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Q3 2012 Results Earnings Call

October 25, 2012 5:00 PM ET


Sean Boyle - Vice President, Investor Relations

Tom Szkutak - Senior Vice President and CFO


Scott Devitt - Morgan Stanley

Mark Mahaney - Citi

Heather Bellini - Goldman Sachs

Douglas Anmuth - J.P. Morgan

Youssef Squali - Cantor Fitzgerald

Brian Pitz - Jefferies

Stephen Ju - Credit Suisse

Brian Nowak - Nomura

Ross Sandler - Deutsche Bank

Mark Miller - William Blair

Herman Leung - Susquehanna

Anthony DiClemente - Barclays

Michael Graham - Canaccord Adams

Justin Post - Bank of America/Merrill Lynch



Good day everyone, and welcome to the Third Quarter 2012 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. Please go ahead.

Sean Boyle

Hello and welcome to our Q3 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, October 25, 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’ll 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 will turn the call over to Tom.

Tom Szkutak

Thanks, Sean. I’ll begin with comments on our third quarter financial results. Trailing 12 month operating cash flow increased 8% to $3.37 billion. Trailing 12 month free cash flow decreased 31% to $1.06 billion. Return on invested capital was 10%, down from 17%. ROIC trailing 12 month free cash flow divided by average total assets minus current liabilities excluding the current portion of long-term debt over five quarter end.

The combination of common stock and stock-based awards outstanding was 469 million shares consistent with 469 million shares. Worldwide revenue grew 27% to $13.81 billion or 30% excluding the $348 million unfavorable impact from year-over-year changes in foreign exchange. We’re grateful to our customers who continue to take advantage of our low prices, vast selection and shipping offers.

Media revenue increased to $4.6 billion, up 11% or 14% excluding foreign exchange. EGM revenue increased to $8.56 billion up 36% or 39% excluding foreign exchange. Worldwide EGM increased to 62% of worldwide sales, up from 58%.

Worldwide paid unit growth was 39%. Active customer accounts exceeded $188 million. Worldwide active seller accounts were more than $2 million. Seller units represented 41% of paid units.

Now, I’ll discuss operating expenses excluding stock-based compensation. Cost of sales was $10.32 billion or 74.7% of revenue compared with 76.5%. Fulfillment, marketing, technology and content and G&A combined was $3.26 billion or 23.6% of sales, up approximately 251 basis points year-over-year.

Fulfillment was $1.45 billion or 10.5% of revenue compared with 10%. Tech and content was $1.08 billion or 7.8% of revenue compared with 6.4%. Marketing was $524 million or 3.8% 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 or stock-based compensation or other operating expense line item. In the North America segment, revenue grew 33% to $7.88 billion. Media revenue grew 15% to $2.22 billion. EGM revenue grew 39% to $5.06 billion, representing 64% of North America revenues, up from 61%. North America segment operating income increased to 102% to $291 million, a 3.7% operating margin.

In the International segment, revenue grew 20% to $5.92 billion, adjusting for the $347 million unfavorable foreign exchange impact revenue growth was 27%. Media revenue grew 7% to $2.38 billion or 12% excluding foreign exchange. And EGM revenue grew 30% to $3.5 billion or 39% excluding foreign exchange. EGM now represents 59% of international revenues up from 54%.

International segment operating loss was $59 million, a 1% negative operating margin compared with income of $116 million. CSOI decreased 11% to $232 million or 1.7% of revenue, down approximately 71 basis points year-over-year, excluding the unfavorable impact from foreign exchange, CSOI decreased to 10%.

Unlike CSOI, our GAAP operating income or loss includes stock-based compensation expense and other operating expense. GAAP operating loss was $28 million or 0.2% negative operating margin comparing with GAAP operating income of $79 million.

Our income tax expense was $83 million. GAAP net loss was $274 million or $0.60 per diluted share compared with net income of $63 million and $0.14 per diluted share.

Third quarter 2012 includes a loss of $169 million, $0.37 per diluted share related to our equity-method share of losses reported by LivingSocial, primarily attributable to its impairment charge of certain assets, including goodwill. As of the end of September the book value of our equity-method investment in LivingSocial was $94 million.

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