Jeff Bezos, founder and CEO of Amazon.com

Online giant Amazon.com, Inc. on Thursday announced financial results for its fourth quarter and year ended December 31, 2005.

Operating cash flow grew 29% to $733 million in 2005, compared with $566 million in 2004. Free cash flow grew 11% to $529 million in 2005, compared with $477 million in 2004. Operating and free cash flow includes a one-time payment of $40 million in connection with a patent lawsuit settlement in third quarter 2005.

Investment in technology and content jumped 57 percent to $132 million, compared with $84 million in the year-earlier period.

Amazon also continues to offer several expensive promotions to keep customers and increasing their use of the site. Amazon Prime for example, gives customers unlimited shipping for $79 a year, and the company offers free shipping on orders over $25.

The company does not disclose how much those promotions cost. But Thomas Szkutak, the chief financial officer, said that together the programs saved customers $475 million in shipping in 2005. The company also said that subscriptions to Amazon Prime more than doubled in December from November.

Jeff Bezos, the company's chief executive and chairman, said the programs, while costly, were critical to Amazon's long-term growth. "We're seeing the customers who are Amazon Prime members are shopping more and doing more cross-shopping," he said in a conference call with analysts.

Common shares outstanding plus shares underlying stock-based awards outstanding totaled 438 million on December 31, 2005, compared with 434 million a year ago.

Net sales increased 17% to $2.98 billion in the fourth quarter, compared with $2.54 billion in fourth quarter 2004. Excluding the $121 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales grew 22% compared with fourth quarter 2004.

Operating income increased 1% to $165 million in the fourth quarter, compared with $162 million in fourth quarter 2004. Excluding the $12 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, operating income grew 9% compared with fourth quarter 2004.

Net income was $199 million in the fourth quarter, or $0.47 per diluted share, compared with net income of $347 million, or $0.82 per diluted share in fourth quarter 2004, which includes a $38 million income tax benefit in the fourth quarter, compared with a $239 million income tax benefit in fourth quarter 2004, primarily related to determining certain deferred tax assets are realizable.

"Subscriptions to Amazon Prime more than doubled from November to December," said Jeff Bezos, founder and CEO of Amazon.com. "Amazon Prime members get 'all-you-can-eat' two-day shipping for free."

Amazon Prime, Amazon.com's first-ever membership program, was introduced in February 2005. For a flat membership fee of $79 per year, Amazon Prime members get unlimited, express two-day shipping for free, with no minimum purchase requirement, on over a million eligible items sold by Amazon.com. Members can order as late as 6:30 p.m. ET and still get their order the next day for only $3.99 per item, and they can share the benefits of Amazon Prime with up to four family members living in their household. Sign up for Amazon Prime at www.amazon.com/prime.

Full Year 2005

Net sales grew 23% to $8.49 billion in 2005, compared with $6.92 billion in 2004. Excluding the $73 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the year, net sales grew 24% compared with 2004.

Operating income was $432 million in 2005, compared with $440 million in 2004. Operating income for 2005 includes the $40 million negative impact of the legal settlement and an $8 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the year.

Net income was $359 million in 2005, or $0.84 per diluted share, compared with net income of $588 million, or $1.39 per diluted share, in 2004. Net income for 2005 includes a $95 million income tax expense, compared with a $233 million income tax benefit in 2004.

Amazon.com also announced today that on March 7, 2006 it will redeem EUR 250 million ($304 million at the Euro to U.S. dollar exchange rate on January 31, 2006) in principal amount of its outstanding 6.875% Convertible Subordinated Notes due 2010, plus accrued and unpaid interest from and including February 16, 2006 to March 6, 2006, under its previously announced $500 million debt repurchase authorization. No premium payment is required to redeem these notes.

Highlights

-- North America segment sales, representing the Company's U.S. and Canadian sites, were $1.68 billion, up 21% from fourth quarter 2004.

-- North America Media sales surpassed $1 billion for the first time in the fourth quarter.

-- International segment sales, representing the Company's U.K., German, French, Japanese and Chinese sites, were $1.29 billion, up 13% from fourth quarter 2004. Excluding the unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales grew 23%.

-- International segment sales accounted for 45% of worldwide net sales in 2005, up from 44% in 2004.

-- Worldwide Other revenue, which includes the Amazon Enterprise Solutions program (formerly known as Merchant.com), increased 74% to $230 million in 2005.

-- Worldwide Electronics & Other General Merchandise sales grew 38% to $2.3 billion in 2005, and increased to 27% of worldwide net sales, up from 24% in 2004.

-- The Company's Japan site -- Amazon.co.jp -- became Amazon.com's sixth site to launch Search Inside the Book, enabling customers to preview the text inside over 160,000 books.

-- Building on its successful Search Inside the Book technology, the Company announced it is currently developing two new innovative programs -- Amazon Pages and Amazon Upgrade -- to benefit readers, authors and publishers that will enable customers to purchase online access to any page, section or chapter of a book, as well as the book in its entirety.

-- Amazon.com's China site -- Joyo.com -- in a long-term test lowered the order size threshold for customers to qualify for free shipping to RMB 99 from RMB 200 and now offers more than 300,000 book, music, video and DVD titles, making it the largest Chinese bookstore in the world.

-- Net sales are expected to be between $2.14 billion and $2.29 billion, or grow between 13% and 20%, compared with first quarter 2005.

-- Operating income is expected to be between $70 million and $105 million, or decline between (35%) and (3%), compared with first quarter 2005. This guidance includes $30 million for stock-based compensation and amortization of intangible assets, and assumes, among other things, that no additional intangible assets are recorded, and that there are no further revisions to stock-based compensation or restructuring-related estimates.

Full Year 2006 Expectations

-- Net sales are expected to be between $9.85 billion and $10.45 billion, or grow between 16% and 23%, compared with 2005.

-- Operating income is expected to be between $370 million and $510 million, or between (14%) decline and 18% growth, compared with 2005. This guidance includes $135 million for stock-based compensation and amortization of intangible assets, and assumes, among other things, that no additional intangible assets are recorded and that there are no changes to stock-based compensation or restructuring-related estimates.