Good day, everyone. Thank you for standing by. Welcome to the Amazon dotcom First Quarter 2013 Financial Results Teleconference. At this time, all participants are in a listen only mode. And after the presentation, we will conduct a question and answer session.
Today's call is being recorded. And for opening remarks, I will be turning the call over to the Vice President of Investor Relations, Mr. Sean Boyle. Mr. Boyle, please go ahead.
Hello, and welcome to our Q1 2013 financial results conference call. Joining us today is Tom Szkutak, 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, April 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 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 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 Q1 financial results. Trailing 12 month operating cash flow increased 39 percent to $4,250,000,000 Trailing 12 month free cash flow decreased 85 percent to $177,000,000 Trailing 12 month capital expenditures were $4,070,000,000 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 Q4 2012. The increase in capital expenditures reflects additional investments support of continued business growth, consisting of investments in technology, infrastructure, including Amazon Web Services and additional capacity to support our fulfillment operations.
Return on invested capital was 1%, down from 12%. 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 471,000,000 shares compared with 464,000,000 1 year ago. Worldwide revenue grew 22 percent to $16,070,000,000 or 24% excluding the $302,000,000 unfavorable impact from year over year changes 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 $5,060,000,000 up 7% or 10% excluding foreign exchange. EGM revenue increased to $10,210,000,000 up 20% or 30% excluding foreign exchange. Worldwide EGM increased to 64% of worldwide sales, up from 60%. Worldwide paid unit growth was 30%. Active customer accounts exceeded 209,000,000 Worldwide active seller accounts were more than 2,000,000 Seller units represented 40 percent of paid units.
Now I'll discuss operating expenses excluding stock based compensation. Cost of sales was $11,800,000,000 or 73.4 percent of revenue compared with 76.1%. Fulfillment, marketing, technology and content and G and A combined was $3,830,000,000 or 23.8 percent of sales, up approximately 289 basis points year over year. Fulfillment was $1,740,000,000 or 10.8 percent of revenue compared with 9.5 percent. Tech and content was $1,260,000,000 or 7.9 percent of revenue compared with 6.5%.
Marketing was $616,000,000 or 3.8 percent of revenue compared with 3.6%. 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 26% to 9,390,000,000 dollars Media revenue grew 14 percent to $2,510,000,000 EGM revenue grew 28 percent to $6,130,000,000 representing 65 percent of North America revenues, up from 64%. North America segment operating income increased 31 percent to $457,000,000 a 4.9% operating margin. In the International segment, revenue grew 16 percent to $6,680,000,000 Adjusting for the $301,000,000 year over year unfavorable foreign exchange impact, revenue growth was 21%.
Media revenue grew 1% to $2,540,000,000 or 7% excluding foreign exchange and EGM revenue grew 28 percent to $4,090,000,000 or 32% excluding foreign exchange. EGM now represents 61 percent international revenues, up from 56%. International segment operating loss was $16,000,000 a 0 point 2 percent negative operating margin compared with income of $49,000,000 CSOI increased 11% to $441,000,000 or 2.7 percent of revenue, down approximately 27 basis points year over year. Unlike CSOI, our GAAP operating income includes stock based compensation expense and other operating expense. GAAP operating income decreased 6% to $181,000,000 or 1.1 percent of net sales.
Our income tax benefit was $18,000,000 and includes $46,000,000 of discrete tax benefits primarily resulting from the retroactive reinstatement of the Federal Research and Development Credit that was enacted in January 2013. GAAP net income was $82,000,000 or $0.18 per diluted share compared with $130,000,000 $0.28 per diluted share. Turning to the balance sheet. Cash and marketable securities increased $2,180,000,000 year over year to $7,800,000,000 Inventory increased 27 percent to $5,400,000,000 and inventory turns were 9.5, down from 10.4 turns a year ago as we expanded selection, improved in stock levels and introduced new product categories. Accounts payable increased 29 percent to $8,920,000,000 and accounts payable days increased to 68 from 62 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 the 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 in 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 or settlements, record any further revisions to stock based compensation estimates and that foreign exchange rates remain approximately where they've been recently. For Q2, 2013, we expect net sales of between $14,500,000,000 $16,200,000,000 a growth of between 13% 26%. This guidance anticipates approximately 2 75 basis points of unfavorable impact from foreign exchange rates. GAAP operating income or loss to be between a $340,000,000 loss $10,000,000 income compared to $107,000,000 income in the prior year period. This includes approximately $340,000,000 for stock based compensation and amortization of intangible assets.
We anticipate consolidated segment operating income, which excludes stock compensation and other operating expense to be between $350,000,000 compared to $360,000,000 in the prior year period. We remain heads down 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 move 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?
Certainly. At this time, we will now open up the call for questions. Thank you. And our first question today will come from analyst Brian Pitzer with Jefferies.
Great. Thanks. In February, you changed your FBA fulfillment fees. Any comments on how this affected third party sales? And what was the overall merchant response?
And then just quickly, any update on your latest plans for new fulfillment centers in 2013? Thanks. In terms of I'll take the second part of the question first. In terms of new fulfillment centers, we've announced 3 in the U. S.
Right now and then a few outside of the U. S. Consistent with prior years, it's early. We really like the growth that we're experiencing. We'll be adding more FCs through the course of the year, But stay tuned and we'll update you as we go.
In terms of FDA, there's not a lot I can talk to there. We're very pleased with the FBA business. We think it's great for sellers, great for customers and we're pleased to offer that service.
Great. Thanks.
Moving on, we'll hear from Scott Devitt of Morgan Stanley.
Hi, thanks. Tom, the international segment sales growth of 21 percent continues to show modest deceleration. And I think with the exception of 4Q, it's been trailing U. S. Growth.
I understand that AWS is mostly booked in the U. S. So that's a piece of the delta. But you've talked in the past quarters about the investments in international driving margin to these breakeven levels in international. I was wondering if you could just talk through the deceleration in the revenue growth in those markets and whether that's comp related, Europe, macro or otherwise?
And then secondly, shipping cost on a net basis is again leveraging. I think that's the 2nd consecutive quarter. I just wonder if you could refresh us in terms of when the accounting change occurred in terms of the shipping revenue calculation for FBA to just understand if that's an organic number now? Thank you.
Yes. The second half of the question, there's it is organic, so there's no it's consistent year over year. So this is the Q1 that will be consistent year over year. In terms of your question on international, we're seeing still very solid growth, 21% on a local currency basis. As you've read, certainly there's some softness from a macro standpoint that others are seeing.
Hard to know whether that's impacting us and how much we're not a bellwether for the economy. But we're very pleased with the growth that we're seeing. Again, 21% on a local currency basis. Unit growth is actually growing substantially faster than that. So again, that's what we're seeing.
In terms of investing, you're absolutely right. We're investing in a number of geographies, including certainly China. We've been investing for several years. We continue to invest there. We think it's a great long term opportunity, but we are in investment mode.
And certainly some of the more recent additions that we've had with Italy and Spain are certainly in investment mode as well.
Thank you.
Thank you. Moving on, we'll take a question from Mark Mahaney of RBC Capital Markets.
Thanks. Just a broad question on demand that's mid teens at the low end revenue growth that you've been guiding to for a quarter or 2 now that would seem well below the kind of the average that you've seen in the past. Are there any other factors you would want to call out or specifically not call out? Do you think that things like the imposition of state sales taxes that are having a near term drag on growth rates last quarter? I think you talked about consumer electronics at the high end.
Are there any particular categories there you'd want to call out as maybe driving that low, that could produce a low end of the range outside of negative FX? Thanks, Tom.
Sure. We give as we've been consistently doing, we're giving a wide range. We think that's appropriate given all the factors. That's not something new that we're doing. That's something that we have been doing for some time.
And you're right, the growth rate guidance for Q2 is 13% to 26%. Certainly foreign exchange is having an impact that includes approximately 2 75 basis points of foreign exchange. So it's approximately 16% to 29% on a local currency basis. So again, it's a wide range and there's probably not a lot to add there, but it takes into account all of the things that we think we need to take into account as we give guidance. And in terms of the absolute dollar range, it's very similar to what we would have in terms of the dollar range we would have given for Q1.
I think it's maybe $100,000,000 difference in terms of the absolute value of that range that we gave. So again, a wide range. We think that that's appropriate. Thank you, Tom.
Our next question today will come from Ben Schechter of Macquarie.
Are there any factors that are impacting the unit growth, particularly the shift from physical to digital, for instance, a rented video versus purchasing a video? Or are there any other factors that you'd highlight that are impacting the unit growth?
The one factor I would call out, 1st of all, in terms of overall unit growth, our overall unit growth is 30 percent year over year. Again, very solid growth. It compares to approximately 49% of in Q1 of last year. So it's certainly we're certainly overlapping a pretty strong growth last Q1. In terms of the physical and digital, certainly one thing that we're seeing is certainly digital is growing at a much faster rate.
And where you do see that a little bit is that our 3rd party units as a percentage of total units, you'll see that that's approximately 40% this quarter that compares to last year up about approximately 100 basis points. But what you are seeing is because the digital units are growing at a faster rate and they're mostly 1st party, you're seeing that number impacted where that percentage as a percentage of our total is not growing as fast as it has the last few quarters. And again, that's largely driven by the digital units growth that you're seeing. So again, that's if you were to back out, for example, and just look at our physical units, our physical units as a percentage of total units this year versus last year is up over 300 basis points. Yes, again that's 3P growth as a percentage of total units.
Thanks.
Our next question today comes from Ross Sandler of Deutsche Bank.
Yes. Thanks guys. Question on the follow-up question on the shipping. So just your shipping cost not your net shipping margin, but just shipping cost relative to gross profit declined about 300 basis points similar to what you've seen over the past 4 quarters. So as you start to comp some of these efficiency gains that you're seeing in shipping, do you think that line will continue to show leverage?
Or is it going to start to level out from here? Thanks.
Yes. We're not giving certainly not giving guidance on any specific line item, but certainly over a long period of time we think there's opportunity certainly efficiency gains to be had there and that's certainly the team will continuously work on.
Next we'll hear from Colin Sebastian of Robert W. Baird and Company.
Thanks. A question on Web Services. I wonder if you can comment on enterprise level adoption and whether there are any meaningful barriers to that happening over time? We noticed you've been pretty aggressive in hiring enterprise level salespeople. Thanks.
No, I don't think that there is. I think the team is doing a fantastic job in terms of developing services that are great for many different customer types including enterprises. And the team is head stump focused on making sure we have a great operational these services are great from an operational standpoint and security standpoint and they're doing a terrific job. And so it's a very great opportunity for enterprises to adopt our web services and the team is certainly focused on that along with other customers and so other customer sets. So again, it's a great opportunity for those customers and for us.
Thank you.
Our next question comes from Douglas Anmuth of JPMorgan.
Thanks for taking the question. You've clearly been more aggressive in terms of video content recently and you're sort of leading with it more in the release tonight in terms of the business content. I was hoping you could just add some more color here on the value that you think that TV and movie content adds to consumers' overall purchase patterns? Thanks.
Sure. It's certainly one of our digital offerings, and we have a number of different few different services. We have certainly content that we're using as part of our Prime offer that we have a lot of free content for customers. We think that's a great service for customers along with express shipping offers as well as other content that we have free, for example, our Kindle owners lending library for books. So again, we think it's a great Prime is a great value for customers and it's part of that value proposition.
We also have a very good transaction business for video as well that's growing very, very fast. And certainly customers like it and we're seeing that reflected in the results that you see today. Thank you.
Moving on, we'll hear next from Justin Post with Merrill Lynch. Mr. Post, your line is open. Please go ahead with your question.
Sorry about
that. I was on mute.
I was wondering if you could help us a little bit about the
Kendall ecosystem. On prior calls a few years ago, you singled it out as a fast growth area and you're very happy with the performance. We haven't heard as much about it lately. Kind of the impact of sort of how units are doing against your expectations and then the impact it's having on prime subs and also your gross and operating margins? Thank
We're very pleased with our Kindle and digital business and we're super excited. In terms of the ecosystem, you're certainly seeing that in our results that you see today. For example, if you look at our media growth, we're certainly that ecosystem is penetrated there than it is in international and you see that reflected in those associated growth rates. Another way you see it is if you take a look at our top 10 best selling items worldwide in Q1, the top 10 are all either digital or Kindle related. Paperwhite is our best selling product worldwide.
But again, all spots in the Q1 were either Kindle or digital items. And I believe that that's the first time that we've seen that. We've been looking at that from a quarterly results standpoint for some period of time and we've had various levels of the top 10, but I think this may be the first quarter we've had all top 10 being either Kindle related or digital related. So again, we're very pleased with what we're doing there and we're going to continue to innovate on behalf of customers.
And any impact on your gross or operating margins that you want to call out?
The one thing I would say is we certainly are investing. It's certainly an area of investment and you're seeing that reflected. We're making a number of investments across the business and certainly we're investing in Kindle and our digital offerings. We're investing in some of the other things I mentioned earlier like China, some of the emerging geographies. So those are certainly some of the larger key investments we're making.
Thank you.
Moving on, we'll hear from Matt Namer of Wells Fargo Securities.
Good afternoon. We're hearing reports that there is refrigeration equipment going into some of your fulfillment centers outside of Seattle area. Just wondering if you can update us on plans to expand Amazon Fresh? Thanks. No, nothing to announce.
We're very pleased with what we've seen in the Seattle area. But again, it's been a test and we continue to monitor that test carefully. It's certainly something that we see that customers love the experience. The challenge has always been making sure we can get the economics right. And that's something we'll continue to focus on.
And up next, we'll take a question from Stephen Ju of Credit Suisse.
Hey, Tom, anything you can say in terms of how much Amazon Instant Video as well as potentially your own in house produced content currently helps and will should in the future help reduce churn Amazon Prime? Thanks.
Thanks for the question. Yes, it's something we haven't released any of the numbers. It's something that we're tracking very closely. It is something that we believe over time will reduce churn and is certainly helping today. What we are seeing is great traction.
We see a lot of usage of the service. Customers love it. And we think it's a very interesting part of Prime offering. And that's why we have been expanding and why you see some of the more recent announcement including some of the stuff included in the earnings release today around original content. So again, it's something that we find very interesting and we're excited about it.
And we'll go next to Ken Siena of Evercore Partners with our next question.
Hi. I was just hoping you could maybe provide a little more color on the unit growth deceleration. And looking back over the last four quarters, it seems like about 500 basis points or so each quarter of deceleration. You had about 200 basis points here, which is an improvement. But anything you could say just to any signs of maturity in some of the businesses and maybe where that deceleration is specifically coming from?
Thank you.
No, there's not a lot I can add. I mean, I think the 30% is still a very strong growth rate. Again, it's growing at a faster rate than revenue, Revenue at 22%, revenue at local currency growth of 24%, very strong third party growth continues to be very strong. Retail growth is strong. So again, there's not a lot I can provide you there.
But again, keep in mind that we are overlapping 49% growth last year Q1, which is certainly a little bit of a difficult compare, but again pleased with the 30% growth rate.
And our next question today comes from John Blackledge of Cowen and Company.
Great. Thanks. Just a question on the Amazon advertising platform. Given the immense amount of purchase data you have on Amazon customers, how is that being used as a competitive advantage? And maybe just provide an overall view on the direction of the Amazon ad platform over time?
Thanks. In terms of the platform itself, we think it's a very sizable, very good long term opportunity for us. And it's something that we've been working on for some time and we just think it's very interesting. One thing you'll notice on our site, we're being obviously very making sure the customer experience is great. What we're really trying to do is we're trying to help customers find and discover what they want to buy online.
So we're very again it's very customer centric, but it's also from a business standpoint a very good long term opportunity. We have a great team that's working on the opportunity and we're excited about the long term potential of it.
Moving on to Anthony DiClemente at Barclays.
Hi, thanks. I'm just wondering what you're seeing in terms of the attach rate of your transactional video on demand business versus usage of Prime Instant Video. I'm wondering just if your consumers tend to choose between the 2 when they're making a selection or does one sort of drive the other? Does a prime subscriber have a higher transactional VOD attach rate than a non prime? So it would be helpful to see what you're hear what you're seeing there in terms of usage?
Yes. I think the only thing I can help you with is we see I'll take prime customers for example. We certainly see adoption of the service in terms of free content, but those same customers are purchasing content as well. And so there is a good attachment to it, which we like. And what we see Prime members doing not just within video content, but we see them doing a lot of cross shopping.
So it's not surprising. We see them do maybe a customer comes and has been traditionally purchasing them pre prime in a few categories, we find that they do a lot more cross shopping, Same thing with digital content. As they use the service, they might start with free content and then they will also continue to view and stream free content but also purchase paid content. So it's a nice effect that we're seeing, which is why we like Prime so much.
Up next, we'll hear from Youssef Squali of Cantor Fitzgerald.
Okay. Thank you very much. Two quick questions please. Going back
to the international question. What's causing international media to decelerate? I think last year Q1, I
think it was up 22%, FX adjusted this quarter was
up 7%. Is it all macro? Or are there any maybe other factors that you can talk about maybe specific to SKUs or something? And the other is more of a clarification. I know last quarter you gave the unit growth in aggregate versus the unit growth of 3P.
I was wondering if you could give that to us as well?
In terms of the International Media growth, this quarter was 1 percent on a dollar basis, 7% on a local currency basis. In terms of the overall growth rate, certainly what you're seeing is digital content as part of that is growing very fast, but it's not as large or as penetrated. Our ecosystem isn't as developed, I would say, as it is in the U. S. And so when you compare the 2 geographies for a second, that's one of the more meaningful differences that you see between the 2, as you see that both are growing digital content very fast, it's just the ecosystem is more built out in North America.
But again, certainly we see very positive signs not given the growth we're experiencing in international. It's just on a lower base. So that's again to be helpful there. In terms of the unit growth, we said that our overall unit growth was 30% for the quarter. Our 3P unit growth, I don't have the overall growth rate, but it's growing at a faster rate than the total.
And our next question today will come from Jordan Rohan of Stifel.
Hey, I was hoping you could comment on the market entry and expansion strategy for Amazon in Brazil. Seemed to be a tremendous amount of press last year about it and it seems to have died down to some degree. I know the company may already be there with Amazon Web Services and some Kindle offerings, but when do you think that might get a little bit broader? And secondly, there's been some stories recently about an Internet streaming device, a box, a set top box, something of the sort. Can you comment on any new hardware form factors, including that plus some sort of a cell phone or handset that might be coming down the pike.
Anything to look forward to in the Kindle family or related? Thanks.
In terms of geographic expansion, there's not a lot I can say specifically about Brazil. We think we're in the right geographies right now. We've expanded into a number of geographies over the past few years. That's certainly something always we look at and you should expect us to expand into additional geographies over time. In terms of any questions related to our product roadmap, we don't.
We have a longstanding practice of not talking about what we might or might not do there. But we're certainly excited about the product roadmap that we have for the future. And again, we have a long standing practice of not giving details until closer at launch.
And ladies and gentlemen, we do have time for one final question today. That question will come from Jason Helfstein of Oppenheimer and Company.
Thanks. Can you give us a little more color around customer growth? I mean, kind of that number has been slowing not dramatically, but that is a slowing trend. Are you focused more on higher value customers to drive the business? And any color around the quarter would be helpful.
Thanks.
No, we're actually pleased with the growth from a customer standpoint. We've seen very good growth and we continue to we have many, many teams across Amazon that are just heads down focused on trying to improve the customer experience and inventing on behalf of customers. So we couldn't be more pleased in what they're doing. And you see that reflected in our overall growth rate this quarter with revenue up 24% on a local currency basis and units growing at 30% on top of a strong growth quarter last year Q1.
Thank you. Great. Thank you for joining us on the call today and for your questions.