Thank you for standing by. Good day, everyone, and welcome to the amazon. Com 4th 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'll 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 Skutec, 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 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 2011.
Now, I'll turn the call over to Tom.
Thanks, Sean. I'll begin with comments on our 4th quarter financial results. Trailing 12 month operating cash flow increased 7 percent to $4,180,000,000 Trailing 12 month free cash flow decreased 81 percent to 3 $95,000,000 Trailing 12 month capital expenditures were $3,790,000,000 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. 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 capacity 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 5 quarter ends. The combination of common stock and stock based awards outstanding was 470,000,000 shares compared with 468,000,000 shares 1 year ago. Worldwide revenue grew 22% to $21,270,000,000 or 23 percent excluding the $178,000,000 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 $6,510,000,000 up 8% excluding foreign exchange.
EGM revenue increased to $13,930,000,000 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 $200,000,000 Worldwide active seller accounts were more than $2,000,000 Seller units represented 39% of paid $1,000,000 or was $16,140,000,000 or 75.9 percent of revenue compared with 79.3%. Fulfillment, marketing, technology and content and G and A combined was $4,450,000,000 or 20.9 percent of sales, up approximately 293 basis points year over year.
Fulfillment was $2,200,000,000 or 10.3 percent of revenue compared with 9 point 3%. Tech and content was $1,220,000,000 or 5.7 percent of revenue compared with 4.5%. Marketing was $833,000,000 or 3.9 percent of revenue compared with 3.3%. Now I'll talk about our segment results. In 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 percent to $12,170,000,000 Media revenue grew 13% to $2,900,000,000 AGM revenue grew 24% to $8,500,000,000 representing 70% of North America revenues, up from 69%. North America segment operating income increased 114% to $608,000,000 a 5 percent operating margin. In the International segment, revenue grew 21% to $9,090,000,000 adjusting for the $183,000,000 year over year unfavorable impact from foreign exchange, revenue growth was 23%. Media revenue grew 5% to 3,610,000,000 foreign exchange. And EGM revenue grew 35 percent to $5,430,000,000 or 37% excluding foreign exchange.
EGM now represents 60% of international revenues, up from 54%. International segment operating income decreased 61 percent to $70,000,000 a 0.8 percent operating margin. Excluding the unfavorable impact from foreign exchange, international segment operating income decreased 56%. CSOI increased 47 percent to $678,000,000 or 3.2 percent 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 percent to 405 dollars 1,000,000 or 1.9 percent of net sales. Our income tax expense was $194,000,000 in Q4 resulting in 58% rate for the quarter and a 79% rate for the full year 2012. GAAP net income was $97,000,000 or 0 point 21 dollars per diluted share compared with $177,000,000 $0.38 per diluted share. Now I'll discuss the full year results. Revenue grew 27 percent to $61,090,000,000 North America revenue grew 30% to $34,810,000,000 and international revenue grew 23 percent to $26,280,000,000 or a 27% growth excluding year over year changes in foreign exchange.
Consolidated segment operating income or CSOI increased 6% to 1 point unfavorable year over year impact from foreign exchange and operating margin decreased 54 basis points to 2.7%. GAAP operating income decreased 22 percent to $676,000,000 or 1.1 percent of net sales. Turning to the balance sheet. Cash and marketable securities increased $1,870,000,000 year over year to $11,450,000,000 Inventory increased 21 percent to $6,030,000,000 and inventory turns were 9.3, down from 10.3 turns a year dollars down from 10.3 point $32,000,000 and accounts payable days increased to 76 from 74 in the prior year. In Q4 2012, we issued $3,000,000,000 of senior non convertible unsecured debt in 3, 5 7 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 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 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 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, twenty thirteen, we expect net sales of between $15,000,000,000 $16,600,000,000 or growth between 14% 26%. This guidance anticipates approximately 122 basis points of unfavorable impact from foreign exchange rates. GAAP offering income or loss to be between a $285,000,000 loss and $65,000,000 positive income compared to $192,000,000 in income in the prior period year. This includes approximately $285,000,000 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 $350,000,000 compared to $398,000,000 income in the prior period. 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. 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?
Thank you. At this time, we will now open up the call for questions. Thank you. We'll take our first question from Scott DeVit with Morgan Stanley.
Hey, thanks for taking the question. Tom, it looks to us that you've successfully begun a transition of your logistics costs in the direction of being more of a given that the growth rate of outbound shipping is now meaningfully below the fulfillment growth rate. And so the question is just is that something that we should expect to continue now on the back of this meaningful fulfillment center expansion ramp? And then 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,
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 certainly not fixed in terms of in absolute terms, but you can see that we had the 20 fulfillment centers last year and that's reflected in the operating expense that you're seeing. But that is a benefit of adding to our fulfillment center network. We are closer and closer to customers with a lot of great selection.
And so 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. So as they grow, they become more effective on a per unit or per customer basis. So 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 JPMorgan.
Great. Thanks for taking the question. Just wanted to ask about the shift to 3rd 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
3rd party. Are there certain categories that you would specifically point
to in this last 4Q where you 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, 3rd party units as a percentage of total units increased from 36% last year Q4 to 39% some expansion of approximately 300 basis Our overall unit growth rate for the quarter in total was 32% and our 3rd party growth rate was in excess of 40 percent. So again, nice growth. It is 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 3rd party our total unit growth rate was substantially faster than that and our 3rd units were growing very fast there as well. So 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 Pitzer 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 out particularly in Q2, Q3?
And maybe you could just
Similar to last year, 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. And so we saw very rapid growth in fulfillment capacity last year. And both 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% there 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?
And then just on the investment cycle, the last couple of calls, you've consistently called out future investments, whether the $1,400,000,000 for Seattle or distribution center expansion. You didn't do it this quarter. I don't want to overeat into it, but 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 did see very strong we saw substantially high unit growth and revenue growth in terms of paid unit growth in Q4, which we're seeing very strong third party growth as well. It was up over 40%. In terms of investment cycle, yes, 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 net, what do you see as being the impact on I'm 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. I mean, we certainly have expanded pretty dramatically over the past really coming out of 2,009. So 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 with the as you would expect with this rapid increase.
We've also expanded selection during that time period. So 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 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 And then we And then we've also added certainly a lot of other services over the past year in terms of fulfillment. So 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 as on a per unit basis because we're not getting productivity.
We don't get the full productivity for a number of years after expanding. So depending on what type of customer is, whether it's a retail unit, a straight third party unit or an FBA unit. But again, we're certainly attempting at least on a product basis to be roughly agnostic.
We'll go next to Brian Novak with Nomura.
Thanks. I have 2. 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? And then 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, it's not 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 $1,000,000,000 e book business growing approximately 70% year over year. It's total year last year. And that's growing at that rate after a really just launching the business approximately 5 years ago.
So it's a pretty good healthy growth rate 5 years in. And we're seeing good 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 the 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.
So I can't give you a specific for attach rates, but the business is making good progress on the video content side. And 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. So can you talk about how the new fulfillment footprint helps on that front?
Is your reliance on air going down as a percent of total items shipped? And 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 a just a more expanded footprint is there's no question that's helping us add additional selection more economically to Prime. And so that's both in terms of 3rd party selection as well as retail selection. And so that's something that we continue to have the benefit of as we get more and more members of Prime and have a bigger and bigger concentration of 2 day shipping in the for that. So we did add the shipping portion of the FBA fees in Q1 of 2012 and we see some benefit year over year.
And but we're still seeing leverage in terms of our ex the FBA fees, quite a bit leverage there. So I don't have a specific number for you there, but we're still seeing quite a bit leverage there ex the 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 and you were able to call out Taiwan and video games category. Any reasons why revenues were kind of in the lower half this quarter? And then 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? And is it possible maybe you're letting the 3rd parties handle some of the maybe less profitable categories for Amazon? Could you talk about that at all? Thank you.
If you take a look at our growth rate, we're 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 32% year over year. In terms of some of the things that we saw, we again, there's we saw 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 a little bit softer. A few of the consumer electronics subcategories like TVs, MP3 players, digital cameras to some extent were softer.
But again with the base that we have in Q4, still very solid growth. Another one, we certainly were thrilled to have Paperwhite in our lineup. It's certainly the best e reader and that's out there and we're very pleased with it, but we couldn't keep up with demand. We would have had more sales in Q4 if we were able to keep up with demand. And so the team is working very hard to make sure we have good in stock going forward on that product.
But 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 look at continue to expand our selection both in terms of Amazon Instant a 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. We'll continue to add selection on the Amazon Instant Video. Beyond that, you have to stay tuned.
We'll go next to Ken Senna 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?
And as you look out, serving, analytics serving, analytics through the AWS platform to advertisers? And kind of where are you sort of in that sort of rollout phase now? Thank you. Yeah. There's in terms of the AWS business, we've the business is growing very fast.
We've increased the number of services pretty dramatically over the past several years. The team is doing a fantastic job there and 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, some of the credit card as well as other marketing revenue goes in there. So but 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 Q4. Did you see a particular deceleration in the month of December? And then second question on international. Profitability, countries where there's kind of outsized dollars of investment going on or accelerated investment at the current time?
Thanks.
In terms of there's not a lot of specifics. We have a long standing practice not talking about trends within the quarter. And 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. But in terms of individual growth rates, I don't have a lot of international, yes, there certainly are geographies that we're investing in heavily. Certainly, China would be 1. Some of the newer some of the European countries, including some of the newer launches we're investing in.
And so 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 4 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 basis points, 350 basis points. In Q4, international declined just 160 basis points. So my question is, should we read this as a beginning of a trend that we saw how international how domestic margins increased over the last four quarters, whether international should follow a similar route over the next foreseeable future?
Yes. There's not a particular callout 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 2, keep in mind that a couple of factors. 1, mix of business is a little bit different. Our AWS business is in the North America segment.
You also have some newer geographies. Our 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. That's some of the ones I mentioned earlier. So those are factors as you look at the 2 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? And then separately, just any view on how video game sales impacted the year over year growth rates for the quarter? Thanks.
Yes, I apologize. We're not we haven't broken out the 1st party versus 3rd 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 there is no direct revenue associated with it, not into the tech and content line, right? Is that right?
That's correct.
Okay. So gross margins would have been even higher if those costs were included elsewhere or broken out separately. It also seems like it's becoming and separate question, 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 on our results today and what we'll have in our 10 ks, which we filed soon. And so I encourage you to take a look at our full disclosures related to that. But 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.
And so those are it's an interesting opportunity. It's a long term opportunity and we'll continue to work on that behalf of customers to make that experience even better. And you should think about it not unlike a lot of the other businesses that we invest in, we think about it over the 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.