In the North America segment, revenue grew 38% to $1.6 billion.
This is the highest growth rate in more than six years.
Media revenue grew 26% to $923 million.
EGM revenue grew 66% to $606 million, representing 38% of North America revenues, up from 32%.
- The company saw another quarter of strong sales in electronics, and revenue from soft goods, which includes jewelry, apparel, shoes and sporting goods, doubled year over year.
- North America gross profit grew 40% to $434 million, and gross margin increased 34 basis points.
- North America segment operating income increased 233% to $82 million, a 5.1% operating margin.
In the International segment, revenue was $1.28 billion, up 31% year over year, or 26% adjusted for the $45 million favorable foreign exchange impact.
Media revenue grew 27% to $910 million, or 23% excluding FX.
EGM revenue grew 40% to $364 million, or 34% excluding FX.
- International gross profit grew 34% to $267 million, or grew 29%, excluding FX, while gross margin increased 48 basis points to 20.8%, which reflects increased third-party mix offset partially by lower prices, product mix and free shipping offers.
- International segment operating income increased 50% to $83 million, a 6.4% operating margin. Excluding the $3 million favorable impact from foreign exchange rates, International operating income increased 42%.
- Consolidated segment operating income grew 106% to $165 million, or 5.7% of net sales, up 198 basis points year over year.
Third Quarter 2007 Outlook
- The company expects net sales of between $3 billion and $3.175 billion, or growth of between 30% and 38%. This guidance anticipates greater than 200 basis points of positive impact from foreign exchange.
- GAAP operating income is expected to be between $75 million and $110 million, or grow between 88% and 175%. This includes approximately $50 million for stock-based compensation and amortization of intangible assets.
- The company anticipates consolidated segment operating income, which excludes stock-based compensation and other operating expense, to be between $125 million and $160 million, or grow between 73% and 122%.
Fiscal 2007 Outlook
- The company expects net sales of between $13.8 billion and $14.3 billion, or growth of between 29% and 34%. This guidance anticipates greater than 200 basis points of positive impact from foreign exchange.
- GAAP operating income is expected to be between $540 million and $640 million, or growth of between 39% and 65%. This includes approximately $185 million for stock-based compensation and amortization of intangible assets.
- The company anticipates consolidated segment operating income, which excludes stock-based compensation and other operating expense, to be between $725 million and $825 million, or grow between 45% and 65%.
- The company anticipates 2007 free cash flow growth rate to trend similar to operating profit growth rate year over year, with some variability from changes in working capital.
- The company expects capital expenditures, including capitalized software development costs, to be approximately $250 million.
- Technology and content will increase in absolute dollars, but the company expects the growth rate of spending in T&C to be less than it was in 2006.
- The company anticipates cash paid for income taxes will be approximately $25 million, compared to $15 million in 2006, as the company continues to benefit from NOLs in the United States. NOL utilization is impacted by many factors, including excess stock-based compensation deductions.
Key questions from the second quarter earnings call conducted by Amazon.com, Inc. on July 24, 2007.
Dave Joseph (Morgan Stanley): You saw a strong improvement in gross margin. There was a one-time impact there, but it also seems that there might be third-party sales at work which continue to be strong. Why do you think you are seeing such strong traction in third-party sales and how sustainable is this?
Tom Szkutak: As it relates to third parties, over the past few years, the company has been investing in improving what it calls seller platforms, and that is surrounding everything that makes it easier for sellers to sell, which includes third parties as well as itself. There is an improvement in third-party sales, third-party units were 30% for the quarter as a percentage of total units, which is up from 29%. Some of that is the launch of Merchants@ International. The importance of it overall is in terms of free cash flow rather than gross margins. This model of having Amazon as a seller as well as third-party is important for customers, and also works for it financially as well. What the customer sees is they get additional selection that they might not ordinarily get from the company by having third parties. They also get the benefit of seeing where there is overlap, seeing competing sellers on Amazon’s detail pages which they can select from. The combination of these factors is great for customers and great for shareholders and so the company thinks it should be a meaningful part of its business as going forward.
Anthony Noto (Goldman Sachs): The domestic business accelerated in both media and EGM - EGM being the biggest factor, up 66% versus 51% in the first quarter. What drove the most incremental dollars in North American EGM to drive that 66% year-over-year growth, which category?
Tom Szkutak: The company is not providing details on the specific categories that make up EGM, but in terms of what is driving it, is customers are responding to what they believe is an excellent value proposition which includes low prices, fast delivery and increased selection. As part of that, fast delivery, Prime is a factor. Prime is a more meaningful part of Amazon’s overall units during the second quarter than it has been previously, so the company has more subscribers, as well as they are buying more. That is a key driver. One other thing is in addition to those key factors, looking at year over year specifically for North America, last year in the second quarter the company had the impact of the wind down and determination of TRU, which infected its revenue by approximately $20 million, which the company disclosed last year during the second quarter.
Jeetil Patel (Deutsche Bank Securities): What is the growth in the non-media-related newer categories a result of?
Jeff Bezos: What the company is finding is, when it launches a new category it needs traffic to those detail pages. As it gets more meaningful traffic to those detail pages, it becomes more attractive for third-party sellers to participate. That is the best way for Amazon to help its third-party business. It is the same as it is to help its retail business, which is to make that customer experience great. When it does that, it attracts customers and traffic to its detail pages, which is good for sellers, which ultimately is good for customers, having these offers, as well as investors.
Jeetil Patel (Deutsche Bank Securities): The penetration of third party looks like about 50% to 55% of U.S. units and around 5% to 10% in the UK. Could you comment on that?
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