SEC Company Response from AMAZON COM (AMZN) — Oct 26, 2017
AMAZON COM INC
Date: Oct. 26, 2017 · CIK: 0001018724 · Accession: 0001018724-17-000133
AI Filing Summary & Sentiment
Letter
United States Securities and Exchange Commission Division of Corporation Finance Filed February 10, 2017 Form 10-Q for the Quarter Ended June 30, 2017 Filed July 28, 2017 File No. 0-22513
Dear Mr. Thompson:
On behalf of Amazon.com, Inc., this responds to your letter of September 27, 2017, regarding our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 10-K”) and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 (the “Q2 2017 10-Q”). Each of your comments is set forth below, followed by our response.
Form 10-K for the Fiscal Year Ended December 31, 2016
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Net Sales, page 23
1.
You state that North American and International net sales have increased in the last three fiscal years primarily as a result of increased unit sales, which were driven in part by “sales in faster growing categories such as electronics and other general merchandise.” Please revise future periodic reports to expand your discussion to describe the drivers of net sales in the “Electronics and other general merchandise” product category, so that investors may better understand any trends that have had, or that you reasonably expect to have, an impact on such net sales, and the extent to which the increase in North American and International net sales is attributable to the increase in unit sales in such product category. In addition, given the breadth of this category, please also provide additional granularity as to the types of products within “electronics and other general merchandise” that are causing “faster growth.” Please refer to Item 303(a)(3) of Regulation S-K and Section III.B of SEC Release No. 34-48960.
October 26, 2017
Page 2
Response
Historically, our presentation of revenue data for the Media and EGM categories, which as noted further below we ceased to disclose after December 31, 2016, provided investors information about groups of similar products and services that reflected the growth and development of our business beyond our initial offerings as an online book retailer. This presentation also was consistent with our entity-wide disclosures regarding revenue from similar products and services. However, growth in overall unit sales has been the primary driver of net sales across the many and expanding products and services sold through our website, and we have not identified individual drivers within Media or EGM. Instead, we focus on providing a wide selection of services and hundreds of millions of products and services to our customers across many categories. Our experience over time has demonstrated that increased sales are driven by our focus on reducing prices for our customers, including from shipping offers, increasing in-stock inventory availability, increasing selection, and enhancing the customer experience.
Accordingly, in coordination with our response to the comments we received from the Staff of the Division of Corporation Finance (the “Staff”) on our Annual Report on Form 10-K for the year ended December 31, 2015, and our subsequent discussions with the Staff and determination to change the entity-wide disclosures we present pursuant to ASC 280-10-50-40, we also evaluated our presentation of revenue data in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”). As a result, in the Q1 2017 10-Q and subsequent quarterly reports we have determined not to refer to an EGM category, and we do not address product categories as a driver of unit sales.
We will continue to monitor the revenue drivers associated with our operations and will identify in future periodic reports any trends that have or are expected to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.
Technology and Content, page 28
2.
Please disclose a break out of research and development expense by project, activity or in whatever fashion you believe will provide more transparency as to the magnitude and direction of your research and development activities.
Response
See discussion related to our research and development expenses included in response to Question 3 below.
Notes to Consolidated Financial Statements
Note 1 – Description of Business and Accounting Policies
Technology and Content, page 43
3.
Please tell us and disclose in future filings the total amount of research and development costs charged to expense for each year presented in the consolidated statements of operations as required by ASC 730-10-50.
October 26, 2017
Page 3
Please also explain in detail the nature of expenses by project or activity that you categorize as research and development costs. Please specifically describe the types of costs related to your initiatives to build and deploy innovative and efficient software and electric devices and development of new products and services as well as AWS and technology infrastructure costs. Please indicate what portion of such costs represents research and development expenditures. In explaining the types of costs, please also describe any engineering or other costs excluded from research and development costs. To the extent you can categorize items included and excluded from research and development by the type of activity illustrated in ASC 730-10-55-1 and 2, that would be helpful to our understanding.
Lastly, we note your disclosure that content costs consist principally of payroll and related expenses for employees involved in category expansion, editorial content, buying and merchandising selection. Please explain to us why it’s appropriate to combine content costs with technology costs, which we understand to be primarily research and development costs. We may have further comments.
Response
In response to the Staff’s last question, which we are addressing first because it helps to inform the basis of our response to this comment, we combine technology and content costs because this grouping of cost best depicts the investments we make to enhance our customers’ experience. This includes investments we make to improve the functionality or appearance of our websites, the speed at which they operate, the selection of products or services we make available on them, and the manner in which we categorize and display items on them. These efforts are intended to improve and facilitate the customer experience. Likewise, we invest in the development of new products and services beyond our website in an effort to serve our customers and invent on their behalf. These investments may include e-readers, tablets, streaming video, voice automation, and compute and storage power, which are intended to enhance the customer experience by expanding the variety of products and services we offer. Collectively, technology and content costs further our efforts to bring selection, price, and availability to our customers, including through research, development, maintenance, and other enhancements.
Our business model encourages the simultaneous research, design, development, and maintenance of both new and existing products and services. For example, our teams are constantly working to build new Alexa skills and simultaneously maintain current skills, and these activities are within a continuum of those described in ASC 730-10-55-1 and 2 and are not easily distinguishable operationally. We focus on innovation and customer obsession and manage the total investment in our employees and infrastructure in order to improve the customer experience. We believe our technology and content presentation is most representative of the investments we make on behalf of our customers.
With regard to the nature of the costs that we incur by project, activity, magnitude, or direction, the sheer volume and diversity of our innovations and other activities does not lend itself well to any further refinement of technology and content expenses. The volume and diversity of these activities is best illustrated in the Highlights section of our quarterly earnings releases, which are attached as exhibits to our Item 2.02 Form 8-Ks. In these documents we provide a condensed list of our innovations that were introduced during the quarter. The list for a quarter’s worth of activity often spans multiple pages, product and service categories, and customer groups, and thus defies simple categorization. Instead, we believe a
October 26, 2017
Page 4
more consumable MD&A discussion is one that describes the reasons for increasing (or decreasing) infrastructure and personnel cost. As described in our historical filings, these are the primary drivers in technology and content cost.
Based on the Staff’s comments, we recognize we can make these factors more clear in our filings by revising our future disclosures as reflected in the mock-up of our 2016 10-K language below:
Technology and Content - MD&A
Technology costs consist principally of research and development activities including and content costs include payroll and related expenses for employees involved in application, production, maintenance, operation, and development the research and development of new and existing products and services, as well as AWS and other technology infrastructure costs. Content costs consist principally of payroll and related expenses for employees involved in category expansion, editorial content, buying, and merchandising selection. development, design, and maintenance of our websites, curation and display of products and services made available on our websites, and infrastructure costs. Infrastructure costs include servers, networking equipment, and data center related depreciation, rent, utilities, and other expenses necessary to support AWS, as well as these and other efforts. 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 several 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 2014, 2015, and 2016, compared to the comparable prior year periods, is primarily due to increased payroll and related costs associated with technical teams responsible for expanding our products and services, and an increase in spending on technology infrastructure principally allocated to our AWS segment.
Technology infrastructure costs consist of servers, networking equipment, and data center related depreciation, rent, utilities, and payroll expenses. These costs are allocated to segments based on usage. In 2014, 2015, and 2016, we expanded our technology infrastructure principally by increasing our capacity for AWS service offerings globally, compared to the comparable prior year periods. Additionally, the costs associated with operating and maintaining our expanded infrastructure have increased over time, corresponding with increased usage. We expect these trends to continue over time as we invest in technology infrastructure to support increased usage.
The increase in payroll and related costs is primarily due to the expansion of existing product categories and service offerings, including AWS, and initiatives to introduce new product and service offerings.
October 26, 2017
Page 5
For 2014, 2015, and 2016, we capitalized $641 million (including $104 million of stock-based compensation), $642 million (including $114 million of stock-based compensation), and $511 million (including $94 million of stock-based compensation) of costs associated with internal-use software and website development. Amortization of previously capitalized amounts was $559 million, $635 million, and $634 million for 2014, 2015, and 2016.
Technology and Content - Note 1
Technology costs consist principally of research and development activities including and content costs include payroll and related expenses for employees involved in application, production, maintenance, operation, and development the research and development of new and existing products and services, as well as AWS and other technology development, design, and maintenance of our websites, curation and display of products and services made available on our websites, and infrastructure costs. Content costs consist principally of payroll and related expenses for employees involved in category expansion, editorial content, buying, and merchandising selection. Infrastructure costs include servers, networking equipment, and data center related depreciation, rent, utilities, and other expenses necessary to support AWS, as well as these and other efforts. Collectively, these costs reflect the investments we make in order to offer a wide variety of products and services to our customers.
Technology and content costs are expensed as incurred, except for certain costs relating to the development of internal-use software and website development costs, including software used to upgrade and enhance our websites and applications supporting our business, which are capitalized and amortized over two years.
Note 7 – Commitments and Contingencies
Legal Proceedings, page 58
4.
We note your disclosure that for some of the matters for which a loss is probable or reasonably possible, an estimate of the amount of loss or range of losses is not possible. Your disclosure implies that there are some matters for which you are able to estimate the possible loss or range of loss in excess of the amounts accrued. Please tell us the matters for which you are able to estimate the possible loss or range in loss in excess of amounts accrued and the amounts thereof. Also, if there is a reasonable possibility that a loss exceeding amounts already recognized may have occurred, in your next periodic filing, please either disclose an estimate (or, if true, state that the estimate is immaterial in lieu of providing quantified amounts) of the additional loss or range of loss, or state such an estimate cannot be made. You may provide your disclosures on an aggregate basis. Please refer to ASC 450-20-50.
Response
Pursuant to ASC 450-20-50, if a loss is probable or reasonably possible, and an estimate of the amount of loss or range of loss in excess of any amount accrued is both possible and material, we would disclose such estimate. The disclosure in our 2016 10-K is not intended to suggest otherwise, and in future filings we will revise our disclosure as follows:
October 26, 2017
Page 6
The outcomes of our legal proceedings and other contingencies are inherently unpredictable, subject to significant uncertainties, and could be material to our operating results and cash flows for a particular period. In addition, for the some matters disclosed above that do not include for which a loss is probable or reasonably possible, an estimate of the amount of loss or range of losses, such an estimate is not possible or is immaterial, and we may be unable to estimate the possible loss or range of losses that could potentially result from the application of non-monetary remedies.
For each of the matters disclosed as a loss contingency in our 20
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CORRESP 1 filename1.htm Document October 26, 2017 William H. Thompson Accounting Branch Chief United States Securities and Exchange Commission Division of Corporation Finance 100 F Street, N.E. Washington, D.C. 20549-0405 Re: Amazon.com, Inc. Form 10-K for the Fiscal Year Ended December 31, 2016 Filed February 10, 2017 Form 10-Q for the Quarter Ended June 30, 2017 Filed July 28, 2017 File No. 0-22513 Dear Mr. Thompson: On behalf of Amazon.com, Inc., this responds to your letter of September 27, 2017, regarding our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 10-K”) and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 (the “Q2 2017 10-Q”). Each of your comments is set forth below, followed by our response. Form 10-K for the Fiscal Year Ended December 31, 2016 Management’s Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net Sales, page 23 1. You state that North American and International net sales have increased in the last three fiscal years primarily as a result of increased unit sales, which were driven in part by “sales in faster growing categories such as electronics and other general merchandise.” Please revise future periodic reports to expand your discussion to describe the drivers of net sales in the “Electronics and other general merchandise” product category, so that investors may better understand any trends that have had, or that you reasonably expect to have, an impact on such net sales, and the extent to which the increase in North American and International net sales is attributable to the increase in unit sales in such product category. In addition, given the breadth of this category, please also provide additional granularity as to the types of products within “electronics and other general merchandise” that are causing “faster growth.” Please refer to Item 303(a)(3) of Regulation S-K and Section III.B of SEC Release No. 34-48960. October 26, 2017 Page 2 Response Historically, our presentation of revenue data for the Media and EGM categories, which as noted further below we ceased to disclose after December 31, 2016, provided investors information about groups of similar products and services that reflected the growth and development of our business beyond our initial offerings as an online book retailer. This presentation also was consistent with our entity-wide disclosures regarding revenue from similar products and services. However, growth in overall unit sales has been the primary driver of net sales across the many and expanding products and services sold through our website, and we have not identified individual drivers within Media or EGM. Instead, we focus on providing a wide selection of services and hundreds of millions of products and services to our customers across many categories. Our experience over time has demonstrated that increased sales are driven by our focus on reducing prices for our customers, including from shipping offers, increasing in-stock inventory availability, increasing selection, and enhancing the customer experience. Accordingly, in coordination with our response to the comments we received from the Staff of the Division of Corporation Finance (the “Staff”) on our Annual Report on Form 10-K for the year ended December 31, 2015, and our subsequent discussions with the Staff and determination to change the entity-wide disclosures we present pursuant to ASC 280-10-50-40, we also evaluated our presentation of revenue data in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”). As a result, in the Q1 2017 10-Q and subsequent quarterly reports we have determined not to refer to an EGM category, and we do not address product categories as a driver of unit sales. We will continue to monitor the revenue drivers associated with our operations and will identify in future periodic reports any trends that have or are expected to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. Technology and Content, page 28 2. Please disclose a break out of research and development expense by project, activity or in whatever fashion you believe will provide more transparency as to the magnitude and direction of your research and development activities. Response See discussion related to our research and development expenses included in response to Question 3 below. Notes to Consolidated Financial Statements Note 1 – Description of Business and Accounting Policies Technology and Content, page 43 3. Please tell us and disclose in future filings the total amount of research and development costs charged to expense for each year presented in the consolidated statements of operations as required by ASC 730-10-50. October 26, 2017 Page 3 Please also explain in detail the nature of expenses by project or activity that you categorize as research and development costs. Please specifically describe the types of costs related to your initiatives to build and deploy innovative and efficient software and electric devices and development of new products and services as well as AWS and technology infrastructure costs. Please indicate what portion of such costs represents research and development expenditures. In explaining the types of costs, please also describe any engineering or other costs excluded from research and development costs. To the extent you can categorize items included and excluded from research and development by the type of activity illustrated in ASC 730-10-55-1 and 2, that would be helpful to our understanding. Lastly, we note your disclosure that content costs consist principally of payroll and related expenses for employees involved in category expansion, editorial content, buying and merchandising selection. Please explain to us why it’s appropriate to combine content costs with technology costs, which we understand to be primarily research and development costs. We may have further comments. Response In response to the Staff’s last question, which we are addressing first because it helps to inform the basis of our response to this comment, we combine technology and content costs because this grouping of cost best depicts the investments we make to enhance our customers’ experience. This includes investments we make to improve the functionality or appearance of our websites, the speed at which they operate, the selection of products or services we make available on them, and the manner in which we categorize and display items on them. These efforts are intended to improve and facilitate the customer experience. Likewise, we invest in the development of new products and services beyond our website in an effort to serve our customers and invent on their behalf. These investments may include e-readers, tablets, streaming video, voice automation, and compute and storage power, which are intended to enhance the customer experience by expanding the variety of products and services we offer. Collectively, technology and content costs further our efforts to bring selection, price, and availability to our customers, including through research, development, maintenance, and other enhancements. Our business model encourages the simultaneous research, design, development, and maintenance of both new and existing products and services. For example, our teams are constantly working to build new Alexa skills and simultaneously maintain current skills, and these activities are within a continuum of those described in ASC 730-10-55-1 and 2 and are not easily distinguishable operationally. We focus on innovation and customer obsession and manage the total investment in our employees and infrastructure in order to improve the customer experience. We believe our technology and content presentation is most representative of the investments we make on behalf of our customers. With regard to the nature of the costs that we incur by project, activity, magnitude, or direction, the sheer volume and diversity of our innovations and other activities does not lend itself well to any further refinement of technology and content expenses. The volume and diversity of these activities is best illustrated in the Highlights section of our quarterly earnings releases, which are attached as exhibits to our Item 2.02 Form 8-Ks. In these documents we provide a condensed list of our innovations that were introduced during the quarter. The list for a quarter’s worth of activity often spans multiple pages, product and service categories, and customer groups, and thus defies simple categorization. Instead, we believe a October 26, 2017 Page 4 more consumable MD&A discussion is one that describes the reasons for increasing (or decreasing) infrastructure and personnel cost. As described in our historical filings, these are the primary drivers in technology and content cost. Based on the Staff’s comments, we recognize we can make these factors more clear in our filings by revising our future disclosures as reflected in the mock-up of our 2016 10-K language below: Technology and Content - MD&A Technology costs consist principally of research and development activities including and content costs include payroll and related expenses for employees involved in application, production, maintenance, operation, and development the research and development of new and existing products and services, as well as AWS and other technology infrastructure costs. Content costs consist principally of payroll and related expenses for employees involved in category expansion, editorial content, buying, and merchandising selection. development, design, and maintenance of our websites, curation and display of products and services made available on our websites, and infrastructure costs. Infrastructure costs include servers, networking equipment, and data center related depreciation, rent, utilities, and other expenses necessary to support AWS, as well as these and other efforts. 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 several 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 2014, 2015, and 2016, compared to the comparable prior year periods, is primarily due to increased payroll and related costs associated with technical teams responsible for expanding our products and services, and an increase in spending on technology infrastructure principally allocated to our AWS segment. Technology infrastructure costs consist of servers, networking equipment, and data center related depreciation, rent, utilities, and payroll expenses. These costs are allocated to segments based on usage. In 2014, 2015, and 2016, we expanded our technology infrastructure principally by increasing our capacity for AWS service offerings globally, compared to the comparable prior year periods. Additionally, the costs associated with operating and maintaining our expanded infrastructure have increased over time, corresponding with increased usage. We expect these trends to continue over time as we invest in technology infrastructure to support increased usage. The increase in payroll and related costs is primarily due to the expansion of existing product categories and service offerings, including AWS, and initiatives to introduce new product and service offerings. October 26, 2017 Page 5 For 2014, 2015, and 2016, we capitalized $641 million (including $104 million of stock-based compensation), $642 million (including $114 million of stock-based compensation), and $511 million (including $94 million of stock-based compensation) of costs associated with internal-use software and website development. Amortization of previously capitalized amounts was $559 million, $635 million, and $634 million for 2014, 2015, and 2016. Technology and Content - Note 1 Technology costs consist principally of research and development activities including and content costs include payroll and related expenses for employees involved in application, production, maintenance, operation, and development the research and development of new and existing products and services, as well as AWS and other technology development, design, and maintenance of our websites, curation and display of products and services made available on our websites, and infrastructure costs. Content costs consist principally of payroll and related expenses for employees involved in category expansion, editorial content, buying, and merchandising selection. Infrastructure costs include servers, networking equipment, and data center related depreciation, rent, utilities, and other expenses necessary to support AWS, as well as these and other efforts. Collectively, these costs reflect the investments we make in order to offer a wide variety of products and services to our customers. Technology and content costs are expensed as incurred, except for certain costs relating to the development of internal-use software and website development costs, including software used to upgrade and enhance our websites and applications supporting our business, which are capitalized and amortized over two years. Note 7 – Commitments and Contingencies Legal Proceedings, page 58 4. We note your disclosure that for some of the matters for which a loss is probable or reasonably possible, an estimate of the amount of loss or range of losses is not possible. Your disclosure implies that there are some matters for which you are able to estimate the possible loss or range of loss in excess of the amounts accrued. Please tell us the matters for which you are able to estimate the possible loss or range in loss in excess of amounts accrued and the amounts thereof. Also, if there is a reasonable possibility that a loss exceeding amounts already recognized may have occurred, in your next periodic filing, please either disclose an estimate (or, if true, state that the estimate is immaterial in lieu of providing quantified amounts) of the additional loss or range of loss, or state such an estimate cannot be made. You may provide your disclosures on an aggregate basis. Please refer to ASC 450-20-50. Response Pursuant to ASC 450-20-50, if a loss is probable or reasonably possible, and an estimate of the amount of loss or range of loss in excess of any amount accrued is both possible and material, we would disclose such estimate. The disclosure in our 2016 10-K is not intended to suggest otherwise, and in future filings we will revise our disclosure as follows: October 26, 2017 Page 6 The outcomes of our legal proceedings and other contingencies are inherently unpredictable, subject to significant uncertainties, and could be material to our operating results and cash flows for a particular period. In addition, for the some matters disclosed above that do not include for which a loss is probable or reasonably possible, an estimate of the amount of loss or range of losses, such an estimate is not possible or is immaterial, and we may be unable to estimate the possible loss or range of losses that could potentially result from the application of non-monetary remedies. For each of the matters disclosed as a loss contingency in our 20