Thank you for standing by. Good day, everyone, and welcome to the Amazon.com fourth quarter 2012 financial results teleconference. At this time, all participants are in a listen-only mode. After today's presentation, we will conduct a question and answer session. Today's call is being recorded. For opening remarks, I will be turning the call over to the Vice President of Investor Relations, Mr. Sean Boyle. Please go ahead.
Hello, and welcome to our Q4 2012 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, January 29, 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-K. 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. Unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2011. I'll turn the call over to Tom.
Thanks, Sean. I'll begin with comments on our fourth quarter financial results. Trailing 12-month operating cash flow increased 7% to $4.18 billion. Trailing 12-month free cash flow decreased 81% to $395 million. Trailing 12-month capital expenditures were $3.79 billion. This amount includes $1.4 billion 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 fourth quarter. The increase in capital expenditures reflects additional investments in support of continued business growth, consisting of investing in technology infrastructure, including Amazon Web Services and additional capacities to support our fulfillment operations. Return on invested capital was 4%, down from 22%. ROIC is TTM free cash flow divided by average total assets minus current liabilities, excluding the current portion of long-term debt over five quarter ends.
The combination of common stock and stock-based awards outstanding was 470 million shares compared with 468 million shares one year ago. Worldwide revenue grew 22% to $21.27 billion, or 23% excluding the $178 million unfavorable impact from year-over-year changes in foreign exchange. We're grateful to our customers who continue to take advantage of our low prices, vast selection, and shipping offers. Media revenue increased to $6.51 billion, up 8%, or 10% excluding foreign exchange. EGM revenue increased to $13.93 billion, up 28%, or 29% excluding foreign exchange. Worldwide EGM increased to 65% of worldwide sales, up from 63%. Worldwide paid unit growth was 32%. Active customer accounts exceeded 200 million. Worldwide active seller accounts were more than 2 million. Seller units represented 39% of paid units. Now I'll discuss operating expenses excluding stock-based compensation. Cost of sales was $16.14 billion, or 75.9% of revenue, compared with 79.3%.
Fulfillment, marketing, technology and content, and G&A combined was $4.45 billion, or 20.9% of sales, up approximately 293 basis points year-over-year. Fulfillment was $2.2 billion, or 10.3% of revenue, compared with 9.3%. Tech and content was $1.22 billion, or 5.7% of revenue, compared with 4.5%. Marketing was $833 million, or 3.9% of revenue, compared with 3.3%. Now I'll talk about our segment results. 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 23% to $12.17 billion. Media revenue grew 13% to $2.9 billion. EGM revenue grew 24% to $8.5 billion, representing 70% of North America revenues, up from 69%. North America segment operating income increased 114% to $608 million, a 5% operating margin. In the International segment, revenue grew 21% to $9.09 billion.
Adjusting for the $183 million year-over-year unfavorable impact from foreign exchange, revenue growth was 23%. Media revenue grew 5% to $3.61 billion, or 7% excluding foreign exchange. EGM revenue grew 35% to $5.43 billion, or 37% excluding foreign exchange. EGM now represents 60% of International revenues, up from 54%. International segment operating income decreased 61% to $70 million, a 0.8% operating margin. Excluding the unfavorable impact from foreign exchange, International segment operating income decreased 56%. CSOI increased 47% to $678 million or 3.2% of revenue, up approximately 54 basis points year-over-year. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income increased 56% to $405 million or 1.9% of net sales. Our income tax expense was $194 million in Q4, resulting in a 58% rate for the quarter and a 79% rate for the full year 2012.
GAAP net income was $97 million, or $0.21 per diluted share, compared with $177 million and $0.38 per diluted share. Now I'll discuss the full year results. Revenue grew 27% to $61.09 billion. North America revenue grew 30% to $34.81 billion. International revenue grew 23% to $26.28 billion, or a 27% growth excluding year-over-year changes in foreign exchange. Consolidated segment operating income, or CSOI, increased 6% to $1.67 billion, or 7%, excluding the unfavorable year-over-year impact from foreign exchange. Operating margin decreased 54 basis points to 2.7%. GAAP operating income decreased 22% to $676 million, or 1.1% of net sales. Turning to the balance sheet. Cash and marketable securities increased to $1.87 billion year-over-year to $11.45 billion.
Inventory increased 21% to $6.03 billion, and inventory turns were 9.3, down from 10.3 turns a year ago, as we expanded selection, improved in-stock levels, and introduced new product categories. Accounts payable increased 20% to $13.32 billion, and accounts payable days increased to 76 from 74 in the prior year. In Q4 2012, we issued $3 billion of senior non-convertible unsecured debt in three, five, and seven-year tranches, with proceeds to be used for general corporate purposes. I'll conclude my portion of today's call with guidance. Incorporated into the 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 impact 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 Q1 2013, we expect net sales of between $15.0 billion and $16.6 billion, or growth between 14% and 26%. This guidance anticipates approximately 122 basis points of unfavorable impact from foreign exchange rates.
GAAP operating income or loss to be between a $285 million loss and $65 million positive income, compared to $192 million in income in the prior period year. This includes approximately $285 million for stock-based compensation and amortization of intangible assets. We anticipate consolidated segment operating income, which excludes stock-based compensation and other expense, to be between zero and $350 million, compared to $398 million income in the prior period. We remain head-on 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. With that, Sean, let's move to questions.
Great. Thanks, Tom. Let's move on to the Q&A portion of the call. Operator, will you please remind our listeners how to initiate a question?
Thank you. At this time, we will now open up the call for questions. In the interest of time, we ask that you limit yourself to one question. If you'd like to ask a question, please press star one on your keypad. We ask that when you pose your question, you pick up your handsets to provide optimum sound quality. Once again, to initiate a question, please press star, then one on your touch-tone telephone at this time. Please hold while we pull for questions. Thank you. We'll take our first question from Scott Devitt with Morgan Stanley.
Hey, thanks for taking the question. Tom, it looks to us that you've successfully begun a transition of your logistics cost in the direction of being more of a fixed fulfillment cost with lower unit-based shipping costs, given that the growth rate of outbound shipping is now meaningfully below the fulfillment growth rate. The question is just, is that something that we should expect to continue now on the back of this meaningful fulfillment center expansion ramp? Separately, but on the same topic, we're also wondering, are there other parts of the business in which you can make this transition to more of a fixed cost in the future? Thanks.
In terms of the fulfillment question, you're right in terms of over the past few years, we have expanded our fulfillment network pretty extensively to the point where we are closer to customers, and you're seeing that reflected in our transportation costs. You can obviously see the fulfillment expense is certainly not fixed in absolute terms, but you can see that we added 20 fulfillment centers last year, and that's reflected in the operating expense that you're seeing. That is a benefit of adding to our fulfillment center network. We get closer and closer to customers with a lot of great selection. You're seeing that reflected in the individual business gross margins, which shows up as benefits of transportation costs. In terms of other opportunities, certainly, there are a number of opportunities as we invest in individual customer experience areas across the business.
Many of those will be on our website. We have a relatively fixed expense as we launch those, and we're able to amortize those costs over our full customer base. As they grow, they become more effective on a per unit or per customer basis. There is a number of opportunities that we have had and will have going forward to do that.
Thank you. We'll take our next question from Douglas Anmuth with J.P. Morgan.
Great, thanks for taking the question. Just wanted to ask about the shift to third party, and I guess in particular, I think last 4Q, you talked about shifting more of the business in the video game space, in particular, to third party. Are there certain categories that you would specifically point to in this last 4Q where you made sort of a similar shift? Thanks.
We did see a good expansion, as you mentioned, in 3P. Third party units as a percentage of total units increased from 36% last year, Q4, to 39%, so an expansion of approximately 300 basis points. Our overall unit growth rate for the quarter in total was 32%, and our third party growth rate was in excess of 40%. Again, nice growth. You're certainly seeing it in a number of areas. You see it certainly in our EGM business. If you look at our North America growth rates, you can see that our revenue was up 23%, but our total unit growth rate was substantially faster than that. Our third party units were growing very fast there as well. There's a number of different areas that you're seeing that, but certainly you're seeing it there.
Thank you. We'll take our next question from Brian Pitz with Jefferies.
Great, thanks. It looks like you're moving more in the direction of same-day shipping. Would you provide any thoughts or insights here? Should we anticipate a significant ramp-up of fulfillment center build-outs, particularly in Q2, Q3? Maybe you could just comment more generally on your FC build-out plans, U.S. versus international. Thanks.
There's not a lot I can comment on in terms of our plans. Similar to last year, as we progress through the year, we can give you further updates on what we plan to do there. Last year, we opened up 20 new fulfillment centers, we saw very rapid growth in fulfillment capacity last year. Stay tuned and we'll let you know more as the year progresses there.
We'll go next to Mark Mahaney with RBC Capital Markets.
Thanks. Two questions, please. That paid unit growth deceleration to 32%, that seems a bit of a disconnect versus an active customer growth that didn't decelerate as much. On a per customer basis, are you seeing some sort of change in overall activity? Is that the impact of newer international markets? Just on the investment cycle, the last couple of calls, you've consistently called out future investments, whether the $1.4 billion for Seattle or distribution center expansion. You didn't do it this quarter. I don't want to overread into it, does that mean that we're at the end of a major investment cycle? Thanks.
In terms of unit growth, there's not a lot more I can add to it. We saw our substantially high unit growth and revenue growth in terms of paid unit growth in Q4. We're seeing very strong third party growth as well. It was up over 40%. In terms of investment cycle, yeah, I wouldn't read into anything related to that. We will still be adding capacity during 2013. In terms of the levels of how much we'll add, as I mentioned earlier in the call, just stay tuned and we'll let you know as the year progresses.
Thank you, Tom.
We'll go next to Heath Terry with Goldman Sachs.
Great, thanks. I was wondering if you could give us just a bit of a sense of what you're seeing as you roll out fulfillment centers into new states. Obviously, the sales tax issue has been one that's come up a good bit, but you've touched on the impact of being closer with faster delivery in those same states. Net, what do you see as being the impact on, not asking you to give us kind of a state-by-state breakdown, but the impact of rolling out the fulfillment center footprint, taking both of those things into account?
I'm not really sure how best to answer your question. We certainly have expanded pretty dramatically over the past, really coming out of 2009. Between 2010, 2011, and 2012, we've rapidly increased our footprint globally. Your comment was more directed towards the U.S., but we've also rapidly increased our footprint in the U.S. As a result of that, we're able to carry a much broader selection closer to customers, just as you'd expect with this rapid increase. We've also expanded selection during that time period. We continue to be in the locations we'd like to be in, and we'll continue to expand our footprint over time and become even closer and closer to customers. Beyond that, there's not a lot I can add.
We'll go next to Gene Munster with Piper Jaffray.
Good afternoon. From a high level, can you remind us the margin difference between 1P and 3P? I know in the past you've talked about you being agnostic between the two, but the growth in 3P and what your CSOI margin is would imply that 3P has a little bit higher margin. Is that the correct read-through? Thanks.
There is some variation by business, but certainly that's what we attempt to do is, from a pricing standpoint, is to try to be agnostic. That's certainly how we run the business. Again, this is on a third party versus retail. Then we've always also added certainly a lot of other services over the past year in terms of fulfillment. It really depends upon where we are in the investment cycle, what our utilization is. As you know, certainly as you look at the last few years, we've been very heavily expanding in terms of fulfillment capacity because of the growth that we've been experiencing. That certainly would put pressure on our overall cost structure, certainly on a per unit basis, because we don't get the full productivity for a number of years after expanding.
Depending on what type of customer is, whether it's a retail unit, a straight third-party unit, or an FBA unit. Again, we're certainly attempting, at least on a product basis, to be roughly agnostic.
We'll go next to Brian Nowak with Nomura.
Thanks. I have two. The first is kind of on the device strategy with Kindles and Kindle HDs. Can you help us at all with kind of what you're seeing with attach rate trends on digital goods after people buy the Kindles? Generally, do you see higher overall GMV per customer on Kindle devices than users on Amazon apps through other devices?
In terms of attach rates, we haven't given a lot of detail, but I think one thing certainly to look at, and it doesn't give you an attach rate, but it gives you at least a sense of the health of the business is the number that was in the release today. We certainly have a multi-billion-dollar e-book business growing approximately 70% year-over-year. That's total year last year. That's growing at that rate after really just launching the business approximately five years ago. It's a pretty good, healthy growth rate five years in. I can't give you specific numbers, but we're seeing very good progress on a number of our other digital media categories. Video I talked about a little bit earlier. We're seeing Prime customers.
Certainly the percentage of Prime customers who are watching free content through Prime Instant Video has gone up dramatically year-over-year. We've also increased Prime membership dramatically year-over-year. They're also purchasing paid content. Those customers that are using this service, they watch free, but they're also paying for new content, which is great. We've launched a number of new services on the music side. Most recently, certainly our CD with free MP3, which we have on many titles. It's still very early, but we certainly like that service, and pleased to offer to customers. I can't give you specific for attach rates, but the business is making good progress on the video content side. Again, it's still very early.
We'll go next to Ross Sandler with Deutsche Bank.
Thanks, guys. Just two quick questions. As you guys build out the Prime membership and the SKUs available through FBA, you run into this challenge of increasing your unit volume of tail items, and at the same time, you need to get products to customers in much shorter shipping cycles. Can you talk about how the new fulfillment footprint helps on that front? Reliance on air going down as a % of total items shipped. Then if I remember correctly, you guys reclassified some FBA revenue in early 2012. Can you just remind us how that flows through the shipping revenue line and what could happen as you comp that in the beginning of 2013? Thanks.
Sure. Just in terms of overall selection, as we added to Prime, what I was talking about earlier in terms of having just a more expanded footprint is there's no question that's helping us add additional selection more economically to Prime. That's both in terms of third-party selection as well as retail selection. That's something that we continue to have the benefit of as we get more and more members in Prime and have a bigger concentration of two-day shipping in the U.S. for that. We did add the shipping portion of the FBA fees in Q1 of 2012, and we see some benefit year-over-year. We're still seeing leverage in terms of our ex the FBA fees, quite a bit leverage there.
I don't have a specific number for you there, but we're still seeing quite a bit of leverage there ex that reclass that you're referring to.
We'll go next to Justin Post with Merrill Lynch.
Great. Thank you. Last year, you reported 4Q in the lower half of revenue range. You were able to call out Taiwan and the video games category. Any reasons why revenues were kind of in the lower half this quarter? If you look at gross profit growth, it clearly has accelerated to 40% growth, but unit growth decelerated to 32%. Can you describe what's driving that kind of accelerating gross profit in the face of lower unit growth? Is it possible maybe you're letting the third parties handle some of the maybe less profitable categories for Amazon? Can you talk about that at all? Thank you.
If you take a look at our growth rate, I think the growth rate for Q4 was solid. It was up 23% on a revenue basis, quite a bit higher than that on a unit growth basis, up 37% year-over-year. In terms of some of the things that we saw, again, we saw a solid growth across many different categories and geographies year-over-year. Certainly some things to call out in terms of things that may have been a little bit softer. A few examples would be, we did see some of the higher average selling price items, particularly the items that are greater than $1,000, were a little bit softer. A few of the consumer electronics subcategories like TVs, MP3 players, digital cameras, to some extent, were softer. Again, with the base that we have in Q4, still very solid growth.
We're thrilled to have Paperwhite in our lineup. It's certainly the best e-reader that's out there. We're very pleased with it, but we couldn't keep up with demand. We would've had more sales in Q4 if we were able to keep up with demand. The team is working very hard to make sure we have good in-stock going forward on that product. We certainly could have sold more in Q4.
We'll take our next question from Tom Forte with Telsey Advisory Group.
Great. Thanks very much for taking my question. I wanted to ask you on Amazon Instant Video, how you felt about your current offering and your ability to add exclusive content in a cost-effective manner through Amazon Studios, and what the relationship is between adding more titles and uses on your hardware, such as your Amazon Kindle devices. Thanks.
We'll continue to expand our selection, both in terms of Amazon Instant Video as well as Prime Instant Video, and we'll do that in a number of different ways. We think we have a very interesting selection right now, and you should expect that we'll be spending more on content as it relates to Prime over time, and we'll continue to add selection on Amazon Instant Video. Beyond that, you'll have to stay tuned.
We'll go next to Ken Sena with Evercore Partners.
Hi. I just had a question on your other segment line. Can you talk a little bit about the non-AWS drivers within that line, such as advertising? As you look out, are there advantages to you in terms of having AWS as far as offering things like buying, serving analytics through the AWS platform to advertisers, and where are you in that sort of rollout phase now? Thank you.
Yeah. In terms of the AWS business, the business is growing very fast. We've increased the number of services pretty dramatically over the past several years. The team's doing a fantastic job there. We'll continue to innovate on behalf of customers in that space. There's a number of other things that go into that line item, other similar credit card, as well as other marketing revenue goes in there. Again AWS is in that line item.
We'll go next to Anthony DiClemente with Barclays.
Hi. Thanks. I wonder if you could comment on the pace of business throughout the fourth quarter. Did you see a particular deceleration in the month of December? Second question on international, I'm wondering, are there any call-outs in terms of specific countries that may have been weighing on profitability, countries where there's kind of outsized dollars of investment going on, or accelerated investment at the current time? Thanks.
There's not a lot of specifics. We have a long-standing practice of not talking about trends within the quarter, but in terms of year-over-year growth or anything like that, obviously the Q4 is very seasonal. December is by far the largest month, followed by November. In terms of individual growth rates, I don't have a lot of comments there. In terms of international, yeah, there certainly are geographies that we're investing in heavily. Certainly China would be one. Some of the European countries, including some of the newer launches we're investing in. Those are certainly, you're seeing those represented in those segment results.
We'll take our next question from Rohit Kulkarni with Citi.
Okay. Thank you for taking my question. In terms of your recent margin profile, especially comparing U.S. and international, I guess over the past four quarters, the vast majority improvement or other, the less worse margin trends we have seen have been due to U.S. margins improving while international were declining in the range of 300-350 basis points. In Q4 international declined just 160 basis points. My question is, should we read this as a beginning of a trend that we saw how domestic margins increased over the last four quarters, whether international should follow a similar route over the next foreseeable future?
Yeah, there's not a particular call-out that I could make on that. The only thing that I would, in terms of the change I'm referring to, but in terms of the difference between the two, keep in mind that a couple factors. One, mix of business is a little bit different, our AWS business is in the North America segment. You also have some newer geographies, or geographies, I shouldn't say that are necessarily newer, but geographies that we're investing in heavily, that have a longer-term horizon for returns, some of the ones I mentioned earlier. Those are factors as you look at the two different segments.
Thanks, Tom.
We'll take our next question from Ben Schachter with Macquarie.
It looks like the first-party gross margin is actually up fairly meaningfully year-over-year. I was wondering if you could talk about that within the context of how Amazon Kindle hardware is impacting gross margin. Separately, just any view on how video game sales impacted the year-over-year growth rates for the quarter? Thanks.
Yeah, I apologize. We haven't broken out the first party versus third party. It's not something we've done for, not something I'm doing today or we've done in previous calls, so there's not a lot I can help you with there.
We'll take our next question from Jordan Rohan with Stifel Nicolaus.
First, just an accounting clarification, should be pretty interesting, but the content costs for Prime Instant Video flow into the cost of goods line, even though there's no direct revenue associated with it, not into the tech and content line, right? Is that right?
That's correct.
Okay, gross margins would have been even higher if those costs were included elsewhere or broken out separately. It also seems like it's becoming kind of common or to reduce the carrying value of your investment in LivingSocial. Do you have a feel on a broad strategic level as to whether the local deals business through Amazon Local or through LivingSocial is something that you care to keep investing in? Thanks.
There's not a lot I can specifically talk about as it relates to LivingSocial beyond what's in our results today and what we'll have in our 10-K which we file soon. I'd encourage you to take a look at our full disclosures related to that. In terms of local, this certainly is still a very interesting opportunity there. We do have a couple, we have an investment in LivingSocial. We also have a local business ourselves. It's an interesting opportunity. It's a long-term opportunity, and we'll continue to work on that on behalf of customers to make that experience even better. You should think about it not unlike a lot of the other businesses that we invest in, we think about it over a long-term horizon, and it's very early there.
Okay, 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 and look forward to talking with you again next quarter.