Thank you for standing by. Good day, everyone, and welcome to the Amazon dotcom Third Quarter 2012 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 will be turning the call over to the Vice President of Investor Relations, Mr. Sean Boyle. Please go ahead.
Hello, and welcome to our Q3 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, October 25, 2012 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 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 Q3 financial results. Trailing 12 month operating cash flow increased 8% to 3 point $37,000,000,000 Trailing 12 month free cash flow decreased 31 percent to $1,060,000,000 Return on invested capital was 10 5 quarter end. The combination of common stock, 5 quarter end. The combination of common stock and stock based awards outstanding was 469,000,000 shares consistent with 469,000,000 shares.
Worldwide revenue grew 27 percent to $13,810,000,000 or 30% excluding the 3 $48,000,000 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 $4,600,000,000 up 11% or 14% excluding foreign exchange. EGM revenue increased to $8,560,000,000 up 36% or 39% excluding foreign exchange. Worldwide EGM increased to 62% of worldwide sales, up from 58%.
Worldwide paid unit growth was 39%. Active customer accounts exceeded 188,000,000 Worldwide active seller accounts were more than 2,000,000 Seller units represented 41% of paid units. Now I'll discuss operating expenses excluding stock based compensation. Cost of sales was $10,320,000,000 or 74.7 percent of revenue compared with 76.5%. Fulfillment, marketing, technology and content and G and A combined was $3,260,000,000 or 20 3.6 percent of sales, up approximately 2 51 basis points year over year.
Fulfillment was $1,450,000,000 or 10.5 percent of revenue compared with 10%. Tech and content was $1,080,000,000 or 7.8 percent of revenue compared with 6.4 percent. Marketing was $524,000,000 or 3.8 percent of revenue compared with 3.3%. 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 33 percent to $7,880,000,000 Media revenue grew 15 percent to $2,220,000,000 AGM revenue grew 39% to $5,060,000,000 dollars representing 64 percent of North America revenues, up from 61%.
North America segment operating income increased 102 percent to $291,000,000 a 3.7 percent operating margin. In the International segment, revenue grew 20 percent to $5,920,000,000 Adjusting for the $347,000,000 unfavorable foreign exchange impact, revenue growth was 27%. Media revenue grew 7% to $2,380,000,000 or 12% excluding foreign exchange and EGM revenue grew 30 percent to $3,500,000,000 or 39 percent excluding foreign exchange. EGM now represents 59% of international revenues, up from 54%. International segment operating loss was $59,000,000 a 1 percent negative operating margin compared with income of $116,000,000 CSOI decreased 11% to $232,000,000 or 1.7 percent of revenue, down approximately 71 basis points year over year.
Excluding the unfavorable impact from foreign exchange, CSOI decreased to 10%. Unlike CSOI, our GAAP operating income or loss includes stock based compensation expense and other operating expense. GAAP operating loss was $28,000,000 or 0.2 percent negative operating margin compared with GAAP operating income of 79,000,000 dollars Our income tax expense was $83,000,000 GAAP net loss was 2 $74,000,000 or $0.60 per diluted share compared with net income of $63,000,000 $0.14 per diluted share. The Q3 of 20 12 includes a loss of $169,000,000 $0.37 per diluted share related to our equity method share of losses reported by Living Social, primarily attributable to its impairment charge of certain assets including goodwill. As of the end of September, the book value of our equity method investment in LivingSocial was $94,000,000 Turning to the balance sheet, cash and marketable securities decreased $1,080,000,000 year over year to $5,250,000,000 Inventory increased 34% to 5 $7,000,000,000 and inventory turns were 9.7, down from 10.8 turns a year ago as we expanded selection, improved in stock levels and introduced new product categories.
Accounts payable increased 28 percent to $8,370,000,000 and accounts payable days increased to 75 from 72 in the prior year. Our Q3 2012 capital expenditures were $716,000,000 The increase in capital expenditures reflects additional investments in support of continued business growth consisting of investments in technology infrastructure, including web services and additional capacity to support our fulfillment operations. 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 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 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 Q4 $22,750,000,000 a growth of between 16% 31%. This guidance anticipates approximately 45 basis points of unfavorable impact from foreign exchange rates.
GAAP operating income or loss to be between $490,000,000 loss $310,000,000 income compared to $260,000,000 income in the prior year. This includes approximately $290,000,000 for 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 a $200,000,000 loss and $600,000,000 income compared to $462,000,000 income in the prior year period. We expect capital expenditures for ongoing operations including capitalized software development to be approximately $900,000,000 to $1,000,000,000 These anticipated investments are driven primarily by our expectations of continued business growth consisting of investments in technology infrastructure, including Amazon Web Services and additional capacity to support our fulfillment operations. We expect additional capital expenditures of approximately 1 point $4,000,000,000 related to the purchase of our currently leased corporate office space as well as property for development of additional corporate office space located in Seattle, Washington.
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 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. In the interest of time, we ask that you limit yourself to one question. And our first question comes from Scott Devitt, Morgan Stanley.
Hi, thank you. 2 please if I could. Tom, first on international margin, I know some of that actually is affected by currency and I was wondering if you could speak to the effect of currency that it's having on margin? And then secondly, what else is driving that down? I would anticipate China investment digital in Italy and Spain being contributors there.
And then secondly, on shipping revenue up 44% year over year, I was wondering if you could break that down between shipping revenue or more prime versus the change in the revenue allocation of FBA? Thanks.
To take the first part of your question Scott, as it relates to operating profit in international, you have the big pieces correct. The first one is we're investing certainly very heavily in capacity. And so you're seeing that both fulfillment and infrastructure capacity that's impacting our results there. In addition to that, we're investing in a number of new geographies. We've talked about Italy and Spain over the last several calls.
Those are certainly having an impact. We're very excited about the opportunity that we have there, but certainly those are investments right now. China, as you also mentioned, is a great long term opportunity for us, but certainly an investment and it is impacting that number. In addition, one that I don't think you did mention was video content for international. We're investing heavily in video content through our subsidiary LoveFilm for Europe.
So those are things that are the primary drivers of what you're seeing in operating income in international. In terms of shipping revenue, there's not a lot I can help you with. There's a number of factors that go into that number. If you take a look at both the shipping revenue and then the resulting net shipping cost, if you will, the net shipping cost is getting a little bit better over time as we get closer and closer to customers with our FC footprint. So those are some of the things, but again a lot of dynamics that are certainly impacting that shipping revenue number.
Our next question comes from Mark Mahaney of Citi.
Great, thanks. Any comments on the paid unit growth deceleration that seemed to have been relatively significant? Anything about the comp or any read in that? And secondly, given all the infrastructure investments you've made, Tom, you just mentioned some of the shipping efficiencies, we're also seeing fulfillment as a percentage of revenue kind of start narrowing a little bit. Do you think you've reached a bit of a cyclical investment cyclical tipping point?
Or am I overeating into just 1 quarter? Thank you.
In terms of the paid unit growth question, it was 30 9%. As you mentioned, it was a deceleration from last quarter. Keep in mind, still the 39% growth is still growing at a faster rate than revenue, 1. 2, if you take a look at last year's unit growth in Q3, the 53% that we had, that was the 2nd highest quarter that we've had in growth rate in the last 10 years. So we're overlapping a very strong growth last quarter.
In terms of fulfillment expense, certainly as we've talked about over the past few years, stepping up very heavily in 20102011 and 12 from a fulfillment standpoint. We've just seen unprecedented growth and we've added a lot of capacity In terms of where it will level off, we'll have to wait and see. Right now, we're still experiencing very strong growth with 30% growth on a local currency basis, 39% unit growth. So we're going to continue to invest where we need to and the fulfillment capacity we do have, we're going to make sure that we operate as efficiently as we can and get more efficient with that capacity over time.
And our next question comes from Heather Bellini of Goldman Sachs.
Great. Thank you. I had a question about pop up stores. It seems like a lot of people are jumping on the bandwagon there. And we've been hearing stuff recently about Amazon trying to leverage those as a way to get closer to customers and help facilitate shipping for the holiday season.
I'm just wondering if you could share with us your strategy there.
Yes. Could you elaborate on what you're referring to? I'm sorry.
A pop up store, meaning something that might only be open for between, say, Black Friday and January 1, a short term store?
Yes. The vast majority, the highest percentage of our the case of Kindle are using physical world retailers as well, which we're very happy to do so. But again, it's not really a driver of our business.
And we'll take a question now from Douglas Anmuth of JPMorgan.
Thanks for taking the question. Tom, it's been nearly a year since you launched the first Fire devices. And I was hoping you could give us a sense of how that cohort of users might be tracking in terms of their buyer activity? In particular, how you're seeing them if they're over indexing in terms of media content consumption, Prime usage and overall purchasing? And how do you feel about that strategy now as you continue to tie Prime into devices?
Thanks.
Maybe the best way to describe it would be certainly we're seeing customers certainly purchasing a lot of content. We like the idea of selling our Kindle Fires and then being rewarded through purchases of content going forward. All that being said, even though we're rewarded with those sales, customers realize that we're going to make sure that we work on behalf of them to make sure that content is not only very wide, but also at great prices. And so we continue to work with to make sure that we can provide that on the customer's behalf. But we're seeing very good shopping patterns on all types of content with the selection that we have.
We're seeing customers not only purchase content, we're seeing customers, prime customers certainly being active and watching free content as well. And that's working very well. So it's a great device.
And we'll go next to Youssef Squaliq of Cantor Fitzgerald.
Yes. Thank you very much. Actually I want to follow-up on that question that was just asked. So intuitively it makes a lot of sense what it is that you're doing. But can you maybe just speak to the effectiveness of selling the device or all these devices kind of near breakeven maybe?
Is there any metric that you can point to help us understand the lift you get either in terms of the frequency or of buying or a lift in average transaction value or anything that could kind of help us gauge from the outside the success of that strategy? And then second, maybe if you could just speak to the thinking behind your content costs related to your streaming service going forward? Just how should we be thinking about it? Thank you.
In terms of there's not a lot of specifics I can give you on a per device basis from a content standpoint in terms of what the purchasing patterns have been. But as I mentioned in the previous question, certainly customers are engaged in the device. They are purchasing content. They are also in the case of video, they're purchasing content as well as watching free content. In the case of books, they're purchasing books as well as if their Prime members, they're participating in free content.
So those are things that going very well. We like what we see there, which is why we continue to invest in that business, which is why you see the offerings, the very compelling offerings that we have out there right now. So those are things that you should expect us to do more of. In terms of the content spend, if you're referring to the related to Prime Instant Video, I think is probably what you're referring to. We have added a lot of content.
We like what we see so far. We're continuing to monitor it very carefully. You should expect us to add more content going forward. We launched Prime some number of years ago now and we had a little over a 1000000 items at launch. We then expanded that dramatically with many physical items.
We're now offering digital items through Prime as well, most notably in certainly in books and video. And we're monitoring the performance very closely. But again, so far we're seeing great new subscribers coming out of these efforts and we like what we see so far.
And our next question comes from Brian Pitzer of Jefferies.
Thanks. I know it's still early, but have you seen those will
impact from sales in states like California where they just started
lighting you guys up on collecting sales tax?
You're right, it is early. The only thing I could point to is we collect an over either sales tax or it's equivalent value added tax. We collect in over 50% of our revenue today. We have very good businesses in those states and geographies that we do that in. So,
And we'll take our next question from Stephen Ju of Credit Suisse.
So good afternoon guys. So revisiting the capacity and infrastructure question overseas, anything you can share in terms of the operating environment and what is required to get the package to the customer? I mean over the longer term, are there any particular regions that you think may never reach the efficiency levels you may currently see in your older geographies? Okay. Thank you.
We actually we feel very good about the investments we're making in fulfillment capacity. When I think about the types of investments that we're making in terms of predictability, certainly, I would consider the fulfillment capacity to be more the running of the business type investments. We have a lot of experience starting up new facilities, operating those efficiently and to the point where as you know we've extended that not only to offer that service for our retail business, we also offer that to sellers through Fulfilled by Amazon. So those are things that we feel certainly those investments we feel good about, but what you are seeing is certainly just a very large ramp that we've done starting in 2010 through now. And it's one of these investments.
We only make those investments where we absolutely need to. But in terms of deploying that capital and those resources, we feel very good about it.
And we will go next to Brian Novak of Nomura.
Hi, thanks. I have two questions, please. Can you talk to what you saw throughout Europe? Did you see any weakening in the European markets throughout the quarter? And if so, any comments on specific pockets or countries of weakness?
And then secondly, can you talk a little bit about social and kind of your use of social networks like Pinterest? Do you feel comfortable working with other social networks to drive business to Amazon as you are now? Or do you think over the long term or time you'd like to have more end to end control over social e commerce? Thanks.
In terms of the Europe piece, we're not breaking out any specific countries in terms of growth. But as you can see from the results, we grew 27% in international on a local currency basis, which includes obviously our footprint in Europe as well as China and Japan. So we feel the growth has been in the high 20s to low 30s over the past several quarters. Certainly, we're reading the same thing that you're reading in terms of the softness. Hard to tell how much that's impacting us.
Again, when you look at 27 percent growth rates, still think that's pretty solid in the environment. Again, hard to tell how much we're impacted by that. In terms of social, we're certainly very looking at a lot of different ways to reach customers. And certainly that's an opportunity for us and something that our monetize those channels.
We'll go next to Ross Sandler of Deutsche Bank.
Great guys. Just two quick questions. First is on Brazil, second on fulfillment. So you guys are hiring in Brazil for local content relationships for Kindle and some warehouse personnel. So how important do you view that market in terms of the retail business?
When do you think you could be in Brazil with a retail presence? And then the second question is fulfillment as a percent of gross profit showed year on year leverage for the first time in like 3 years. So do you feel like you've turned the corner on some of the capacity improvements? Or given the pace of new facilities that you're putting in, is there any reason why that would reverse back down again from here?
In terms of the first question, we have a long standing practice of not talking about what we might or might not do. Certainly Brazil is an interesting geography as well as there are others. And we certainly export to Brazil today. But beyond that, there's not a lot to talk to. In terms of fulfillment, you are seeing a little bit of leverage in Q3 versus what we've seen in the past few years.
Again, it's 1 quarter. I wouldn't read too much into that at this stage. But certainly, we feel good about the footprint that we have. We feel good about a lot of the capacity that we've added since 2010. Some of that capacity going back is getting more productive than it had been.
Been. The challenging part is obviously we're layering on a sizable number of FCs this year on top of that that you're seeing the cost for. So there's again the 2019 that we've announced to date.
And we'll take our next question from Mark Miller of William Blair.
Hi, good afternoon. Could you share what you've learned with the add on program and the purchase rate you're seeing? And do you think over time you're going to have a meaningful expansion of smaller ticket items? And can that affect the percent of orders that have multiple items in the shipment? In terms of add ons, we're our goal is to try to make products available to customers that we weren't able to make available to before.
And so, it's very early, but that's the it's just one additional way that we can add selection for customers and be able to get it to customers profitably. So again, there's not much more to it than that.
And we'll go now to Herman Lyon of Susquehanna.
Great. Thanks, guys. Two quick questions. I guess when you look into your holiday as you might go into the holiday season with your 3rd party inventory last year hitting sort of a bump with video games as well as some of the Thailand floods. I was wondering what types of steps you guys are kind of doing to better prepare yourselves for a holiday season that this upcoming holiday season?
And the second question is wondering how we should think about the increasing shipping cost leverage as you go into 2013 with your distribution centers much closer and a higher percentage of FBA units? Thanks.
In terms of holiday readiness, we feel very good. We're as you can see from We're continually We're continually trying to increase our in stock levels. So you're certainly seeing some of that already in the numbers. And we're very excited about getting ready for a great holiday season and that's with our own retail inventory. Certainly, we have sellers who are selling on our platform will be doing the same thing and we're customers during Q4.
In terms of shipping cost leverage, customers during Q4. In terms of shipping cost leverage, I think there's a great opportunity over a longer period of time in terms of providing what that would happen from a short term leverage standpoint, it'd be premature to do that at this stage. But we can check-in in future periods and talk more about that.
And we'll go now to Anthony DiClemente of Barclays.
Hi. Just one question. On the North America Media segment, just a modest deceleration. I would imagine that digital content sales and download to rent probably grew much faster than the growth rate of that segment. And so I'm just wondering if there's anything specifically that you can call out that was weighing that growth rate down in that segment whether it's physical media or otherwise?
Thanks.
You've characterized it correctly. Digital content is growing very fast and it's reflected in the number that you see there. Beyond that, there's not a lot of callouts with the exception of if you look back over the past 5 quarters, certainly the highest growth we've had would be Q3 of 2011, which we're lapping. So that's the other factor. But again, very good growth on the digital media side.
Also keep in mind that the growth of digital will also trail our device sales and given the new launches that we've had recently that will be good for digital content sales going forward.
And we'll take a question from Michael Graham of Canaccord Adams.
Hi, good afternoon. Tom, last quarter you made a comment that same day delivery on a wide scale wasn't a goal. And since then, I've got more anecdotal evidence of people getting a lot of same day delivery, especially here in New York. And there was some news from Walmart that they were going to start shipping from their stores. So just could you give us any updated thoughts or philosophy you might have around what's an appropriate amount of time to strive for to deliver to people?
And then as a quick follow-up to that, it seems like every quarter you're guiding to sort of 1% operating margins. And just wondering like is that a philosophical way that you're managing the business? Is there sort of an infinite number of things that you guys could spend on if you wanted to and we should expect this sort of level going forward? Thanks.
In terms of same day delivery or delivery speed, we have just a tremendous amount of selection. And what I was referring to last time was I said, I talked about with a large amount of selection broadly that that's certainly challenging to do same day everywhere. It's certainly a to do same day everywhere. It's certainly a challenge from an economic standpoint. That being said, we if you look back over the past several years, we have done added a lot of capacity.
We're getting we have large FCs that are closer and closer to customers that has helped improve our delivery speed to customers and programs like Prime specifically has helped us get closer and closer to customers from a delivery speed standpoint. So what I would expect moving forward would be more of the same. We're going to continue to improve the customer experience in every possible way we can, which includes getting closer to customers from a shipping standpoint. And we feel good about that. And again, you've seen improvements in the past year and in the past several years.
And New York is one of those cases.
And our final question will come from Justin Post of Bank of America Merrill Lynch.
Thank you. Just thinking about this investment cycle, it's been like 2 years and a quarter and yet revenues accelerating a little bit and free cash flow and margin trends continue to be kind of down year over year. Can you just talk about what you're seeing on returns on the investments you've been making over the last 2 years and as far as like return on investment capital? Is the profile of your returns changing over time as you think about history? And then when can we start seeing kind of returns on this as far as revenues improving or kind of some of the financial ratios starting to turn?
Can you give us any thoughts on how you're thinking about that? And then just a financial question, U. S. Revenues for other were up 63% and then international was plus 15% for other and I think the difference is AWS. Is there any other big differences between the two geographies that we should think about?
Thank you.
In terms of return on invested capital beyond the total numbers, there's not any specifics that I can point to right now. But what I can tell you is in terms of our profile, you think about the parts of our business, the retail business, I feel very good. We have a lot of experience in terms of getting great returns for share owners. We feel it's something that we have again a lot of experience in as we've added new categories in particular geographies. Oftentimes we've already launched those in other geographies.
So we're able to learn from the experiences we've had to date. So we feel good about those. We have a great portion of our businesses and our media business is converting to digital. So we've talked a lot about that and feel very good about the opportunity that we have there both in terms of integrating content into those devices. So we feel good about that business and it's growing very fast.
In terms of our Web Services business, that's a if you start with the core operation of that business, we've been in that part of the business serving Amazon the customer since inception. We've added a lot of new services that have helped both Amazon internally as well as external customers. We like the characteristics of the potential ROIC potential of those of that business as well. Our 3rd party business continues to grow on our consumer business dramatically and we like the ROIC potential of those. We're investing in a lot of new geographies, a few in the last couple of years.
And on top of that, China. China's you should think about that one as more of a long term opportunity, something that we've been investing in for several years. You shouldn't be expecting high returns on invested capital in the short run-in that geography, but very exciting from a long term perspective. Italy and Spain, we're in investment mode in those geographies. But again, those are more in line with some of the other geographies we're in, in terms of timeline for returns and feel very good about those.
So hopefully that gives you some picture of a little bit of the landscape and how we're thinking about ROICs.
Thank you for joining us on the call today and for your questions. A replay will be available on our Investor Relations Web site 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.