Good day, and welcome to the Amazon Quarterly Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Rob Eldridge, VP of Investor Relations. Please go ahead.
Hello, and welcome to our Q2 twenty ten financial results conference call. Joining us today is Tom Scutak, 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 22, 2010 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 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 2,009.
Now, I'll turn the call over to Tom.
Thanks, Rob. I'll begin with on our financial results. Trailing 12 month free cash flow grew 29 percent to $1,990,000,000 Return on invested capital was 34%, down from 42%. ROIC is TTM free cash flow divided by average total assets 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 465,000,000 shares compared with 451,000,000 shares.
Worldwide revenue grew 41 percent to 6 $57,000,000,000 or 42 percent excluding the $48,000,000 unfavorable impact from year over year changes in FX. We're grateful to our customers who continue to take advantage for our low prices, fast selection with free shipping offers including Amazon Prime. Media revenue increased to 2 $87,000,000,000 up 18%. EGM revenue increased to $3,490,000,000 up 69% or 70% excluding foreign exchange rates. Worldwide EGM increased to 53% of worldwide sales, up from 45%.
Worldwide unit growth was 39%. Active customer accounts exceeded $118,000,000 Worldwide active seller accounts were more than $2,000,000 up 19 percent. Seller units were 32% of total units. Consolidated gross profit grew 42 percent to $1,610,000,000 and gross margin was 24.5%. Beginning this quarter, we no longer allocate fulfillment costs related to 3rd party inventory to cost of sales.
Using our prior method, gross margin in Q2, 2010 was 24.1 percent. Now, I'll discuss operating expenses excluding stock based compensation. Fulfillment, marketing, technology and content and G and A combined was $1,200,000,000 or 18.3 percent of sales, up 50 basis points year over year. Fulfillment was 5 $58,000,000 or 8.5 percent of revenue compared with 8.4%. Using our prior method of allocating fulfillment costs related to 3rd party inventory to cost of sales, Q2 twenty ten fulfillment was 8.1% of revenue.
Tech and Content was $350,000,000 or 5.3 percent of revenue compared with 5.5 percent. Marketing was $204,000,000 or 3.1 percent of revenue, up from 2.7% in the prior year.
Now I'll talk about
our segment results and consistent with prior segment, revenue grew 46 percent to $3,590,000,000 Media revenue grew 15% to 1 point $32,000,000,000 The sequential decline in quarter over quarter growth rates was driven primarily by seasonality in textbook sales and slower rates of growth in video games and video game consoles. EGM revenue grew 76 increased 61 percent to $200,000,000 a 5.6 percent operating margin. In the International segment, revenue grew 35 percent to $2,980,000,000 Revenue growth was 38% adjusting for the $54,000,000 year over year foreign exchange effect during the quarter. Media revenue grew 20 percent to $1,550,000,000 or 21% excluding foreign exchange rates, and EGM revenue grew 9 percent to $1,400,000,000 or 63% excluding foreign exchange rates. EGM now represents 47% of international revenues up from 40%.
International segment operating income increased 15% to $206,000,000 a 6.9% a 6.9 percent operating margin. Excluding the unfavorable impact of foreign exchange rates, international segment operating income increased 21%. CSOI grew 34% to $406,000,000 or 6.2 percent of revenue, down 35 basis points year over year. Excluding the $10,000,000 unfavorable impact from FX, CSOI grew 37%. Unlike CSOI, our GAAP operating income includes stock based compensation expense and other operating expense.
GAAP operating income grew 71% to $270,000,000 or 4.1 percent of net sales. Q2, 2019 operating income was negatively impacted by $51,000,000 legal settlement. Our income tax expense was $88,000,000 in Q2 or a 30 percent rate for the quarter. During the quarter, we recorded estimated tax expense associated with tentative agreement between the Japanese and U. S.
Tax authorities on the allocation of income between the U. S. And Japan for 2,003 through 2,005 resulting in a 3 percentage point increase in our effective tax rate for the quarter. GAAP net income was $207,000,000 or 0 point and $42,000,000 $0.32 per diluted share. Turning to the balance sheet, cash marketable securities increased $1,900,000,000 year over year to $5,110,000,000 Inventory increased 46 percent to $1,940,000,000 and inventory turns were 12 point 5, up from 12.4 turns a year ago, even as we expanded selection, improved in stock levels and introduced new product categories.
Accounts payable increased 41 percent to $3,550,000,000 and accounts payable days were 65, unchanged from the prior year. Our Q2 twenty
10
including capacity to support our fulfillment operations, additional investments in technology infrastructure, including Amazon Web Services, and investments in corporate office space. We expect this trend to continue throughout 20 10. 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
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 effect on guidance. Our guidance further assumes that we don't conclude any additional business acquisitions record any further revisions to stock based compensation estimates and that foreign exchange rates remain approximate where they've been recently. For Q3, we expect net sales of between $6,900,000,000 $7,625,000,000 dollars a growth between 27% 40%.
This guidance anticipates approximately 300 basis points of unfavorable impact from foreign exchange rates. GAAP operating income to be between $210,000,000 $310,000,000 or between 16 percent decline and 24% growth. This anticipates approximately $130,000,000 for stock based compensation and intangible assets. We anticipate consolidated segment operating income, which excludes stock based compensation and other operating expense to be between $340,000,000 440 $1,000,000 or between 3% decline and 26% growth. We remain head sound focused on driving a better customer experience through price selection and convenience.
We believe putting the customers first is the only reliable way to create lasting value for shareholders. Thanks. And with that, Rob, 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 And we'll take our first question from Jatil Patel from Deutsche Bank.
Great. Two questions. First of all, I guess, as it relates to broadly fulfillment, I guess, can you talk about maybe a little bit more color on fulfillment capacity being layered into the business? I guess is that both domestic and international or just more of a U. S.
Kind of phenomenon, maybe a bit more color on, I guess how much of this incremental capacity is being allocated to your partners, seller partners out there? And I guess, is this the build out in front of the holiday season that you typically do? And then second, are you seeing consumers still buy more books in an environment where consumers have the Kindle app available on multiple devices these days?
Okay. In terms of
answering your first question, just to clarify on the fulfillment expense as a percentage of revenue, we have historically reallocate have allocated some of our costs from operating expenses to COGS. And when we reporting gross margins last quarter, we decided this quarter not to allocate some of our costs out of operating expenses and into COGS. And the impact of that is a little over are about 40 basis points as a percentage of revenue higher than they would have been if we had not done this and the offset is in COGS. So then
if you take a look
at it, those fulfillment expenses, we are growing very, very fast. And so we're adding capacity to support growth and we plan on adding 13 fulfillment centers this year after keeping our fulfillment center structure relatively flat last year. We did add some customers as well as filled by Amazon, our partners. And your question around whether it's domestic or international, it's across geographies. So it's 13 fulfillment centers across geographies.
And so we're very excited about it because again we're experiencing when we look at the growth our overall growth rates at 42% on a local currency basis this quarter, 42% last quarter, 37% in Q4. So again, we're growing very, very strong. So and then in terms of your second question, could you just, Jade, elaborate a little bit further? I think
I think early on when the Kindle device came out, you had actually just talked about how consumers were purchasing more books through the Kindle device. Are you seeing now that you have a Kindle app that resides in multiple different devices, products out there in the marketplace, are you seeing consumers buy more books via the Kindle app?
What we're seeing is strong growth on Kindle as well as the apps. So we're seeing very, very strong growth on Kindle. So it's really across the board is what you're seeing.
Is this idea of the cloud based computing for books really resonating with consumers today?
I'm sorry, you cut out a little bit, Gito.
The idea of this cloud based kind of format of reading or having availability of digital books resonating with consumers, such that I can read my book on a PC, my Blackberry and my iPhone and Kindle and switch around depending on what's convenient for me. Is that?
It certainly is. And customers can come and buy content on their Kindle and buy it once and use it everywhere, which is great. And so we're seeing, as you probably saw in the release from early in the week, we're seeing very, very strong device growth and we're seeing very, very strong content growth and we're extremely pleased with what we're seeing there.
Thanks.
We'll take the next caller
please. And our next question is from Scott Debit with Morgan Stanley.
Hi, thanks. Just one question please. Tom, if you go back over the past 4 quarters, on average you had been beating the midpoint of your revenue guidance by approximately 7% and op inc by about 27%. And in the Q2, revenue was towards the high end of guidance, but the operating income was at the midpoint. So could you maybe talk about anything in the business that you felt that changed in the quarter?
Or how we should think about your forward operating guidance going forward relative to the now the past five
be very helpful. We're trying to be giving you our best forecast of what's going to happen during the quarter. We have had some times where we've been on the high end of that and been over it, but certainly when we provide guidance, that's not what we're trying to do. We're trying to give an accurate description of what we think the range will be. And so we approach it the same way every time, and we give the guidance that we think is appropriate.
And as you mentioned, our results today are well within it's in the top half for revenue guidance. It's also in the top half for consolidated segment operating income as well. Thanks.
And we'll take our next question. Our next question is from James Mitchell from Goldman Sachs.
Kind of one lengthy question. Could you talk about why the international operating margins are trending down while the domestic operating margins are trending up? Does that primarily reflect mix shifts in terms of 3rd party and EGM within each market or more of the 13 new fulfillment centers outside North America than inside it? And to what extent are the 13 new fulfillment centers already hitting expenses in the Q2 versus coming in, in the Q3?
In terms of international, first of all, I want to highlight a couple of things related to international. International saw an accelerated growth this quarter. It was 38% growth on a local currency basis. That's the strongest you know there's a number of things that's driving it. We've added a lot of selection over the past few years.
If you look back and you see that just the categories that we've launched over the past few years, we continue to add selection in existing categories, but in those new categories that we've launched over the past few years. So that growth from new and existing categories is certainly doing quite well. We're making sure that we're very competitive from a pricing standpoint, which is helping. And certainly, other things such as prime is having a noticeable impact on the growth rate there. So that's really what's driving the growth rate.
And with that accelerated growth rate in some of those newer categories, you're seeing some mix. Again, we have a number of categories that are very new there over the past few years and they're coming up the scale, but it's still very early. So you should assume that many of those are lower gross margin categories and you can see that reflected in the EGM growth within international. So again, saw very, very strong growth there. In terms of fulfillment centers, I mentioned this to I think it was Jeetel's question earlier.
We haven't the plan is to add 13. You're seeing some of the costs starting in Q2 for some of those fulfillment centers, and you see more as reflected in our guidance for Q3. But again, they're dispersed in a number of different geographies.
And we'll take our next question from Mark Mahaney with Citi.
Great. A couple of quick ones. The tax rate, whether you're onetime items in there, it sounds like based on your the way you described it for, is that rate you should think about going forward? Secondly, can you just give us the apples to apples North American and international gross margins under the old accounting methodologies? And then 3rd, can you talk about marketing expenses?
Those seem to have picked up. Is there some change in the strategy or did you find marketing expenses more expensive this
Mark? Hey, Mark, it's Rob. We were unable to hear what you said. So we're going to move on to the next caller.
I've got a few of the pieces and I'll give you the yes, it was very scratchy. But the we did mention on a tax rate standpoint, our tax rate was 30 percent. Yes, if there's any one time unusuals, I think is what you asked for. There was one that I mentioned in my opening remarks related to Japan, and we have a tentative agreement there. And the impact of that, it's about 300 basis points on that tax rate.
So without that, it would have been about approximately 27% for the quarter. In terms of marketing, you asked the question around marketing. Our Our approach has been consistent. The spend that you're seeing during the quarter is primarily online. If you're looking at the year over year growth that you're seeing in terms of basis points, certainly, we have Zappos in our quarterly numbers, which we didn't have last year.
And if you many of you probably saw the results consolidating and they were spending at a rate percentage of revenue, a much greater rate than Amazon was. And you should assume that they're still spending at a rate that's faster than Amazon and that's reflected in that total. You also may have noticed that we're doing some broad scale advertising, TV advertising for Kindle, which we think is the right thing to do and included in the number
that you see there. And we'll take our next question from Justin Post with Bank of America Merrill Lynch.
Thank you. Looks like you added 2,200 people in the quarter. Could you explain where those people are mostly centered toward? Are they in the digital initiatives, maybe helping improve the Kindle or are they more in the fulfillment center related? And secondly, any timeframe from when the kind of the personnel ramp up could kind of slow down?
Is it next year or is it sooner than that? Thank you.
In terms of the growth, sequential growth from Q1 to Q2, we did add 2,200 people. The majority of those were operations people and within that operations, the majority of those would support new volume. I should say the volume that we're seeing. And so that's what's in there. The rest of the growth rate supporting the things we've been talking about over the past several years, We're supporting new category growth both in North America and international.
We're supporting the growth in Kindle, supporting our seller business, supporting our fastly growing Web Services business. Those are the things that we're supporting to grow our business going forward.
And we'll take our next
it's unusually low for Q2 and I know it moves around, but it looks like part of the reason is ramping up on inventory a little earlier in the year. Can you provide some color around that?
Well, our inventory actually our turns improved slightly year over year, about a tenth of a turn. We're pleased with what we see there. You're right, you do have some volatility in free cash flow. Certainly, one of the things that you're seeing is CapEx is was $196,000,000 in the quarter, which is up and that's really in a few different pieces, but certainly the incremental spend relates to capacity that's both on the fulfillment side as well as infrastructure side and the infrastructure side to support our retail business as well as our fast growing AWS business.
On that CapEx, should we look at that roughly $200,000,000 you're spending per quarter? I know there's $100,000,000 of incremental expense in for the year for the new facility move, but is that sort of a baseline excluding that facility impact?
You should in terms of Q3 should be our highest quarter of the year so far and you should expect that number to be more than $300,000,000 during Q3. And again, that's we're adding we plan to add 13 fulfillment centers this year. We plan to add infrastructure capacity to support our fast growing business, which includes AWS. And on the fulfillment side, it's not just to support our retail business, but to support our FBA business, supporting our seller partners, so in addition to the office based comments that you made.
We go to Brian Pitzer with UBS.
Great, thanks. One quick additional question on marketing. Should we expect an even larger ramp up as percent of revenue in Q4 given more aggressive spending on Kindle? And can you talk about what's driving acceleration in other revenue? Is it Amazon product units or Web Services?
Thanks.
Sorry, Mr. Brian. I heard the first question, but could you repeat the second part?
Yes.
Could you discuss the acceleration in other revenues? Is it some of your initiatives in Amazon product ads or maybe Web Services?
Okay. In terms of other revenue, there's a number of things that are in there, but certainly our Web Services business is included in other revenue and it's growing very fast. So we're certainly seeing that. And in terms of marketing, we're not giving guidance on any specific line item in Q3 in our guidance and we're not giving any guidance at this point for Q4. But I would expect that we're going to approach marketing very similar to what you've seen over the past quarter.
We're seeing the vast majority of it will be online. We would still expect our Zappos team to continue to market as they have. And as you've seen so far this quarter, we've been doing some TV ads for Kindle during the quarter as well. So all of that would be included in our marketing and reflected in our guidance.
And we'll take our next question from Doug Anuth with Barclays Capital.
Great. Thanks for taking the question. Tom, I was hoping you could comment on the North America Media business and in particular grew 15% on certainly an easier comp from last year. You pointed to a couple of things there, but anything any more detail you can provide here? And how much, I guess, in particular is this related to the digital success that you're having through the Kindle?
Thanks.
The growth rate, the deceleration that you see is driven primarily by seasonality in textbook. We had and also weakness in video games and video game consoles. From a textbook standpoint, it's very seasonal. It's growing very fast in Q1. It's not as much of an impact in Q2 as you would imagine.
And then the weakness in video games and video game consoles due to allocations on the console side and also a lack of major releases. But in terms of growth on the book side, we're if you've seen the very, very strong growth in both Kindle device, which is in AGM as well as Kindle content, which is in media. So it's growing very, very fast. But our books our physical book business, while the Kindle books are growing dramatically, is also growing double digits, so year over year in the quarter. So we're very pleased with our overall book business, both our physical and digital business.
Great. Thank
And we'll take our next question from Spencer Wang with Credit Suisse.
Thanks. Good afternoon. Just I guess one housekeeping question. Tom, can you give us a sense of roughly the impact from Zappos acquisition in the quarter? And also was there any impact from the change in the Kindle hardware accounting?
Thanks.
Yes. In terms of those two pieces, we're not breaking those out. I think the way to think about it though is, if you look at our EGM growth rate from North America, which is where those two things would occur, we saw if you back those out, we still saw an accelerated growth rate. So again, we're not providing individual product line details in this case, but that's what we're seeing.
And on the accounting change, Tom?
It was including both of those in that number
when I said that. Thanks. And we'll take our next question from Sean Milne with Janney Capital Markets.
Thanks. Just first on the housekeeping front. Can you give us a sense for what kind of capacity that you're as a percent of capacity that you would be adding with the 13 distribution centers? Any sense of magnitude there would be helpful. And secondly, if you can give us any color on just the pace of business through the Q2, June relative to April?
Thank you.
Yes. In terms of the number of fulfillment centers, 13 is on a base of just under 40. And so to size it a little bit. And in terms of pace, we don't give updates on inter quarter. But again, as you can see from our overall growth rate, we saw very, very strong growth in Q2, 42% on a local currency basis, 46% for North America, 38% for international.
International was the best growth rate of any quarter we've had in a little over 5 years. So it's very strong. There was World Cup going on during about 20 days, the last 20 days of the quarter and hard to say what kind of impact that had, but I'm sure it had some impact and but that was included in that 38% growth on a local currency basis. But again, it's we're not a bellwether for the economy and we focus very hard on expanding selection and make sure we have great prices and making sure that we have great convenience for customers including Amazon Prime. So those are things that we're focused on and it was really what's driving the growth that you see today.
Just a quick follow-up on the 13 distribution centers out of the 40 plus. I'm assuming that these are more regional nature and that blended the average square footage would be a little bit lower than what we've seen from some of the sort of early distribution centers. Is that a fair take?
It was 13 on just under 40 and not just over 40. And we're not providing the square footage details, but I would think of them as varying size in different regions.
Okay. Thank you.
And we'll take our next question from Imran Khan from JPMorgan.
Yes. Hi. Thank you so much for taking my questions. A couple of questions. First, it seems like CapEx grew 5th straight quarter and was like roughly 3% of your revenue and depreciation and amortization grew like 53%.
So how should we think about the CapEx? What's driving this CapEx growth? So that's question number one. And question number 2, it seems like high end you're guiding 40% revenue growth, but operating income growth rate of 24%. So what's driving the deleverage?
And the third, a housekeeping question, how many Kindle apps for iPad has been downloaded? Can you give us some sense on that? Thank you.
Sure. I'll take your CapEx question first. The largest pieces of the increase are related to capacity and it's capacity both from a fulfillment perspective and an infrastructure perspective. When I say fulfillment, it's to support our fast growing retail business as well as our fast growing Fulfilled by Amazon business where we on behalf of our partners. From an infrastructure standpoint, we're supporting our again our retail business, but also we have an AWS business that's growing very, very strong right now.
And so we're supporting that growth by adding CapEx. So that's what's included in the CapEx. In terms of the range of guidance, I just wanted to clarify a little bit. You said the range, upper end of the range was 40%. Keep in mind that that anticipates approximately 300 basis points of unfavorable exchange rates.
So at the high end of the range, it's more like 43%, as well as on the bottom end of the range for CSOI, you mentioned 24%, it's actually 26%, and that anticipates approximately 600 basis points of exchange. So it would be at the high of the range, it would be 43% growth ex exchange for revenue 32% growth ex on the high end of the range, 43% excluding exchange for revenue and 32% growth excluding exchange on CSOI. And again, it reflects our best estimate for the high end of that range and the things that we see. But again, it anticipates some of the things that I'm talking about. It anticipates the capacity that will show up in CapEx as well as operating expense across a number of different fronts.
And then the rest of the operating expenses in support of the things that we've been talking about again for the last several years, it's the growing retail business, both in North America and international, our seller business, AWS, our Kindle business, seller business, if I didn't say that. So again, those are the things that we're adding resources to support the opportunities Sebastian with
Lazard. Good afternoon. Thanks for Sebastian with Lazard.
Good afternoon. Thanks for taking my questions. I guess first one clarification on the Media segment, given the questions there. Was the performance in that segment under your expectations for the quarter? And then secondly, I'm curious about your view of the consumer environment versus 90 days ago and if you're preparing for this holiday period any differently than maybe you were last year at this time?
Thanks.
We're very, very pleased with the media growth. And so we're very pleased with what we saw. We're extremely pleased with our Kindle content growth. And again, as I mentioned, our physical books also grew double digits year over year during the quarter. So we're very, very pleased with our overall books business as related to that.
And again, we saw our sequential decline based on primarily the textbook sales Even though we saw weakness in our video games and video game console business, we're still very pleased with that business and we think we're doing the team is doing a great job in terms of the fundamental supporting customers and we like the opportunities that we see there. In terms of the consumer sentiment, again, I don't think we're the bellwether. What we're seeing is reflected in our Q2 results, And
And we'll take our next question from Sandeep Agarwal with Karas and Company.
Thanks for taking my questions. Actually, I have two questions. One is, Tom, can you talk about maybe the average selling price for the Kindle e books? And even if you don't want to talk about the pricing, maybe directionally how they have trended last 2 quarters? And secondly, the price reduction in Kindle device in June, it fair to assume that it was gross margin agnostic?
Thank you.
In terms of the ASP in Kindle, I can't help you with the average. But what I can help you with is,
if you take a look
at the some of the details that we provided earlier in the week, point you to that release where we have over 630,000 titles, 510,000 of those were $9.99 or below. That excludes the $1,800,000 pre-nineteen 23 free content that we have in the Kindle. So there's just great values and great selection for customers and we're seeing that customers responding to that great selection in the convenience of the device, the convenience of the apps, the fact that you can buy it once on Kindle and read it in many different places is really important to customers. And again, there's great values there as well.
And Tom, just in terms of the growth, the price reduction in the Kindle device?
Yes. I'm not commenting on the best values to customers. Get it to the best values to customers and we're committed to doing that. And we think we're very fortunate to see when we dropped our price from $2.59 down to $1.89 we started tripling the growth rate, which we're extremely pleased to see. And we're very happy with our kingdom business and it has great momentum right now.
And we'll take our last question from Heath Terry with FBR Capital Markets.
Great. Thanks. First, I guess, just quickly, can you give us a sense of what kind of traction you're seeing for Kendall at Target since the rollout there? And then looking at the category expansion in international, how much expansion do you have left given the verticals that you've added before the offering outside the U. S.
Starts to parallel what you're offering inside the U. S?
In terms of Target, we have a longstanding practice of not talking about any results from specific partner, but we're pleased overall with our growth in Kendall all the way around and we're pleased with our relationship there. In terms of international, we have we're still adding a lot of selections in international in each of the categories that we're in, older categories that we've been in
selection there. Keep in mind that
we also have, add selection there. Keep in mind that we also have within international an opportunity to add categories and selection obviously in those geographies. So we think there's great opportunities there. Great. Thank
you.
Thank you for joining 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