Q1 2012 Earnings Call

April 26, 2012 5:00 pm ET


Sean Boyle -

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


Spencer Wang - Crédit Suisse AG, Research Division

Scott W. Devitt - Morgan Stanley, Research Division

Mark S. Mahaney - Citigroup Inc, Research Division

Heather Bellini - Goldman Sachs Group Inc., Research Division

Kenneth Sena - Evercore Partners Inc., Research Division

Douglas Anmuth - JP Morgan Chase & Co, Research Division

Charles Eugene Munster - Piper Jaffray Companies, Research Division

Brian Nowak - Nomura Securities Co. Ltd., Research Division

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

Carlos Kirjner - Sanford C. Bernstein & Co., LLC., Research Division

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

Lloyd Walmsley - Deutsche Bank AG, Research Division

Anthony J. DiClemente - Barclays Capital, Research Division

A. Justin Post - BofA Merrill Lynch, Research Division

Herman Leung - Susquehanna Financial Group, LLLP, Research Division

Benjamin A. Schachter - Macquarie Research

Gregor Schauer - Robert W. Baird & Co. Incorporated, Research Division



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Thank you for standing by. Good day, everyone, and welcome to the First Quarter 2012 Financial Results Teleconference. [Operator Instructions] 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, sir.

Sean Boyle

Hello, and welcome to our Q1 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, April 26, 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 our 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'll turn the call over to Tom.

Thomas J. Szkutak

Thanks, Sean. I'll begin with comments on our first quarter financial results. Trailing 12-month operating cash flow increased 1% to $3.05 billion. Trailing 12-month free cash flow decreased 39% to $1.15 billion. Return on invested capital was 12%, down from 24%. ROIC 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 464 million shares compared with 466 million shares. During the quarter, we repurchased 5.3 million shares of our common stock for $960 million.

Worldwide revenue grew 34% to $13.18 billion or 34% excluding the $56 million unfavorable 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 $4.71 billion, up 19% or 19% excluding foreign exchange. EGM revenue increased to $7.97 billion, up 43% or 43% excluding foreign exchange. Worldwide EGM increased to 60% of worldwide sales, up from 57%. Worldwide paid unit growth was 49%. Active customer accounts exceeded 173 million. Worldwide active seller accounts were more than 2 million. Seller units were 39% of paid units compared to 36% of paid units in the Q1 2011.

Now I'll discuss operating expenses, excluding stock-based compensation. Cost of sales was $10.03 billion or 76.1% of revenue compared with 77.2%. Fulfillment, marketing, technology, content and G&A combined was $2.76 billion or 20.9% of sales, up approximately 283 basis points year-over-year. Fulfillment was $1.26 billion or 9.5% of revenue compared with 8.4%. Tech and content was $816 million or 6.5% of revenue compared with 5.3%. Marketing was $468 million or 3.6% of revenue compared with 3.2%.

Now I'll talk about our segment results. And consistent with prior periods, we do not allocate the segments or stock-based compensation expense or other operating expense line item. In the North America segment, revenue grew 36% to $7.43 billion. Media revenue grew 17% to $2.2 billion. EGM revenue grew 44% to $4.77 billion, representing 64% of North America revenues, up from 60%. North America segment operating income increased 20% to $349 million, a 4.7% operating margin.

In the International segment, revenue grew 31% to $5.76 billion. Adjusted for the $55 million year-over-year unfavorable foreign exchange impact, revenue growth was 32%. Media revenue grew 21% to $2.51 billion or 22%, excluding foreign exchange. And EGM revenue grew 40% to $3.2 billion or 42%, excluding foreign exchange. EGM now represents 56% of International revenues, up from 52%. International segment operating income decreased 72% to $49 million, a 0.9% operating margin. Excluding the unfavorable impact from foreign exchange, International segment operating income decreased 65%.

CSOI decreased 15% to $398 million or 3% of revenue, down approximately 170 basis points year-over-year. Excluding the unfavorable impact from foreign exchange, CSOI decreased 14%. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income decreased 40% to $192 million or 1.5% of net sales. Our income tax expense was $43 million in Q1, resulting in a 51% rate for the quarter. GAAP net income was $130 million or $0.28 per diluted share compared with $201 million or $0.44 per diluted share.

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