Q3 2011 Earnings Call

October 25, 2011 5:00 pm ET


John Felton -

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


Kerry K. Rice - Needham & Company, LLC, Research Division

Herman Leung - Susquehanna Financial Group, LLLP, Research Division

Jeetil J. Patel - Deutsche Bank AG, Research Division

Mark S. Mahaney - Citigroup Inc, Research Division

Spencer Wang - Crédit Suisse AG, Research Division

James H. Friedland - Cowen and Company, LLC, Research Division

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

Douglas Anmuth - JP Morgan Chase & Co, Research Division

Brian J. Pitz - UBS Investment Bank, Research Division

Ross Sandler - RBC Capital Markets, LLC, Research Division

Youssef H. Squali - Jefferies & Company, Inc., Research Division

Colin A. Sebastian - Robert W. Baird & Co. Incorporated, Research Division

Scott W. Devitt - Morgan Stanley, Research Division

Benjamin A. Schachter - Macquarie Research



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

John Felton

Hello, and welcome to our Q3 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, October 25, 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 will turn the call over to Tom.

Thomas J. Szkutak

Thanks, John. I'll begin with comments in our third quarter financial results. Trailing 12-month operating cash flow increased 19% to $3.11 billion. Trailing 12-month free cash flow decreased 17% to $1.53 billion. Return on invested capital is 17%, down from 28%.

Return on invested capital is TTM free cash flow divided by average total assets minus current liabilities, excluding the current portion of long-term debt over 5 quarter end. The combination of common stock and stock-based awards outstanding was 469 million shares compared with 465 million shares.

Worldwide revenue grew 44% to $10.88 billion or 39%, excluding the $371 million favorable impact from year-over-year changes in foreign exchange. We are grateful to our customers who continue to take advantage for our low prices, vast selection and shipping offers.

Media revenue increased to $4.15 billion, up 24% or 19%, excluding foreign exchange. EGM revenue increased to $6.32 billion, up 59% or 54%, excluding foreign exchange. Worldwide EGM increased to 58% of worldwide sales, up from 53%.

Worldwide paid unit growth was 53%. Active customer accounts exceeded 152 million. Worldwide active sellers were more than 2 million.

Now I'll discuss operating expenses, excluding stock-based compensation. Cost of sales was $8.32 billion or 76.5% of revenue consistent with the prior-year period. Fulfillment, marketing, technology and content and G&A combined was $2.29 billion or 21.1% of sales, up approximately 290 basis points year-over-year.

Fulfillment was $1.09 billion or 10% of revenue compared with 8.7%. Tech and content was $694 million or 6.4% of revenue compared with 5.1%. Marketing was $360 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 segments or stock-based type of compensation or other operating expense line item. In the North American segment, revenue grew 44% to $5.93 billion. Media revenue grew 21% to $1.93 billion. EGM revenue grew 56% to $3.64 billion, representing 51% of North American revenues, up from 56%.

North America segment operating income decreased 23% to $144 million, a 2.4% operating margin.

In the International segment, revenue grew 44% to $4.94 billion, adjusting for the $367 million year-over-year favorable foreign exchange impact, revenue growth was 33%.

Media revenue grew 27% to $2.23 billion or 17% excluding foreign exchange and EGM revenue grew 63% to $2.68 million or 51%, excluding foreign exchange. EGM now represents 54% of international revenues up from 48%.

International segment operating income decreased 46% to $116 million, a 2.4% operating margin. Excluding the favorable impact of foreign exchange, International segment operating income decreased 55%.

Consolidated segment operating income decreased 35% to $260 million or 2.4% of revenue down approximately 290 basis points year-over-year. Excluding the $14 million favorable impact from foreign exchange, CSOI decreased 38%. Unlike CSOI, our GAAP operating income include stock-based compensation expense and other operating expense. GAAP operating income decreased 71% to $79 million or 0.7% of net sales.

Our income tax expense was $67 million in Q3, resulting in a 52% rate for the quarter and a 31% rate year-to-date. GAAP net income was $63 million or $0.14 per diluted share compared with $231 million and $0.51 per diluted share.

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