Amazon.com Inc., Q3 2013 Earnings Call, Oct 24, 2013 - NasdaqGS:AMZN

NasdaqGS:AMZN

During the Amazon.com Third Quarter 2013 Financial Results Teleconference, Sean Boyle, the Vice President of Investor Relations, made the following statements:

1. Opening Remarks:

   • Welcomed participants to the Q3 2013 financial results conference call.
   • Announced that Tom Szkutak, the CFO, would join him on the call.
   • Mentioned that they would be available for questions after their prepared remarks.

2. Guidelines for Discussion:

   • Noted that the discussion and responses would reflect management's views as of the day of the call, October 24, 2013.
   • Reminded listeners that the call would include forward-looking statements and that actual results may differ materially.
   • Directed participants to the press release and SEC filings for additional information about potential impacts on financial results.
   • Advised listeners to have the press release in front of them, which includes financial results, metrics, and commentary on the quarter.

3. Non-GAAP Financial Measures:

   • Informed that the call would discuss non-GAAP financial measures.
   • Mentioned that additional disclosures regarding these measures, including reconciliations with comparable GAAP measures, could be found in the press release, accompanying slides, and SEC filings.
   • Noted that comparisons made during the call would be against the results for the comparable period of 2012, unless otherwise stated.

4. Transition to CFO:

   • Passed the call over to Tom Szkutak, the CFO, to begin with comments on the third quarter financial results.

5. Conclusion:

   • Thanked participants for joining the call and for their questions.
   • Announced 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.

These statements were made during the opening and closing portions of the earnings call transcript.

Thomas J. Szkutak, the Former Chief Financial Officer and Senior Vice President of Amazon.com, Inc., provided details on the company’s third quarter 2013 financial results and addressed various questions from analysts. Here is a detailed summary of his remarks:

Third Quarter Financial Results

• Operating Cash Flow: Increased by 48% to $4.98 billion.
• Free Cash Flow: Decreased by 63% to $388 million.
• Capital Expenditures: Totaled $4.59 billion, including $1.4 billion for the purchase of previously leased corporate office space and property for developing additional office space in Seattle.
• Return on Invested Capital (ROIC): Dropped to 3% from 10%.
• Worldwide Revenue: Grew by 24% to $17.09 billion, or 26% excluding the $332 million negative impact from foreign exchange rates.
• Media Revenue: Increased to $5.03 billion, up 9% (or 13% excluding foreign exchange).
• EGM (Electronics, General Merchandise) Revenue: Increased to $11.05 billion, up 29% (or 31% excluding foreign exchange).
• Worldwide EGM: Composed 65% of worldwide sales, up from 62%.
• Worldwide Paid Unit Growth: Reached 29%.
• Active Customer Accounts: Exceeded 224 million.
• Worldwide Active Seller Accounts: Exceeded 2 million.
• Seller Units: Represented 40% of paid units.

Operating Expenses (Excluding Stock-Based Compensation)

• Cost of Sales: $12.37 billion or 72.3% of revenue, down from 74.7%.
• Fulfillment: $1.96 billion or 11.5% of revenue, up from 10.5%.
• Technology and Content: $1.58 billion or 9.2% of revenue, up from 7.8%.
• Marketing: $671 million or 3.9% of revenue, up from 3.8%.
• General and Administrative (G&A): Not explicitly mentioned.

Segment Results

• North America Segment:
  • Revenue grew by 31% to $10.3 billion.
  • Media revenue grew by 18% to $2.61 billion.
  • EGM revenue grew by 33% to $6.73 billion, representing 65% of North America revenues, up from 64%.
  • Segment operating income increased by 1% to $295 million, with a 2.9% operating margin.
• International Segment:
  • Revenue grew by 15% to $6.79 billion, or 20% excluding the $327 million unfavorable foreign exchange impact.
  • Media revenue increased by 2% to $2.42 billion, or 9% excluding foreign exchange.
  • EGM revenue grew by 23% to $4.32 billion, or 28% excluding foreign exchange.
  • Segment operating loss was $28 million, compared to a $59 million loss in the prior period.

Consolidated Segment Operating Income

• Increased by 15% to $267 million, or 1.6% of revenue, down approximately 10 basis points year-over-year.

GAAP Results

• GAAP Operating Loss: $25 million compared to a $28 million loss in the prior year period.
• Income Tax Benefit: $12 million.
• GAAP Net Loss: $41 million or $0.09 per diluted share, compared with a net loss of $274 million or $0.60 per diluted share.
• Third Quarter 2012: Included a loss of $169 million or $0.37 per diluted share related to Amazon’s equity-method share of the loss recorded by LivingSocial.

Balance Sheet Highlights

• Cash and Marketable Securities: Increased by $2.44 billion year-over-year to $7.69 billion.
• Inventory: Increased by 20% to $6.07 billion, with inventory turns of 9.2, down from 9.7 turns a year ago.
• Accounts Payable: Increased by 20% to $10.04 billion, with accounts payable days remaining at 75.

Guidance

• Q4 2013 Net Sales: Expected to be between $23.5 billion and $26.5 billion, a growth of between 10% and 25%.
• GAAP Operating Income or Loss: Expected to be between a $500 million loss and $500 million in income.
• Consolidated Segment Operating Income or Loss: Expected to be between a $150 million loss and $850 million income.

Other Key Points

• Prime Membership: Growing very fast, with millions of new Prime members added in the last 90 days.

• Kindle Family and Digital Media Penetration: Different levels of penetration in the U.S. compared to international markets, driven by device launches, e-book library size, and local language content.

• Lifetime Value of Customers: Strong increase in Prime membership and good retention, indicating higher lifetime value for Prime customers.

• North America EGM Acceleration: Broad-based growth across categories, including fashion apparel and consumer staples, driven by increased selection and improved customer experience.

• Kiva Robots: Launched in a few fulfillment centers, showing promising productivity improvements.

• ROIC: Depressed due to heavy investments, with no specific timeline for return to previous levels.

• Video Content for Prime Instant Video: Increasing usage and adoption on Kindle devices and other platforms, contributing to Prime membership growth.

• Seasonal Hiring: Growing at a rate above U.S. revenue growth, reflecting preparation for the holiday season and supporting increased selection and Fulfilled by Amazon services.

• Pricing: Operating in a competitive environment, with a focus on maintaining competitive pricing.

• China Market: Early stages with room for multiple winners, focusing on providing great prices, selection, and speedy delivery.

• AmazonFresh: Early stage in Los Angeles, with positive initial results and expanding selection.

• Acquisition of TenMarks: Interest in the educational technology market, aiming to explore opportunities in helping students learn math.

• North America Segment Margins: Lower in Q3 due to seasonal readiness investments.

• Fulfillment Centers: Net addition of 7, including consolidations and larger facilities, with significant square footage added.

• Amazon Locker Initiative: Early stage, offering convenience for customers, and an area of ongoing learning and potential expansion.

• Inventory Growth: Slowed to 20%, with increased turns driven by unique selection growth and improved in-stock levels.

• Delivery Speed: Gradual improvement over the past 10+ years, with options for faster delivery, including same-day delivery.

• Login and Pay Program: Interesting opportunity with potential for monetization over time.

• India Market: Early stage, with a marketplace model and Fulfilled by Amazon, focusing on long-term growth.

• Current Quarter Trends: Steady acceleration of growth in North America since Q4 of the previous year.

• AWS Growth: Very strong and early-stage, with a great team and significant long-term opportunity.

• LivingSocial: No additional comments beyond the financial impact.

• Other Revenue Components: AWS is the largest and fastest-growing component, with strong growth.