Amazon.com Inc., Q3 2007 Earnings Call, Oct-23-2007 - NasdaqGS:AMZN

NasdaqGS:AMZN

Tom Szkutak, the Chief Financial Officer of Amazon.com, Inc., provided the following details during the Q3 2007 earnings call:

Opening Remarks

• Financial Results Overview:
  • Trailing 12-month free cash flow increased by 118% to $800 million.
  • Common stock and stock-based awards outstanding remained unchanged at $435 million.
  • Worldwide revenue grew by 41% to $3.26 billion.
  • Q3 2007 revenue benefited by approximately 290 basis points of year-over-year growth from Harry Potter VII sales and attachments.

Revenue Breakdown

• Media Revenue: Increased to $2.09 billion, up 36% (or 32% excluding FX).
• EGM (Electronics, General Merchandise) Revenue: Increased to $1.08 billion, up 54% (or 51% excluding FX).
• Worldwide Unit Growth: 32%.
• Active Customer Accounts: Exceeded 72 million, up 17% year over year.

Gross Profit and Margins

• Worldwide Gross Profit: $762 million, up 39%.
• Gross Margin: Decreased by 45 basis points to 23.4%, primarily due to lowering prices and changes in product mix, partially offset by increases in the third-party business.

Third-Party Business

• Worldwide Active Seller Accounts: Over 1.2 million.
• Third-Party Units: 32% of total units, up from 30% in the prior year.

Operating Expenses

• Fulfillment, Marketing, Tech and Content, and G&A: Combined $585 million or 18% of sales, an improvement of 273 basis points year over year.
• Fulfillment: $285 million or 8.7% of net sales, down 31 basis points year over year.
• Technology and Content: $181 million, or 5.6% of net sales, an improvement of 122 basis points year over year.
• Marketing: $72 million or 2.2% of net sales, an improvement of 51 basis points year over year.

Segment Results

• North America Segment:
  • Revenue grew 42% to $1.79 billion.
  • Media revenue grew 38% to $1.08 billion.
  • EGM revenue grew 54% to $631 million, representing 35% of North American revenues, up from 33%.
  • North American gross profit grew 34% to $460 million.
  • North American segment operating income increased 263% to $79 million, a 4.4% operating margin.
• International Segment:
  • Revenue was $1.47 billion, up 40% (or 33% adjusted for the $72 million favorable foreign exchange impact).
  • Media revenue grew 33% to $1.01 billion (or 27% excluding FX).
  • EGM revenue grew 54% to $448 million (or 45% excluding foreign exchange).
  • International gross profit grew 47% to $302 million, or 39% excluding FX.
  • International segment operating income increased 94% to $98 million, or 6.6% operating margin.

Cash Flow and Taxes

• Consolidated Segment Operating Income (CSOI): Grew 145% to $177 million or 5.4% of net sales, up 228 basis points year over year.
• GAAP Operating Income: Grew 207% to $123 million or 3.8% of net sales.
• Provision for Income Taxes: $44 million in Q3, or a 35% rate for the quarter.
• Cash and Marketable Securities: $1.91 billion, an increase of $690 million year over year.
• Inventory: Increased 32% to $970 million.
• Investment in Net Fixed Assets: Increased $42 million from a year ago to $491 million.
• Return on Invested Capital (ROIC): 42%.

Guidance

• Q4 Guidance:
  • Net sales between $5.1 billion and $5.45 billion, or growth of between 28% and 37%.
  • GAAP operating income between $221 million and $291 million, or grow between 12% and 48%.
  • Consolidated segment operating income between $275 million and $345 million, or grow between 20% and 51%.
• Calendar Year 2007 Guidance:
  • Net sales between $14.263 billion and $14.613 billion, or growth of between 33% and 36%.
  • GAAP operating income between $605 million and $675 million, or growth of between 56% and 74%.
  • Consolidated segment operating income between $796 million and $866 million, or grow between 59% and 73%.
  • Free cash flow growth rate expected to trend similarly to operating profit growth rate year over year.
  • Capital expenditures, including capitalized software development costs, expected to be approximately $250 million.

Additional Comments

• Impact of Consumer Spending: Customers are responding to a good customer experience, focusing on lower prices, increased selection, and speed of delivery, particularly with Amazon Prime.
• 2008 Outlook: Guidance for 2008 would be provided on the next earnings call. There is room for investment given the larger base.
• International Expansion: More selection will be added in existing geographies before considering new ones.
• Digital Media Offerings: Early results for Unbox and the MP3 store are positive, with good customer feedback.
• Third Party Business Internationally: The international third-party business is growing, contributing to gross margins.
• Amazon Prime: Membership more than doubled year over year. Opportunities exist to optimize the fulfillment network for faster delivery as Prime scales.
• Hiring: 1,400 people added to headcount, primarily in fulfillment centers for the holiday season.
• Harry Potter Impact: Sales related to Harry Potter VII in Q4 will not be as sizable as in Q3.
• Fulfillment Costs: Leveraging overall fulfillment center infrastructure contributed to the decrease in fulfillment costs as a percentage of sales.

Conclusion

Tom concluded his portion of the call with the guidance for Q4 and the full year 2007, emphasizing the uncertainty surrounding exchange rate fluctuations and the global economy. He highlighted that actual results could differ materially from guidance.

Kimberly K. Nelson, the Executive Vice President and Chief Financial Officer of Amazon.com, Inc., made the following statements during the Q3 2007 earnings call:

1. Opening Remarks:

   • Welcomed everyone to the Q3 2007 financial results conference call.
   • Introduced Tom Szkutak, the CFO, who would be available for Q&A alongside Jeff Bezos, the founder and CEO.
   • Noted that the discussion and responses to questions reflect management's views as of October 23, 2007.
   • Mentioned that actual results may differ materially from forward-looking statements.
   • Directed listeners to have the press release in front of them, which includes financial results, metrics, and commentary on the quarter.
   • Indicated that the call would discuss non-GAAP financial measures, with reconciliations provided in the press release, accompanying slides, and SEC filings.
   • Stated that comparisons on the call would be against results for the comparable period of 2006 unless otherwise stated.

2. Transition to Tom Szkutak:

   • Turned the call over to Tom Szkutak for his comments on financial results.

3. Q&A Session:

   • Invited Tom and Jeff to participate in the Q&A portion of the call.
   • Asked the operator to remind listeners how to initiate a question.

4. Closing Remarks:

   • Thanked everyone for joining the call and for their questions.

   • Noted that a replay would be available on the investor relations website at least through the end of the quarter.

   • Appreciated the interest in Amazon.com and looked forward to talking with everyone again the next quarter.