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Q1 2013 Results Earnings Call

April 25, 2013 5:00 PM ET


Sean Boyle - Vice President, Investor Relations

Tom Szkutak - Chief Executive Officer


Brian Pitz - Jefferies

Scott Devitt - Morgan Stanley

Mark Mahaney - RBC capital Markets

Ben Schachter - Macquarie

Ross Sandler - Deutsche Bank

Colin Sebastian - Robert W. Baird

Douglas Anmuth - JPMorgan

Justin Post - Merrill Lynch

Matt Nemer - Wells Fargo Securities

Steven Ju - Credit Suisse

Ken Sena - Evercore Partners

John Blackledge - Cowen & Company

Anthony Diclemente - Barclays

Youssef Squali - Cantor Fitzgerald

Jordan Rohan - Stifel

Jason Helfstein - Oppenheimer & Company



Good day everyone, thank you for standing by. Welcome to the First Quarter 2013 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. Mr. Boyle, please go ahead.

Sean Boyle

Hello and welcome to our Q1 2013 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, April 25, 2013 only and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K.

As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results, as well as metrics and commentary on the quarter. During this call, we will discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast and our filings with the SEC, each of which is posted on our IR website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.

Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2012.

Now, I’ll turn the call over to Tom.

Tom Szkutak

Thanks Sean. I’ll begin with comments on our financial results. Trailing 12-month operating cash flow increased 39% to $4.25 billion. Trailing 12-month free cash flow decreased 85% to $177 million. Trailing-12 month capital expenditures were $4.07 billion.

This amount includes $1.4 billion in purchases of our previously leased corporate office space, as well as property for development of additional corporate office space located in Seattle, Washington which we purchased in the fourth quarter 2012.

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.

Return on invested capital was 1%, down from 12%. ROIC is TTM free cash flow divided by average total assets minus current liabilities excluding the current portion of long-term debt over five quarter ends. The combination of common stock and stock-based awards outstanding was 471 million shares compared with 464 million one year ago.

Worldwide revenue grew 22% to $16.07 billion or 24% excluding the $302 million unfavorable impact from year-over-year changes in foreign exchange rate. We are grateful to our customers who continue to take advantage of our low prices, vast selection and shipping offers.

Media revenue increased to $5.06 billion, up 7% or 10% excluding foreign exchange. EGM revenue increased to $10.21 billion, up 28% or 30% excluding foreign exchange. Worldwide EGM increased to 64% of worldwide sales, up from 60%.

Worldwide paid unit growth was 30%. Active customer accounts exceeded 209 million. Worldwide active seller accounts were more than 2 million. Seller units represented 40% of paid units.

Now, I will discuss operating expenses excluding stock-based compensation. Cost of sales was $11.8 billion, or 73.4% of revenue, compared with 76.1%. Fulfillment, marketing, technology and content and G&A combined was $3.83 billion, or 23.8% of sales, up approximately 289 basis points year-over-year. Fulfillment was $1.74 billion, or 10.8% of revenue compared with 9.5%. Tech and content was $1.26 billion, or 7.9% of revenue, compared with 6.5%. Marketing was $616 million, or 3.8% of revenue compared with 3.6%.

Now, let’s 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 26% to $9.39 billion. Media revenue grew 14% to $2.51 billion. EGM revenue grew 28% to $6.13 billion, representing 65% of North America revenues, up from 64%. North America segment operating income increased 31% to $457 million, a 4.9% operating margin.

In the international segment, revenue grew 16% to $6.68 billion. Adjusting for the $301 million year-over-year unfavorable foreign exchange impact, revenue growth was 21%. Media revenue grew 1% to $2.54 billion, or 7% excluding foreign exchange and EGM revenue grew 28% to $4.09 billion, or 32% excluding foreign exchange. EGM now represents 61% of international revenues, up from 56%.

International segment operating loss was $16 million, a 0.2% negative operating margin compared with income of $49 million.

CSOI increased 11% to $441 million, or 2.7% of revenue, down approximately 27 basis points year-over-year. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income decreased 6% to $181 million, or 1.1% of net sales.

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