Amazon.com’s (AMZN) Management on Q2 2014 Results – Earnings Call Transcript

Source: Seeking Alpha

 

Amazon.com, Inc. (NASDAQ:AMZN)

Q2 2014 Earnings Conference Call

July 24, 2014, 05:00 PM ET

Executives

Phil Hardin – Director of Investor Relations

Tom Szkutak – Chief Financial Officer

Analysts

Carlos Kirjner – Bernstein

Neil Doshi – CRT Capital

Eric Sheridan – UBS

Mark May – Citi

Brian Pitz – Jefferies

Heath Terry – Goldman Sachs

John Blackledge – Cowen & Company

Ben Schachter – Macquarie

Mark Miller – William Blair

Justin Post – Bank of America-Merrill Lynch

Youssef Squali – Cantor Fitzgerald

Brian Nowak – SIG

Mark Mahaney – RBC Capital Markets

Greg Melich – ISI Group

Colin Sebastian – Robert Baird & Company

Operator

Good day and welcome to the Amazon.com Q2 2014 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. Also, today’s call is being recorded.

For opening remarks, I’ll be turning the conference over to the Director of Investor Relations, Phil Hardin. Please go ahead, sir.

Phil Hardin – Director of Investor Relations

Hello and welcome to our Q2 2014 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, July 24, 2014 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 reconciliations of these measures with comparable GAAP measures.

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Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2013.

Now, I’ll turn the call over to Tom.

Tom Szkutak – Chief Financial Officer

Thanks, Phil. I’ll begin with comments on our second quarter financial results. Trailing 12-month operating cash flow increased 18% to $5.33 billion. Trailing 12-month free cash flow increased to $1.04 billion. Trailing 12-month capital expenditures were $4.29 billion. The increase in capital expenditures reflects additional investments in support of continued business growth consisting of additional capacity to support our fulfillment operations and investments in technology infrastructure including Amazon Web Services.

Return on invested capital was 6%, up from 2%, ROIC’s TTM 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 480 million shares compared with 470 million one year ago.

Worldwide revenue grew 23% to $19.34 billion or 22% excluding the $237 million favorable impact from year-over-year changes in foreign exchange rates. Media revenue increased to $4.84 billion, up 10% or 9% excluding foreign exchange. EGM revenue increased to $13.28 billion, up 27% or 26% excluding foreign exchange. Worldwide EGM increased to 69% of worldwide sales, up from 66%. Worldwide paid unit growth was 23%. Active customer accounts exceeded 250 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 $13.4 billion or 69.3% of revenue compared with 71.4%. Fulfillment, marketing, tech and content and G&A combined was $5.54 billion or 28.6% of sales, up approximately 260 basis points year-over-year. Fulfillment was $2.28 billion or 11.8% of revenue compared with 11.2%. Tech and content was $2.02 billion or 10.4% of revenue compared with 9.1%. Marketing was $911 million or 4.7% of revenue compared with 4.1%.

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Now I’ll talk about our segment results. And consistent with prior periods, we do not allocate to segments our stock-based compensation or other operating expense line item. In the North America segment, revenue grew 26% to $12 billion. Media revenue grew 13% to $2.46 billion or 14% excluding foreign exchange. EGM revenue grew 29% to $8.37 billion, representing 70% of North America revenues, up from 68%. Other revenue grew 38% to $1.17 billion. North America segment operating income increased 7% to $438 million, a 3.7% operating margin.

In the international segment, revenue grew 18% to $7.34 billion. Excluding the $246 million year-over-year favorable foreign exchange impact, revenue growth was 14%. Media revenue grew 7% to $2.38 billion or 4% excluding foreign exchange, and EGM revenue grew 25% to $4.91 billion or 20% excluding foreign exchange. EGM now represents 67% of international revenues, up from 63%. International segment operating loss was $34 million compared with $0 million in the prior period.

CSOI decreased 1% to $404 million or 2.1% of revenue, down approximately 50 basis points year-over-year. Excluding the favorable impact from foreign exchange rate, CSOI decreased 9%. Unlike CSOI, our GAAP operating income or loss includes stock-based compensation expense and other operating expense. GAAP operating loss was $15 million compared to operating income of $79 million in the prior-year period. Our income tax expense was $94 million, and this includes approximately $90 million of discrete tax items primarily attributable to audit-related developments. GAAP net loss was $126 million or $0.27 per diluted share compared with a net loss of $7 million and $0.02 per diluted share.

Turning to the balance sheet, cash and marketable securities increased $523 million year-over-year to $7.99 billion. Inventory increased 23% to $6.64 billion. And inventory turns were 9.1, down from 9.4 turns a year ago, as we expanded selection, improved in-stock levels and introduced new product categories. Accounts payable increased 16% to $10.46 billion and accounts payable days decreased to 71 from 73 in the prior year.

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