Amazon.com, Inc. (AMZN)
Q2 2010 Earnings Call Transcript
July 22, 2010, 5:00 p.m. ET

Executives

Robert Eldridge - Vice President of Investor Relations
Thomas Szkutak - Chief Financial Officer and Senior Vice President

Analysts

Jeetil Patel - Deutsche Bank AG
Scott Devitt - Morgan Stanley
James Mitchell - Goldman Sachs Group Inc.
Mark Mahaney - Citigroup Inc
Justin Post – Bank of America/Merrill Lynch
James Friedland - Cowen and Company, LLC
Brian Pitz - UBS Investment Bank
Douglas Anmuth - Barclays Capital
Spencer Wang - Credit Suisse AG
Shawn Milne - Janney Montgomery Scott LLC
Imran Khan - JP Morgan Chase & Co
Colin Sebastian - Lazard Capital Markets LLC
Sandeep Aggarwal - Caris & Company
Heath Terry - FBR Capital Markets & Co.

Presentation

Operator

Good day, and welcome to the Amazon Quarterly Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Rob Eldridge, VP of Investor Relations. Please go ahead.

Robert Eldridge

Hello, and welcome to our Q2 2010 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 22, 2010 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 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 2009. Now I will turn the call over to Tom.

Thomas Szkutak

Thanks, Rob. I will begin with comments on our financial results. Trailing 12-month free cash flow grew 29% to $1.99 billion. Return on invested capital is 34%, down from 42%. 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 ends.

The combination of common stock and stock-based awards outstanding was 465 million shares compared with 451 million shares. Worldwide revenue grew 41% to $6.57 billion, or 42%, excluding the $48 million unfavorable impact from year-over-year changes in FX. We are grateful to our customers who continue to take advantage of our low prices, fast selection with free shipping offers, including Amazon Prime.

Media revenue increased to $2.87 billion, up 18%. EGM revenue increased to $3.49 billion, up 69%, or 70% excluding foreign exchange rates. Worldwide EGM increased to 53% of worldwide sales up from 45%. Worldwide unit growth was 39%. Active customer accounts exceeded 118 million. Worldwide active seller accounts were more than 2 million, up 19%. Seller units were 32% of total units.

Consolidated gross profit grew 42% to $1.61 billion, and gross margin was 24.5%. Beginning this quarter, we no longer allocate Fulfillment costs related to the third-party inventory to cost of sales. Using our prior method, gross margin in Q2 2010 was 24.1%.

Now I will discuss operating expenses excluding stock-based compensation. Fulfillment, marketing, technology and content in G&A combined were $1.2 billion, or 18.3% of sales, up 50 basis points year-over-year. Fulfillment was $558 million or 8.5% of revenue, compared with 8.4%. Using the prior method of allocating Fulfillment costs related to third-party inventory to cost of sales, Q2 2010 Fulfillment was 8.1% of revenue. Tech and content was $350 million or 5.3% of revenue, compared with 5.5%. Marketing was $204 million, or 3.1% of revenue up from 2.7% in the prior year.

Now I will talk about our segment results and, consistent with prior periods, we do not allocate segments, our stock-based compensation or other operating expense line item.