Thank you for standing by. Good day, everyone, and welcome to the Amazon dotcom Second Quarter 2013 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 would like to turn the call over to Vice President of Investor Relations, Mr. Sean Boyle. Please go ahead sir.
Hello, and welcome to our Q2 2013 financial results conference Joining us today is Tom Szutak, our CFO. We will be available for questions after our prepared remarks. The following discussion and responses to your questions reflect management's views as of today, July 25, 2013 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 most recent Annual Report on Form 10 ks.
As you listen to today's conference 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 2012. Now, I'll turn the call over to Tom.
Thanks, Sean. I'll begin with comments on our Q2 financial results. Trailing 12 month operating cash flow increased 41 percent to $4,530,000,000 Trailing 12 month free cash flow decreased 76 percent to $265,000,000 Trailing 12 month capital expenditures were $4,270,000,000 This amount includes $1,400,000,000 in purchases of our previously leased corporate office space as well as property for development of additional corporate office space located in Seattle, Washington, which we purchased in the Q4 of 2012. The increase in capital expenditures reflects additional investments in support of continued business growth, consistent of investments in technology infrastructure, including Amazon Web Services and additional capacity to support our fulfillment operations. Return on invested capital was 2%, down from 11%.
ROIC is TTM free cash flow divided by average total assets minus current liabilities excluding the current portion of long term debt over 5 quarter ends. The combination of common stock and stock based awards outstanding was 474,000,000 shares compared with 468,000,000 shares. Worldwide revenue grew 22 percent to $15,700,000,000 or 25 percent excluding the $392,000,000 unfavorable impact from year over year change in foreign exchange rates. We're grateful to our customers who continue to take advantage of our low prices, fast selection and shipping offers. Media revenue increased to $4,400,000,000 up 7% or 11% excluding foreign exchange.
EGM revenue increased to $10,420,000,000 up 28% or 30% excluding foreign exchange. Worldwide EGM increased to 66% and worldwide sales, up from 64%. Worldwide paid unit growth was 29%. Active customer accounts exceeded 215,000,000 Worldwide active seller accounts were more than 2,000,000. Seller units represented 40% of paid units.
Now I'll discuss operating expenses excluding stock based compensation. Cost of sales was $11,210,000,000 or 71.4 percent of revenue compared with 73.9%. Fulfillment, Fulfillment, marketing, tech and content and G and A combined was $4,090,000,000 or 26 percent of sales, up approximately 2 75 basis points year over year. Fulfillment was $1,760,000,000 or 11.2 percent of revenue compared with 10.1%. Tech and content was $1,430,000,000 or 9.1 percent of revenue compared with 7.6%.
Marketing was $651,000,000 or 4.1 percent of revenue consistent with prior period. Now I'll 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 percent to $9,490,000,000 Media revenue grew 16 percent to $2,170,000,000 dollars AGM revenue grew 31 percent to $6,480,000,000 representing 68% of North America revenues, up from 67%. North America segment operating income increased 19 percent to $409,000,000 a 4.3% operating margin. In the International segment, revenue grew 13% to 6,210,000,000 dollars Adjusting for the $391,000,000 year over year unfavorable foreign exchange impact, revenue growth was 20%.
Media revenue decreased 1% to $2,220,000,000 or grew 7% excluding foreign exchange. And EGM revenue grew 22% to 3,940,000,000 dollars or 29% excluding foreign exchange. EGM now represents 63% of international revenues, up from 59%. International segment operating income was 0, down from $16,000,000 in the prior year period. Excluding the unfavorable impact from foreign exchange, international segment operating income increased 11%.
CSOI increased 14% to $409,000,000 or 2.6 percent of revenue, down approximately 20 basis points year over year. Excluding the unfavorable impact from foreign exchange, CSOI increased 19%. Unlike CSOI, our GAAP operating income includes compensation expense and other operating expense. GAAP operating income decreased 26 percent to $79,000,000 or 0.5 percent of net sales. Our income tax expense was $13,000,000 GAAP net loss was $7,000,000 or $0.02 per diluted share compared with net income of $7,000,000 $0.01 per diluted share.
Turning to the balance sheet, cash marketable securities increased 2 point 4 $1,000,000,000 Inventory increased 24 percent to $5,420,000,000 and inventory turns were $9,400,000,000 down from 10.1 turns a year ago as we expanded selection, improved in stock levels and introduced new product categories. Accounts payable increased 27% to $8,990,000,000 and accounts payable days increased to $73,000,000 from $68,000,000 in the prior year. I'll conclude my portion of today's call with guidance. Incorporated into our guidance are the order trends that we've seen to date and what we believe today to be appropriately conservative assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including a high level of uncertainty surrounding exchange rate fluctuations, as well as the global economy and consumer spending.
It's 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 settling intercompany balances and foreign currencies amongst our subsidiaries, unfavorable resolution of legal matters and changes to our effective tax rates can all have a material effect on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions, investments, restructurings or legal settlements, record any further revisions to stock based compensation estimates and net foreign exchange rates remain approximately where they've been recently. For Q3, twenty thirteen, we expect net sales of between $15,450,000,000 $17,150,000,000 a growth between 12 $5,000,000,000 a growth between 12% 20 4%. This guidance anticipates approximately 300 basis points of unfavorable impact from foreign exchange rates.
GAAP operating loss to be between $440,000,000 $65,000,000 compared to $28,000,000 in Q3 2012. This includes approximately $340,000,000 of stock based compensation and amortization of intangible assets. We anticipate consolidated segment operating income or loss, which excludes stock based compensation and other operating expense to be between $100,000,000 loss $275,000,000 in income compared to $232,000,000 of income in Q3 2012. We remain head sound focused on driving a better customer experience through price, selection and convenience. We believe putting customers first is the only reliable way to create lasting value for shareholders.
Thanks. And with that, Sean, let's go to questions.
Great. Thanks, Tom. Let's move on to the Q and A portion of the call. Operator, will you please remind our listeners how to initiate a question?
At this time, we will now open the call up for questions. In the interest of time, we ask that you limit yourself to 1 question. Our first question comes from Ross Sandler from Deutsche Bank.
Thanks guys. Just had one question on shipping. It looks like the unit efficiency in shipping continues to improve. What are you guys doing to drive the cost of shipping each unit lower? And are there more costs that can be taken out on a per unit basis?
And then as you start looking at same day delivery in some of these markets, including the new grocery program, what incremental cost do you see around doing same day fulfillment? Thanks.
In terms of the economics, we have a great team operations team that's working on how do we serve customers reliably and faster. So that certainly that's reflected in our transportation costs. Also from a productivity standpoint, we're just as we add capacity, we're just getting closer and closer to customers with larger selection, which is certainly helpful from a our transportation costs. And the team's done a great job over the years of becoming even more reliable and faster and more productive. And again, they'll be working on ways to make that even better over time.
And we'll move to Douglas Anmuth from JPMorgan.
Great. Thanks for taking the question. So hoping you could talk a little bit more just on the profitability of the grocery business and how you'll know when it's the right time to expand to more markets beyond Seattle and LA? And then also if you could comment on the European macro environment just given the growth that you saw in the international business just de selling a little bit from last quarter? Thanks.
In terms of the fresh business, we started doing a pilot several years ago in Seattle. We did a number of teams done a great job inventing on behalf of customers. It's a very good customer experience. The challenge that we've had over the past several years is how to make it economically viable. And so that's the team's done a lot of different experiments and invented well on behalf of customers to see what works.
And we took a lot of that knowledge and which enabled us to launch Fresh in LA. And it's very early there. We're still in the trial period. It's a good customer experience and we like what we see so far, but it's very, very early. And so it's something that we'll continue to work on and both from a customer experience and from an economic standpoint.
And there's not much more I can add to that right now. So you have to stay tuned and see where that ends up.
Our next question comes from Mark Miller from William Blair.
Hi, good afternoon. Could you help us understand the 3rd party unit growth? I think this is the Q1 in about 3 years that 3rd party unit penetration hasn't increased. And then additionally, wondering if you could comment at all on potential to expand Prime membership options In terms of the 3rd party unit growth, it was 40% this quarter, which compares to 40% last year in Q2. So again, it is flat as a percentage of total units.
One thing to keep in mind though is our digital units are growing at a faster rate than physical and those digital units are primarily first party units. So if you take out digital units out in both periods, we're actually up approximately 300 basis points. So our physical seller business is growing very nicely. It's growing at a faster rate than retail and it's doing very well. And so very pleased to see that.
And we'll move now to Brian Piss from Jefferies.
Great. Thanks. A quick question on fulfillment centers. Any color on your current plan for the year in terms of locations, U. S.
Versus international timing, etcetera? And then separately, any comments on the weaker growth in international media? Thanks. In terms of FCs, we've announced to date 5 net new facilities in the U. S.
We've also announced some in international. It's still early as we did in prior last few years. We'll give you updates as we went along. And so we can update you a little bit later in the year to see how that progresses, but we certainly are adding new capacity and that's reflected in the guidance that you see in Q3 as we get ready for our Q4 seasonal quarter. In terms of growth in international media, What you're seeing there is on a local currency growth basis, you see a 7% growth.
That's consistent with what you've seen in the last couple of quarters. We're at the very early stages. We're excited about what we're seeing so far in digital, but we're in that early stage transformation from digital from physical to digital within international. And so you see from the release that we've launched a lot of new things related to digital over the past 90 days and even prior to that. So we're very excited about those launches and excited about the transformation.
We're also excited if you look at our total international business, we've got a lot of opportunities to invest in. I talked about the conversion from physical to digital. We also have selections to add within existing categories, new categories, new geographies. So we're very excited about the opportunity that we have there.
Thank you.
And we'll now go to Scott Divitt from Morgan Stanley.
Hi, thanks. I guess the international topic again, but it's been asked a few times. So maybe specifically in China, Tom, in terms of what the company hypothesis is in terms of the way that market plays out over time and how you think about investment spend in that market? And then secondly, as it relates to AWS, it's nice the event, the annual event and the quarterly events that happen. I was wondering when you think it makes sense to start talking more about it in releases and on calls.
Is it just the 10% revenue threshold or something else that would lead to more discussions on that on calls like this? Thanks.
In terms of China, we are investing heavily in China and we have been for some number of years. We have a good customer experience there. We continue to look at ways to make that even better. We're adding selection across many categories right now. It's a very interesting geography.
And so we'll continue to work on that experience for customers. You should expect us to be in investment mode for some time. And but it's a very sizable segment, very interesting long term growth opportunity. And we'll continue to work on making that better for customers and for investors over time. In terms of AWS, the business is growing very, very strongly.
We've got a great team that's innovating on behalf of customers, launching new services, becoming more productive, which allows us to be able to lower prices. We've had many price reductions since we started with AWS and we share that very visibly. And so we're very excited about that business. And even though we were off to a very good start, it's a very big opportunity and we continue to invest in that business and we're very excited to do it. We think it's a great long term opportunity and we have a great team working on it.
Thank you. Our next question comes from Mark Mahaney from RBC.
Great. Thanks. Tom, just one question related to consumer packaged goods. Any comments there on whether you're seeing broader purchases by the Amazon customers of more traditional consumer staples than you've seen in the past? And is that something that you're trying to promote?
Thank you. Yes. We just to make sure I have your question, we are seeing when you look at our, for example, our North America growth, particularly EGM, we're seeing very good growth across many different categories. But a few call outs, we are seeing very good growth in apparel specifically and also consumables. And so the team has done a very nice job.
Both teams have done a very nice job from a customer experience
And we'll now go to Mark May from Citi.
Thanks for taking my question. Another one on international and the media segment there. I believe that you now have a more comprehensive localized international strategy for the Kendall. And I wonder if you could talk about what if any impact that you think that that might have over the next few quarters in terms of its impact on the International Media segment? And also AWS.
I think one of the contributors of growth and we suspect margins in the U. S. Has been the success of AWS. Here, I wonder if you could talk about any plans for AWS outside the U. S?
Sure. In terms of Kindle, you're right. We now have Kindle stores, if you will, established in all of the Amazon domains that we have around the world. And recently we announced Kindle Fire HD is available to customers in over 170 countries. We introduced Kindle Paperwhite and Kindle Fire HD in China.
Both that's both online on our website and also in a number of offline retail locations. So again, there's a lot of advancement in terms of the Kindle. But again, it's very early, very encouraged by the opportunity that we have there for customers and our ability to try to capitalize on that from a digital content standpoint. In terms of AWS, the business is expanding and it's incredible opportunity globally. We recognize that, the team recognizes that And we'll continue to work on that on behalf of customers.
Our next question comes from Justin Post from Merrill Lynch.
Thank you. The company and the business is going through a lot of transitions with digital media, AWS, obviously Prime and potentially same day delivery. Long time ago, you used to give us kind of a margin outlook for the company. As you think about these businesses, do you think that they are better for Amazon and that you can have greater share of retail as these evolutions happen? And then also what are the implications on Amazon's long term margins as you go through these transitions over time?
Any help on that could help. Thanks. Sure. In terms of the way we're looking at them certainly is based on the free cash flow potential. And we have a we're in some really interesting great businesses that have a lot of potential from a free cash flow generation standpoint with good and high ROICs, which is exciting.
From a margin standpoint, always challenging to predict where that will come out in terms of absolute numbers. But what we will do is we want to make sure that we try to maximize free cash flow. That's something that we've always said. So our strategy hasn't changed. Our outlook hasn't changed in that regard.
Frequently, we'd be asked historically is double digit operating margins possible and I still think it's possible. But also if it means if a good high single digit operating margin gets us to better higher free cash flow over time, that's fine too. So again, our goal is to we don't focus on individual margins. Our goal is to make sure that we generate free cash flow, large amounts of free cash flow and use that capital efficiently. So those are goals that we have and we certainly think that opportunity is there in each of the businesses that we operate in.
Our next question comes from Ben Schachter from Macquarie.
Two quick questions on revenue recognition. Over the past some quarters, I believe that the digital media at least has moved around between the agency and wholesale model. Can you help us quantify how this has actually impacted the reported media revenue rates? In other words, would 2Q revenue rates have been meaningfully different if the model had been the same? And then second question just quickly on Prime.
Can you remind us how you recognize revenue from the Prime membership fee over the course of the year? Thanks.
Sure. In terms of the Prime, we recognize it over the life of the subscription. And then in terms of 3rd party versus 1st party, certainly we have had some shift within digital media. But again, digital media is primarily a first party business and happens to be one portion of our business. But you're absolutely right.
And in terms of our 3rd party business, which from a unit perspective is 40% of our total units this quarter, we recognize the share of that revenue, the rev share if you will as revenue, whereas the other parts of largely we're recognizing that as first party revenue and so we're recognizing the full amount of the revenue in the current period.
Thank you. Our next question comes from Jordan Rohan from Stifel Nicolaus.
Thank you so much. I'm curious about your expansion efforts in Spain since it's a relatively new territory for you, how well situated you are and how ready you are for the Q4 there? And also, there have been a lot of stories about Amazon heading into Brazil, but I don't believe we've identified any fulfillment centers and things like that. Can you discuss the extent and breadth of your offering in Brazil, whether it's Kindle devices, digital media or something beyond that? Thank you.
In terms of Spain, we're very excited about what we see. It's growing very fast. We're in investment mode and it's an exciting geography for us and we're very optimistic over time that it'll be a great geography for us. So we're very happy to serve customers in Spain and we'll continue to as we've done in other geographies that continue to serve customers and continue to expand selection and get service levels even better over time. And so very excited about that.
In terms of Brazil, we do have a Kindle store and we have devices at physical retailers. So from a Kindle perspective, that's what we're doing in Brazil.
Our next question comes from Ron Josey from JMP Securities.
Great. Thank you for taking my question. I'm wondering if you can talk a little bit about North America EGM. Just given the strength you saw in the business and continued reacceleration, have you seen any sort of impact, assuming no, but from price matching programs from offline retailers? And we'll talk and also on sales tax.
Thank you. In terms of North America total growth, we saw an acceleration from last quarter from 26% to 30%. We saw an acceleration in both North America Media as well as North America EGM. Within EGM, it was very broad in terms of growth. We saw very strong growth across many different categories.
And so very pleased with that. I called out a couple that were notable in terms of apparel as well as in consumables. Certainly, those are getting larger and still growing very fast, which is why I call those out. In terms of competitiveness, it's been very competitive. It is today.
It has been since our inception. We have many different competitors online. We have many competitors offline. As you go to your home or office, you pass our competitors every day. That's an environment we're used to dealing in.
It's something that's not new. It's something that we see in all of our geographies across many different categories.
Our next question comes from Heath Terry from Goldman Sachs.
Great. Thanks, Tom. As you get closer to customers with more FCEs and more efficient shipping, what kind of impact is that having on conversion rates on within customers in those areas? Is shipping time shortened or delivery time shortened? And then as you look at the early adopters for fresh in LA, any sense that you can share with us of what kind of cross shopping you're seeing among new fresh customers?
Are they bundling media in EGM and those other orders? Or to any degree, are these new Amazon new to Amazon customers that have been brought in purely because of Fresh?
If you take a look at LA, it's just again very excited and it's very early. So I think on that one just have to stay tuned. But in terms of as we get closer and closer to customers with fulfillment, we have seen growth due to that and it's manifested its way in a few different ways, but most notably, you see it in Prime. We've because of our fulfillment logistics capability, we've been able to offer Prime broadly and we just have selection that's just closer and closer to customers. And if you look back over the last several years, there's been different reasons why we've grown the way we've grown in terms of adding new selection and making sure that we have really sharp pricing.
But certainly Prime and which includes a speed of delivery has certainly been a notable has had a notable impact. And we're very pleased with the Prime program. Customers like it. We're adding we see very strong growth in Prime subscribers. We see very good retention of Prime members.
So it's a great program for us. And certainly, again, delivery speed is certainly impacting that program and our overall growth.
Our next question comes from Anthony DiClemente from Barclays.
Thank you. On the topic of media, just wondering Tom if there are any callouts in terms of categories of strength or weakness within physical or digital media that you could call out? And along those lines, just wondering if you could comment on your media device rollout strategy from here, if there's In
In terms of media growth, not a lot of callouts except probably the obvious is digital units growing very fast relative to physical units and we're excited to see that. And because of where we are, we're further penetrated in North America. You're seeing a bigger impact on our growth rate than you are in international. And we certainly see that, but not a lot of other callouts there. But again, we're very pleased and certainly customers responding many things including selection and great prices and everything else within those digital offerings, but also they're responding to unique selection that we have.
And we if you take a look at our release, you'll see the specific numbers related to some of the exclusives we have. And certainly that's having an impact. So there's many, many different things that are working for us in that space as part of our overall ecosystem for digital that we're pleased with. In terms of our device plan, we're very pleased with the devices we have and to offer customers. We think we have a great offering both in terms of Kindle and Kindle Fire.
In terms of our future roadmap, we have a longstanding practice of not talking about what that will be prior to announcement.
Our next question comes from Youssef Squali from Cantor Fitzgerald.
Thank you very much. Two quick questions please. Technical content was up to 9% of revenues. I think that's the highest it's ever been. How much of that is actually streaming content related?
And how do we look at it going forward? Does it stay at that elevated level? And then on Fresh, is that business profitable for you in the Seattle area? Thanks.
In terms of tech and content, we're spending in a number of different areas, but there's a few that I'd like to highlight. One is certainly keep in mind that the infrastructure related to our very fast growing web services business is included in tech and content. So certainly as we ramp up that business and it's becoming more sizable and growing very fast, you're seeing that impacting that line item. We're also investing very heavily in digital and that's across many different parts of our digital offerings there. That's also included any of the tech teams that working on customer experience across Amazon as we grow.
So as we support both our seller businesses and our retail businesses, that are included in that line item. So certainly that's what you're seeing there. In terms of Fresh, we're not breaking out the financials. But keep in mind that Fresh was designed as a pilot and certainly the economics have improved over time through invention on behalf of the team there as well as operating efficiencies. So again, that was set up as a test and which has enabled us to launch L.
A.
And we'll now go to Colin Sebastian from Robert Baird.
Thanks very much. I guess
a quick follow-up on the device strategy and given the fairly quick pace of innovation in the tablet market overall, I wonder if you can contrast the benefits of that for Amazon given the popularity of shopping and media apps with the costs and complexity of maintaining your own line of hardware? And related to this, it seems as if the pace of new content acquisition and licensing has picked up a bit. So I wonder if that reflects any changes in either the competitive dynamics or pricing or some sort of other strategy shift on your part? Thanks.
In terms of some of the dynamics, we're very excited about our digital business. We're inventing you see a lot of different inventions both on the hardware side as well as on the software side from a device standpoint. You also see a lot of invention around the content side. And we think, for example, Primus and Video, which combines video and our Prime membership is very compelling and we're investing heavily in content. It's still very early there, but we're finding that customers certainly existing Prime members are more and more streaming content.
We're having new Prime members come to Amazon largely because of video in terms of one segment of that population that's coming for new Prime members is because of Primates and Video. And we can see that based on the free trials and the conversion of those free trials from related to Primus and Video. And so that's certainly one portion of our growth in Prime memberships, which we find exciting. For us to be able to offer exclusive content on the book side is very interesting. So again, we're investing a lot of different across a lot of different areas.
And yes, there are a lot of different dynamics, but we think we're well suited for both the device software and content side of those businesses.
Our next question comes from Matt Namer from Wells Fargo Securities.
Good afternoon. Just two questions. 1, given your comments that international will be in investment mode for some time, you just remind us what the priorities are there from either a geography or a product standpoint? And then secondly, following the management changes at Quincy, would love an update on the plans for that business and maybe just a sense for how integrated it is to Amazon retail? Thanks.
Yeah. In terms of the international piece, what I was referring to was when I said investment mode for some time, I was referring to China specifically. And we have a lot of opportunity to grow. We'll still continue to invest in international, but my comment was specifically around China. And then your question around Quincy?
And we'll go to Stephen Ju from Credit Suisse.
Tom, is there anything else?
Hello. Enough? Just to follow-up, I think on the Quipi question, I think was around the founders leaving and we're well positioned with them leaving. I missed the last part of that. But we did we're fortunate to have the founders with us for a number of years.
They did a great job while they were here. And we have a great team at Quidsey and we're pleased with that business. And the retail team works very closely with the Quidsi business and excited to have it as part of the Amazon team.
Tom, is there anything you can share in terms of the situation in Germany with the worker strikes? Are you able to fulfill some unaffected fulfillment centers? Or is it causing some hindrance to your operations there? And also if you can update us on what you've been doing with Keyva since you've acquired it? Are you focusing more on internal integration?
Are you selling more aggressively to external clients? Thanks.
In terms of Germany, there's not a lot I can add to there. We're certainly serving customers. Those results are reflected in our overall total results that you see today for Q2 as well as our international results. In terms of Kiva, we certainly we have a great team there. We love the technology.
We don't have any announcements in terms of rollouts, but we're ahead of schedule from what we had set out at the time of purchase, which we're happy about. So I'll have to stay tuned on the actual rollout, but we're very encouraged by what we see there.
And our final question comes from Ken Senna from Evercore Partners.
Hi, thank you. Just going back to your comments on unit acceleration. Has the shift from agency to wholesale in terms of the DOJ e book settlement, has that completed? Or are you still working your way through many of the U. S.
Publishers? Thank you. We're working through it. I wouldn't say that that's complete, but we're working through it.
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