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Q4 2011 Earnings Call

January 31, 2012 5:00 pm ET


Sean Boyle -

Thomas J. Szkutak - Chief Financial Officer and Senior Vice President


Jeetil J. Patel - Deutsche Bank AG, Research Division

Scott W. Devitt - Morgan Stanley, Research Division

Mark S. Mahaney - Citigroup Inc, Research Division

Spencer Wang - Crédit Suisse AG, Research Division

Youssef H. Squali - Jefferies & Company, Inc., Research Division

Heather Bellini - Goldman Sachs Group Inc., Research Division

Justin Post - BofA Merrill Lynch, Research Division

Jordan Rohan - Stifel, Nicolaus & Co., Inc., Research Division

Charles Eugene Munster - Piper Jaffray Companies, Research Division

Douglas Anmuth - JP Morgan Chase & Co, Research Division



Good day, everyone, and welcome to the Fourth Quarter 2011 Financial Results Teleconference. [Operator Instructions] Today's call is being recorded. For opening remarks, I would like to turn the call over to Vice President of Investor Relations, Sean Boyle. Please go ahead, sir.

Sean Boyle

Hello, and welcome to our Q4 2011 Financial Results Conference Call. Joining us today is Tom Szkutak, our CFO; and John Felton, our Director of Investor Relations. 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, January 31, 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-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 reconciliation 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 2010. Now I'll turn the call over to Tom.

Thomas J. Szkutak

Thanks, Sean. I'll begin with comments on our fourth quarter financial results. Trailing 12-month operating cash flow increased 12% to $3.9 billion. Trailing 12-month free cash flow decreased 17% to $2.09 billion. Return on invested capital is 22%, down from 34%. Return on invested capital is TTM free cash flow divided by average total assets minus 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 468 million shares compared with 465 million shares. During the quarter, we repurchased 1.5 million shares of our common stock for $277 million.

Worldwide revenue grew 35% to $17.43 billion, or 34% excluding the $101 million favorable impact from year-over-year changes in foreign exchange rates. We're grateful to our customers, who continue to take advantage of our low prices, vast selection and shipping offers.

Media revenue increased to $6.01 billion, up 15% or 14% excluding foreign exchange. EGM revenue increased to $10.91 billion, up 48%, or 47% excluding foreign exchange. Worldwide EGM increased to 63% of worldwide sales, up from 57%.

Worldwide paid unit growth was 46%. Active customer accounts exceeded $164 million. Worldwide active seller accounts were more than $2 million. Seller units were 36% of paid units compared to 32% of paid units in Q4 2010.

Now I'll discuss our operating expenses, excluding stock-based compensation. Cost of sales was $13.83 billion, or 79.3% of revenue compared with 79.7%. Fulfillment, marketing, technology and content and G&A combined was $3.14 billion or 18% of sales, up approximately 250 basis points year-over-year.

Fulfillment was $1.62 billion or 9.3% of revenue compared with 8.2%. Tech and content was $782 million or 4.5% of revenue compared with 3.5%. Marketing was $581 million or 3.3% of revenue compared with 2.8%.

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 37% to $9.9 billion. Media revenue grew 8% to $2.56 billion. EGM revenue grew 51% to $6.88 billion, representing 69% of North America revenues, up from 63%.

North America segment operating income decreased 4% to $285 million, a 2.9% operating margin. In the International segment, revenue grew 31% to $7.53 billion. Adjusting for the $102 million year-over-year favorable foreign exchange impact, revenue growth was 29%.

Media revenue grew 20% to $3.45 billion, or 18% excluding foreign exchange rates. And EGM revenue grew 42% to $4.03 billion, or 41% excluding foreign exchange. EGM now represents 54% of international revenues, up from 49%.

International segment operating income decreased 46% to $177 million, a 2.4% operating margin. Excluding the favorable impact from foreign exchange rates, International segment operating income decreased 46%.

CSOI decreased 26% to $462 million, or 2.7% of revenue, down approximately 216 basis points year-over-year. Excluding the favorable impact from foreign exchange, CSOI decreased 27%. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense.

GAAP operating income decreased 45% to $260 million, or 1.5% of net sales. Our income tax expense was $86 million in Q4, resulting in a 32% rate for the quarter and a 31% rate for the full year 2011. GAAP net income was $177 million, or $0.38 per diluted share, compared with $416 million and $0.91 per diluted share.

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