Jeff Bezos - Founder and CEO Tom Szkutak - CFO Kim Nelson - Director of IR

Jeetil Patel - Deutsche Bank Securities Anthony Noto - Goldman Sachs Mark Rowen - Prudential Doug Anmuth - Lehman Brothers Justin Post - Merrill Lynch Imran Khan – JP Morgan Paul Beaver - Piper Jaffray Mark Mahaney - Citigroup Robert Peck - Bear, Stearns Heath Terry - Credit Suisse

Thank you for standing by. Good day, everyone, and welcome to the Amazon.com second quarter 2006 financial results teleconference. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today's call is being recorded. For opening remarks, I will be turning the call over to the Director of Investor Relations, Kim Nelson. Please go ahead.

Hello and welcome to our Q2 2006 financial results conference call. Joining us today is Tom Szkutak, our CFO; Jeff Bezos, our Founder and CEO and Tom will both be available for Q&A. The following discussion and responses to your questions reflect management's view as of today, July 25, 2006, only and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our 2005 Annual Report on Form 10-K. As you listen to today's call, we encourage you to have our press release in front of you, which includes our financial results, as well as metrics and commentary on the quarter. During this call, we will discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast and our filings with the SEC -- each of which is posted on our IR website -- you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2005. Now I will turn the call over to Tom.

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Thanks, Kim. I will begin with comments on our financial results. Trailing 12-month free cash flow declined 23% to $375 million. Free cash flow is operating cash flow minus capital expenditures. The primary driver of the free cash flow decline was our increased expenditure in technology and content. Free cash flow was also reduced by a $40 million patent litigation settlement in third quarter 2005; $34 million from excess tax benefits for stock-based compensation now classified as financing cash flows; and investments in additional fulfillment capacity. The termination of our contract with ToysRUs.com and related fee disputes had a negative impact on trailing 12-month free cash flow of $20 million. We're working to maximize free cash flow per share over the long term. The combination of common stock and stock-based awards outstanding was 443 million shares compared with 438 million, up 1%. Stock-based awards outstanding were 24 million or 5.8% of shares outstanding, down from 26 million or 6.3% of shares outstanding. We strive to efficiently manage share count. Return on invested capital was 23%. ROIC is TTM-free cash flow divided by average total assets minus average current liabilities. Revenue grew 22% to $2.14 billion, or 23% excluding the $24 million unfavorable impact from year-over-year changes in foreign exchange rates. Worldwide unit growth was 25%. Third-party units representing marketplace and merchant’s units sold on Amazon sites were 29% of total units, up from 28%. Active customer accounts representing customers who have ordered in the past year surpassed 59 million, up 18%. Electronics and other general merchandise, or EGM, increased 37% to $624 million, or 38% excluding foreign exchange rates. EGM represents 29% of worldwide sales, up from 26%. Gross profit grew 13% to $509 million in Q2 and gross margin decreased 187 basis points to 24%, primarily due to the wind-down and termination of our contract with ToysRUs.com, lower product prices for customers and greater shipping loss driven by free shipping and Amazon Prime. Now we'll discuss operating expenses, excluding stock-based compensation. Fulfillment, marketing, tech and content, and G&A combined was $429 million or 20.1% of sales, up 192 basis points. Fulfillment was $182 million or 8.5% of sales, down 18 basis points. In 2006, we expect to increase our fulfillment space less than in 2005 to expand our capacity to satisfy peak demand. Marketing was $52 million or 2.4% of sales, up 11 basis points. Technology and content was $151 million, up 63% year-over-year or 7.1% of sales, up 177 basis points. We have invested in technology to innovate in areas such as seller platforms, web services and digital. Additionally, we continue to invest in increasing selection. In the last 12 months, we have increased selection of unique products carried in our warehouses by 48%. In addition to adding to our category leadership and buying teams for existing categories, we have added additional resources in new categories such as our grocery store at Amazon.com and our sporting goods store in Germany. You should expect we will continue to focus on selection over time. We're looking forward to the coming decrease in our year-over-year growth rate in technology and content spending in the second half of 2006. G&A was $44 million or 2.1% of sales, up 22 basis points. As a reminder, in 2Q05, we reported a $3 million expense reduction related to the favorable resolution of one of our previously outstanding legal matters. Now we will talk about our segment results. Consistent with prior periods, we don't allocate stock-based compensation or other operating expense to our segments. In the North America segment, revenue grew 21% to $1.16 billion, or 23% excluding the $20 million impact from ToysRUs.com. Media revenue grew 15% to $730 million, and EGM revenue grew 32% to $365 million, representing 32% of North America revenues, up from 29%. Gross profit grew 11% to $309 million, and gross margin decreased 224 basis points to 26.7%. 170 basis points of the 224 basis point decline was due to the termination of our ToysRUs.com contract. Other drivers were lower prices, including free shipping and Amazon Prime, as well as product mix. These effects were partially offset by increases in unit volume and the year-over-year increase in third-party sales in our mix. North America segment operating income decreased $47 million to $25 million, a 2.1% operating margin. In the international segment, revenue grew 24% to $982 million. Revenue growth was 27%, adjusting for the $25 million year-over-year unfavorable foreign exchange impact during the quarter. Media revenue grew 17% to $718 million, or 20% excluding foreign exchange rates. EGM revenue grew 45% to $259 million, or 48% excluding FX. EGM represents 26% of international revenues, up from 22%. Gross profit grew 16% to $200 million or grew 19% excluding FX, while gross margin decreased 132 basis points to 20.4%. The decrease in gross margin is primarily from free shipping, price reductions and mix shift. International segment operating income decreased $5 million to $55 million, a 5.6% operating margin. Excluding FX, international operating income decreased 4%. The decrease in international segment operating income is primarily due to lower prices, including free shipping; and increases in operating expense, particularly technology and content. The combination of operating income in our North America and international segments is our consolidated segment operating income, or CSOI. Our segment information in our press release reconciles CSOI to GAAP operating income. CSOI declined 39% to $80 million. The decline in operating income was mainly due to technology and content investment, lower prices including free shipping and Amazon Prime, and $20 million from the contract termination. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income decreased 55% to $47 million. Our provision for income taxes was $32 million in Q2 or a 59% rate for the quarter, which includes a $4 million year-to-date adjustment to reflect our current estimate of our annual effective tax rate of 51%. Our effective tax rate remains higher than the 35% statutory rate primarily due to taxable income associated with the transfer of certain operating assets in connection with establishing our EU headquarters in Luxembourg. We expect these asset transfers to result in tax expense for financial reporting above the 35% statutory rate throughout 2006 and beneficially impact our effective tax rate over time. Since we have deferred tax assets related to our NOLs, these asset transfers will not have a significant impact on our cash taxes paid in 2006, which we expect to be approximately $25 million compared with $12 million in 2005. We are endeavoring to optimize our global taxes on a cash paid basis, not for tax expense on a financial reporting basis. GAAP net income was $22 million or $0.05 per diluted share compared with $52 million and $0.12 per diluted share. Turning to the balance sheet, cash and marketable securities increased $94 million to $1.4 billion. Inventory increased 36% to $521 million and turns decreased 6% to 14.3 as we continue to focus on availability and selection and took advantage of buying opportunities from vendors. We will continue to focus on availability and selection and to increase our mix of direct buying in existing and new product categories, enabling us to offer even lower prices to customers. Our investment in net fixed assets, which includes net capitalized software development costs, increased 52% from a year to $405 million. Our capital expenditures were $58 million for Q2, of which $27 million were software development costs. Our growth continues to be fueled by our relentless focus on the primary inputs of customer experience, convenience, selection and price. Some recent examples of our progress includes Amazon Prime. Membership in Amazon Prime more than doubled from year end. In Q2 '06, we also saw a strong quarter-to-quarter sequential growth for new prime memberships. We continue to see increased purchases by Amazon Prime customers across more categories, with especially heavy purchases in electronics, kitchen, and health and personal care. We launched our new Toy and Baby Stores on www.amazon.com featuring tens of thousands of products offered by Amazon and leading mass market and specialty retailers. This is the largest selection of toy and baby products ever offered through Amazon.com and for the first time ever, toy and baby products are eligible for Free Super Saver Shipping and Amazon Prime. We launched a grocery store on Amazon.com, with over 14,000 dry goods grocery products across more than 1,200 brands, all eligible for Free Super Saver Shipping and Amazon Prime. Our German website launched its sporting goods store, offering customers a selection of thousands of sporting goods in over 25 categories in top brands like Adidas, Burton, Nike, Puma, Quiksilver and Salomon. Amazon Enterprise Solutions extended its agreement with Target.com through August 2010 and launched a new Sears Canada-branded website, providing Sears Canada with the tools and services to control its brand, merchandising and online business using Amazon Enterprise Solutions technology. Amazon S3, a simple storage service for software developers, gained momentum in its first full quarter after launch, providing businesses of all sizes, from Microsoft to SmugMug, with a web services solution for storing and retrieving any amount of data at any time from anywhere on the Web. Developers continue to adopt Amazon's web services. Over 180,000 have registered to date, up greater than 60% year-over-year. Third-party sellers remain a key part of our selection expansion, and worldwide active seller accounts, merchants with an order from a customer during the preceding 12 months, exceeded 1.08 million, up 10% year-over-year. Some pricing highlights include the average customer discount across books, music and video products purchased on www.amazon.com increased more than 250 basis points year-over-year. Amazon.co.jp increased its customer discount on pre-order new-release DVDs up to 25%. Over the past 12 months, customers have saved over $0.5 billion on shipping through our worldwide free shipping offers and Amazon Prime. I will conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we have seen to date and what we believe to date to be appropriately conservative assumptions. However, there is a high level of uncertainty surrounding fluctuation in the euro, pound, yen, Canadian dollar and won exchange rates, as well as the global economy and consumer spending and the impact on both of world events. While we are cautiously optimistic, it is not possible to accurately predict demand, and therefore our actual results could differ materially from our guidance. Let me also remind everyone that we mark our euro-denominated debt to market at the end of each quarter, which results in a gain or loss for any movement in the euro between reporting dates. We also have euro exposure related to our interest expense on this euro-denominated debt. We incur a foreign currency gain or loss corresponding with inter-Company balances denominated in foreign currencies, which are settled among subsidiaries. Depending on the amount and timing, an unfavorable resolution of outstanding legal matters could materially affect our business, results of operations, financial position or cash flows in a particular period. Our effective tax rate in 2006 is subject to significant variation based on changes in our corporate structure and business operations, the amount of expenses incurred that are permanently non-deductible for U.S. tax purposes, such as stock-based compensation paid to foreign employees, the tax characterization of income earned, changes in current tax laws and changes in estimates, including accurately predicting our taxable income in the taxable jurisdictions to which it relates. Our guidance assumes that we won't record any additional intangible assets or any further revisions to stock-based compensation or our restructuring-related estimates and that FX rates remain approximately where they have been recently. For Q3, we expect net sales of between $2.17 billion and $2.33 billion, a growth of between 17% and 25%. GAAP operating income to be between $7 million and $42 million or between 87% decline and a 24% decline. This includes stock-based compensation and amortization of intangible assets of approximately $38 million. We anticipate consolidated segment operating income, which excludes stock-based compensation and other operating expense, to be between $45 million and $80 million or between a 63% decline and a 34% decline. For calendar 2006, we expect net sales of between $10.15 billion and $10.65 billion, a growth of between 20% and 25%. This guidance anticipates a small negative impact from foreign exchange. GAAP operating income to be between $310 million and $440 million or between a 28% decline and 2% growth. This includes approximately $120 million for stock-based compensation and amortization of intangible assets. We anticipate consolidated segment operating income, which excludes stock-based compensation and other operating expense, to be between $430 million and $560 million or a 24% decline and 1% decline. As you can see from our Q3 and total year guidance, we expect operating leverage will show significant improvement in the fourth quarter. We expect our 2006 free cash flow growth rate to trend similar to our operating profit growth rate year-over-year. This excludes the impact of FAS 123 R, which could be up to $100 million of excess tax benefit from stock-based compensation being classified as positive financing cash flows instead of operating cash flows, up from $7 million in 2005. We expect capital expenditures, including capitalized software development costs, to be approximately $225 million. We will continue to strive for year-over-year annual growth in free cash flow and free cash flow per share while investing in our long-term opportunities. We're confident that if we continue to improve customer experience and execute efficiently, our value proposition as well as our free cash flow, will further expand. Thanks, and with that, Kim, let's move to questions.

Great. Thanks, Tom. Let's move on to the Q&A portion of the call with Jeff and Tom. Operator, will you please remind our listeners how to ask a question?

(Operator Instructions) Your first question comes from Jeetil Patel - Deutsche Bank Securities. Jeetil Patel - Deutsche Bank Securities: A couple of questions. If you take the midpoint of the CSOI range from the last quarter to this quarter and adjust for the Toys 'R' Us impact of $50 million, it gets to about a $35 million swing, from $580 million to $545 million. Can you just reconcile, is that all the toy category build out and scaling up in that category, or is there something else that is really driving that? Second, you talked about web services, about 180,000 developers. When do you think you start to meaningfully monetize those 180,000 developers and the initiatives that they're up to, to built out their own services around the Amazon ecosystem?

In terms of the guidance question, you are right. We increased the revenue guidance to $10.15 billion to $10.65 billion. In the bottom, we gave a range for CSOI of $430 million to $560 million which again, on the bottom end of that range is down $85 million from last time. The reason why it is down from last time is because of the heavy investment in toys, which certainly includes the termination of the contract, as well as being more aggressive on prices in all of our categories. So that's really the delta on the bottom line. In terms of web services, we are very excited about what we see so far. It is still very, very early for us. We think certainly from a return perspective, certainly we're looking at it over the long term, but we are extremely encouraged from what we see so far. Jeetil Patel - Deutsche Bank Securities: You provide the base level infrastructure in the web services area. Are you also looking at the SKUs and the product detail pages that you have on the platform as the monetization engine for these developers? Or is there another monetization engine to help them subsidize or generate revenues off of their initiatives?

Well, for part of our web services, it is exactly as you say. But then there are web services like Amazon S3, the simple storage service, that has gotten traction that has vastly exceeded our expectations and continues to grow. So we are super-excited about that. That is a completely different model, where we monetize it by literally charging for the web service directly. Then the developers who use those services will monetize them and do monetize them by charging subscription fees to their own on-demand applications. Jeetil Patel - Deutsche Bank Securities: Thank you.

Our next question comes from Anthony Noto - Goldman Sachs. Anthony Noto - Goldman Sachs: Thank you very much. Jeff, I was wondering if you could comment a little bit on Amazon's long-term vision and how you would qualify the way you think you can differentiate the brand going forward? I mean, there's a lot we read about in the papers, and obviously there's a lot of initiatives that have happened in the last quarter. I just wonder if we could revisit that as we have seen you announce, obviously, groceries. There's a lot of talk around a lot of other things as it relates to the media categories and digital strategy. On your site, there's a lot of new videos and other entertainment types of contents as opposed to pure product sales. Tom, my question is you guys have talked about maximizing free cash flow dollars. I definitely understand the impact from Toys 'R' Us on your lower operating income for the fourth quarter. I don't necessarily see the benefit from lowering prices further, because it results in a pretty significant pickup in revenue. 25% revenue growth is an acceleration, that's really a positive. But it looks like it is coming at the cost of operating income, and therefore free cash flow relative to what you would have thought excluding Toys 'R' Us. I was wondering if you could comment on that. Thanks.

Sure. Our strategy for our business is a three-fold with respect to finding the elements that matter to customers that are durable in time where we can build flywheels that we can continue to put energy into. The three big flywheels are selection, price and availability. So if you look at each of those, we know that 10 years from now, customers will still care about selection. We know they will still care about availability and price. They'll want to get their products quickly. So the energy that we put into building those flywheels today will continue to pay dividends, even ten years from now. So the price one is very straightforward. The more scale we have, the better our cost structure, both on the variable side with COGS and because we get to leverage our fixed expense as well. So there, we will have the ability to offer lower prices and that makes the Company scale increase, which again allows us to keep spinning that flywheel and further drive down costs and prices and so on. With availability, you will see a similar flywheel. As you have a distributed node fulfillment center network, you get to put products closer to customers. That makes it possible to economically do outbound transportation for things like Amazon Prime. So the fact that we have a big multi-node network and that we have the volume to economically support a multi-node network puts us in a very unique and differentiated position to offer a membership program like Amazon Prime to economically afford to do things like Free Super Saver Shipping. So availability is another one. Then selection has a similar thing. You see that the number of in-stock ASINs that we have under our own roof is up very dramatically year-over-year, more than 40%. Again, in order to be able to do that, you need a certain amount of volume because when you look at those low-turn ASINs in the tail, you need to have enough volume that you can afford to carry even those slow-moving ASINs and make them available to customers on a very rapid basis. The third-party strategy also plays into that selection point, where the more customer volume we have, the more flow we have, the more active customers, the more third-party sellers want to interact with that customer flow.

I think Jeff answered a good portion of the second part of your question, Anthony, with his answer as well, in terms of the pricing strategy. But you're absolutely right, pricing in the short term is expensive, but it has the benefits that Jeff described as he talked about the flywheel as it relates to pricing. It gives us the ability over the long term to have a bigger scale, to get better COGS reductions. It has the ability to leverage our fixed cost structure better as well. So as you think about our guidance and the pricing piece specifically, that is exactly how we're thinking about it. In addition to that, the way you should think about it is it's existing categories plus new categories. As we launch these new categories, we want to make sure that we get the scale quickly to get some of the benefits that Jeff described. So that is what we intend on doing and that is the rationale. Anthony Noto - Goldman Sachs: Tom, do you think the forecasted acceleration in revenue growth to 25% year-over-year, which is faster than this quarter and the third quarter, and a seasonally stronger growth rate of 65% compared to last year at 60%, is completely due to the lower prices or is it also due to groceries and other categories you may not have announced yet?

It is due to a number of things that we talked about. We are investing heavily in the toy category for the second half, some of the new categories we have launched. We are expanding selection in the existing categories. We're putting more selection under our own roof, which we also think is helpful, as well as the pricing. But in terms of what I was describing with the impact on the bottom line, and those are the elements, but certainly on the top-line perspective, it is pricing, additional selection and new categories. Anthony Noto - Goldman Sachs: Thank you.

Our next question comes from Mark Rowen - Prudential. Mark Rowen - Prudential: Thanks. When you do your own toys, is that going to cause your gross margin to drop significantly in the back half of the year from where it was, given that your third-party gross margins were probably higher?

Yes, we haven't broken out the full financials on our relationship with TRU, or we don't give guidance on any specific category. As we look forward, we certainly have reflected what we think will happen in the toys category in the guidance that we have given for both Q3 and the total year. Mark Rowen - Prudential: Well, I guess the reason I'm asking is with the lower reported operating margin that you guided to, is that primarily a function of gross margin or higher expenses?

Yes, it is, again, it incorporates all of the factors that we have seen to date and what we expect for the second half. But the investment specifically in toys, as we talk about it, is a number of different things. It is certainly an investment in the people to run that category. It is an investment in the selection, which we have built up very quickly to launch in early July, and we'll continue to add to that selection over time. It is an investment in the fact that we're offering today free shipping, Super Saving Shipping, as well as free shipping through Amazon Prime. So that's certainly a significant investment, as well as we want to make sure that we have very competitive pricing as we launch this new category for us on our detail pages. So it is a combination of all of those. That is what is reflected in both our Q3 and total year guidance. Mark Rowen - Prudential: Do you think in the toy category that you'll be able to sell as many toy units as Toys 'R' Us did? Or is it going to take time to build up the customer awareness? In other words, did the Toys 'R' Us brand attract a certain number of those customers and unit sales?

You know, we are not giving unit guidance on the toy category. But I would say that we are optimistic. We think we are going to offer an incredible experience to customers. We think this is, over the long term, is very good for customers and for shareholders. We are excited about the experience that we can give, not only with the selection, but with the service, particularly with Prime and Super Saver Shipping. So we think the total package is going to be great for customers and shareholders long term. We think customers are going to like it short term. We think it is going to be expensive short term. Mark Rowen - Prudential: Thanks.

Our next question comes from Doug Anmuth - Lehman Brothers. Doug Anmuth - Lehman Brothers: Thank you. I just wanted to get some more detail on your free cash flow, and specifically the $13 million that you essentially withheld from Toys 'R' Us during the quarter. I just wanted to get clarity on how that is being booked in your cash flow statement, and then also just clarify that we're not really seeing that in the income statement. Also, why did you see no real benefit in terms of accounts payable during the quarter? Thank you.

Sure. First of all, this is active litigation in terms of Toys 'R' Us. But from an accounting standpoint, we did withhold the $13 million, so it is reflected positively in our free cash flow and operating cash flows. From an accounting standpoint, there's $20 million of revenue that we did not recognize during the quarter that has also an impact of $20 million on CSOI. So it's $20 million of revenue in CSOI that we did not recognize. I'm not sure if I understand the payables question. Our payable days were 53 days for the quarter. That is up from 51 days last year. So it is an improvement of two days year-over-year. Doug Anmuth - Lehman Brothers: With the change in accounts payable, is that a positive benefit of $4 million during the quarter? Just looking back historically, you have always obviously had a much bigger benefit in the second quarter.

What you are probably looking at is, and you can see it in some of the timing, the two-day improvement year-over-year actually was very solid compared to most of the quarters over the past several quarters. If you look at Q1 year-over-year, it was actually a little bit better improvement, which is closer to four days, which was probably the best we have had in several quarters. So again, it was still a very good improvement and year-over-year, 53 versus 51 days. It also improved sequentially from 48 to 53 days. So again, it was I think a solid improvement year-over-year. Doug Anmuth - Lehman Brothers: Thank you.

Our next question comes from Justin Post - Merrill Lynch. Justin Post - Merrill Lynch: Thank you. I noticed that the shipping costs went up from 21% growth last quarter to 27% growth this quarter. I am assuming that's for Amazon Prime. Can you talk a little bit about the benefits of Amazon Prime? What do those customers give you that the non-Prime customers don’t give you? Why are you still keeping with the program? Are you still positive on it? Secondly, on the media items, more and more media seems to be going digital. Can you talk about any thoughts you have on the margin outlook for media sales as they become digital and if you think there will be any changes to Amazon's margin structure if you bring more digital items to consumers?

The reason that we like Amazon Prime -- yes, we're still very positive on it. In fact, we are more positive on it than we ever have been as we see the adoption. It's because we see a lift in sales when people, their kind of pre- and post-behavior after they become Amazon Prime members. The experience that we are giving to the customer is improved because they're getting their products very rapidly. So they get more instant gratification. While they still free shipping, they get two-day delivery; whereas before, they could get free shipping, and they did often get free shipping, but it was with our Super Saver Shipping, which isn't a two-day delivery. So really, that is the thing that we like about it. There are several things, but the big one is we see an increase in sales from those Amazon Prime members, and it deepens our relationship with those customers. They shop in more categories with us. It is a program that would be very hard for most companies to pursue. It requires that you be a multi-category retailer to do it, in an effective way. It requires that you have excellent transportation costs. It requires a certain amount of scale so that you can have a multi-node network. So it is differentiated. It is something that customers love. It is durable in time. It creates an uplift in sales. So while this is certainly an expensive investment, it really does build what will be a more important and bigger company over the long term. Justin Post - Merrill Lynch: Then on the digital distribution of maybe music and video, how do you see that affecting margins over the long term?

It's very early and certainly difficult to predict what will happen over time. So certainly it is something that we are staying very close to. But it is difficult to estimate what that impact will be over time. Justin Post - Merrill Lynch: Thank you.

Our next question comes from Imran Khan - JP Morgan. Imran Khan - JP Morgan: Good afternoon, Jeff and Tom. Two questions. First, if I look at your midpoint of your guidance in Q3 and Q4, it seems like you are expecting significant margin expansion in Q4 from Q3 levels. I'm trying to understand what gives you that confidence, considering you are getting into some of the businesses that have lower gross margins like grocery and maybe toy. Clearly, you're investing a lot of dollars in the technology area. Investors or the analysts like us, we are outside. How can I keep track of your progress? How can I keep track of this scorecard that we'll really see some sort of return on investment of those investments?

Sure. First of all, on the guidance question, if you look at Q3, I just want to remind you, as you look at the top line guidance, that in Q3 we are overlapping Harry Potter 6. As we had mentioned last year during our call for Q3, that the impact of Harry Potter 6 on our overall top line was approximately 260 basis points. So we are overlapping that, because you're looking at the growth rates in Q3 and Q4, keep that in mind. As you are looking at the bottom line, beyond the factors that I have already described in our guidance, keep in mind that in Q4 of last year or throughout last year, we have built up our spend in technology and content. In Q4 specifically, we're overlapping that spend. As we mentioned, we expect that our technology and content growth rate is going to decline in the second half versus first half. So that is what is impacting Q4 most predominately. In terms of the other question related to technology and content, how you measure our progress in terms of output, I think that that's something that you will have to wait and see as we launch new products and services over time. Imran Khan - JP Morgan: Great, thanks.

Our next question comes from Safa Rashtchy - Piper Jaffray. Paul Beaver - Piper Jaffray: This is Paul Beaver for Safa. I was just wondering if you are seeing any pressure from gas prices or a slowing economy? Similarly, will you be able to get incremental leverage from your vendors in this slowing economy?

I will take the second part of your question. I think certainly our leverage with suppliers will certainly be most prominent as we continue to grow. That's an up and down economy. As we get further scale in our individual categories it just helps our overall COGS. It also helps leverage our fixed cost structure. So again, that's where you'll see it both in up and down economies. In terms of gas prices -- I am assuming that is on demand -- with the growth rates that we have, I don't think that we are necessarily a great bellwether for the economy. So it is hard to say, but again, I think that's all I have to say on that particular question. Paul Beaver - Piper Jaffray: A quick follow-up. What is your strategy with the grocery segment? It seems like a fairly low-margin category to pursue. Can you just provide some color for us?

Well, the way we are doing this category is very different from the way it has been done in the past. The quantity sizes tend toward stock-up quantity sizes, which gets the ASP of the item higher. We are accustomed to operating with relatively low ASP items. When you look at the amount of gross profit dollars in an item that we handle profitably at Amazon.com, it can be very low. That is a capability that we have built up over time. So we are selecting the items that go into that store to be items that we think over time can build a profitable business for us. The consumer reaction in these early days to that offering has been extremely positive, in large part because the selection of that offering is already so strong, and it will just get better from here. So we don't just carry a few flavors of Jello; we carry all 80. Paul Beaver - Piper Jaffray: Thank you.

Our next question comes from Mark Mahaney - Citigroup. Mark Mahaney - Citigroup: A question for Jeff. Jeff, when you talked about the three flywheels -- selection, price and availability -- I'm wondering if you think about the digital media offerings that are out there in the market now, do you sense that one of those flywheels or two of those flywheels aren't there in strength? Where would be the weakness of those three flywheels amongst the existing digital media offerings that are out in the marketplace? Thank you.

Sure. Digital will have its own set of flywheels, and we are not prepared to talk about that at this time.

Our next question comes from Robert Peck - Bear Stearns. Robert Peck - Bear Stearns: Quick questions around the changing environment around you. First of all, with the eBay fee increase impending, could you talk a little bit about any additional inquiries you've gotten from third-party sellers and how you think that could impact you going into third or fourth quarter? Secondly, could you also address the rollout of eBay Express really starting in September/October and how you think that could impact business going forward and maybe some of your advantages? Lastly, with Google Checkout, could you talk a little bit about any impacts that you could see from that? Is there any sort of patent violation there as far as one-click checkout? Any comments around those three products would be great. Thanks.

I would just say that as a long-standing practice, we don't talk about other companies. We will certainly stick with that. The retail business and the fixed-price business is one that has always had a tremendous amount of competition. These are very large markets. There is room for thousands of winners. We are customer focused and will stay that way. That doesn't mean we don't pay attention to what competitors do; we do. We watch and we try to learn. But these are big markets and there's plenty of room.

Our last question comes from Heath Terry - Credit Suisse. Heath Terry - Credit Suisse: Great. I was wondering if you could just give us an update on the Marks & Spencer relationship in Europe? Where are you guys in the process of actually getting that into production? Also, in your international business, how should we be thinking about new product rollouts there as your international product offerings continue to lag what we're seeing here in the U.S.?

Sure. I will take the second part first. In terms of our international business, we think there's still a lot of opportunity to grow and add new selection and new product categories. We've seen some of those launches recently, certainly with sports, as we mentioned on the opening comments. So again, we are very excited about the opportunity we have in international. We think there's a lot of selection and new categories to go into. We think there is, over time, certainly geographical expansion in addition to what we have done to date that are high. In terms of Marks & Spencer, as we have mentioned previously, we will be launching their website in the second half of this year.

Thanks Heath, and thank you for joining us on the call today and for your questions. A replay will be available on our investor relations website at least through the end of the quarter. We appreciate your interest in Amazon.com and look forward to talking with you again next quarter.

Thank you.

Thank you.

Thank you, everyone. That does conclude today's conference. You may now disconnect. Did you know?:

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