Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Second Quarter 20 12 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 Goyle. Please go ahead.
Hello, and welcome to our Q2 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, July 26, 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 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 Q2 financial results. Trailing 12 month operating cash flow was $3,220,000,000 compared with 3,210,000,000 dollars Trailing 12 month free cash flow decreased 40 percent to $1,100,000,000 Return on invested capital was 11% down from 21%. ROIC is trailing 12 month free cash flow divided by average total assets minus current liabilities excluding the current portion of long term debt over 5 quarter end. The combination of common stock and stock based awards outstanding was 468,000,000 shares compared with 468,000,000 shares.
Worldwide revenue grew 29 percent to $12,830,000,000 or 32% excluding the $272,000,000 percent Media revenue increased to $4,120,000,000 up 13% or 15% excluding foreign exchange. EGM revenue increased to $8,160,000,000 up 30 8% or 42% excluding foreign exchange. Worldwide EGM increased to 64% of worldwide sales, up from 59%. Worldwide paid unit growth was 43%. Active customer accounts exceeded 180,000,000.
Worldwide active seller accounts were more than 2,000,000. Seller units were 40% of paid units compared to 36% of paid units in Q2 of 2011. Now I'll discuss operating expenses excluding stock based compensation. Cost of sales was $9,490,000,000 or 73.9 percent of revenue compared with 75.9 percent. Fulfillment, marketing, technology and content and G and A combined was 2.99 $1,000,000,000 or 23.3 percent of sales, up approximately 307 basis points year over year.
Fulfillment was 1,300,000,000 dollars or 10.1 percent of revenue compared with 9.2%. Tech and Content was $970,000,000 or 7.6 percent of revenue compared with 6.3%. Marketing was $521,000,000 or 4.1 percent of revenue compared with 3.3%. Now I'll talk about our segment results and consistent with prior periods, we do not allocate the segments our stock based compensation or other operating expense line item. In the North America segment revenue grew 36 percent to $7,330,000,000 Media revenue grew 18 percent to $1,870,000,000 AGM revenue grew 41% to $4,940,000,000 representing 67% of North America revenues, up from 65%.
North America segment operating income increased 61 percent to $344,000,000 a 4.7 percent operating margin. In the international segment, revenue grew 22 percent to $5,510,000,000 adjusting for the 2 $69,000,000 year over year unfavorable foreign exchange impact, revenue growth was 28%. Media revenue grew 8% to 2,250,000,000 dollars or 12% excluding foreign exchange. And EGM revenue grew 34% to $3,220,000,000 or 42% excluding foreign exchange. EGM now represents 59 percent of international revenues, up from 53%.
International segment operating income segment operating income decreased 91% to $16,000,000 or 0.3 percent operating margin. Excluding the unfavorable impact of foreign exchange, international segment operating income decreased 74%. Consolidated segment operating income decreased 7 percent to $360,000,000 or 2.8 percent of revenue down approximately 109 basis points year over year. Excluding the unfavorable impact from foreign exchange, CSOI decreased 4%. Unlike CSOI, GAAP operating income includes stock based compensation expense and other operating expense.
GAAP operating income decreased 47% to $107,000,000 or 0.8 percent of net sales. Our income tax expense was $109,000,000 a 75% effective tax rate for the quarter and includes a one time expense of $51,000,000 related to the integration of Kiva Systems acquisition. Accordingly, our Q2 2012 effective tax rate is higher than both our current estimated 2012 annual effective rate and our 2011 effective tax rate. GAAP net income was $7,000,000 or $0.01 per diluted share compared with $191,000,000 $0.41 per diluted share. Q222netincomeincludes $65,000,000 of estimated loss related to the acquisition and integration of Kiva Systems.
Turning to the balance sheet.
Cash and marketable securities decreased 1 point $39,000,000,000 year over year to $4,970,000,000 Inventory increased 36 percent to $4,380,000,000 and inventory turns were 10.1 dollars down from 11.3 turns a year ago as we expanded selection, improved in stock levels and introduced new product categories. Accounts payable increased 24 percent to $7,070,000,000 and accounts payable days decreased to 68 from $69,000,000 in the prior year. Our Q2 2012 capital expenditures were $657,000,000 The increase in capital expenditures reflects additional investments in support of continued business growth, consisting of investments in technology infrastructure, including Amazon 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 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 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 For the Q3 2012, we expect net sales of between $12,900,000,000 and 14 point $3,000,000,000 or growth between 19% 31%. This guidance anticipates approximately 4 25 basis points of unfavorable impact foreign exchange rates.
GAAP operating income or loss to be between $350,000,000 loss $50,000,000 loss, down from $79,000,000 income in the comparable prior year period. This includes approximately $275,000,000 for stock based compensation and amortization of intangible assets. We anticipate consolidated segment operating income or loss, which excludes stock based $75,000,000 loss $225,000,000 in income or between 129 percent decline and 14% decline. We expect including capitalized software development to be approximately $800,000,000 to $900,000,000 These anticipated investments are driven primarily by expectations of continued business growth, consisting of investments in technology infrastructure, including Amazon Web Services and additional capacity to support our fulfillment operations. We remain head sound focused on driving 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?
At this time, we will now open the call up for questions. Thank you. We will take our first question from Spencer Wang with Credit Suisse.
Thanks. Good afternoon. Just one question on Kiva and a couple of parts, Tom. Now that you've closed the acquisition, can you talk about how you'll deploy the Kiva technology? Is that for new fulfillment centers only?
Or can you use that in your legacy fulfillment centers? And perhaps what type of operational efficiencies that could gain? And then last part would be, is there any impact our 3Q guidance from the Kiva acquisition specifically? Thanks.
Sure. In terms of Kiva itself, we're very, very excited to have Kiva as part of the Amazon team. We're looking forward to getting great productivity over time through the use. But again, it's very early and you'll just have to stay tuned in terms of the plan. In terms of the impact, you mentioned Q3.
Let me just provide a little bit of data on both Q2 actuals and Q3. In terms of GAAP operating income in Q2, it was negative $25,000,000 For Q3, it's approximately negative $35,000,000 And then on net income for Q2, it was a loss of approximately $65,000,000 So those are the numbers for Q2 and Q3. But again, we're very, very happy to have them part of the team and we look forward to working with them going forward.
We will go next to Heather Bellini with Goldman Sachs.
Hi, guys. Great quarter. Contributing to that? Yes. The bigger issue is not that it's related to overall 3Ps, there's a number of different factors certainly driving the improvement in implied gross margins that you're referring to.
But as it relates to 3P, it's on the broader 3P. So if you take a look at from a units perspective, 3rd party was 40% of our total units in Q2. That's up from 36%. So it's approximately 400 basis points increase as a percentage of total units, which is certainly one of the factors that you're seeing there.
We will go next to Herman Leung with Susquehanna.
Hey, great. Thanks for the question. This is Deepak sitting in for Herman. So the question I had was on the hardware business. So how important do you think is the hardware strategy to you for the digital content now given that Kindle Fire has been out there for a while.
So could you discuss about the strategy on the business and how it's driving the digital content?
Sure. It's we're very excited about both the hardware and the content side of the business. We think if you take a look at our devices, certainly it's very integrated, which is great for an incredible experience. And so we've been very excited about the progress we've made so far from both the device and content standpoint. And we're super excited about the roadmap that we have.
So again, that's again very, very happy with what the team is doing there.
We will go next to Brian Nowak with Nomura Equity Research.
Thank you. Thanks for taking the question. I noticed this is Aaron Rubinson sitting in for Brian Nowak. I noticed that shipping costs were lower as a percent of sales for the first time in nearly 3 years. The driver, it looks like, is shipping cost per unit, which fell about 10%.
Can you talk about how much of that might be attributable to the proximity of distribution centers to metro areas, lower fuel, more favorable carrier pricing, etcetera, and whether or not you see anything on the horizon that would change that course?
Yes, we're seeing there's a number of different factors, but certainly one of them is we're getting closer to customers and that's just with our wide multi node fulfillment network. So that's certainly having an impact on that. And again, we have a lot of opportunity to improve that over time. But again, it's the team is making good progress and you're seeing that reflected in the results so far.
We'll go next to Justin Post with Bank of America Merrill
Lynch. Hi. Thanks for taking my question. This is Paul Bieber for Justin. Just going back to the gross margin question, I was wondering if you could give us some color on the relative impact of a few different things, category maturity, advertising, 3PEA and maybe digital content on gross margins, which ones are impacting gross margins more than others?
And then just a quick question on the taxes. What will the impact of sales tax collection in Texas and California be on gross margins?
In terms of your question on gross margins, we're not breaking that up, but certainly 3P is having an impact, mix of business is having an impact. We have we continue to try to work with our partners to get even better prices on the goods that we provide for customers, which is certainly impacting it. Mix of business things like AWS is certainly impacting that as well, given the growth rates there. So again, those are things that are impacting. In terms of sales taxes, any impact that we certainly would expect to see would be included in the guidance that we're giving for Q3.
But one thing to keep in mind as it relates to that is we right now approximately 50% of our business around the world, We either collect sales tax or value added tax. We have very good businesses in most jurisdictions. And so keep that in mind as you think about any upcoming changes.
We'll go next to Doug Anmuth with JPMorgan.
Hi, thanks. This is Kaisa Gala in for Doug. Just a couple of questions. Can you you discuss the international media deceleration? Looks like it decelerated from 22% to 12% on an ex FX basis.
And then can you just give us an update on the fulfillment center plans for the rest of the year? Thanks.
Sure. In terms of I'll take international in total first and then the same is true for media. And really total business, international growth in international media, for both the total business international growth in international media, we had very, very strong growth last year Q2. In fact, our total growth rate last year was 51% for the total business. And on a local currency basis that was 44% growth.
That's the highest growth quarter we've had in over 10 years. And so when you look at that, when you're comparing ourselves in Q2 this year, we had very good growth given that compare to last year. And that's some of what you're seeing also in international media as you mentioned. So international media was up 8%. On a local currency basis, it was up 12%.
And certainly, it's a challenging compare. Also, there were some things just with as we some timing things as we launched with the unfortunate events in Japan last year, we certainly did have some releases that we know were scheduled for late in the quarter that obviously didn't happen that moved into Q2 just from a supply standpoint. Those are certainly impacting that region and some other things. So it's again, think of it in terms of the comparison point to last year is probably the best thing to do.
We'll go next to Mark Mahaney with Citi.
Hi. This is Rohit Kulkarni filling in for Mark. A couple of questions. Can you talk about or disclose anything about mobile, how that's affecting your business? EBay, you talked about mobile affecting And second And second is can you talk about the broad philosophy of management about short term profitability versus long term growth?
As in probably this is the first time in a while that you have bracketed negative pro form a operating income in your guidance, how should we view your short term investment or the short term profitability outlook? Thank you. Sure.
In terms of 1st in terms of mobile, clearly smartphones and tablets are significant tailwinds for our business. Although we're not breaking out the numbers, it's a big tailwind on our business and it's going great. So we're seeing a very nice impact from that. And again, the tailwind that we expect that will continue. In terms of short term versus long term, we're all about trying to make sure we do the right long term things for both customers and share owners.
But more specifically around Q3, Q3 is similar to Q2 and other previous quarters and that we're investing certainly for the long term. Yet on the flip side, keep in mind as you look at Q3 specifically, we're getting ready for a most seasonal quarter. And we expect given the growth that we've had, we're seeing very strong growth. So we're investing heavily to get ready for that. In terms of capacity, for example, we've announced 18 new fulfillment centers so far this year.
We've actually opened 8 of those already this year out of the 18. And we're looking at potentially opening even more than that. And sorry, I'm sorry, 6 open so far this year out of 2018. And so those are certainly something that are impacting cost so far and you'll be seeing that heavier in Q3 as we get ready for the most seasonal quarter.
We'll go next to Mark Miller with William Blair.
Hi. I was hoping you
could share some perspective on your URL expansion strategy. I'd like to know, I guess, some sense for the growth you're seeing there and how material it is in your overall numbers? And should we expect to see further expansion in those sites? Yes. There's not a lot I can help you with there.
We're certainly looking as we as you'd
We'll go next to Scott Tillman with Karas and Company.
Thanks. Good afternoon. Tom, I was just curious, we've had a few quarters here where operating income has far surpassed the upper end of your guidance range. And we had a quarter here where Europe definitely seemed to weaken as the months went by. Just wondering what you think is causing that divergence between sort of expectations at the beginning of the quarter and how things are playing out?
And then just as a quick follow-up to one of the other questions. Looking at the fulfillment center network, just wondering if you are satisfied with the fee increases that were put in place in February that that business is now matching the margin for the rest of the business? Thanks.
I'm sorry, could you elaborate on the month's went by? I wasn't following your question.
Just on operating income, we've had a couple a few quarters here where the numbers have come in far better than guidance. And we actually had a situation where Europe actually got worse as the quarter went on. So I was wondering what is driving that outperformance?
Got it. We certainly as you look at I'll talk to Q2 since the most recent quarter, but we had a lot of strength across many different areas. One of the ones I mentioned that certainly helped our operating profit as well as our gross margin was a third party business continued to be very, very strong. And certainly that was a factor. Again, there was a number of factors.
One thing too, you do see some timing differences to some extent between Q2 and Q3 in terms of our prep for Q4. You that not only in our operating results, but you see it on our CapEx. In the last 90 days ago, we said that we would spend approximately eight $100,000,000 to $900,000,000 of CapEx for Q2. We spent a little less than $700,000,000 You see that number for Q3 being $800,000,000 to $900,000,000 as well $800,000,000 to $900,000,000 So again, those are things that you're seeing just a little bit of a shift between Q2 and Q3 there.
We'll go next to Ron Josey with Zinc Equity.
Great. Thanks for So I wanted to ask you a quick question on 3P. And given it's around 40% of sales this year, items sold, what point do you believe the customer experience on Amazon is at risk given the rise of 3rd party sales? And any insight in terms of adoption on FBA for by third parties would be very helpful. And then one quick follow-up just on your comments, Tom, on CapEx.
I think you said came in lower in 2Q guidance is for another $800,000,000 to $900,000,000 Is that guidance sort of consistent maybe going out going forward or is this sort of a one time build technology? Thank you.
Yes. In terms of the 3rd party units, certainly, FDA is having an impact on that. That's one of the drivers certainly to that's helping us have that percentage of total units go up. And we've looked at and been working very hard over a number of years on improving the experience for both sellers once they're part of the program, those units that are FBA and our fulfillment network network are eligible for all of our programs including free Super Saver Shipping, Prime. So again those are great certainly that's a great program for customers.
It's a great program for sellers and it's a great program for investors. And so we think of it, I don't think of it as a bad thing at all. I think of it as a good thing. We have a lot of retail units we send directly to customers. We're offering a great experience on 3rd party units, which includes FDA and a number of other programs that we have.
So again, we'll continue to try to make that even better for customers and sellers over time, but it's working very well. And again, those the benefit of having 3rd parties on our platform is we get to add great new selection. We also have competing offers directly on our detail pages. So when customers come they get to choose in terms of who they want to purchase from. So it's a competitive environment on our platform.
So we think that's great for customers and for us.
We'll go next to So Young Lee with SunTrust.
Hi, thanks for taking my question. I was just curious about living social. It seems to be bigger loss than usual. Can you give us some color on what happened perhaps? And secondly, can you talk about the kind of traction you're getting with Love Film given all the exclusive content you're getting there?
Thanks.
Love Film Business is doing very well. It's growing nicely. As you mentioned, we continue to add content there and we plan on adding more content there over time. Very excited to have that business as part of Amazon and the team is doing great. In terms of LivingSocial, there's not a lot I can add to it other than what we've disclosed.
We'll go next to Ken Sena with Evercore Partners.
Thanks. This is Andrew McNellis in for Ken. Somewhat related to other questions that have been asked, could you provide any update to your same day shipping efforts and how that relates to sales tax and fulfillment center investment?
Sure. In terms of delivery speed to customers, we're certainly trying to get geographically always trying to get closer to customers. That's something not new. It's something that we've been doing for some time. But in terms of same day, we don't really see a way to do same day delivery on a broad scale economically.
But again, we'll continue to work on behalf of customers to try to figure out a way to serve them even better by getting product faster. But in terms of same day, we don't see a way to do that on a broad economically.
We'll go next to Anthony DiClemente with Barclays.
Hi. This is Perry Gold on for Anthony. Could you please touch on the online sales tax issue and how it could affect your build out strategy for fulfillment centers? Thank
you. As I mentioned earlier, we have we do collect in several states within the U. S. We do collect in a number of geographies that have an equivalent value added tax. Approximately half of our business we actually collect sales tax and value added tax.
We do very good business in those geographies. Those geographies are reflected for the most part. If you go back the last several years, most of them have been included. We've certainly added some new geographies or new jurisdictions that we collect during that time period. But you see that we've seen very, very strong growth even while collecting.
So we're very supportive of collecting. We think the best way to do that is through a federal solution. And we keep working with Congress and others to try to get that passed.
We'll go next to Kerry Rice with Needham and Company.
Thanks a lot. Kind of hitting on the sales tax issue again, Amazon signed a lot of bilateral agreements with several states on the collection of sales tax. And I know there's a federal effort also going on. Can you talk about if a federal sales tax is passed, how does that impact your bilateral agreements with the states? Does that supersede it?
Or does that kind of have to continue to go on with those particular states and build those fulfillment centers and things in those states that you've agreed to?
Yes. There's not a lot I can add to that. Sorry, I can't be that helpful with your question. I apologize. But again, you're right, we do support federal legislation.
We're working very hard at that. One thing to keep in mind too, we price our products irrespective of what sales tax is. That's a customer obligation. And so we're pricing products very well. And so that's not something that we just started doing.
That's something we've been doing for a long time. And that's why we have a good business in those geographies and jurisdictions where we do collect. And because customers are coming to us because they want to have value, which we offer irrespective of tax. There's been a number of different third parties that have certainly reported on that. They come because they want great convenience.
They want obviously great service. And those are the things we're focused on. And those are the things that we believe customers will still want over the long term and that's why we focus on those areas.
We'll go next to Matt Niemeyer with Wells Fargo Securities.
Hey, Tom. The international segment operating income has been under a lot of pressure. Is that primarily related to existing markets, growth in new markets? And then is that would that be on the merchandise margin side of the P and L? Or is it more of an operating cost issue?
Keep in mind with international, it's a mix of geographies. And we're certainly the sum that we're investing in, we mentioned certainly in other calls, China is an area that is growing very fast, but we're certainly in investment mode there. In recent years, we've launched Italy and Spain. We're certainly investing in those geographies and like what we see there. Those are fulfillment capacity.
And so those are the things that we're fulfillment capacity. And so those are the things that are certainly impacting those numbers.
We will take our last question from Atul Baga with Lazard Capital.
Hey, guys. Thanks for taking my question. I have two questions, one on guidance and the other one on Prime member. Can you help us can you give some color on guidance what you're baking for growth in international versus domestic? And guidance implies there is some compression in margins.
Is it again mostly the function of the sales mix? Or is something else going on there? And then second on Prime members, can you remind us the profitability of Prime member versus non Prime member? And longer term, where do you think the penetration of Prime members within your overall base?
In terms of revenue, we don't break out the segments in terms of the split. But if you take a look at our guidance, it's to grow between 19% 31%. And if you look at the impact of exchanges a little over 400 basis points and so rounded it, it's just under 36% on the high end and 23% on the low end. And so that's the range of guidance. And so we're certainly pleased with what we saw in Q2 and we're certainly giving as we have in past quarters a wide range, appropriate wide range for Q3.
In terms of the bottom line in terms of operating income and CSOI guidance that we've given, as I mentioned earlier, certainly a number of different factors like the other like the last several quarters as we've been talking about we're certainly investing a lot in the business. But one thing to keep in mind is for the guidance in the upcoming quarter to Q3 and we are certainly getting ready given the growth rates we've had for our most seasonal quarter, but certainly impacting the bottom line in terms of our guidance. And as I mentioned earlier, we're opening a lot of fulfillment centers. We're adding a lot of capacity for both our web service business as well as infrastructure support, our retail business. So again, we're investing across the business, which is like other periods.
But again, we're getting ready for Q4.
That will conclude our question
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.
That does conclude today's conference. We thank you for your participation.