Q2 2011 Earnings Call

July 26, 2011 5:00 pm ET


John Felton -

Thomas Szkutak - Chief Financial Officer and Senior Vice President


Scott Devitt - Morgan Stanley

Brian Pitz - UBS Investment Bank

Colin Sebastian - Robert W. Baird & Co. Incorporated

Spencer Wang - Crédit Suisse AG

Youssef Squali - Jefferies & Company, Inc.

James Friedland - Cowen and Company, LLC

Charles Munster - Piper Jaffray Companies

Justin Post - BofA Merrill Lynch

Douglas Anmuth - JP Morgan Chase & Co

Jeetil Patel - Deutsche Bank AG

Mark Mahaney - Citigroup Inc



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Good day, everyone, and welcome to the Second Quarter 2011 Financial Results Teleconference. [Operator Instructions] Today's call is being recorded. For opening remarks, I will be turning the call over to the Director of Investor Relations, Mr. John Felton. Please go ahead.

John Felton

Hello, and welcome to our Q2 2011 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 26, 2011, 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.

Finally, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2010. Now I'll turn the call over to Tom.

Thomas Szkutak

Thanks, John. I'll begin with comments on our second quarter financial results. Trailing 12 months operating cash flow increased 25% to $3.21 billion. Trailing 12 months free cash flow decreased 8% to $1.83 billion. Return on invested capital is 21%, down from 34%. ROIC is 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 468 million shares compared with 465 million shares.

Worldwide revenue grew 51% to $9.91 billion or 44%, excluding the $477 million favorable 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 $3.66 billion, up 27% or 20% excluding foreign exchange. EGM revenue increased to $5.89 billion, up 69% or 62%, excluding foreign exchange. Worldwide EGM increased to 59% of worldwide sales, up from 53%.

Worldwide paid unit growth was 56% compared to 45% paid unit growth in Q1 2011. Active customer accounts exceeded $144 million.

Worldwide active seller accounts were more than $2 million. Seller units were 36% of paid units compared to 36% of paid units in Q1 2011 and 34% of paid units in Q2 2010.

Now, I'll discuss operating expenses, excluding stock-based compensation. Cost of sales was $7.52 billion or 75.9% of revenue compared with 75.5%. Fulfillment, Marketing, Technology and Content and G&A combined was $2 billion or 20.2% of sales, up approximately 190 basis points year-over-year.

Fulfillment was $909 million or 9.2% of revenue compared with 8.5%. Tech and content was $624 million or 6.3% of revenue compared with 5.3%. Marketing was $331 million or 3.3% of revenue compared with 3.1%.

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 51% to $5.41 billion. Adjusting for the $3 million year-over-year favorable foreign exchange impact, revenue growth was 50%. Media revenue grew 20% to $1.58 billion. EGM revenue grew 67% to $3.5 billion, representing 65% of North America revenues, up from 58%. North America segment operating income increased 7% to $214 million, a 4% operating margin.

In the International segment, revenue grew 51% to $4.51 billion, adjusting for the $473 million year-over-year favorable foreign exchange impact, revenue growth was 36%.

Media revenue grew 34% to $2.07 billion or 20%, excluding foreign exchange, and EGM revenue grew 71% to $2.4 billion or 53%, excluding foreign exchange. EGM now represents 53% of international revenues, up from 47%.

International segment operating income decreased 16% to $172 million, a 3.8% operating margin. Excluding the favorable impact of foreign exchange, International segment operating income decreased 34%. CSOI decreased 5% to $386 million or 3.9% of revenue, down 229 basis points year-over-year. Excluding the $28 million favorable impact from foreign exchange, CSOI decreased 12%. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense. GAAP operating income decreased 25% to $201 million or 2% of net sales.

Our income tax expense was $49 million in Q2, resulting in a 22% rate for the quarter and a 26% rate year-to-date. GAAP net income was $191 million or $0.41 per diluted share compared with $207 million and $0.45 per diluted share. Second quarter 2011 net income was positively impacted by equity method investment activity of $15 million, including the $49 million gain on sale of an equity position partially offset by $34 million in losses from equity method investments.

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