Amazon Chief Bezos Says Free Cash Flow Trumps Margins
(Corrects cash flow description in fourth paragraph of story published Jan. 7.)
“Percentage margins are not one of the things we are seeking to optimize,” Bezos said in an interview with the Harvard Business Review posted online Jan 3. “It’s the absolute dollar free cash flow per share that you want to maximize. If you can do that by lowering margins, we would do that. Free cash flow, that’s something investors can spend.”
Amazon is spending to improve a network of warehouses and enhance cloud-computing facilities that give customers a cheap and safe way to outsource data centers. Operating margin is estimated to be 1.8 percent this year, down from 4.6 percent in 2009, after a building boom to lure cloud customers and boost online product sales. Bezos said those investments ultimately will add to free cash flow that totaled $2.09 billion in 2011.
This year, cash flow per share from operating activities for Seattle-based Amazon is expected to rise 65 percent to $10.68, from an estimated $6.48 in 2012, according to data compiled by Bloomberg. Operating cash flow is what a company spends on regular business operations, which can include depreciation, amortization and changes in working capital. Free cash flow excludes capital expenditures.
Meeting customers’ demands, even if that means lowering prices to build loyalty, will boost free cash flow over the long term, Bezos said.
“We’ve done price elasticity studies, and the answer is always we should raise prices,” he said. “We don’t do that because we believe -- and again we have to take this as an article of faith -- we believe that by keeping our prices very, very low, we earn trust with customers over time and that that actually does maximize free cash flow over the long term.”
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