Amazon.com (AMZN) Blows Away Estimates; Highlights from Q409 Conference Call

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January 29, 2010 1:06 PM EST

Amazon.com, Inc. (NASDAQ: AMZN) reported a Q409 EPS of $0.85, beating analyst estimated by $0.13. The revenue for the quarter was $9.52 billion, which compares to the estimate of $9.02 billion.

They also see sales between $6.45 - $7.00 billion for Q110, trumping the analyst estimates of $6.36 billion.

Highlights from AMZN's Q409 Conference Call:

Thomas J. Szkutak, Senior Vice President and Chief Financial Officer:

Currently 12-month free cash flow grew 114% to $2.92 billion. Return on invested capital was 66% up from 41%. ROIC is taking our free cash flow divided by average total assets minus current liabilities excluding the current portion of long-term debt over five quarter ends.
Worldwide revenue grew 42% to $9.52 billion or 37% excluding the $354 million favorable impact from year-over-year changes in foreign exchange rates.
Media revenue increased to $4.68 billion, up 29%, or 23% excluding foreign exchange rates.
EGM revenue increased to $4.61 billion, up 60% or 54% excluding foreign exchange rates.
Worldwide unit growth was 37%. Active customer accounts exceeded 105 million, up 19%.
Worldwide active seller accounts for more than 1.9 million, up 24%. Seller units were 28% of total units. Worldwide gross profit was $1.98 billion, up 47%.
Fulfillment, marketing, technology and content, and G&A combined was $1.3 billion or 14.5% of sales, down 25 basis points year over year. Fulfillment was $733 million or 7.7% of revenue compared with 7.9%. Tech and content was $297 million or 3.1% of revenue compared with 3.5%. Marketing was $269 million, or 2.8% of revenue, up from 2.5% in the prior year.
Zappos, which was included in our results beginning November 1, 2009, contributed approximately $200 million to our fourth quarter revenue.
Media revenue grew 37% to $2.58 billion or 26% excluding FX. And EGM revenue grew 68% to $1.95 billion, or 56% excluding FX. EGM now represents 43% of international revenues, up from 38%.
International gross profit grew 42% to $806 million or grew 31% excluding FX while gross margin decreased 79 basis points to 17.7%, driven by lower prices for our customers and changes in product mix, partially offset by improvements in inventory management including vendor pricing and increases in 3P product sales.
International segment operating income increased 39% to $319 million, a 7% operating margin. Excluding the favorable impact from foreign exchange rates, International segment operating income increased 25%. Consolidated segment operating income grew 66% to $597 million or 6.3% of revenue, up 91 basis points year over year.
Excluding the $31 million favorable impact from foreign exchange rates, CSOI grew 58%. Unlike CSOI, our GAAP operating income includes stock-based compensation expense and other operating expense.
GAAP operating income grew 75% to $476 million or 5% of net sales.
Our income tax expense was $85 million in Q4 or an 18% rate for the quarter. GAAP net income was $384 million or $0.85 per diluted share compared with $225 million and $0.52 per diluted share.
Revenue grew 28% to $24.51 billion or 29% excluding the $182 million unfavorable impact from year-over-year changes in foreign exchange rates. North America revenue grew 25% to $12.83 billion and International grew 31%
to $11.68 billion, or 33% growth excluding year-over-year changes in FX.
Consolidated segment operating income or CSOI grew 44% to $1.57 billion, or 48% excluding $40 million of unfavorable year-over-year impact from foreign exchange rates, and operating margin increased 71 basis points to 6.4%.
GAAP operating income grew 34% to $1.13 billion or 4.6% of net sales. Turning to the balance sheet, cash and marketable securities increased $2.64 billion year-over-year to 6.37 billion. Our cash and marketable securities primarily consists of cash, government and government agency securities, AAA-rated money market funds, and other investment grade securities.
In January 2010, our Board of Directors authorized a program to repurchase up to $2 billion of our common stock, replacing our previous share repurchase program.
Inventory increased 55% to $2.17 billion and inventory turns were 12.2, unchanged from a year-ago even as we expanded selection, improved in-stock levels and introduced new product categories.
Accounts payable increased 56% to $5.61 billion and accounts payable days increased to 68 days from 62 in the prior year. Our 2009 capital expenditures were $373 million.
...we want to remind you that we're beginning the transition to our new Seattle offices this year. We will incur incremental CapEx of approximately $100 million in 2010 in support of this multi-year project.
Sales of our Kindle eReader are considered arrangements with multiple elements, which include the device, wireless connectivity and software upgrades. The revenue related to the device, which is a substantial portion of the total sales price, and related costs will be recognized at the time of delivery. Revenue for the wireless connectivity and the software upgrades will be continued to be amortized over the life of the device, which remains estimated at two years. The impact of the adoption of this standard is included in the first quarter 2010 guidance.

For Q1 we expect net sales of between 6.45 and $7 billion or growth of between 32 and 43%. This guidance anticipates approximately 500 basis points of positive impact of foreign exchange.
GAAP operating income to be between 275 and $365 million, or grow between 13 and 50%. This includes approximately $110 million for stock-based compensation and amortization of intangible assets.
We anticipate consolidated segment operating income, which excludes stock-based compensation and other operating xpense to be between 385 and $475 million, or growth of between 20 and 48%.

Q & A Session:

(Q)...that tax rate of 18%, should we extrapolate from that going forward? Secondly, any broad comment on your ability to sell, increasingly sell consumer staples, particularly momentum behind that subscribe-and-save program, and then finally could you help us quantify at all the Kindle impact, the difference in accounting maybe by providing an adjustment for what Kindle revenue or something would have been like last year, some way for us to parse out how much of an increase in the - or how much of the guidance could just be due to a change in the revenue recognition? (A) In terms of tax rate it was 18% for the quarter, 22% for the year. That
includes certainly the - the reason why the change in Q4 is related to the jurisdictions that we operate in. Again, we're not providing guidance beyond 2009 for taxes. In terms of consumer staples, it's certainly a category that we like. It's growing very nicely, subscribers [inaudible] saved from an adoption standpoint is working, and so those are things that, we're going to continue to focus on as well as other things to try to grow that particular category. As it relates to the Kindle change, we have provided some information in the 10-K. Essentially the way you should think about guidance is, certainly, the change is effective 1/1, so it's included in our Q1 guidance, so for the units that we sell, a substantial portion of the price times those units will be reflected in our revenue. In addition to that, we have approximately $500 million of deferred revenue from shipments from last year that will be amortized between 2010 and 2011. So a portion of that $500 million will also be in Q1.
(Q)...when you look at the Zappos' benefit to 1Q '10 revenue, is it fair to assume it's similar to 4Q '09's $200 million? Given on the one hand you have a full three months in the quarter but on the other hand it's a seasonally slower quarter? (A) we're not giving guidance on Zappos specifically, it's reflected in the guidance that we give for Q1. We have released the - certainly previous quarters so you can go back to Q1 of last year, make your own assumptions in terms of growth rate for year-over-year and certainly there'd be a range there, but you can see that's probably the best way to think about it and look at what you'd put in for Q1.
(Q) Housekeeping North American gross margins improved 200 business points on a year-over-year basis. Trying to understand what are the moving parts that help in driving this gross margins higher and how should we think about the swing factors in the North American gross margins? And, secondly, as we look at the media business become more digital and we see more and more new devices coming to the marketplace, could you help us understand, how does Amazon's competitive advantage - or competitive position change in the marketplace, i.e., obviously physical versus web. You have some competitive advantage - but if every - there are a lot of more devices that are sold that can download books electronically. How does your competitive advantage or how does your competitive position change? (A) In terms of your first question, North American gross margins are up a little over 200 basis points, as you mentioned. Number of drivers: certainly we had a nice increase in other revenue, which includes our web services businesses, our service business, as well as other agreements that go into that line item. Inventory management, we're getting better at inventory management, which also flows into our operating results as well. We're getting better prices from suppliers and partners. We had good third-party sales. So those are the key contributors. Partially offsetting that, we certainly had lower prices during the quarter. So those are really the drivers for gross margin. In terms of how we're thinking about the digital and physical within media, we think we're positioned very nicely from a digital perspective. We have, obviously, some longer standing relationships with many, many different partners around the world in those particular categories. We think, you know, we're focused on the customer, and I think, when you look at Kindle, that's a
certainly good example of that. We think we've built a nice - very nice purpose - book purpose device. And, - excuse me - that's purpose built for reading. And that we believe that readers deserve to have a dedicated device with great selection at great prices. And so those are the things that we've worked on in the 27 months since launch and those are the things that we'll continue to focus on, again with starting with the customer.
(Q) You've got a lot of different services you've worked on over the years between Kindle, digital music, digital video, Cloud computing and web services. Is there any sort of, I guess, perspective or view that you have that maybe there's an opportunity to consolidate or integrate all these services together in a unified platform that can be licensed or OEM'd to other companies to utilize while you kind of manage the backbone behind it? (A) I'm not sure there's a lot I can help you with there. In each of those services, our primary focus is how do we have a great customer experience? And that's the one thing that's common in all of those, and we're going to continue to focus, as we have in our physical business, on how do we make sure that we have a great experience and those are the things that are in common. (Q) You think that - you don't think all those individual services can be offered up as a kind of bundled solution ever? (A) I'd hate to speculate on something like that. I think it's -- we're focused on what's right for customers and many of those have distinct customer sets that are different from each other and, again, we're focused on how to make that experience great.
when you think about the category rollout roadmap, could you give us any thoughts on where you are in that? Are you 80% of all the categories you can roll out, or are there still a lot more opportunity? How would you frame that opportunity at this point in your life cycle? (A) In terms of category rollout, hard to say in percentage terms, but we have still a lot of room to add additional selections. And if you look at it on a worldwide basis, think about it this way, we have many new geographies that we can enter, some of which - many that we support today from an export standpoint, but we could certainly roll out more geographies. And so we can add a category selection there. And we can add many new categories in all of our geographies. And then also we're adding a selection in categories that we've been in for ten or more years each year. We continue to grow the selection of those categories. So it is one of the inputs to growth. It's one that we're very focused on, it's one we're going to be continued to be focused on for many years to come because there's just a lot of selection to add out there.
(Q) 3P mix, U.S. versus international, can you give us some gauge in terms of the differences and distinctions in those areas? (A) In terms of 3P, again we're pleased with both segments. We continue to grow nicely in our seller business and we continue to look for ways to improve that experience not only for our customers, but for sellers which is certainly another customer set that we have. And one example of that is filled by Amazon, which certainly has been helpful in terms of growing our selection from sellers and the number of sellers as well.
(Q) Will Apple continue to support the Kindle app with their iPad? (A) Yes.
(Q) I wanted to ask you about your pricing strategy if you - if there's been a change there with regards to being a price follower or a price leader? And then secondly, looking at the Q1 outlook if you can talk about some of the variables that might lead to year-over-year contraction in the CSOI margin, if that's Zappos related, perhaps, or from the deferred revenues from Kindle or something else? (A) In terms of pricing, no, nothing's changed. We're all about how to make sure we get great prices across all of our categories, across all of our geographies, so nothing's changed there. In terms of Q1, we've given a range that we think is appropriate and as you can see from the lower end of the range as you described, for the upper range, you see operating margins improving year over year. And again we're very positive about what we saw in Q4, as well as what we saw as we progressed throughout 2009. Yet there's still a degree of uncertainty out there. And so we think that's representative of the guidance that we've given and we think it's appropriate. In terms of your other questions, in terms of individual breakouts of businesses, you know, we're not providing that as part of our guidance.