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Amazon (AMZN) Q3 2010 Earnings Call

October 21, 2010; 05:00 am ET


Thomas Szkutak – Senior Vice President & Chief Financial Officer

Robert Eldridge – Vice President of Investor Relations


Scott Devitt – Morgan Stanley

Mark Mahaney – Citi

James Mitchell – Goldman Sachs

Brian Pitz – UBS

Douglas Anmuth – Barclays Capital

Gene Munster – Piper Jaffray

Greg O'Shara – Lazard Capital Markets

Youssef Squali – Jefferies

Jeetil Patel – Deutsche Bank Securities

Jim Friedland – Cowen and Company

Imran Khan - JP Morgan

Sandeep Aggarwal – Caris & Company

Spencer Wang – Credit Suisse

Justin Post – Bank of America


Good day, and welcome to the Amazon Quarterly Conference Call. Today’s conference is being recorded. At this time, I would like to turn the call over to Mr. Rob Eldridge, please go ahead, Sir.

Robert Eldridge

Hello, and welcome to our Q3 2010 financial results conference call. Joining us today is Thomas Szkutak, our CFO. We will be available for questions after our prepared remarks.

The following discussion and responses to your questions reflect the management's views as of today, October 21, 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-K.

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 the 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 2009. Now, I'll turn the call over to Tom.

Thomas Szkutak

Thanks Rob. I'll begin with comments on our financial results. Trailing 12-month operating cash flow increased 16% to $2.62 billion. Trailing 12-month free cash flow decreased 5% to $1.83 billion. Return on invested capital was 28%, down from 50%. 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 465 million shares compared with 451 million shares. Worldwide revenue grew 39% to $7.56 billion or 40%, excluding the $83 million unfavorable impact from year-over-year changes in foreign exchanges rates. We're grateful to our customers who continue to take advantage of our low prices, fast selection and free shipping offers, including Amazon Prime.

Media revenue increased to $3.35 billion, up 14% or 15% excluding foreign exchange rates. EGM revenue increased to $3.97 billion, up 68% or 71% excluding foreign exchange rates. Worldwide EGM increased to 53% of worldwide sales, up from 43%. Worldwide unit growth was 41%. Active customer accounts were approximately 121 million. Worldwide active seller accounts were more than 2 million. Seller units were 34% of total units.

Consolidated gross profit grew 39% to $1.77 billion, and gross margin was 23.5%.

Now, I'll discuss our operating expenses, excluding stock-based compensation. Fulfillment, marketing, technology and content in G&A combined was $1.37 billion or 18.2% of sales, up 120 basis points year-over-year. Fulfillment was $657 million or 8.7% of revenue, compared with 8.2%.

Tech and content was $386 million or 5.1% of revenue, compared with 4.9%. Marketing was $234 million or 3.1% of revenue, up from 2.6% in the prior year.

Now, I'll talk about our segment results and consistent with prior periods, we do not allocate the segments or stock-based compensation or other operating expense line item.

In the North America segment, revenue grew 45% to $4.13 billion. Media revenue grew 13% to $1.59 billion. EGM revenue grew 80% to $2.33 billion representing 56% of North America revenues, up from 45%. North America segment operating income increased 19% to $186 million, up 4.5% operating margin.

In the international segment, revenue grew 32% to $3.43 billion. Revenue growth was 35%, adjusting for the $86 million year-over-year unfavorable foreign exchange impact during the quarter. Media revenue grew 16% to $1.76 billion or 18% excluding FX. And EGM revenue grew 54% to $1.64 billion or 60% excluding FX. EGM now represents 48% of international revenues, up from 41%.

International segment operating income increased to 11% to $215 million, a 6.2% operating margin. Excluding the unfavorable impact for foreign exchange, international segment operating income increased 20%.

CSOI grew 15% to $401 million or 5.3% of revenue down a 112 basis points year-over-year. Excluding the $15 million unfavorable impact from foreign exchange, CSOI grew 19%. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income grew 7% to $268 million or 3.5% of net sales.

Our income tax expense was $79 million in Q3 or a 27% rate for the quarter. GAAP net income was $231 million or $0.51 per diluted share compared with $199 million and $0.45 per diluted share.

Turning to the balance sheet, cash and marketable securities increased $1.88 billion year-over-year to $5.88 billion. Inventory increased 56% to $2.52 billion and inventory turns were 11.8 down from 12.1 turns a year ago, as we extended selection, improved in-stock levels and introduced new product categories.

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