Jeff Bezos: The company has not provided any numbers by segment. The numbers that are quoted have not been provided by Amazon. Overall, it is 30% as a percentage of the total. What the company has said though is that its North America is higher than International, so there is an opportunity. Amazon is continuously focused on how to make the experience better for customers as well as sellers.
Mark Mahaney (Citigroup): Could you provide an update on some of the digital media offerings?
Jeff Bezos: It is too early to discuss any of the traction. The company has Amazon Unbox, which has downloadable videos, and has made arrangements with TiVo so that it can offer customers those videos directly to their TiVo Series 2 and Series 3 Internet-connected boxes. Then the company has announced, but not yet launched, an MP3 DRM-free music offering that it is excited about.
Brian Pitz (Banc of America): Could you provide color on the impact of Harry Potter attachments in the quarter?
Jeff Bezos: In terms of Harry Potter 7, all of the shipments of the book are happening during the third quarter but the associated attachments, Amazon’s normal practice is to ship those products as they become available. The impact on the second quarter was less than 100 basis points globally. There is also some traffic in addition to that, which is difficult to quantify what the incremental impact of that is.
Brian Pitz (Banc of America): Is advertising becoming a more material line item?
Jeff Bezos: The company has not broken it out. It is testing a number of things and seeing how they work.
Robert Peck (Bear Stearns): What do you think about the allocation of the free cash flow going forward?
Tom Szkutak: Looking forward, the company has Board authorization to purchase up to $500 million worth of shares over the next two years. It also has an authorization to retire up to $500 million of debt. The company is going to think about it thoughtfully in making sure that it does what is right for shareholders. The company has retired debt that it thinks is appropriate. It has also retired some convertible debt that avoided potential dilution of fewer than 10 million shares. Those are some of the examples of things that Amazon has done in the past. Going forward, it will certainly be mindful and do the right thing from a treasury and corporate finance perspective.
Doug Anmuth (Lehman Brothers): In the past, when EGM has spiked as a percentage of your sales, it has negatively impacted gross margins. This time EGM came in at 34% and you still posted good gross margin upside. Could you talk about the drivers within gross margins and also whether the mix within EGM during the quarter was any different than it has been in the past?
Tom Szkutak: The gross margins for the quarter were up 50 basis points year over year. The impact that the wind down and termination of TRU, had on both revenue as well as gross profit and operating profit, is being a similar amount in terms of that termination. Those categories, meaning toys, baby and videogames, as Amazon launches those, are like other categories that it launches, that when it launches new categories it is pricing its products competitively and they are lower gross margins to start with. It is not a full impact of that 20 year over year. Those are some of the dynamics related to that. Amazon continues to have low prices for customers. Offsetting that, it continues to be diligent on the COGS side, trying to get additional COGS out. Third party is 30% of total units, up from 29%. That is overlapping where some of the toys were third-party business last year. That would have been higher if that was not in there.
Justin Post (Merrill Lynch): The marketing side was up 22% year over year, below revenue growth. Are you seeing some deflation in marketing costs, or could that have been just some Harry Potter traffic benefits that you got in the quarter?
Tom Szkutak: Marketing was 2.2% of revenue. Over the past two to three years, the range has been tight; it has been anywhere from 2.2% to 2.7%. This past quarter was at the lower end of that range. There is nothing unusual about that. The company would not expect it over time, to stay at the lower end of that range.
Justin Post (Merrill Lynch): Tech expense reaccelerated and was up $15 million sequentially. Are there any new initiatives on the tech side?
Tom Szkutak: Amazon is going to continue to grow technology and content dollars. They were up about 16% year over year. There is some positive leverage in the quarter due to that, because last year, the second quarter was up 63%. The company continues to invest in digital and web services, improving seller platforms. This category expansion is included in those numbers as well.
Aaron Kessler (Piper Jaffray): You are getting increasing traction on the web services. Where are you seeing the best traction and what do you see as the biggest opportunity, starting with Amazon web services?
Jeff Bezos: Amazon is seeing good early traction in its web services initiatives. It is one of the areas that it has been investing in over the last couple of years. It is encouraging to see that traction. The company has got a lot of customers, and the team that is doing that is creating a lot of value for those customers. They are making it much easier for those customers to do business. This customer set is developers. A lot of them are start-up companies. If you are a start-up company building a web scale application, there is a lot of work that has to go into that. A lot of that work is not differentiating. It is things like picking the right operating systems, getting data centers set up and entering into contracts, et cetera. There are a lot of decisions to be made and it is kind of a price of admission. It has to be done well, but it does not actually move the ball forward in terms of creating differentiated product or service. What Amazon Web Services does is make it easy for people, for developers, start-up companies and bigger companies. The company is seeing a wide range of adoption from individuals, start-up companies of a single person to venture capital-funded start-up companies, all the way to large corporations using these services. Amazon is optimistic about the long-term potential. It is still early, but the company is working hard on this, and thinks it is, in the long-term, an important business.
Aaron Kessler (Piper Jaffray): The domestic gross margin is about 6% ahead of international. Is there any reason that international cannot get similar to domestic longer term, assuming that you can get to a similar level of third-party sales?
Tom Szkutak: Each of the countries that Amazon operates in has their own local competitors. In any given quarter or time period, it could have competitive dynamics which would make its gross margins on any particular category either higher or lower. From a structural standpoint, the company does not think that there are a lot of differences of why they could not be similar over time. The biggest thing that Amazon needs to do is that it has a lot more selection today, as it has more categories in its U.S. web site. Amazon has been expanding its international categories over the past several years. Inclusive of the last couple quarters, one should expect to see an additional selection being added and new categories over the next 12 months in international. As Amazon improves the customer experience, it thinks that that will be helpful to its international web sites, to bring those closer. As it gets more meaningful in terms of size, in terms of negotiating better deals with suppliers, in terms of higher rebates, just because of the sheer volume that Amazon purchases, it will get better.
Scott Devitt (Stifel Nicolaus): The U.S. business did not have a change in new users or new customers to the site, but the revenue growth rate acceleration is meaningful. Could you give detail, in terms of frequency changes in terms of purchasing patterns of the customer set, within Prime versus your other customers?
Tom Szkutak: The company has not disclosed any of the frequency patterns between Prime and non-Prime customers. What is helping Amazon’s North America growth is, the value proposition, low prices and fast delivery, which includes Prime. In terms of frequency, the company likes what it is seeing in Prime as it relates to frequency, because that is what the program is designed to do.
Imran Khan (JP Morgan): Your U.S. growth rate is strong. What are you doing to reaccelerate the international business from this level?
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