because we turn our inventory quickly, collecting payments from our customers before payments are due to suppliers. Our high inventory turnover means we maintain relatively low levels of investment in inventory$480 million at year end on a sales base of nearly $7 billion.
The capital efficiency of our business model is illustrated by our modest investments in fixed assets, which were $246 million at year end or 4% of 2004 sales.
Free cash flow2 grew 38% to $477 million in 2004, a $131 million improvement over the prior year. We are confident that if we continue to improve customer experienceincluding increasing selection and lowering pricesand execute efficiently, our value proposition, as well as our free cash flow, will further expand.
As to dilution, total shares outstanding plus stock-based awards are essentially unchanged at the end of 2004 compared with 2003, and are down 1% over the last three years. During that same period, weve also eliminated over six million shares of potential future dilution by repaying more than $600 million of convertible debt that was due in 2009 and 2010. Efficiently managing share count means more cash flow per share and more long-term value for owners.
This focus on free cash flow isnt new for Amazon.com. We made it clear in our 1997 letter to shareholdersour first as a public companythat when forced to choose between optimizing GAAP accounting and maximizing the present value of future cash flows, well take the cash flows. Im attaching a copy of our complete 1997 letter and encourage current and prospective shareowners to take a look at it.
As always, 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.
Jeffrey P. Bezos
Founder and Chief Executive Officer