Good day, everyone, and welcome to the Amazon.com first quarter 2007 financial results teleconference. (Operator Instructions) For opening remarks, I will be turning the call over to the Director of Investor Relations, Mrs. Kim Nelson. Please go ahead.

Hello, and welcome to our Q1 2007 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 views as of today, April 24, 2007 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 2006 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 2006. Now, I will turn the call over to Tom. Thomas J. Szkutak: Thanks, Kim. I will begin with comments on our financial results. Trailing 12 month free cash flow increased 4% to $521 million, while the combination of common stock and stock-based awards outstanding decreased 2% to $430 million. Worldwide revenue grew 32% to $3.02 billion, or 29% excluding the $84 million favorable impact from foreign exchange rates. Media revenue increased to $1.99 billion, up 26% or 23% excluding FX. This is the highest growth rate for worldwide media in three years. EGM revenue increased to $947 million, up 48% or 44% excluding FX. EGM continued to increase its share of our worldwide sales mix, representing 31% of sales in Q107, up from 28% for the same period last year. Our worldwide unit growth was 23% and active customer accounts exceeded 66 million, up 15% year over year. Worldwide gross profit was $719 million, up 31%. Gross margin decreased 17 basis points to 23.8%. Worldwide active seller accounts were over 1.1 million and third party units representing marketplace and merchants at units sold on Amazon sites with 30% of total units versus 29% in the prior year. Now I will discuss operating expenses excluding stock-based compensation. Fulfillment, marketing, tech and content and G&A combined with $540 million, or 17.9% of sales, an improvement of 86 basis points year over year. Fulfillment was $253 million, or 8.4% of net sales, up 6 basis points year over year. We continued to increase capacity through efficiencies, as well as adding leased warehouse space to our network. In the quarter, we announced plans for additional warehouses, one in the U.K. and one in France, supporting our international operations. Technology and content was $167 million, or 5.5% of net sales, an improvement of 55 basis points year over year as we continue to grow into our new level of spending. In 2007, technology and content will increase in absolute dollars but we expect the growth rate of our spending in T&C to be significantly less than it was in 2006. Now I will talk about our segment results, and consistent with prior periods, we do not allocate to segments our stock-based compensation or other operating expense line item. In the North America segment, revenue grew 30% to $1.62 billion. Media revenue grew 21% to $990 million. EGM revenue grew 51% to $564 million, representing 35% of North America revenues, up from 30%. We saw another quarter of strong sales in electronics and revenue from soft goods, which includes jewellery, apparel, shoes and sporting goods, more than doubled year over year. Additionally, we are pleased with the early customer response to our grocery subscription service, which offers automated replenishment plus a 15% additional discount. Some of the most popular items for subscription include diapers, nutrition bars and coffee. North America gross profit grew 29% to $439 million and gross margin decreased 27 basis points to 27.1% from product mix and lowering prices. North America segment operating income increased 39% to $86 million, a 5.3% operating margin, up 34 basis points year over year. In the international segment, revenue grew 35% to $1.39 billion. Revenue growth was 27% adjusting for the $84 million year over year favorable FX impact during the quarter. Media revenue grew 31% to $1 billion, or 24% excluding FX, and EGM revenue grew 44% to $383 million, or 34% excluding FX. International gross profit grew 36% to $280 million, or grew 27% excluding FX, while gross margin increased 9 basis points to 20.1%, which reflects increasing third-party mix, offset partially by lowering prices, product mix, and free shipping offers. International segment operating income increased 61% to $93 million, or 6.7% operating margin, up 109 basis points year over year. Excluding the $7 million favorable impact from FX, international operating income increased 47%. CSOI grew 50% to $179 million, or 6% of net sales, up 69 basis points year over year. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income grew 38% to $145 million, or 4.8% of net sales. Our income tax expense was $33 million in Q1, reflecting an effective tax rate of 23%. We expect our effective tax rate in 2007 to be approximately 23%. However, there is potential for significant volatility of our effective tax rate due to several factors, including variability in accurately predicting the amount and mix of taxable income by jurisdiction. In 2007, we anticipate cash paid for income taxes will be approximately $25 million compared to $15 million in 2006, as we continue to benefit from NOLs in the U.S. GAAP net income was $111 million, or $0.26 per diluted share, compared with $51 million and $0.12 per diluted share. Turning to the balance sheet, cash and marketable securities were $1.42 billion, an increase of $86 million year over year. During the quarter, we repurchased 6 million shares of our common stock for $248 million, and today we announced authorization from our Board of Directors to repurchase up to $500 million of our common stock over the next 24 months. Inventory increased 40% to $754 million, and inventory turns decreased from 14.4 a year ago to 12.9, as we expanded selection and improved in-stock levels across product categories and geographies and introduced new product categories. Our investment in net fixed assets, which includes net capitalized software development costs, increased $81 million from a year ago to $442 million. Our return on invested capital was 30%. ROIC is TTM free cash flow divided by average total assets minus the average current liabilities. 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 today to be appropriately conservative assumptions. However, there is a high level of uncertainty surrounding exchange rate fluctuations, as well as the global economy and consumer spending. It is not possible to accurately predict demand and therefore our actual results could differ materially from our guidance. As we describe in more detail in our public filings, issues such as marketing our Euro-denominated debt to market quarterly, inter-company balances in foreign currencies that settle amongst our subsidiaries, unfavorable resolution of legal matters and changes to our effective tax rates can all have a material effect on our guidance. Our guidance assumes that we do not 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 Q2, we expect net sales of between $2.7 billion and $2.85 billion, or growth of between 26% and 33%. This guidance anticipates greater than 200 basis points of positive impact from foreign exchange. GAAP operating income to be between $65 million and $105 million, or grow between 39% and 125%. This includes approximately $45 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 $110 million and $150 million, or grow between 38% and 88%. For calendar year 2007, we expect net sales of between $13.4 billion and $14 billion, or growth of between 25% and 31%. This guidance anticipates approximately 200 basis points of positive impact from foreign exchange. GAAP operating income to be between $463 million and $593 million, or growth of between 19% and 52%. This includes approximately $170 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 $630 million and $760 million, or growth between 26% and 52%. We anticipate our 2007 free cash flow growth rate to trend similar to our operating profit growth rate year over year, with some variability from changes to working capital, and we expect capital expenditures, including capitalized software development costs, to be approximately $250 million. We will continue to strive for year-over-year annual growth of free cash flow and free cash flow per share while investing in our long-term opportunities. We are confident that if we continue to improve customer experience and execute efficiently, our value proposition, as well as our free cash flow, will expand. Thanks, and with that, Kim, let’s move to questions.

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 initiate a question?

(Operator Instructions) Our first question today will come from Robert Peck from Bear Stearns.

Tom, I just wanted to clarify a couple of things. One is, could you give us a little bit of color around the spending of S3, EC2, where you see that spending going over the next couple of quarters, and what capacity are you using to handle the demand there? How does that capacity get adjusted for the 4Q? The second question is more on gross margins, where you see gross margins trending over the next couple of quarters, how do you see the impact of any further increased shipping supplements or even the negative shipping stuff you have been testing for Amazon.com? Thanks. Thomas J. Szkutak: Could you repeat the gross margin question again? I did not hear the last part of it.

The gross margin question is just more of how should we think about gross margins going forward to reflect any further increased shipping rebates, shipping supplements, and even implications of things like -- what is your turnover there? Thomas J. Szkutak: In terms of gross margins, certainly the endless rebate that you mentioned was also -- that’s the negative $5 shipping, if you will, is included in the results that you saw in Q1, so that is reflected in Q1 and it is reflected, whatever we might do going forward in each of our categories. Certainly reflected in the guidance that we have given, but what you are seeing in Q1 is certainly a contraction in our gross margins, meaning it was down 17 basis points year over year versus what we saw more recently, where it was down 110 basis points for the year, total year 2006 versus total year 2005, as well as a similar number for Q4. What you are seeing really is strength in our third party business, which you saw reflected, particularly in our international gross margins, as well as improvements in COGS. As we move forward, we are certainly still working very hard to get further COGS improvements, and the growth that we have seen in a lot of the categories and the scale that we are getting is helping us do that. Jeffrey P. Bezos: I will take the EC2 and S3 question, and just say we are -- we do not break it out. We are seeing very strong demand for those services and expect to continue to roll out new capacity for them.

Meaning that in the fourth quarter, would you therefore build up more capacity to handle what could be increased demand with that segment? Jeffrey P. Bezos: We have been adding new capacity for those services and I continue to expect that to continue indefinitely.

Our next question is from Anthony Noto from Goldman Sachs.

Tom, you alluded to the margins internationally, gross margins benefiting from the increased mix of third party. Those margins on an historic basis relative to the U.S. have been quite a bit below. Do you think as that mix continues to improve, you could get your gross margins internationally to where they are domestically, and if not, why? And then the second question, can you quantify how much you think you benefit from the pre-orders of Harry Potter during this quarter, in terms of incremental traffic or attachment rates from pre-orders? Thank you. Thomas J. Szkutak: Sure. In terms of international, that is certainly one way which our international and North America gross margins will become closer over time, and so certainly it is an opportunity. Even though we saw nice growth in international third party, it is still -- it is a percentage of total units, not as high a percentage as North America, so it is certainly an opportunity for us going forward, and other areas as well. As you would imagine, in our international segment is a make-up of several different countries, and from a buying perspective as we get to scale in each of those categories and each of those countries, it will help us buy better which will also help us improve margins over time. So those are really the key drivers. In terms of pre-orders, the effect on Q1 has been small. We are very pleased with the pre-orders that we have today for Harry Potter 7, but in terms of the impact on our overall growth rate in Q1, we think it is a pretty small number.

Thank you.

We will take a question from Mark Mahaney from City Investment Research.

Great, thanks. I want to just follow-up on the third-party sales growth internationally. Could you give us any more clarity on that? Were there particular categories or stores in which you saw that third-party growth, or particular countries? And then, just a real quick question on the tax rate. It seems like it jumps around a lot. Is it reasonable to assume that 23% this year is what it will be like next year, and why the big change or the big bring down in the tax rate guidance? Thank you very much. Thomas J. Szkutak: Sure. I will take the tax rate question first. There is a lot of variability in the tax rate. The 23% is our best estimate for 2007. It is also our actual effective tax rate for Q1. We are not giving guidance on our effective tax rate going forward beyond 2007 again because of the variability surrounding it. I would like to point out though as well that our cash taxes paid last year were $15 million. We are estimating this year to be approximately $25 million, and so that is related to taxes. In terms of your other question was related to third-party, I think the only other color maybe, you were looking for some additional color, is just to keep in mind that we launched merchants at international in the U.K. and Germany in the second-half of last year. We have more recently launched it in Japan, and so that is certainly a driver, one of the drivers. But one of the other things that we have talked about frequently related to our international business and launching new categories in general, the more traffic we get to those individual categories, good things happen, and what I mean by good things happen, we are able to have, since we have more traffic we are able to get more third-party selling on our detail pages as well as get better COGS improvements over time. That is some of what you are seeing reflected in our Q1 results.

We have a question from Scott Devitt from Stifel Nicolaus.

Thank you. First, on the breakdown of revenue, Amazon is the only large Internet company where the domestic sales are growing faster than international sales, so I am wondering if you could just talk to, in the markets that you are in internationally, the capacity for growth rates to actually improve with time. I think you noted the launch of marketplaces in the U.K. and Germany. Are there other drivers that in the intermediate term actually could cause the international growth rate to, on an organic basis, be above the domestic rate? And then I had a follow-up. Thomas J. Szkutak: Sure. We are actually very encouraged by the opportunity that we have globally, but certainly we are seeing at this stage a higher growth rate in North America than in international. EGM is certainly a big opportunity for us, both in North America and in international, and as we have talked about on previous calls, we just have a lot more categories today in North America. Over the next 12 months, you will be seeing more categories coming out, specifically in international, and we are going to continue to add not only new categories but add selection within the categories we are in. So we still think of it as a big opportunity, but you are right; our North America is outpacing international. Certainly as part of that, North America is certainly being helped by Amazon Prime. We are seeing what we -- certainly customers are liking what they see there and that is certainly being reflected in our overall growth rate in North America.

Thanks, and the follow-up is related to Amazon Unboxing Tivo, which seems to be an interesting new product. I was interested in the capacity to increase the content, what you think the constraints are in terms of the content owners actually providing the content so that you had a significant increase in selection in that category and the possibility longer term to possibly have a subscription model around that? Thanks. Thomas J. Szkutak: Well, we have been and continue to be in the process of adding selection. We just recently added the NHL, the National Hockey League, and you can expect us to continue to go down that path. It is certainly something that is a core brand attribute for Amazon.com, is Earth’s biggest selection, and there are lots of ways to continue to improve that selection and you can count on us to do it. I cannot remember what your -- was there a second part?

Subscription model in the movie category; as content increases, the capacity to actually create a subscription model without the same delivery constraints that a competitor may have. Thomas J. Szkutak: With regard to that, I will not be able to answer just because it is kind of forward-looking. We will have to wait and see how that develops.

Great. Thank you.

We will go next to Jeetil Patel from Deutsche Bank Securities.

Great. Thank you. Good quarter. A couple of questions; first on the web services side, it is certainly a big opportunity. Can you discuss a bit of when does it become a more material component of your business strategy and how you approach customers on the start-up and programming side, and I guess when it becomes a meaningful contributor to the financials? Second, just on the digital music side, I would love to get your thoughts as you are in the music category, to how the MP3 standard competes against the iPod iTunes model, and is there an opportunity there as you look forward here, especially with DRM getting out of the industry altogether? Thanks. Thomas J. Szkutak: In terms of the web services, it is very early. We are very pleased with the traction that we are getting to date. It is certainly exciting to see, but it is very, very early. Jeffrey P. Bezos: These are the kinds of things -- I think we are really on to something, given the early initial traction. This is new customer stuff for us. We have been working on it for just a couple of years now, and there are already a very large number of developers using these services. We have gotten very positive feedback from them. We keep enhancing the services. The team here at Amazon that is working on these web services is super passionate about this, very, very excited. It is going to take -- in terms of your question of when it might affect the overall economics of the company, it is going to be -- inside a company of this, of our current scale, it takes a long time for businesses, new businesses to grow to where they have a meaningful impact on the overall. We have seen that previously with things like international, new product categories, and so on, so it is going to require some patience in order to see that have a financial return but it is certainly just excellent early traction.

Jeff, do you think that has the potential to be just as significant as the core retailing business that you are sitting in today? Jeffrey P. Bezos: The market sizes are potentially very large, and how large it can be, over what kind of time frame, we will have to wait and see. I think it is premature to speculate about that but we are going to keep inventing in that area and working hard to satisfy developer customers.

Our next question is from Brian Pitz from Banc of America.

Thank you. Would you give us a sense as to how much of an impact the mix shift to media from electronics this quarter was helpful to margins? And then a second unrelated, how much of the strong international results were related to the U.K., given that growth over there, both on the advertising and e-commerce side, has been so strong? Thanks. Thomas J. Szkutak: In terms of your question around mix, we actually saw very strong growth across both media and EGM over the 12-month period, so I would not necessarily consider it a significant shift in terms of mix. There was certainly a little bit of mix shift within the international piece where we had media growing, it was accelerated and EGM was not, but in total aggregate, we did not really see a big mix shift. In terms of any specific country, you were asking about the U.K., we are not splitting our results out that way. We reported on the two segments, international and North America, but we certainly saw solid growth in international, with growth of 27% ex exchange. That is right in the range that we have seen over the last several quarters. It has been in the 26% to 29% range, and we saw very strong growth in North America, with Q4 and Q1 being really very strong growth versus what we have seen over the past several years in terms of growth rate being 30% and 31% in the last two quarters. So again, seeing very strong growth.

Just a quick follow-up, on Tivo, any new metric you could share with us in terms of the 1.5 million subs that are either buying or renting movies, or any metrics on that front? Thanks. Thomas J. Szkutak: No, we do not have any new metrics to share there.

We will go next to Justin Post from Merrill Lynch.

If you take the midpoint of your range of GAAP operating income from last quarter to this quarter, I think it went from 3.2 to 3.8, if our calculations are correct, and it seems like it is on the gross profit side but could you talk about why your margin expectations have increased? Are you seeing less price competition in the media categories? Are there any other things that you want to mention that have improved your optimism on your operating margins? Thomas J. Szkutak: In terms of the operating margins, we have improved both our top line, our CSOI, and our implied operating margins for the year. The reason for that is over really the last 90 days, we have seen certainly stronger growth, which customers are telling us that they like the selection and the pricing and the convenience that we have, and so certainly we are seeing the impact of that higher growth, particularly in North America. We also saw better, as I mentioned earlier, better COGS. Again with our revenue being higher, we are just getting better COGS improvements, and as well as our third-party mix. So those are the key things at the gross margin level, and then we were able to, in Q1 we were able to leverage our operating costs with this higher growth rate. If you assume that certainly a portion of our total operating costs is relatively fixed, and so as we increase our revenue like we did, we will be able to leverage that fixed cost infrastructure, which is also helping our operating margins as well.

Great, thank you. One quick follow-up; do you have a number in front of you, what your NOL is right now at this point? Thomas J. Szkutak: It was $1.7 billion at the end of 2006 is what we reported in the K. We have certainly utilized some of that up during Q1, but beyond that I cannot help you with that number.

We will take a question from Douglas Anmuth from Lehman Brothers.

Thank you. My question also follows up on your margins, but it is more on the going forward basis. Looking at your outlook, just given the fact that you posted 6% pro forma operating margins in 1Q, and I am trying to figure out what you are thinking over the next nine months of the year, given that the guidance for the full year is 4.7% to 5.4% operating margin, so what specifically could drag down those margins over the next nine months versus where you are now, or -- I am trying to figure out why those numbers are not conservative going forward. Thank you. Thomas J. Szkutak: Sure. In terms of the range, as you would expect, we do have some volatility in our sales rates as you look out in each of our individual quarters. In other words, just based on the guidance that we have given for Q2, Q2 is generally a lower sales quarter for us just from a seasonality standpoint. As you look at the operating costs, a portion of being fixed as a percentage of that, it obviously would bring down our operating margins. So that is certainly one factor. And then also, there are some mix effects within Q4 being a heavier EGM quarter, but we are -- we increased our CSOI and our income, as well as our implied operating margin for the year based on certainly some of the things that we saw in Q1. Based on the range we have given, we are certainly cautiously optimistic about the rest of the year and the total year.

Our next question is from Imran Khan from JP Morgan.

Thank you very much for taking my questions, two questions; first, if I look at your EGM growth rate in the international market, it decelerated 16 percentage points on a year-over-year basis from 50 to 34. I am just trying to understand if there’s anything specific to this quarter. How should we think about the EGM growth rate in the international market, excluding foreign exchange going forward? Secondly, clearly Amazon Prime was a big success in the U.S. Are you thinking to roll it out in the international market? Thank you. Thomas J. Szkutak: Sure. In terms of our international EGM growth, it was 34%, so it was solid growth for the quarter but it was down from what it has been more recently. What we did see though was a, on a units basis, we saw an acceleration of unit growth in Q1 for international EGM versus what we have seen in recent quarters. Part of that is this mix that we talked about for third party with the launching of merchants in a few of the countries that I mentioned earlier, so we are pleased certainly with the unit growth that we saw. In terms of Prime, we are certainly very happy with what we are seeing in North America and we will have to wait and see what that means going forward as it relates to other geographies.

Our last question today comes from Jordan Rohan from RBC Capital.

Thanks. Over the last quarter or so, both Google and Yahoo!, the major paid search engines, have made changes to their algorithms which should I would think benefit Amazon as a strong brand in the placement and the efficiency of its paid search campaign. While I know paid search is not a huge driver of the operating costs, and specifically the sales and marketing, can you speak to whether this had an impact on your efficiency and how you think about it going forward? Thomas J. Szkutak: No, I really do not have any comments related to that at all.

Thank you very much.

-- on the call today and for your questions. A replay will be available at 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. Thomas J. Szkutak: Thank you. Jeffrey P. Bezos: Thanks.